Western Balkans Competitiveness Outlook 2024: North Macedonia

The central government of North Macedonia manages an SOE portfolio comprising a total of 30 enterprises, according to publicly available information posted on the Ministry of Finance’s website.1 15 of these SOEs have the special legal form of “public enterprise” and are subject primarily to a special Law on Public Enterprises, while the remaining 15 are fully corporatised and subject to the Law on Companies.2 Fully corporatised SOEs that perform activities in the public interest are additionally subject to the Law on Public Enterprises.

The authorities of North Macedonia do not maintain a centralised dataset on SOEs with enterprise-specific information on their employment levels or corporate valuation, making it difficult to paint a complete picture of SOEs’ economic footprint. However, since 2020, the Ministry of Finance has published a list of central government-owned SOEs with very basic quarterly revenue and expenditure data (Table 6.2). This list shows that SOEs are notably present in the primary sectors, including the national forest enterprise; the electricity and gas sector, including the power plant enterprise and transmission system operator; transportation, including rail transport and infrastructure, public roads and the national airport; telecommunications, including the public broadcasting company; and other utilities, including water supply and postal services. The central government also notably owns two real estate companies, the national lottery and a sports arena.

Concerning the performance of SOEs in the central government’s portfolio, as shown in Table 6.2, 17 of the state’s 30 SOEs were loss-making during the first quarter of 2023. Although some losses may only be temporal, an examination of annual and quarterly data for earlier years also finds a large proportion of loss-making SOEs: 19 SOEs in 2020, 10 in the last quarter of 2022 and 14 in the last quarter of 2021.3 For SOEs that are established to undertake public-interest activities, their financial losses may be partly explained by the costs associated with these activities. However, a more in-depth analysis of the actual costs associated with such obligations would be warranted to assess the reasons for SOEs’ underperformance. Good practice calls for the costs of public-service obligations to be clearly defined and financed directly from the state budget.

Concerning the clarification of ownership policy and rationales, the authorities of North Macedonia have not elaborated a state ownership policy that articulates the rationales for state ownership of enterprises or defines the overarching objectives of the state as a shareholder. For the 15 central government-owned SOEs that are incorporated under the special legal form of “public enterprise”, the Law on Public Enterprises essentially communicates the overarching rationale for state ownership by stating that these enterprises are established to undertake activities in the public interest. However, the rationales for state ownership are not explicitly defined for the SOEs that are incorporated as joint-stock or limited liability companies and do not undertake public-interest activities. For these companies, the rationales for state ownership can sometimes be implicitly ascertained, for example, from sectoral policies or company-specific documents such as articles of association. In the context of this assessment, the authorities reported that state enterprise ownership is undertaken primarily to 1) support national “strategic” interests and 2) provide goods and services where no market exists.

In practice, SOE-specific objectives are either defined in SOE statutes or bylaws or are determined in an ad hoc manner, for example, via communication between state shareholding entities and SOE boards or managers. The authorities report that the state does not set quantifiable performance objectives for most SOEs. Without an ownership policy in place to steer shareholding ministries’ decisions, the SOE objectives-setting process appears to be ad hoc and characterised by an unclear division of responsibilities between the state as owner, boards of directors and management. The lack of clearly defined objectives and responsibilities undoubtedly exacerbates SOEs’ frequent performance issues.

Efforts to professionalise state ownership practices in North Macedonia are limited by the SOE portfolio's dispersed nature and the absence of a state ownership policy to harmonise practices across the public administration. Public bodies with state ownership responsibilities include the Ministry of Finance, the Ministry of Economy, the Ministry of Transport and Telecommunications and the Ministry of Agriculture, Forestry and Water Supply. No co-ordinating agency has been established to harmonise state ownership practices across the SOE portfolio, although the Ministry of Finance has established an SOE monitoring unit, which as mentioned previously publishes quarterly financial data for all SOEs.

April 2022 amendments to the Law on Public Enterprises introduced new qualifications criteria for SOE supervisory boards, contributing to a more robust board nomination framework for certain categories of SOEs (those undertaking public-interest activities and thus subject to the Law on Public Enterprises). The three-member supervisory boards of these SOEs are henceforth required to include: one member with at least five years of work experience in the field of public enterprise activity, one member with at least five years of work experience in the field of financial operations, and one member with at least five years of work experience in the field of legal affairs. These new criteria constitute a positive step towards strengthening the professional qualifications of SOE supervisory boards. However, the criteria do not apply to fully corporatised SOEs that do not undertake public-interest activities, meaning that their boards of directors will continue to be selected by the government (often based on recommendations of line ministries) without any broadly applicable requirements regarding their qualifications. Additionally, the authorities have not elaborated more detailed guidelines outlining the exact process shareholding institutions should follow when appointing SOE board members following the new criteria. SOE board recruitment procedures are currently not open to the public, contributing to a general lack of transparency. These shortcomings add to the risk of politicising the SOE board nomination process and the possibility that political concerns rather than corporate objectives influence management decisions.

