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Shadow Governance Intel

Shadow Governance Intel

Shadow Governance Intel (www.shadowgovintel.com), the analytical arm of West Sands Advisory Limited, conducts in-depth research on power players and power plays that challenge the transparency…

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Can New Blood Shake Up Serbia’s Power Industry?

Power

State owned Energy Power Industry of Serbia (EPS - Elektroprivreda Srbije) controls all domestic electricity production. The EPS was established after the disintegration of Yugoslavia and the formation of the Republic of Serbia in 1992. Given its monopoly in Serbia, it has been associated with several corruption scandals, and has been tied to the political elite. Control over EPS is therefore often viewed as a tool that can be utilised to exert influence.

EPS produces 95 percent of the total electricity consumed in Serbia, 70 percent of which originates from coal production. It also controls the country’s coal mines, water dams, and the limited oil and gas reserves (Balkan Energy, June 2016). EPS is credited with providing over 8 percent of the country’s total budget revenues, employing more than 30,000 people. Moreover, EPS is key to the state’s subsidies policy.

As in other former Socialist countries, Serbia inherited a system of highly subsidised energy prices. Serbian electricity prices are one of the lowest in Europe, with households paying €0.05 per KWh, whilst it was reported (2014) that the real market price of electricity produced by EPS is €18.5 cents per KWh.

EPS is a legacy of the Socialist system of the Yugoslavian era. Highly indebted, EPS was, and remains, key to regulating the price of electricity so that it is affordable to the majority of citizens. Of equal importance, since the fall of Yugoslavia, EPS has been utilised as a political tool for the Socialist Party of Serbia (SPS - Socijalisti?ka Partija Srbije), the ruling party in Serbia during the 1990s. Under state control, the SPS used the EPS as a tool to distributed state resources among party members. This further consolidated SPS control over the electricity producer.

This has ultimately permitted the SPS to maintain an influential position in Serbian politics despite their declining popularity. Although the SPS is regarded as the most influential political party in the country’s energy sector, its role in EPS - through the control of most of its directorships and the workers union - has allowed it to exert pressure and influence over different Serbian governments, thereby benefiting politically.

EPS Opacity and SPS Control

The entrenchment of the SPS in EPS has been possible, in part, given the complicated and opaque structures of the company itself.

Although it has been under reform since 2011, EPS still represents one of the biggest state employers in Serbia. Before July 2015, when the first phase of these reforms was completed, most of the assets owned by the company - such as central electrics and dams - were incorporated within the EPS commercial structure, creating a labyrinth of an organisational chart with hundreds of directorships. It is believed that EPS, before the 2011 reforms, had around 600 directorships.

Serbian law stipulates that EPS directorships are chosen by the government, which today is mainly controlled by the Serbian Progressive Party (SNS - Srpska Napredna Stranka). However, because of the history of EPS, the ability of the SNS to exert control over this institution is likely to be a long process. Given the long political tenure of the SPS, it successfully filled middle management offices with loyal members, thus directly controlling assets and employees. Although the SPS has steadily lost political influence in Serbia, it was only in 2016 that there were convincing signs that the SNS was beginning to dismantle SPS influence in the highest of EPS positions. This was evidenced by the dismissal of the Executive Director for Energy Production, Dragan Jovanovi?, In May 2016. Jovanovi? was a senior SPS-linked member. Related: U.S. Oil Sanctions Could Push Venezuela To The Brink

Several other cases demonstrate the entanglement of SPS members in EPS structures. During the 2014 general elections, the EPS union threatened to cut the electricity network if their salaries were not raised – this was interpreted as a move to apply pressure on the government. This threat is believed to have placed the SPS in an intermediary role between the union and the government, enabling the SPS to retain its position as a key political player.

Two other prominent members of the SPS - Aleksandar Anti? and Dušan Bajatovi? - hold also influential positions in the Serbian energy sector. Anti? is the Minister of Energy, while Bajatovi? is the General Director of Srbijagas. Both SPS members are understood to have direct ties to Gazprom, the Russian energy giant consistently accused of following a political agenda. In this sense, Anti? enjoys good relations with the Gazprom leadership and allegedly has directly benefited from these links, while Bajatovi? is also a Board Member of YugoRosGaz, an energy distributor in Serbia, and a subsidiary of Gazprom (50 percent).

The SNS-Russia link plays an important role in the on-going power struggle between the SNS and the SPS in the Serbian energy sector. In this sense, Vu?i? will have to take into account the Russian backing of the SPS in his political movements and calculations to diminish SPS influence in this sector.

Despite the SPS’s relative political demise, it is still retaining influence in the energy sector and within EPS. In fact, the SPS still appears to be able to utilise the EPS to exert political influence on a national level. However, in order to maintain this position, the SPS needs the organisational structure of the EPS to remain as complex as possible. It is ostensibly through the EPS that the SPS is able to ‘buy’ loyalty; for example, it is alleged SPS-linked businessmen have been showed preferential treatment in EPS tenders, and loyal SPS followers have been awarded EPS employment.

At the same time, presence of SPS loyalists in EPS allows them to misappropriate the EPS budget for their personal benefit.

Is Vu?i? Enough?

Serbia’s President, Aleksander Vu?i?, and his political party the SNS, have presented themselves as a unique political opportunity for Serbia to end endemic corruption and align itself with the European Union (EU). Coinciding with the arrival of the SNS to power (2012), Serbia was accepted as a candidate state by the EU.

EU demands for more accountable state structures have had a direct impact on EPS dynamics. The high levels of opacity associated with this entity add a complication to Serbia’s EU accession negotiations. However, it is these very negotiations that provide SNS legitimacy to embark on a programme of significant reform within the EPS.

