## wpiea2019201-print-pdf

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---

### INTRODUCTION AND MOTIVATION
- Objectives:
  - Establish size and composition of the SOE sector via a new firm-level dataset for 2015–2017.
  - Analyze financial performance at sector and firm level using financial ratio analysis to identify firms posing fiscal risks.
  - Review governments’ ownership functions and oversight policies against region and World Bank/OECD recommendations in ownership and governance framework; financial oversight; fiscal and policy interactions.
- Definition used: companies in which any level of government has directly or indirectly more than 50 percent ownership.
- Institutional context:
  - Dayton Peace Agreement (1995) decentralized SOE ownership across FBiH, RS, 10 cantons in FBiH, 145 municipalities, and the Brcko district.
  - No accurate, up-to-date, publicly-available SOE datasets prior to this study.

### KEY SUMMARY FINDINGS
- Employment and productivity:
  - SOEs account for about 11 percent of total employment but only 10 percent of value added.
- Aggregate financials and arrears:
  - Aggregate SOE debts roughly 26 percent of GDP.
  - Close to 4 percent of GDP in tax and social contributions arrears.
  - Aggregate sector profitability (2015–2017): ROE averaged -0.3 percent; ROA averaged -0.2 percent.
- Risk and leverage:
  - Over 44 thousand persons employed in SOEs facing high or very high financial risks (6 percent of total employment).
  - Leverage high (Debt/EBITDA), reducing likelihood of debt reduction without government support or restructuring.
- Opportunity cost:
  - If ROE were 4 percent (consistent with moderate profitability risk), GDP would be some 3 percent higher—interpreted as implicit opportunity cost of sustaining inefficient SOEs.
- Governance shortcomings:
  - No ownership policy documents outlining rationale for government ownership, operational/financial objectives, and division of responsibilities.
  - Decentralized management and Supervisory Board selection with weak independence requirements.
  - Weak financial and operational oversight; weak compliance with audited financial statement publication.
  - No formal policies conditioning government support to SOEs; no formal dividend policies; direct subsidies and loan guarantees granted without explicit Public Sector Obligations (PSO).
  - Richmond and others (2019) ranks BiH second to last for SOE governance in the region.

### SOE FOOTPRINT
- Count and coverage:
  - Total number of SOEs: more than 550 SOEs in BiH.
    - 315 in FBiH and 235 in RS.
  - Quantitative analysis sample: 414 firms for 2014–2017 (information for almost 80 percent of SOEs; likely covers more than 90 percent by revenue, employment, or assets).
- Ownership by tier and concentration:
  - Municipalities own 279 SOEs; municipal SOE employment: 11 thousand at end-2017.
  - Entity central government-owned SOEs (FBiH and RS) generated about 85 percent of SOE revenues (EUR 2.9 billion), held roughly 85 percent of SOE assets and liabilities (EUR 13.3 billion and EUR 3.5 billion, respectively), and employed 58 thousand out of 76 thousand total SOE employment in the sample.
  - Largest 20 SOEs represent around 80 percent of total SOEs fixed assets and 70 percent of turnover.
- Sectoral composition:
  - Electricity, gas, steam and air conditioning sector generates 45.6 percent of total SOE revenues.
  - Information and communication: 12.4 percent of SOE revenues.
  - Transportation and storage: 11.7 percent of SOE revenues.
  - More than 70 percent of total SOEs assets concentrated in electricity, gas, steam and air conditioning (37 percent) and transportation and storage (36 percent).
  - Top three SOEs by average revenues: Elektroprivreda BiH (EUR 535 million), BH Telecom (EUR 274 million), Elektroprivreda RS (EUR 210 million).
- Employment footprint and public sector context:
  - Roughly 80 thousand workers employed in 550 SOEs (about 11 percent of total employment).
  - SOE employment concentrated: electricity and water sectors (28 thousand), transportation (12 thousand), mining (12 thousand).
  - SOE employment is around a quarter of public sector employment and 11 percent of total employment.
  - Authors’ database supports public sector footprint estimate at more than 46 percent of total employment.
  - General government employment reported at 17 percent of total employment (2017) but likely underreported; properly accounted public employment likely around half of total employment.
- Labor market distortions:
  - Average gross monthly salary in SOEs (2017): EUR 756.
  - Average gross monthly salary in general government (2017): EUR 540.
  - Average gross monthly salary in private sector (2017): EUR 535.
  - SOE salaries roughly 40 percent higher than private sector despite lower productivity.
  - Average revenue per worker in SOEs estimated around 8 percent lower than private sector.
  - Share of salaries in operating expenditures: SOEs 30.5 percent vs private sector 12.0 percent.

### SOE FINANCIAL CONDITION AND PERFORMANCE
- Aggregate balance-sheet highlights:
  - Total SOE debts total EUR 4 billion (26 percent of GDP).
  - Close to 4 percent of GDP in tax and social contributions arrears.
  - About 85 percent of SOEs solvent as of end-2017 with positive equity of about EUR 1 billion.
  - 66 firms have accumulated losses of EUR 1.6 billion, leaving negative equity totaling EUR 290 million (2 percent of GDP).
  - Almost half of SOEs are illiquid and rely on state support to remain afloat.
- Profitability and returns (2015–2017 averages):
  - ROE averaged -0.3 percent.
  - ROA averaged -0.2 percent.
- Investment and dividends (2017):
  - Total SOE investments: around EUR 500 million.
  - SOE investment in non-financial assets: EUR 274 million (1.7 percent of GDP).
  - SOEs paid EUR 40 million in dividends in 2017 (0.3 percent of GDP); 95 percent of dividends issued by only three out of 18 companies that paid dividends (out of 414 SOEs in the sample).
- Liquidity and budgetary support (2017):
  - 45 percent of SOEs have current liquidity ratios below 1.
  - General government budgetary support in 2017: 0.9 percent of GDP, or 2.2 percent of expenditures, through budget transfers, grants, and subsidies.