On a related point, stakeholders interviewed for the 2021 assessment noted that the CEOs of SOEs often change with political cycles, indicating that SOE boards cannot play their good-practice roles of overseeing management in the long-term interest of the enterprise and shielding SOEs from political influence.

Efforts to establish independent and professional boards in Macedonian SOEs have been limited. For fully corporatised SOEs, the company law includes some basic good-practice elements, notably that 1) board members are liable for any damages inflicted on the company as a result of their decisions and 2) boards must comprise at least one-quarter independent directors, which are non-executive members without any family ties to management; do not hold more than 10% of shares in the company; and do not have any business relationships with it. Beyond these basic elements, several shortcomings in SOE board responsibilities and independence persist. First, for SOEs with single-tier boards, the state shareholder (the Annual General Meeting), rather than the board of directors, has the right to appoint the CEO, depriving these boards of their good-practice role of overseeing management with no political interference. Secondly, there is no practice of appointing independent directors to the boards of statutory SOEs (“public enterprises”). Thirdly, the boards of some SOEs frequently include acting politicians, greatly jeopardising their ability to shield SOE management from political interference. Finally, the authorities report that in some SOEs, board members receive instructions from the state shareholder on how to vote on agenda items at the general shareholders’ meeting, pointing to a system in which boards are not fully empowered to professionally exercise their role of overseeing management with no shareholder interference. These elements, together with the aforementioned lack of a harmonised board nomination framework applicable to all SOEs, create a situation wherein SOE boards cannot be considered adequately equipped to exercise objective judgement – and supervise SOE management – in the interest of the enterprises they oversee.

Concerning privatisation practices, North Macedonia does not currently have an active privatisation programme in place, and the authorities have not provided any information on privatisations undertaken over the past decade. In 2021, the previous government announced plans to explore the possible privatisation of several loss-making SOEs, including the national postal services operator, but those plans have not been carried out (BNE Intellinews, 2021[2]). More recently, the prime minister announced an ambition to pursue the partial or full privatisation of Macedonian Post, noting that the enterprise regularly operates at a loss of approximately EUR 3 million per year that the government budget must cover (Fokus, 2022[3]).

Unsurprisingly, given the lack of a state ownership policy outlining why the state owns specific companies, the legislation applicable to privatisations similarly does not specify in which circumstances SOEs should be privatised. A certain degree of transparency is required during the privatisation process, e.g. through the requirement that the state publish information about forthcoming privatisations, including about the concerned company and the value of shares being sold, within 15-20 days prior to the completion of the sale. However, there is no requirement for planned privatisations to be announced before a seller is identified. Concerning institutional responsibilities, the Privatisation Commission of the Government of the Republic of North Macedonia is responsible for managing and disposing of state capital. It proposes the method of sale and the initial selling price of shares. The Commission receives technical support from the Ministry of Economy, the Ministry of Finance or the Pension and Disability Fund.4

The authorities of North Macedonia have not elaborated SOE-specific financial and non-financial reporting requirements applicable to all SOEs, but SOEs are required by applicable legislation to submit financial statements to the central registry, which subsequently must make them publicly available. SOEs subject to the Law on Public Enterprises must publish their financial statements directly on enterprise websites. In line with good practice, financial statements must be prepared following international financial reporting standards (IFRS). Non-financial reporting practices are less developed across the SOE sector, and SOEs are not subject to any sustainability reporting requirements. The absence of sustainability-related reporting requirements represents a missed opportunity for strengthened monitoring of SOEs’ role in contributing to the low-carbon transition. This is particularly relevant for SOEs operating in sectors with a high carbon footprint, such as energy production. As is the case across the region, very few SOEs systematically report on their public-service activities.

The state does not produce an annual aggregate report on the performance of the SOE portfolio as a whole. However, as highlighted previously, the Ministry of Finance has since 2020 published basic financial information (total revenues and expenditures) on all SOEs quarterly. While this information does not constitute an aggregate report, it does represent a step toward greater transparency and improved central monitoring of SOEs.

