International finance corporation country partnership strategy
Improving Governance in fYR Macedonia
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Improving Governance in fYR MacedoniaAs in countries throughout Central and Eastern Europe, by the late 1990s governance issues became seen as key constraints to progress in fYR Macedonia. As recently as 2005, most firms continued to rank corruption as an obstacle to the operation and growth of business.6 Addressing corruption concerns continues to be a high priority of Macedonian citizens (following unemployment and poverty).7 Other obstacles voiced by firms also point to weaknesses in the system of governance; firms complain about the functioning of the judiciary and, as a direct consequence, about contract violations by suppliers and customers. Dramatic improvements in the business environment for firms are required, both through better governance of the regulatory bodies that impinge upon business activity, and through more efficient and transparent provision of the public goods and services upon which Macedonians rely. All governments since 1998 have won elections on strong anti-corruption platforms, and the 2006 elections raised the profile even further. The lists of legislation adopted and institutions established covering this area and the governance framework more broadly is extensive and mostly in line with good international experiences. In addition to passing an anticorruption strategy and action plan –common first steps in many countries– fYR Macedonia has followed up with the implementation of legislation guaranteeing free access to information, introduction of e-government procedures in some areas, establishment of a special commission to check asset disclosures of public official and investigate cases of corruption, and has gradually been strengthening the capacity of key oversight institutions such as the State Audit Office. The government has taken steps to repair the disconnect between the anti-corruption legal framework and enforcement actions. Charges have been brought against high-ranking current and former officials, judgments were issued in some long-lasting corruption cases, and other signs of serious intentions have begun to build credibility for the government anticorruption programs. However, these efforts need to be sustained in order to avoid suffering the same outcome as similar efforts in the past and in order to have an impact on the perceptions of corruption and trust in institutions. The signing of the Stabilization and Association Agreement (SAA) with the EU has increased consensus among political parties on the need to sustain progress in improving governance. The experience of the EU’s newest members, Bulgaria and Romania, has made it clear that the European Commission places great importance on controlling corruption as a precondition for accession. The Macedonian authorities -both through statements and actions- have signaled that they intend to be proactive in addressing corruption. Although certain principles of good governance are universal -transparency, accountability, and voice for example- the binding constraints are not the same in all sectors. In some areas the institutions of transparency are strong, while the capacity for implementation is weak; in others major sector reorganizations may be required to reduce the incentives for corrupt behavior. This CPS calls for an expanded focus on the most critical governance weaknesses and the ways that the WBG can work with fYR Macedonia to address them. Some activities will be oriented directly toward improving cross-cutting institutions of governance, while others will address weaknesses in key sectors. Recognizing progress in key sectors, and helping to achieve even more Improving governance requires transparent, open and accountable public institutions, but also greater efficiency in the public sector. FYR Macedonia’s efforts to improve transparency in customs and to build accountability through monitoring provide real evidence of how reforms can benefit the business community and reduce corruption at the same time. Through the TTFSE project, border crossing times were closely monitored in four pilot border and inland facilities. The clearance times were steadily reduced through the life of the project (Figure 3), and this also coincided with a dramatic reduction in the prevalence of bribery at customs as measured by two independent surveys of firms (Figure 4). At the same time, the levels of corruption reported by firms remain worse than the average for 10 new members of the EU, and worse yet compared to the average of the original four EU Cohesion countries. FYR Macedonia’s poor ranking in the Doing Business indicators for Trading Across Borders also highlights the need to continue to make administrative procedures for trade more friendly for business. Nevertheless, the progress to date in reducing the barriers to trade has been particularly important for business development in a small country such as fYR Macedonia, and the present CPS aims to build on these successes.
Other reforms have similarly led to improvements in the manner in which government bodies interact with the business community. Recent reforms such as the introduction of the “one-stop shop” for business registration have considerably improved the process, reducing the time to register a business8 from 48 to 18 days, and should bolster gains that had already been achieved in reducing the frequency of bribes for business licensing (Figure 5). The ongoing regulatory reform effort is also expected to reduce opportunities for corruption.