### RISK ANALYSIS METHODOLOGY AND AGGREGATE FINDINGS
- Ratios and scoring:
  - Profitability – Return on Equity (ROE).
  - Leverage – Debt to EBITDA Ratio.
  - Liquidity – Current Ratio (current assets vs current liabilities).
  - SOEs scored 1 to 5 per ratio (1 – very high risk, 5 – sound); composite scores classify firms from very high risk to sound.
- Aggregate risk distributions:
  - Profitability risk: 49 percent of SOEs face high or very high profitability risks.
  - Leverage risk: More than 78 percent of SOEs are in high or very high leverage risk categories.
  - Liquidity risk: Over 50 percent of SOEs have current assets < current liabilities.
  - Composite risk: 228 SOEs face high or very high financial risk based on composite index.
  - Employment in high/very high risk SOEs: roughly 44 thousand workers.
  - 99 percent of SOE tax arrears are held by companies classified as very high or high risk.

### TOP SOES AND ILLUSTRATIVE HIGH-RISK CASES (Box 1 highlights)
- GRAS (Sarajevo Public Transportation Company):
  - Fully owned by Sarajevo cantonal government; insolvent as of end-2017.
  - Total liabilities: EUR 110 million (1.1 percent of FBiH GDP).
  - Tax and SSC arrears: EUR 81.6 million (0.8 of FBiH GDP).
  - Current liquidity ratio: 0.1.
  - Negative equity: EUR 106 million (1.1 percent of FBiH GDP).
- Aluminij Mostar:
  - FBiH central government owns 44 percent; Croatian government 12 percent; rest private minority.
  - Accumulated losses: more than EUR 120 million (1.3 percent of FBiH GDP).
  - Liabilities: Euro 188 million (2.0 of FBiH GDP), increased more than 140 percent from 2014 to 2017.
  - Current liquidity ratio: around 0.5.
  - Employment implications: 900 workers in Aluminij and about ten thousand in its supply chain.
- Sectoral arrears specifics:
  - Large tax arrears listed: FBiH Railways (EUR 104.0 million), GRAS (EUR 81.6 million), Kreka (EUR 70.0 million), Zenica (EUR 61.8 million), Kakanj (EUR 36.6 million).
- Other notable high-risk SOEs:
  - Entity railway companies, RMU Kreka and RMU Kakanj mines, Energoinvest, Autoceste FBiH and Autoputevi RS, Elektroprivreda RS and Elektrokrajina Banja Luka.
- Sound large SOE example:
  - Igman dd Konjic classified as sound among top 20.

### MACRO-FISCAL IMPACTS AND ADJUSTMENT NEEDS
- If SOEs had averaged 4.0 percent ROE in 2017:
  - Net income would be 3 percentage points of GDP (or EUR 127 per capita).
- Debt metrics and adjustments:
  - Unconsolidated SOE debt was 26.6 percent of GDP at end-2017 (Debt/EBITDA = 8.3).
  - To reach Debt/EBITDA mid-point target of 2.5:
    - Either debt would need to decrease by EUR 2.65 billion (about EUR 750 per person), or
    - EBITDA would need to increase by the same amount.
  - Current liabilities would need to decline by 5.6 percent of GDP to bring the liquidity ratio to 1.4 (mid-point of moderate risk category).
- Net-debt and public sector context:
  - Total SOE net-debt estimated at 22 percent of GDP (Net debt = Total debt – Tax Arrears).
  - General government debt including guarantees: roughly 40 percent of GDP in 2017.
  - Total public sector debt could amount to around 62 percent of GDP, depending on elimination of public sector cross debts.

### GOVERNANCE FRAMEWORK, GAPS, AND RECOMMENDATIONS
- Governance pillars:
  - Ownership Policy: accurate SOE inventory; public SOE register; Ownership Policy document stating rationale for state ownership; appointment of qualified and independent board members.
  - Financial Oversight: year-end financial and operational targets; external audits; sector reporting to parliament.
  - Fiscal Links: systematic risk assessment; budgetary support only for pre-established and approved PSOs; explicit non-commercial mandates in legislation; formal dividend policies.
- FBiH and RS governance gaps:
  - Registers incomplete or outdated; no comprehensive ownership policy documents.
  - Oversight units: FBiH planning an SOE oversight unit (temporary legal basis); RS uses IDBRS as centralized ownership function but no designated government overseer of IDBRS.
  - Financial oversight weaknesses: uneven external audit coverage; many SOEs have not submitted financial statements; no entity SOE sector-wide annual report.
  - Board appointments: professional competency criteria exist but no provisions requiring independence from political parties nor conflict-of-interest rules.
- Development banks governance (Box 3):
  - Federation Development Bank (FDB): size 2015 EUR 148 million (1.5 percent of banking sector assets); not audited by FBiH Supreme Audit Agency; should be classified as general government.
  - IDBRS: assets under management ~EUR 1.2 billion (around 25 percent of RS GDP in 2015); systemic importance; lack of designated government overseer; should be classified as general government.
- Key policy recommendations:
  - Establish centralized online SOE registers including financial statements and update regularly.
  - Put in place Ownership Policy documents for entity, cantonal and municipal governments specifying rationale, objectives, and responsibilities.
  - Depoliticize board and management appointments; strengthen independence and conflict-of-interest safeguards in line with OECD guidelines.
  - Strengthen Supreme Audit Boards’ capacity and ensure timely receipt of all public sector annual financial statements.
  - Publish all annual financial statements on centralized entity websites; enforce compliance.
  - Formalize arms-length financial relations; grant budgetary support only in exchange for ex-ante PSOs; adopt formal dividend policies.
  - Conduct fiscal risk assessments via centralized oversight units and include them in medium-term budget planning and parliament reports.
  - Classify and include FDB and IDBRS in general government accounting given funding and risk exposure.

