Transparency International – Moldova presented its Report on Transparency Monitoring of State Companies and Joint Stock Companies with State Capital. The study was conducted within the project “Promoting Responsibility and Transparency in State Enterprises” supported by the National Endowment for Democracy.
The objective of this monitoring was to analyze the situation regarding the transparency of the activity of state companies, to identify possible problems and to develop proposals for improving the situation, including improving the related legal framework.
The subject of the monitoring were the transparency of the policies of appointing the Board members and of the managers of the state companies; budget planning and execution; procurement procedures; conflict of interestsț policy; implementation of recommendations made within audits and state controls; reporting on the activity of the companie. The subject of monitoring is 67 companies managed by 14 central public authorities (CPA).
As a result of the monitoring, the following problems were identified:
General Business Activity Information: About 1/3 of the central public authorities provided the requested by TI-Moldova information beyond the deadlines set by the Law on Access to Information. Some authorities initially censured information provided by their enterprises/companies.
Certain types of activity, service/works performed by the state companies seams inappropriate for their specific activity. For example the State Enterprise “Registru” whose duties include keeping the state registers, organizes language and computer courses, provides transportation and distribution of special correspondence, condicts technical and scientific research, trasological, grafoscopic, dactyloscopic research. The services of the state prophylactic sanatorium “Constructorul” included agriculture, fishing, manufacture of clothes, furniture production, building construction, tourism. Practising such inappropriate activities by state companies may also create unfair competition for private entrepreneurs.
Business administrators and their remuneration: in their answers to the request of TI-Moldova, about ¼ of the monitored enterprises did not indicate the remuneration of their managers, invoking the personal nature of the data or providing an evasive response (note: the remuneration of the administrators of state enterprises is not personal information).
The remuneration of the managers of the state companies remained unproportionally high despite of chronical net losses registered by the companies (eg, “Air Moldova”, “Railway Moldova”, “Ungheni River Port”, “Aeronautical Training Center Training”,”Moldaeroservice”, “Cricova Winery “, “Milestii-Mici” Stone Mine,”Vestmoldtransgaz”,” Vamservinform “,”Palace of the Republic”.
The componense of Boards of Directors, the remuneration of its members: despite the considerable losses registered by some companies, the members of their boards continue to benefit from significant remuneration („Air Moldova”, “Aeronautical Training Center”, “Moldaeroservice”, Republican Applied Pedology Centre,” Cricova Winery “,”Milestii-Mici” Stone Mine, “Chişinău Glass Factory”, “Vestmoldtransgaz”, “Customservinform”, “Palace of the Republic”).
Contrary to the legislation, the Boards of Directors of some enterprises include an exaggerated number of representatives of the founder (“Posta Moldovei”: out of 9 members of the Board, 5 are from the founder – the Ministry of Technology and Information of Moldova; in “Molddata” and “Radio Frequencies” of 9 members, 6 are representing the same ministry). Such an over-representation of the founder organisation in the Board seems to be rather a form of loyalisation of Board members than increasing control over the activity of state companies.
Board members frequently have no sufficient work experience, particularly in business. In some cases, the composition of the Board indicated by the company differs from the one on its web-site, in other cases the Board of the company indicated on the company’s web site differs from the one on the founder’s website.
Staff employment procedures: Only 1/3 of companies claim to have posted job vacancies and qualification requirements for candidates and only half of them have organized competitions for this purpose. Insufficient transparency of employment procedures, decision-making in conflicts of interest situations lead to the transformation of companies into “incubators” for the relatives of state officials. Although the public authorities organize competitions for the position of the manager of state enterprises, they are often mimicked, transparency being apparent.
Companies’ Incomes and Expenses: Following the request of TI-Moldova, about one quarter of enterprises did not provide information on their income and expenditure, in some cases the information was censored by the founding authorities. Some companies indicated that they did not make such estimates, even though the legislation requires the approval of the annual estimate of incomes by the Board of Directors.
Procurement procedures: Although companies are required by law to ensure transparency in procurement, only 1/8 of them presented their procurement plans or indicated the sourse where such information may be fund. About 40% of companies did not indicate, as required, the value of their total procurements. Only about 40% of enterprises have published ads or invitations to bid, and only one enterprise has published detailed data on the results of selection.
Confuse stipulations in the Law on State Enterprise vis-a-vis the procurement procedures and lack of concrete requirements on the information to be published, provide businesses with an opportunity to avoid transparency in the procurement process.
Conflicts of interests: the conflict of interests’ policy is usually not applied in state companies, therefore suspicious transactions with affiliated companies take place, relatives of state officials are hired in high paid positions, which damages the efficiency of the enterprises. Only a small number of companies have informed TI-Moldova about the existence of conflicts of interest (the Winery” Milestii Mici, “Moldaeroservice”, “Molddatsa”). There were companies that hid the cases of conflicts of interests, even if they were officially stated by the National Integrity Commission (“Universul” Publishing House” and the State Road Administration).
Audits and controls at the monitored companies: The requirements for the audit of the annual financial statements set out in legislation create opportunities to avoid this procedure by loss-making or “floating-off” companies due to ineffective or fraudulent management. According to the Agency for Public Property, in 2016 about 2/3 of the public enterprises included into the Public Property Register do not meet the criteria according to which they would be obliged to carry out the audit of the annual financial reports. About 60% of audited / controlled enterprises noted that the deviations and irregularities identified were removed, with recommendations being implemented. However, no enterprise published data on the results of controls / audits, nor did it disclose information about the measures taken to implement the recommendations.
