REVIEW #7: SOEs in Serbia: Substituting Market Failure with Government Failure

Government interference in the market is often justified with claims that government has a fundamental role to deal with market failures to increase total social welfare. In some instances, interference takes the form of state-owned enterprises (SOEs) that produce goods or provide services instead of private companies. However, what is often overlooked is the fact that market failure can be exchanged for government failure, in which total welfare is not increased by government actions, and sometimes is decreased by it. The reasons for this can be numerous: from lack of knowledge, incompetent administration, and political cycles, to corruption and state capture1.


In Serbia there is a plethora of possible government policy actions beyond the establishment and operation of SOEs. Having in mind the negative results stemming from the operation of SOEs, to alleviate this problem an approach other than appointing new management is necessary, as might be heard in public discourse.

Serbian SOEs are poorly managed and are used as tools for keeping social peace with unreasonably low prices of services rendered, high wage bills, and low efficiency. SOEs also pose a high fiscal burden (relying on high government subsidies) and fiscal risk (their debt is often taken over by the government due to liquidity or solvency issues).

SOEs in the Serbian Economy

SOEs have a prominent role in the Serbia economy, employing about 10% of all registred workers. The total number of SOEs is not publicly disclosed, as there are different methodologies in deciding which companies should be included in the list. Therefore, the data regarding their operations – although coming from formal government sources – should be used with a grain of salt, since some of them are contradictory.

Serbian SOEs can be subdivied into several categories:

1) Public enterprises

Two government bodies that supervise the work of public enterprises provide two different figures for these companies. The Ministry of Economy listed only 37 companies as public entreprises on their website, while the Commissioner for Information of Public Importance and Personal Data Protection listed 137 of them2. They employ about 79,000 people3.The companies have a special status because they are considered vital to the economy or welfare of the population. As such, they must render their service at all costs, and cannot go bankrupt because the government must see to it that the service be provided in continuity4. The status of a public company is granted by government via a special sublegislative document; these companies can function in the form of a limited liability company or a public limited company,. However, their shares cannot be traded and their proprietor is the state itself. The Ministry of Economy appoints the managing boards and CEOs in a process that is envisaged to be transparent, but is prone to political pressures. The companies are concentrated in several industries, such as power generation and distribution, natural gas distribution, postal service, national parks, real estate, and rail transport.

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1 Tullock, G. et al. (2002) Government Failure: A Primer in Public Choice, Cato Institute.

2 The Ministry of Economy uses the legal definition, stating that public enterprises are companies that “provide service of general importance“ (Law on Public Enterprises, Official Gazette 15/2016). The Commissioner for Information of Public Importance in its catalogue lists all legal entities that were set up or that are being financed fully or predominantly, by the central government (Law on free access to infomation of public importance, Official Gazette 120/2004, 54/2007, 104/2009, 36/2010); the majority of these companies are actually public enterprises since only they are directly financed by the government. The two lists, therefore, overlap.

3 Ministry of Finance of the Republic of Serbia (2016), Fiscal Strategy for 2017.

4 Law on Public Enterprises, Official Gazette 15/2016, article 14.

Mihailo Gajic