### OPTIONS FOR SOE FUTURES AND IMPLEMENTATION GUIDANCE
- Decision scenarios:
  - Privatization: when no policy rationale exists for continued public ownership; if viable, privatization with restructuring and possible budgetary support; proceeds to be reported, audited, and subject to parliamentary oversight.
  - Continued state ownership: retain when clear policy rationale and potential financial viability; restructure when viable with fiscal risk reduction measures and possible PSOs.
  - Concessions / PPPs: use where state participation fosters development; identify and disclose fiscal risks in the budget.
  - Bankruptcy: proceed when SOE is insolvent with no policy rationale and not viable even with restructuring; accompany with targeted social measures.
  - Conversion to government agency: convert SOEs that do not perform commercial functions into government agencies/budgetary units; bring related debts into general government for transparency.
- Social safeguards:
  - Identify vulnerable groups affected by privatization and implement mitigation measures: retraining, expanded social safety nets, transition pension arrangements, active labor market policies, local economic development projects.

### CONCLUSION — PRIORITY ACTIONS
- Establish centralized and regularly updated SOE registers with financial statements.
- Produce Ownership Policy documents at entity, cantonal, and municipal levels.
- Create centralized oversight units at ministries of finance to disclose and manage fiscal risks from SOEs.
- Condition budgetary support on ex-ante PSOs; eliminate quasi-fiscal subsidies through tax and SSC arrears.
- Assess, restructure, privatize, or close SOEs based on policy relevance and financial soundness; apply social safeguards and transparent reporting of privatization proceeds.

*Source: wpiea2019201-print-pdf*

### INTRODUCTION AND MOTIVATION _______________________________________________________ 5

### INTRODUCTION AND MOTIVATION

### Overview and objectives
- SOEs are a large part of Bosnia and Herzegovina’s (BiH) economy and affect macroeconomic performance, including fiscal sustainability, labor market, and competitiveness.
- Historical and institutional context:
  - Legacy of former Yugoslavia with predominant public capital at all government levels.
  - Dayton Peace Agreement (1995) decentralized government functions and SOE ownership across Federation of Bosnia and Herzegovina (FBiH), Republika Srpska (RS), 10 cantons in FBiH, 145 municipalities, and the Brcko district.
  - Privatizations during 1996–2006 were numerous but perceived as mixed; governance and oversight remain weak (accountability, transparency, enforcement).
  - No accurate, up-to-date, publicly-available datasets about SOEs prior to this study.
- Definition used: companies in which any level of government has directly or indirectly more than 50 percent ownership (excludes state-ownership below 50 percent).
- Three objectives of the paper:
  - Establish size and composition of the SOE sector via a new firm-level dataset for 2015–2017.
  - Analyze financial performance at sector and firm level using financial ratio analysis to identify firms posing fiscal risks.
  - Review governments’ ownership functions and oversight policies against region and World Bank/OECD recommendations in: ownership and governance framework; financial oversight; fiscal and policy interactions.

### Key summary findings (Introduction)
- SOEs account for about 11 percent of total employment but only 10 percent of value added, indicating lower productivity per worker relative to the rest of the economy.
- Aggregate SOE debts are roughly 26 percent of GDP, including close to 4 percent of GDP in tax and social contributions arrears.
- Over 44 thousand persons are employed in SOEs facing high or very high financial risks (6 percent of total employment).
- Aggregate sector profitability (2015–2017):
  - Return on Equity (ROE) averaged -0.3 percent.
  - Return on Assets (ROA) averaged -0.2 percent.
- If ROE were 4 percent (consistent with moderate profitability risk), GDP would be some 3 percent higher—interpreted as implicit opportunity cost of sustaining inefficient SOEs.
- Leverage is high (measured as Debt/EBITDA), making debt reduction unlikely without government support or restructuring.
- Governance shortcomings:
  - No ownership policy documents that outline rationale for government ownership, operational/financial objectives, and division of responsibilities.
  - Decentralized management and Supervisory Board selection; weak independence requirements.
  - Weak financial and operational oversight; weak compliance with audited financial statement publication.
  - No formal policies conditioning government support to SOEs; no formal dividend policies; direct subsidies and loan guarantees granted without explicit Public Sector Obligations (PSO).
  - Large implicit government support via tax and social security contribution arrears.
  - Richmond and others (2019) ranks BiH second to last for SOE governance in the region.

---

### SOE FOOTPRINT

- Total number of SOEs: more than 550 SOEs in BiH.
  - 315 in FBiH and 235 in RS.
- Data compilation:
  - Centralized SOE registers exist in FBiH and RS but not at BiH level.
  - Authors created a financial statements database covering entity, cantonal, and municipal SOEs.
  - Quantitative analysis sample: 414 firms for 2014–2017 (information for almost 80 percent of SOEs; likely covers more than 90 percent by revenue, employment, or assets).
- Ownership by government tier:
  - Municipalities own 279 SOEs (mainly water supply, heating, sewage; also communication and recreation). Municipal SOE employment: 11 thousand at end-2017.
  - Entity central government-owned SOEs (FBiH and RS) generated about 85 percent of SOE revenues (EUR 2.9 billion), held roughly 85 percent of SOE assets and liabilities (EUR 13.3 billion and EUR 3.5 billion, respectively), and employed 58 thousand out of 76 thousand total SOE employment in the sample.
- Concentration:
  - Largest 20 SOEs (by fixed assets and turnover) represent around 80 percent and 70 percent of total SOEs fixed assets and turnover, respectively.
- Sectoral concentration:
  - Electricity, gas, steam and air conditioning sector generates 45.6 percent of total SOE revenues; followed by information and communication (12.4 percent); transportation and storage (11.7 percent).
  - More than 70 percent of total SOEs assets are concentrated in electricity, gas, steam and air conditioning (37 percent) and transportation and storage (36 percent).
  - Top three SOEs by average revenues (sample period): Elektroprivreda BiH (EUR 535 million), BH Telecom (EUR 274 million), Elektroprivreda RS (EUR 210 million).
- Employment footprint:
  - Roughly 80 thousand workers employed in 550 SOEs (about 11 percent of total employment).
  - SOE employment concentrated in production of goods and services: electricity and water sectors (28 thousand), transportation (12 thousand), mining (12 thousand).
  - Top five SOE employers: Elektroprivreda BiH, FBiH Railways, RS Railways, Banovici coal mine, Kreka coal mine.
  - BiH is the only country in the region where SOE employment increased since 2005; ranks in top third in terms of SOE employment as share of total employment.
- Public sector employment footprint:
  - SOE employment is around a quarter of public sector employment and 11 percent of total employment.
  - Authors’ SOE database supports an estimate of the public sector footprint at more than 46 percent of total employment.
  - General government employment reported at 17 percent of total employment (2017), but reported data excludes health institutions and other non-classified institutions; properly accounted public employment likely around half of total employment.
- Labor market distortions:
  - Average gross monthly salary in SOEs (2017): EUR 756.
  - Average gross monthly salary in general government (2017): EUR 540.
  - Average gross monthly salary in private sector (2017): EUR 535.
  - SOE salaries roughly 40 percent higher than private sector despite lower productivity.
  - Average revenue per worker in SOEs estimated around 8 percent lower than private sector.
  - Share of salaries in operating expenditures: SOEs 30.5 percent vs private sector 12.0 percent.
  - Result: wage premium and more stable employment in SOEs distort labor markets.