Progress in improving business entry is beginning to be matched in imposing discipline on firms through business exit and payment discipline. The myriad of governance issues that gave selective benefits to well-connected firms through soft-budgets, under-priced utilities prices, and an ineffective bankruptcy procedure have begun to receive more prominent attention by the Macedonian authorities. A new Bankruptcy Law is expected to expedite bankruptcy proceedings and, more importantly, to help deal with conflicts of interest among bankruptcy trustees. Similarly, fYR Macedonia’s nascent regulatory institutions have begun to exercise their authority in controlling the practice of giving subsidized energy prices for large energy consumers and the excessive tolerance of arrears. These lingering practices leave unsubsidized firms at a clear disadvantage. The dual challenge of building a well-governed state regulatory system for utilities, while also ensuring that the (monopolistic) providers achieve cost recovery, is aptly illustrated by the energy sector. In addition to the impact that soft budget constraints have on competition, there is a very direct impact on this sector. Poor payment discipline for electricity bills by state owned organizations and large consumers is a key factor contributing to the financial deterioration of the energy sector in fYR Macedonia. While the government fully recognized this problem, and provided additional budget allocations for state organizations to meet their obligations in its supplementary 2006 budget, actual payment discipline by budgetary institutions has yet to be improved and requires constant monitoring by the government. Combined with weaknesses in the regulation of the energy sector –electricity tariff filings lag significant increases in the price of electricity imports and are insufficient to cope with the maintenance and investment needs of the electricity sector– the utilities have difficulty maintaining cost recovery. Improving financial markets and facilitating access to credit remain critical to support business entry and growth and, ultimately, job creation. While the legal and supervisory framework for banking is increasingly in line with international standards and EU requirements, continued efforts to strengthen banking supervision are needed to further promote market discipline and efficiency, and enforce strong bank governance. The government is also committed to address weaknesses in the insurance sector, where ineffective supervision together with poor governance arrangements have impeded the sound development of the sector –one of the smallest in the region– and provide inadequate protection to policy holders.
Judicial corruption in fYR Macedonia has largely been tied to the politicization of the selection and disciplining of judges, as well as opaque court proceedings and lack of enforcement. Significant steps were taken in 2005 and 2006 to address this situation with the adoption of constitutional amendments and fundamental legislation. However, implementation of this legal framework will require time, resources and commitment from the government and the judiciary. The adoption of new Laws on Civil Procedure, Enforcement, Administrative Disputes and Misdemeanors are designed to reduce the backlog in the courts and speed the judicial resolution of disputes. While new private enforcement agents have begun to operate, implementation of the other laws remains a challenge. The revision of sector laws, continued training and supervision of private enforcement agents and the creation of an Administrative Court all must take place for the legislative changes to have an impact in improving judicial efficiency and effectiveness. These reforms are closely linked to efforts to control administrative corruption and ineffective service delivery in other sectors, both of which continue to be challenges for fYR Macedonia. A recent report from the Administrative Inspectorate made clear that agencies such as the denationalization commissions are neither operating effectively nor quickly enough to satisfy the needs of the citizens. Improved monitoring and reporting by the Inspectorate and more efficient resolution of citizen complaints against administrative actions will require additional capacity building and resources. Governance problems need to be addressed in many state agencies and in remaining public enterprises. For example, unofficial payments for official land or real estate registrations or even to receive information are not unusual, creating a key constraint over real property rights. Another example relates to the maintenance in fYR Macedonia’s road system, which has been hindered by both lack of transparency in oversight authority and by substantial leakages in the collection of tolls. It is not difficult to find similar examples in other public enterprises and agencies. The government is working on plans to deal with this, either by privatizing, for example, the public enterprise for housing, or by adopting a comprehensive strategy for sector reform, for example, in forestry. However, without broad reform of the process of selection and accountability of public sector managers, these are not likely to give lasting results. Moreover, local public enterprises still remain largely unaccountable, with little commercial orientation. Most public utilities operate on the local level9 –specifically, the communal services enterprises and utilities providing water and