Serbia has been working with the World Bank (WB) and the International Monetary Fund (IMF) to introduce more liberalised policies, and policies that would pave the road for privatisation. These policies have also had an impact on EPS; and, indirectly, are benefiting Vu?i? strategy of power accumulation. His clear political will to become the most influential political figure in the country will inevitably result in ensuring that these reforms simultaneously align with his personal and political goals.

The political hegemony of the SNS and Vu?i?, as demonstrated in the April 2017 elections, has granted them the legitimacy to continue with reforming the energy sector, as demanded by international institutions. As speculated by the Serbian press, the arrival to power of Vu?i? would have triggered an internal battle between the SNS and SNP for control over EPS, despite both parties forming the same coalition government in 2012.

In this context, Vu?i? is likely to use energy sector reforms to reinforce his informal influence, and informally challenge the influence the SPS has secured over the years over EPS. While these reforms are publicly portrayed as necessary to tackle corruption, it is unlikely that in the short term, EPS and the Serbian energy market will become more transparent and liberalised.

In this context, is the empowered figure of Vu?i? strong enough to revert the situation of EPS?

As Vu?i? has consolidated his power and influence in the Serbian government, he has also changed who controls the higher echelons of the EPS. In March 2016, Aleksandar Obradovi? was dismissed as CEO, and accused of buying two Audi automobiles, while the EPS was in debt. The pro-government press initiated a campaign against Obradovi?, portraying him as the sole senior EPS corrupt figure. Related: Saudi Oil Minister Just Did Something He Has Never Done Before

This media campaign legitimised his dismissal, and paved the road for the appointment of his replacement - Milorad Grci? – an individual known to be even closer to the SNS. Moreover, this scandal triggered a reaction from EPS Chairman, Branko Kova?evi?, who precisely backed the government rhetoric and supported the dismissal of Obradovi?, demonstrating his obedience to Vu?i?.

The reaction of the EPS management to this scandal reveals the lack of independence this institution has from the Serbian government. This clearly highglights the political will of Vu?i? to further reinforce his informal power in EPS, with the ultimate goal of eventually (and finally) replacing the SPS as the most influential political actor in the energy sector.

Can New Laws be Trusted?

While the legal framework of public companies in Serbia remains opaque and easily vulnerable to government (Vu?i?) interests, in July 2015 the EPS implemented the first phase of an energy law passed in 2011. This law aimed to reorganise the energy sector, and adapt it to EU standards. Other international organisations, such as the IMF and the World Bank, have also backed the implementation of this law.

While this law was designed to meet international and Western standards of free market rules, the political context of the Serbian energy sector - and in particular of EPS – turns the law into a potential political tool for Vu?i? to extend his political influence.

The first phase of this law has mainly consisted of centralising EPS management. Prior to July 2015, 14 legal entities operated under EPS, today the number these entities has been reduced to EPS - “Public Enterprise Electric Power Industry of Serbia” – and two subsidiaries: “Distribution System Operator EPS Distribution” and “EPS Supply”, a modification that also allows the SNS to nominate trusted people to fill these new directorships.

Although this law was designed to help introduce greater transparency and efficiency, from a political perspective, the reduction of legal entities within EPS is forcing the reduction of directorships, most of which are believed to be controlled by the SPS. In this sense, these reforms are employing a top-down logic, trying to diminish the influence of middle to senior management officials to ultimately diminishing SPS influence.

Moreover, covered under the discourse of higher efficiency and transparency – as supported by the IMF and the WB - Serbian government bodies have announced the necessary layoff of between 5,000 and 10,000 employees. Given that the high number of low-qualified workers are predominantly SPS supporters, the reduction of employees appears to be a parallel strategy to further reduce SPS influence. The weaker the position of the SPS vis-à-vis the EPS, the higher the chances for Vu?i? to gain control over this institution.

EPS: Liberalisation or “the Serbian Leopard”

Although EPS is one of the highest indebted state-owned companies in Serbia, the recent and future reforms that this entity is witnessing are not likely to tackle this grave economic problem, but instead, increase SNS’s influence vis-à-vis the SPS. Under the current political trends, the current reforms should be viewed in tandem with the continuous political empowerment of President Vu?i?.

Under the political and economic umbrella of the EU, the WB and the IMF, there is a high probability that Vu?i? will look to increase the benefits he, and his circle of loyalists, benefit from the resources available through controlling EPS. Although Vu?i? is leading EPS reforms, his main aim is not to create a more liberalised and transparent energy sector, but to ensure that the influence of the SPS is truly reduced. This can be viewed as part of the next stage of his larger strategy to further consolidate political power. As was written in the famous Italian novel “The Leopard”: “If we want things to stay as they are, things will have to change”. In this sense, Vu?i?-led reforms are likely to focus more on the change of personnel than in the deep structural reforms necessary to make EPS a transparent and profitable company.

This process of “change” is not likely to be quick, as Vu?i? is fighting against decades of SPS political infiltration and job distribution vis-à-vis the EPS. In any case, international investors should be aware of the political exposure associated via individual EPS directors and senior management, and the influence (although reduced) the SPS - and power players linked to this party, including those backed by Russia – continue to hold.

As announced by Serbian Minster of Energy Aleksandar Anti?, the EPS will not be totally privatised, but private investment will be allowed after transforming EPS into a joint-stock company.

Investors should be cognisant of the on-going internal competition between the SNS and SPS to asset influence over EPS, and how this could threaten current power players within EPS. Moreover, given the level of political exposure associated with EPS senior management / directors, any change in the current political status quo in Serbia would conceivably threaten their positions, and potentially the viability of commercial contracts signed with EPS via SPS loyalists. For the foreseeable future, the destiny of the EPS remains unaltered.

By Shadow Governance Intel for Oilprice.com

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