---

### SOE PERFORMANCE

- Aggregate balance-sheet and financial condition highlights:
  - Total SOE debts total EUR 4 billion (26 percent of GDP).
  - Close to 4 percent of GDP in tax and social contributions arrears.
  - About 85 percent of SOEs solvent as of end-2017 with positive equity of about EUR 1 billion.
  - 66 firms have accumulated losses of EUR 1.6 billion, wiping out equity, leaving negative equity totaling EUR 290 million (2 percent of GDP).
  - Many firms are technically insolvent; operational and financial restructuring or bankruptcy may be required.
  - Almost half of SOEs are illiquid and rely on state support (implicit and explicit) to remain afloat.
- Sector profitability and efficiency (2015–2017 averages):
  - ROE averaged -0.3 percent.
  - ROA averaged -0.2 percent.
- Implications:
  - Low returns imply government investment in SOEs yields negative returns.
  - High leverage (Debt/EBITDA) reduces likelihood of debt reduction without government support or restructuring.
  - Liquidity shortfalls mean many SOEs depend on government support in short run.
- Distribution of accumulated losses:
  - Most losses concentrated in Mining and Quarrying, Manufacturing, and Energy sectors (EUR 1.6 billion accumulated losses across 66 firms).

---

### Analytical approach and organization (from source)
- Data construction: new firm-level dataset for 2015–2017 using multiple sources; sample of 414 firms for 2014–2017.
- Financial ratio analysis used to assess profitability, leverage, and liquidity to identify high-risk SOEs (Renteria 2018 methodology referenced).
- Governance assessment: benchmarking FBiH and RS responses to region-wide questionnaire against World Bank and OECD recommendations across ownership policy, financial oversight, and fiscal/policy interactions.
- Paper organization:
  - Section II: SOE footprint (size, composition, financial indicators, labor market role).
  - Section III: Financial ratio analysis and high-risk identification.
  - Section IV: Review of entity SOE governance frameworks and proposed improvements.
  - Section V: Options to improve SOE sector performance.

---

*Source: https://www.imf.org/-/media/files/publications/wp/2019/wpiea2019201-print-pdf.pdf*

### Box 1. Examples of SOEs Posing Macro-Critical Fiscal Risks

### Box 1. Examples of SOEs Posing Macro-Critical Fiscal Risks

### Sarajevo Public Transportation Company (GRAS)
- Fully owned by the Sarajevo cantonal government.
- Insolvent with unsustainable business model.
- As of end-2017:
  - Total liabilities: EUR 110 million or 1.1 percent of FBiH GDP.
  - Tax and SSC arrears (direct and indirect taxes): EUR 81.6 million or 0.8 of FBiH GDP — more than four times the company’s annual income.
  - Current liquidity ratio: 0.1.
- Main causes of poor performance:
  - Generous implicit subsidies (low fares not consistent with cost recovery) are not reimbursed by the cantonal government.
  - Poor revenue collection and lack of adequate collection enforcement.
- Recent policy action: the Sarajevo cantonal government has announced plans to undertake operational restructuring.
- Related negative equity note (as of end-2017): GRAS negative equity EUR 106 million (1.1 percent of FBiH GDP).

### Aluminij Mostar
- Joint stock company; FBiH central government owns 44 percent, Croatian government owns 12 percent, resten private minority shareholders.
- Highly indebted to FBiH-owned Electricity Company of Mostar (Elektroprivreda HZHB); implicit government support sustaining operations.
- Operations unsustainable and require large government financial support.
- As of end-2017:
  - Accumulated losses: more than EUR 120 million (1.3 percent of FBiH GDP).
  - Liabilities: Euro 188 million (2.0 of FBiH GDP), an increase of more than 140 percent from 2014 until 2017.
  - Current liquidity ratio (CLR): around 0.5.
- Around three-quarters of debt owed to Electricity Company of Mostar for unpaid electricity (primary input).
- Employment implications: 900 workers in Aluminij and about ten thousand workers in its supply chain.
- Policy action: FBiH government searching for a strategic partner to avoid bankruptcy.

### SOE Asset and Liability Structure
- SOE assets composition:
  - Long-term assets: about 87 percent of total assets.
  - Short-term assets: about 13 percent of total assets.
  - Private sector long-term assets: about 53.6 percent of total assets (contrast).
  - Note: high long-term asset share may indicate shortcomings in long-term asset valuation, potential over-valuation if maintenance not performed or assets obsolete.
- SOE leverage and indebtedness (2017):
  - Unconsolidated SOE debt: roughly 26 percent of GDP.
  - Debt distribution: about half held by transportation sector SOEs (mainly highway and railway); electricity and mining more than 20 percent.
  - Long-term liabilities: about 12 percent of GDP; about 80 percent held by SOEs with large long-term investment needs in transportation and energy sectors (issue government-guaranteed debt).
  - Tax and social security contributions arrears: about 4 percent of GDP (mostly railway and mining companies).
    - Specific large tax arrears (listed): FBiH Railways (EUR 104.0 million), Public transportation company in Sarajevo – GRAS (EUR 81.6 million), coal mines Kreka (EUR 70.0 million), Zenica (EUR 61.8 million), and Kakanj (EUR 36.6 million).
  - Liabilities to suppliers: about 4 percent of GDP.
- Net-debt and public sector debt context:
  - Total SOE net-debt estimated at 22 percent of GDP (Net debt = Total debt – Tax Arrears).
  - General government debt including guarantees: roughly 40 percent of GDP in 2017.
  - Total public sector debt could amount to around 62 percent of GDP, depending on elimination of public sector cross debts.