Information disclosure: The Law on state enterprises rather limits the disclosure of the information on the activity of the state companies (particularly the financial reports, the report on the activity of the management, the company development intentions and the audit results).
Webpages of founders and managed businesses: The legal framework does not set requirements for publishing information on managed businesses on the central public authorities’ (CPA) websites. Checking the CPAs’ sites has shown that most of them place mainly minimal information about the business activity of these companies. 70% of the monitored companies have webpages, but only a few of them contain consistent information about their activities.The focus group discussions with experts also un-wailed a number of problems in the activity of state companies:An important problem is the worsening of economic and financial performance of state companies. In 2015, as compared to 2014, the losses of state-owned companies have increased about 1.5 times, of the joint-stock companies – about 2 times. This is also due to the inefficient or fraudulent management of state companies and deprives the public budget of considerable incomes.
State companies continue to accumulate historical debt, including due to non-payment of domestic and foreign credits. This affects their financial independence and generates the risk of extinguishing debts from the state budget. The audit results of the Chamber of Accounts show multiple irregularities in the business, including non-compliance with accounting rules, mismanagement of public goods, deviations in the rental of premises, failure to comply with tariff approval procedures, etc. The enormous differences between the patrimony owned by enterprises and that recorded in the accounting and cadastral bodies create the risk that the state will lose the unregistered properties.
Problems in the activity of state companies are also generated by the influence of political / group interests on businesses, including the appointment of directors and board members, procurement (including affiliated off-shore companies), employment and promotion of affiliated persons, etc.
Over the past 20 years, state assets have not been revalued, which, along with the poor economic and financial results caused by the fraudulent management of many businesses, could lead to their privatization at ridiculous prices.
It is also worth noting that the 251 state-owned companies and 111 state-owned joint stock companies registered in the Public Property Register are managed by dozens of ministries, agencies and public institutions. Business administration based on branch principles has led to the emergence of institutional conflicts of interest. Thus, public policy makers in certain areas are also managers of state-owned companies competing in these areas with private enterprises. Consequently, public authorities through various measures (including subsidies, facilities) favor the businesses they manage, which affects the competitive environment.
The causes of the deplorable situation in the field are in particular the lacunar legal framework that tolerates the irresponsibility of the members of the management bodies, control and corporate directors, restricting the disclosure of information by businesses. Even though a number of amendments have been made to the Law on State Enterprise and related legislation in recent years, radical changes in the management of state companies have not occurred.
Starting from the above, the State must strategically address the activity of state-owned companies:
- identify the strategic areas where the presence of the state is necessary; – to specify the form of its presence;
- either through public-private partnerships or through state-owned companies, clearly define the types of activity in order not to affect the competitive environment;
- analyse the activity of the state enterprises, re-valuate the public patrimony and proceed to the privatization or liquidation of the inefficient and unnecessary companies;
- ensure the privatization of companies in transparent and fair auctions.
A new law is needed that will regulate both the activity of state and municipal companies. The general principles of founding, operating and liquidating municipal companies should be the same as for state-owned companies. These enterprises have to satisfy several basic criteria:
- that their creation and existence is well argued;
- to exist only in areas where there is no private competition;
- apply international corporate governance standards with professional management, with performance criteria set by law, with indicators included in business plans for average and yearly periods;
- the management boards include professional and independent persons of the founder; – ensuring transparency of activity (including through the international financial reporting system) and procurement procedures (as in the case of public institutions);
- to eliminate the transactions and acquisitions of enterprises with offshore jurisdictions and those with a high risk of dubious transactions.
A single entity should be set up to manage and supervise the work of all state and municipal companies. This would allow the resolution of the problems caused by the division of corporate governance skills by branch principles. This entity should develop policies to manage state property, including state-owned companies, state-owned joint stock companies, and municipalities, and monitor these businesses, including on the basis of Court of Accounts and Financial Inspection reports.
In the draft Law on the state enterprise and the municipal enterprise have to find some basic aspects, in particular:
In the context of business management, the law should provide for:
- the appointment of the members of the Board of Directors and the managers of companies on the basis of transparent competitions / evaluations;
- establishing more rigorous requirements for candidates for the position of company manager and member of the Management Board (especially in terms of qualification and work experience);
- the remuneration of the administration and Board of Directors in correlation with the economic and financial performance of the company.
In the context of disclosure of public information, the law should be harmonized with OECD standards, providing:
- expanding the list of information to be published (with information such as: the objectives of the company and the results achieved, the foreseeable risk factors and their overcoming, the composition, the qualification and the procedures for appointing the members of the management and control bodies, the participation of the members in other boards, the remuneration of the company’s manager Financial aid, financial guarantees and commitments assumed by the state, acquisitions made, the activity of subsidiaries / representations, data on the personnel of the company and the created jobs, results of controls and audits);
- oblige the founder to elaborate and publish on its web page annual aggregate reports on the activity of the managed companies.
Other legal aspects of business activity should also be improved, providing in particular for:
- applying the Public Procurement Act to state and municipal enterprises, at least in the context of public procurement for the needs of the technical and material base;
- applying anti-corruption policies to state-owned and municipal enterprises (meaningful engagement and promotion of staff members, conflict of interest policy, transparency and accountability in the use of public funds, etc.);
- developing and adopting the governance code for state companies as recommended by the OECD.
This monitoring was carried out in the project “Promoting Responsibility and Transparency in State Enterprises” with the financial support of the National Endowment for Democracy. The opinions expressed belong to the authors and do not necessarily reflect the position of the sponsor.