sanitation, solid waste management, and urban transport. The institutional and legal framework for these enterprises provides insufficient incentives for operational or financial efficiency, and incentives to select managers based on qualification is often absent. With the government intent on pursuing large investment projects (most notably in energy and infrastructure) over the next few years, the legal framework on use of concessions, unsolicited bids and private-public partnerships needs to be carefully reviewed to ensure that these are made in a transparent, competitive, and cost-effective manner. In education and health there have been steps to improve accountability. While corruption remains a problem in education,10 in order to improve transparency, fYR Macedonia is now developing a high quality and comprehensive student assessment and testing system. The full-scale introduction of a national examination at the end of secondary education (Matura) in 2008 will improve the objectivity of access to tertiary education, and a series of national assessments will measure system performance. In addition, capacity and accountability have improved at the school level, because all schools now have School Boards with representation from parents, that are required to prepare a school development plan, and will undergo a period evaluation (including both external and internal processes). Ensuring these systems work effectively is essential and the priority for the next period. FYR Macedonia also has yet to make good use of the emerging data on performance. In health, notorious for its governance issues, many steps are taken as well, as described in Box 1.
Strengthening the institutions of oversight The demand side for good governance remains weakly developed, although this is gradually improving. Civil society has yet to meet its potential as a control mechanism over the government, though some of the country’s NGOs are characterized by political influence and conflict of interests themselves. FYR Macedonia’s new Free Access to Information Law, a model law in many ways, shows great potential for strengthening the supply of information for citizens, the media, and NGOs, although implementation has been uneven and it will take time for the value of such a law to be fully utilized by civil society. A new Law on Conflict of Interest is currently under discussion by the Parliament. The institutions of financial oversight have gradually been strengthened. An independent State Audit Office (SAO) was established and staffing has grown consistently to the point where the SAO routinely produces audit reports valuable for identifying corruption.11 Internal audit has also been strengthened and capacity is expanding. Strong support for the further development of both the internal and external audit functions is now being provided by the EC as an integral component of conformance with Chapter 32 of the acquis. All government transactions are executed through the Single Treasury Account providing sound controls over collection and spending. The transparency of government spending has improved as well– monthly Budget execution reports are posted on Ministry of Finance web-site, as are all SAO reports. While these measures have increased the visibility of corrupt practices and reduced public tolerance, bribery to receive government contracts is reported to remain a considerably bigger problem for doing business than in other ECA countries (Figure 7) The violations uncovered by SAO auditors almost invariably involve procurement violations, and with few exceptions, follow-up on the findings remains weak.
Establishing a meritocratic and professional public administration has not yet been achieved, despite it being a priority of successive governments. The Law on Civil Servants, setting-up employment, pay and career rules, covers only 13 percent of the public administration, though there is evidence that even this law is not fully implemented. Administration issues in other parts of the public administration remain non-transparent. As a result, changes and replacements are frequent (especially after political changes) resulting into a politicized public service, which was one of the main concerns of the latest EC Progress Report. Furthermore, efforts to contain the wage-bill without a corresponding reduction in public employment levels translated into a low-paid unattractive public service highly vulnerable to corrupt practices. The decompression of civil service salaries, completed in 2006, has set a good example, but more is needed to address similar issues in the public administration at large. The need to closely monitor implementation of governance-oriented laws is acute. The conclusions of the 2006 Conference on the Implementation of the State Program for Prevention and Repression of Corruption called for establishment of monitoring indicators that would enable careful tracking of the implementation of the Program.12 A broad effort was launched over the last year, resulting in sets of baseline indicators on the implementation of the Program and also providing valuable information on the state of the governance framework in the country. The results of this activity have not been encouraging, as progress in some sectors and areas has not been met in others. Helping the government improve performance in strengthening governance is a key goal of this CPS. Download 2.05 Mb. Share with your friends:
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