### SOE Financial Performance, Liquidity, and Returns
- Sector profitability and income (2015–2017):
  - Sector was loss-making on average in 2015-2017; marginally profitable in 2017 with six profitable sectors.
  - Most profitable commercial sector: information and telecommunication (Euro 38 million or 0.4 percent of FBiH GDP), driven by BH Telecom (more than three-quarters of the industry’s profits).
  - Other profitable sectors: agriculture, forestry and fishing; transportation and storage.
  - Mining sector incurred large losses totaling 0.2 percent of GDP.
- Liquidity (2017):
  - 45 percent of SOEs have current liquidity ratios below 1.
  - General government budgetary support in 2017: 0.9 percent of GDP, or 2.2 percent of expenditures, through budget transfers, grants, and subsidies.
- Dividends (2017):
  - SOEs paid 0.3 percent of GDP in dividends.
  - 95 percent of dividends were issued by only three out of 18 companies that paid dividend (out of 414 SOEs in the sample).
  - Implicit government support includes non-payment of labor taxes in addition to direct budgetary support — overall return to ownership is highly negative.
  - Comparative note: Sweden SOE sector paid 0.45 percent of GDP in dividends, despite SOE revenues as percent of GDP being about one-third the size of the SOE sector in BiH.
- SOE investment in 2017:
  - Total SOE investments: around EUR 500 million.
  - Sector concentration: Electricity (49.8 percent), Transportation and Storage (19 percent), Information and Communication (16.6 percent) accounted for almost 86 percent of SOE investment.
  - SOE investment in non-financial assets: EUR 274 million (1.7 percent of GDP).
  - Largest investors in non-financial assets: RS Highway company (EUR 67.3 million), BH Telecom (EUR 30.9 million), Elektroprivreda BiH (EUR 23.0 million).
  - Despite investment, infrastructure quality lags regional peers.

### Financial Ratio and Risk Analysis Methodology
- Financial ratios used (Renteria and others (2018)):
  - Profitability – Return on Equity (ROE).
  - Leverage – Debt to EBITDA Ratio (Total debt divided by Earnings before Interest, Tax, Depreciation, and Amortization).
  - Liquidity – Current Ratio (short-term assets vs short-term liabilities; ratio below 1 suggests need for support).
- Risk map:
  - SOEs receive 1 to 5 points for each analyzed ratio (1 – very high risk, 5 – sound). Total score classifies SOEs: very high risk (score 3–4), high risk (5–7), moderate risk (8–10), low risk (11–13), sound (14–15).
  - Coefficients calculated as an average for 2015–2017.

### Aggregate Risk Findings
- Profitability risk:
  - 49 percent of SOEs face high or very high profitability risks.
  - Highest profitability risks by sector: manufacturing (77 percent), mining (75 percent), construction (64 percent), transportation (53 percent).
- Leverage risk:
  - More than 78 percent of SOEs are in the high or very high leverage risk categories.
  - Highest leverage risks by sector: transportation (90 percent), manufacturing (87 percent), construction (86 percent), mining (83 percent), water utilities (77 percent).
- Liquidity risk:
  - Over 50 percent of SOEs likely face challenges in settling current liabilities (current assets < current liabilities).
  - Sectors with largest proportion of high/very high liquidity risks: transportation (68 percent), mining (67 percent), manufacturing (60 percent), construction (57 percent).
- Composite risk:
  - 228 SOEs face high or very high financial risk based on composite index of profitability, leverage, liquidity.
  - Sectors with largest proportions of high/very high composite risk: transportation (74 percent), construction (71 percent), manufacturing and mining (67 percent).
  - Employment in high/very high risk SOEs: roughly 44 thousand workers.
  - 99 percent of SOE tax arrears are held by companies classified as very high or high risk.

### Top SOEs and Specific High-Risk Cases
- Fourteen out of the top 20 largest SOEs face high or very high overall financial risks.
- Notable firm-level findings:
  - Entity railway companies classified as very high risk; RS railway company (Zeljeznice RS) undergoing operational and financial restructuring under a WB program; FBiH railway company (Zeljeznice FBiH) likely warrants restructuring.
  - GRAS classified as very high risk; all three indicators in very high risk category; tax arrears EUR 81.8 million or 438 percent of annual revenue (one of the largest tax debtors, mostly due to non-payment of labor taxes).
  - Two large Federation mines (RMU Kreka and RMU Kakanj) face very high financial risks and continue to accrue tax arrears; combined employment ~4,600 workers (employment decreased during sample period).
  - Energoinvest in very high financial risk category; limited operations; FBiH government considering privatization and/or restructuring options.
  - Two entity highway companies (Autoceste FBiH and Autoputevi RS) are high risk due to high leverage and low liquidity; large investments for Corridor Vc are financed by multilateral debt and guaranteed by entity governments; these SOEs often act on behalf of governments and are classified as general government for fiscal reporting and analysis.
  - RS electricity companies (Elektroprivreda RS and Elektrokrajina Banja Luka) face high financial risks; 2019 RS Economic Reform Program calls for operational and financial restructuring of Elektroprivreda RS.
  - BH Telecom and HT Mostar face low financial risks by this analysis, but profits and revenues declined substantially over 2014–2017 and further operational and international benchmarking analysis is warranted.
  - Igman dd Konjic is the only sound large SOE in the top 20 (munition supplier with viable export-oriented business model).

### Impact of Potential Efficiency Gains
- Opportunity cost estimate:
  - BiH governments forego up to 3.0 percent of GDP in potential income per year through inefficiencies.
  - In 2015-2017, ROE averaged -0.3 percent for all SOEs (comparison to midpoint of moderate risk category used to estimate opportunity costs).

### Policy Implications and Actions Noted in Source
- Need for careful monitoring of SOE long-term liabilities and government-guaranteed debt due to large fiscal risks.
- Tax and SSC arrears (missing contributions) impact sustainability of health and pension funds.
- Liquidity shortfalls necessitate budgetary support; continued government support likely needed in short run for a number of SOEs.
- Recommended actions observed in examples:
  - Operational and financial restructuring (GRAS, railway companies, Elektroprivreda RS, large mines).
  - Search for strategic partner to avoid bankruptcy (Aluminij Mostar).
  - Consideration of privatization and/or restructuring (Energoinvest).
  - Classification of certain SOEs acting on behalf of government as general government for fiscal reporting and analysis (entity highway companies).
  - Broader operational analysis and international benchmarking for firms with apparent low financial risk but declining performance (BH Telecom, HT Mostar).

*Source: wpiea2019201-print-pdf - Box 1. Examples of SOEs Posing Macro-Critical Fiscal Risks*

### 4.0 percent for Swedish SOEs during the

### wpiea2019201-print-pdf - 4.0 percent for Swedish SOEs during the

### SOE financial performance and fiscal impact
- If SOEs were to have averaged 4.0 percent ROE in 2017, net income would be 3 percentage points of GDP (or EUR 127 per capita).
- SOEs are over-indebted by close to 18 percent of GDP.
- Unconsolidated SOE debt was 26.6 percent of GDP at end-2017 (Debt/EBITDA = 8.3).
- To reach the Debt/EBITDA mid-point target of 2.5:
  - Either debt would need to decrease by EUR 2.65 billion (about EUR 750 per person),
  - Or EBITDA would need to increase by the same amount.
- Significant debt reduction or improvements in operational efficiency and profitability are needed to bring SOE debt to sustainable levels.
- Balance sheet restructuring to restore liquidity:
  - Current liabilities would need to decline by 5.6 percent of GDP to bring the liquidity ratio to 1.4 (mid-point of moderate risk category).

### SOE governance framework — objectives and pillars
- Sound SOE governance frameworks foster transparency, ensure accountability, and mitigate fiscal risks.
- Transparency: timely and regular disclosure of SOE commercial and non-commercial operations and financial results to governments and the public.
- Accountability: managerial performance and supervisory boards should be scrutinized by parliaments and the public.
- Fiscal risk mitigation: systematic assessment of financial and operational soundness with weaknesses addressed by governments, SOE management and supervisory boards.
- A robust governance framework should be based on three pillars:
  - Ownership Policy:
    - All levels of government should have an accurate inventory of all SOEs under their control, including a publicly-available SOE register accounting for majority-owned and minority-stake SOEs.
    - The rationale for state-ownership should be expressed in an Ownership Policy document, preferably as part of SOE sector oversight legislation.
    - Governments should appoint qualified individuals as their representatives in SOEs; management board members appointed based solely on professional competencies; supervisory board members discharge duties independently with fiduciary responsibility to the public.
  - Financial Oversight:
    - Year-end financial and operational targets should be set to evaluate and hold SOE management and supervisory boards accountable.
    - Annual financial statements should be externally audited and reviewed by governments and Supreme Audit boards.
    - Governments should submit SOE sector reports to the parliament to be held accountable for their ownership role.
  - Fiscal Links:
    - Systematic and regular assessment of risks stemming from SOE operations to avoid unexpected use of budgetary resources and preserve annual and medium term budgets.
    - Budgetary subsidies and transfers should only be provided to satisfy pre-established and approved Public Sector Obligations by SOEs to prevent quasi-fiscal support not provided for and disclosed in budgets.
    - Explicit non-commercial mandates of SOEs should be included in relevant legislation or Ownership Documents.
    - Dividend policies based on pre-agreed metrics can ensure predictable financial flows, avoid negatively impacting SOE operations and investment plans, and prevent cash hoarding by SOEs.

### Governance gaps and empirical assessment
- FBiH and RS responses to an oversight questionnaire indicate persistent weaknesses in SOE governance.
- A composite governance index was constructed using oversight policy responses covering the three pillars above; the index assesses gaps in legislation and policies underpinning the SOE governance framework (index cannot be used to evaluate actual implementation).
- FBiH and RS responses place BiH close to the bottom of the index ratings, with particularly low scores for fiscal links.
- Countries with high index scores have often undergone significant reforms in the context of EU membership accession; countries in former Yugoslavia not in the EU have relatively low index scores.

### Ownership policy and SOE registers — FBiH and RS specifics
- FBiH:
  - Existing registers have significant shortcomings.
  - A register at the FBiH central government level created by the Prime Minister’s office includes only the 45 firms that are majority owned by the central government; it does not include 188 firms owned by cantons and municipalities.
  - The register is publicly available but can only be found in the official gazette (FBiH Official Gazette, 20/16, 3/17, 9/17, and 69/17).
  - FIA has published a list of SOEs in which general government institutions have ownership stakes, but no details on which government owns the companies nor their respective ownership stakes (FIA SOE registry: https://fia.ba/JavnoPreduzece/Index).
  - There are no sector-wide ownership documents stating FBiH central government, cantonal and local government policies in the SOE sector and ownership rationale for each SOE.
- RS:
  - The RS government published a comprehensive SOE register in 2014, but it has not been updated since then; the register is publicly available on the registry agency’s web site (Agency for Intermediary, IT and Financial Services of the RS: https://www.apif.net/index.php/registri/2014-05-12-12-14-56.html).
  - As in FBiH, there is no ownership document that states the RS central government policy in the SOE sector.

### SOE oversight units and institutional arrangements
- FBiH:
  - Authorities are planning to establish an SOE oversight unit in the FBiH Prime Minister’s office.
  - The legal basis for this office is temporary because it was not yet legally established by a decree.
  - Line ministries continue decentralized oversight over SOEs, including on financial performance, creating dual reporting lines.
- RS:
  - The Investment and Development Bank of the Republika Srpska (IDBRS) performs the centralized ownership function on behalf of the RS government.
  - IDBRS has a broad development and investment mandate that includes managing state assets on behalf of the RS central government and executing other government functions.
  - The Shares Fund (SF) was established in 2006 to manage SOEs; in 2015, the SF managed assets totaling EUR 600 million (about 12.6 percent of RS GDP).
  - No government agency is tasked with overseeing the IDBRS to ensure proper management of state assets and adequate risk and return tradeoffs.

*Source: wpiea2019201-print-pdf - 4.0 percent for Swedish SOEs during the*

### Box 3. Improving the Governance of Development Banks

### Box 3. Improving the Governance of Development Banks

### Overview
- Two development banks in Bosnia and Herzegovina:
  - Federation Development Bank (FDB) — FBiH-owned.
  - Investment and Development Bank of the Republika Srpska (IDBRS) — RS-owned.
- Both banks have significant oversight weaknesses despite differing mandates and size.

### Federation Development Bank — Findings
- Mandate: financing for reconstruction and development, economic infrastructure, agriculture, rural developments and exports.
- Market share: Manages a small share of the banking sector.
- Size (2015): EUR 148 million (1.5 percent of banking sector assets).
- Government plans: The FBiH government is currently considering expanding its activities.
- Oversight weaknesses:
  - Limited government oversight: FBiH minister of finance attends supervisory board meetings but there is no regular reporting to the FBiH MOF.
  - Loan book data (including substantial government on-lending) is not publicly available.
  - Compliance with board appointment qualification criteria has been uneven.
  - Supervisory board independence criteria are not aligned with those of private sector banks.
  - FBiH Supreme Audit Agency has never audited the FDB.
- Classification point:
  - The FDB is fully funded by the FBiH government, not exposed to risk by its own account, and acts on behalf of the FBiH government; it should be classified as and included in general government.

### Federation Development Bank — Policy Recommendations
- Improve reporting and transparency of loan book data, including on-lending.
- Align supervisory board independence and appointment criteria with those of private sector banks.
- Ensure regular audits by the FBiH Supreme Audit Agency.
- Classify and include the FDB in general government accounting given funding and risk exposure characteristics.

### Investment and Development Bank of the Republika Srpska — Findings
- Mandate: manage government investments and support social and economic development, including the financial stability of the RS banking sector; operates as lending institution and fund manager including oversight of SOEs.
- Funds capitalization (2006-2008): six funds capitalized using privatization state asset sales proceeds (EUR 298 million).
- Systemic importance: 2015 FSAP established IDBRS has systemic importance because of large exposure to the banking system and sizable direct lending programs.
- Size (2015): assets under IDBRS management totaled some EUR 1.2 billion (around 25 percent of RS GDP or 1/3 of RS banks assets. (IMF 2015)).
- Oversight weaknesses:
  - RS government has not designated a government agency to oversee IDBRS to ensure government assets are well-managed and to assess fiscal risks.
  - Mandate is very broad with no specific and quantifiable development objectives or investment performance targets.
  - Management and supervisory board selection requirements are not aligned with those of private banks.
  - Financial reporting is limited: audited financial statements are published, but no consolidated audited annual financial statements include operations of all six funds and disclose related-party transactions.
  - RS Supreme Audit Board has not audited the bank since 2012.
- Classification point:
  - IDBRS is fully funded by RS government assets, not exposed to risk by its own account, and acts on behalf of the RS government, and thus it should be classified as general government.

### Investment and Development Bank of the Republika Srpska — Policy Recommendations
- Designate a government agency responsible for oversight of IDBRS and assessment of fiscal risks.
- Define specific and quantifiable development objectives and investment performance targets.
- Align management and supervisory board selection requirements with private bank standards.
- Produce consolidated audited annual financial statements covering all funds and related-party transactions.
- Resume audits by the RS Supreme Audit Board.
- Classify IDBRS as general government given funding and risk profile.

### SOE Board Appointments — Findings
- Nomination process: Supervisory and board members are nominated by line ministries and approved by cabinets in FBiH and RS central governments.
- Competency and independence:
  - Professional competency requirements for board member selection exist.
  - No provisions requiring independence from political parties nor regulating conflicts of interest.
  - Competency requirements are perceived to be weakly defined.

### SOE Board Appointments — Policy Recommendations
- Strengthen independence requirements for supervisory and board members in line with OECD guidelines.
  - OECD guidance: independent supervisory board members should be free of any material interests or relationships with the enterprise, its management, other major shareholders and the ownership entity that could jeopardize objective judgement.
- Put safeguards in place to avoid conflicts of interest and limit political interference in board processes.

### Financial Oversight — Findings
- Large implementation gaps in financial oversight of SOEs in both FBiH and RS.
- Financial and operational performance oversight of SOEs is not done in practice.
- No fiscal risk assessment framework assessing SOE performance systematically.
- Supreme Audit Boards:
  - Legal mandate exists to conduct financial audits of SOEs, but audits are conducted only sporadically due to capacity constraints.
- Financial statement publication:
  - Legal provisions for publication of externally-audited annual financial statements, but compliance is uneven.
  - In FBiH many financial statements are not publicly available; Financial Intelligence Agency (FIA) charges fees to access SOE statements.
  - In RS, Agency for Intermediary, IT and Financial Services (APIF) publishes shortened (summary) financial statements free of charge and charges fees to access full financial statements.
  - More than 100 SOEs have not submitted financial statements to FIA and APIF recently; no information on their performance is available.
- Sector reporting: Entity governments have never produced an SOE sector-wide annual report summarizing performance and outlining fiscal risks.

### Financial Oversight — Policy Recommendations
- Broaden Supreme Audit Boards’ review coverage to include large SOEs and strengthen their audit capacity.
  - Ensure Supreme Audit Boards receive all public sector annual financial statements on a timely basis.
  - In RS, resume audit of the IDBRS and individual SOEs.
- Publish all annual financial statements of SOEs on centralized websites for each entity, including approved business plans for each SOE; enforce this requirement given many non-reporting SOEs.
- Submit annual comprehensive SOE sector reports to entity parliaments describing recent financial and operational performance and highlighting fiscal risks.

### Fiscal and Policy Interactions with Government — Findings
- Significant public support to SOEs through subsidies, grants, and quasi-fiscal means without pre-conditions.
- Fiscal support (2017): entity governments disbursed EUR 109 million (0.9 percent of GDP) in budgetary subsidies and grants.
- Stock of arrears (2017): social contributions and direct tax arrears approximately EUR 0.6 billion or 4 percent of GDP.
  - Allowing SOEs to accumulate tax arrears is a form of quasi-fiscal support not approved through the budget process.
- Dividends:
  - SOEs distributed EUR 40 million in dividends in 2017.
  - Dividends are distributed on an ad-hoc basis; no formal dividend policies are in place, which undermines medium-term budget planning.
- Medium-term budget planning is hampered by lack of formal fiscal risk assessments; entity MOFs do not conduct fiscal risks assessments that account for explicit and implicit financial interactions between governments and SOEs.

### Fiscal and Policy Interactions with Government — Policy Recommendations
- Formalize “arms-length” financial relations between SOEs and governments by following EU directives on State Aid.
  - Budgetary support to SOEs should be granted only in exchange for ex-ante Public Sector Obligations (PSOs) that specify the nature of the policy mandate; could include ex-post assessments of compliance with PSOs.
- Adopt formal dividend policies that condition dividend payouts on financial performance to increase transparency and predictability.
- Conduct fiscal risk assessments via centralized oversight units and include them in medium-term budget planning documents and budget execution reports sent to parliament.

### Options to Improve SOE Sector Performance — Summary and Assessment Tools
- Clarify rationale for state ownership in Ownership Policy Documents; current “strategic” designations lack ex-ante criteria and are perceived as arbitrary.
- Systematic decision-making process for future of each SOE disclosed to the public based on assessments of financial soundness and policy objectives.
- Broaden financial soundness assessment to include:
  - Forward-looking financial and operational projections and analysis of business plans and market conditions.
  - International benchmarking with private companies in neighboring countries.
  - Assessment of SOE impact on the rest of the economy (competition, input quality and cost, SOE wage premium, tax and social contribution arrears, systemwide liquidity constraints).

### Options for the Future of SOEs — Decision Scenarios and Guidance
- Privatization
  - Consider when there is no policy rationale for continued public ownership.
  - If not financially sound but potentially viable, privatization coupled with credible restructuring and possible budgetary support may be needed.
  - If already financially sound, timing and process should maximize sale price and strengthen the government balance sheet.
  - Privatization can improve economic performance and governance in context of broader reforms and transparency; must mitigate social impacts and avoid concentration of resources.
  - Privatization proceeds should be reported, audited, subject to parliamentary oversight, and used prudently (avoid earmarking; focus on priority investment spending).
  - Tailor mitigation measures: retraining, expanded social safety nets, transition pension arrangements, active labor market policies, local economic development projects.

- Continued State Ownership
  - Retain ownership if potential financial viability and a clear policy rationale exist.
  - Restructuring may be possible for financially unsound but potentially viable SOEs; credible restructuring should include fiscal risk reduction measures and possible PSOs in exchange for fiscal support.

- Concessions / Public Private Partnerships (PPPs)
  - Consider as alternatives where state participation fosters development; private resources and management can enhance financial soundness and operational efficiency.
  - Identify, disclose, and cost fiscal risks in the budget as concessions and PPPs are risk-sharing arrangements.

- Bankruptcy
  - If no policy rationale exists and the SOE is insolvent and not viable even with restructuring, proceed with bankruptcy and introduce targeted measures for vulnerable groups and affected communities.

- Conversion to Government Agency
  - Convert SOEs that do not perform commercial functions nor are financially viable into government agencies/budgetary units.
  - Example: highly leveraged entity highway companies implementing long-term strategic government decisions with debts guaranteed by the government — their insolvency-related fiscal risks should be brought into the general government balance sheet for transparency.
  - Integrating such SOEs into general government reduces budgetary fragmentation and places accountability inside the government.

*Source: Box 3. Improving the Governance of Development Banks, wpiea2019201-print-pdf*

### CONCLUSION

### CONCLUSION

### Governance reforms to improve transparency and accountability
- Establish centralized online SOE registers that include all SOEs owned by entity central, cantonal, and municipal governments.
- Ensure the registers are updated regularly and include financial statements of all SOEs.
- Entity, cantonal and municipal governments should put in place Ownership Policy documents for their respective SOE sectors that specify the rationale for state ownership, commercial and policy objectives, and delineate the responsibilities of the governments and SOE management and supervisory boards.
- Implement policies to depoliticize appointments to SOE boards and management to help improve SOE performance.

### Financial oversight and fiscal risk management
- Improve financial oversight by setting up centralized oversight units at ministries of finance.
- Fiscal risks arising from SOEs should be disclosed.
- Budgetary support should only be granted with explicit conditions in return for ex-ante Public Sector Obligations provided by SOEs.
- Quasi-fiscal subsidies through tax and SSC arrears should not be tolerated.

### Assessment, restructuring, and privatization options
- In the context of a wider-reform effort, consider the future of SOEs taking into account their policy relevance and financial performance.
- SOEs that are not policy relevant and financially unsound should be closed, restructured or privatized.
- SOEs that are not policy relevant but are financially sound should be privatized.
- Options for privatization include concessions, Public-Private Partnerships (PPPs) or full privatization.

### Social safeguards and management of privatization proceeds
- Identify vulnerable groups that might be negatively affected by privatization and implement measures to mitigate possible social impact, such as employment support and possibly social safety net measures.
- Treat proceeds from privatization as a form of financing that should be reported, audited, and subject to parliamentary oversight.

*Source: CONCLUSION, wpiea2019201-print-pdf*

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_Source: https://www.imf.org/-/media/files/publications/wp/2019/wpiea2019201-print-pdf.pdf_