Regarding auditing practices, applicable legislation requires that an independent external auditor audit some SOEs’ annual financial statements, but there is a lack of clarity regarding exactly which SOEs this requirement applies to. The Law on Audit requires external audits for public-interest entities (which should include all SOEs under the scope of the Law on Public Enterprises). However, the authorities report that such external audits are only undertaken for companies with mixed capital and that the financial statements of statutory SOEs (“public enterprises”) are only audited by the state audit office in an ad hoc manner. In practice, such state audits are generally undertaken for no more than one or two SOEs per year. In 2022, the state audit office conducted an audit of the financial statements, together with an audit of compliance with applicable laws and regulations, of the electricity transmission system operator JSC MEPSO. The auditors expressed an adverse opinion on the quality and reliability of the enterprise’s financial statements (State Audit Office of North Macedonia, 2023[4]). Similar audits were undertaken for Power Plants of North Macedonia in 2021, which found that in the period 2011-20, a “significant amount of funds” was invested in projects that were not completed and in equipment that was not put to use (State Audit Office of North Macedonia, 2022[5]). This audit also pointed to weaknesses in the enterprise’s application of public procurement laws. The negative conclusions of these two audits suggest that there is also scope to examine financial-reporting practices in other SOEs and assess the quality and credibility of their financial statements.

Concerning anti-corruption and integrity measures, there are important shortcomings in SOEs’ ownership arrangements and board responsibilities and independence that increase the risk of political interference in SOE management decisions and operations. The fact that CEOs in some SOEs are appointed directly by the government is one element that is not aligned with good practice, as it increases the risk that management decisions will be motivated by factors other than corporate performance. Some basic legal elements are in place to somewhat mitigate corruption risks, for example, the fact that board members can be held liable for damages to the company caused by their decisions. More specifically, the Law on Companies establishes individual and collective liability for the boards of fully corporatised SOEs, while the Law on Public Enterprises establishes that the general manager and management board members are responsible for any damages the enterprise incurs as a result of their decisions. However, the authorities have not elaborated specific expectations for SOEs regarding the establishment of anti-corruption and integrity measures, and SOEs are not required to carry out corruption risk assessments. The aforementioned weaknesses in some SOEs’ financial-reporting practices point to another avenue for corruption risk: without reliable reporting on how funds are used within the companies, irregular transactions can go unnoticed.

There are very few SOEs with non-state minority shareholders in North Macedonia, making protecting minority shareholders a low-priority issue regarding state ownership reform.5 However, if the authorities decide to increase private capital in SOEs, which can drive performance improvements, then minority shareholder rights will increase in importance. Currently, there is sound basic legislation in place ensuring shareholders’ equal treatment under the law. There are also additional measures to allow for minority shareholders’ participation in corporate decision making, e.g. the right for shareholders with at least 10% of shares to call a general meeting or request a meeting of the board of directors. This provision differs from practices in most other Western Balkan economies, where shareholders with at least 5% of shares have such rights (in Kosovo, a similar provision applies to shareholders with at least 10% of share capital). In this respect, it can be concluded that certain minority shareholders in North Macedonia have weaker rights than their counterparts in some neighbouring economies. However, international practices differ regarding the existence and amount of such shareholding thresholds that confer specific rights, and there is no internationally agreed “good practice” in this respect.

The fact that 15 SOEs in North Macedonia are incorporated under the separate legal form of “public enterprise” constitutes an important difference in these SOEs’ legal and regulatory treatment compared to private companies. Additionally, some of the provisions of the Law on Public Enterprises may have unintended negative consequences on the level playing field between SOEs and private companies. For example, provisions requiring an uninterrupted provision of public services by SOEs may contribute to the perception that these companies cannot be allowed to fail. As a result, many loss‑making SOEs continue to operate with the aid of state subsidies and are not subject to the market pressures that would cause a private company to undertake structural reforms to improve efficiency, with significant implications on fair competition and the level playing field.

Concerning SOE financing conditions, one of the most notable factors contributing to unequal financing conditions compared to private companies is that approximately half of all SOEs in North Macedonia are regularly loss-making. SOEs are not subject to minimum target rates of return and are allowed to continue operating despite their significant losses. As mentioned previously, in some cases, these losses may be explained by public-service obligations subsidised by corporate earnings. However, there is very limited transparency on the actual costs of such public-service obligations. More rigorous data collection and an in-depth review of the sources of SOEs’ underperformance are warranted.

North Macedonia’s progress in implementing earlier CO 2021 Recommendations on state ownership has overall been limited, with no measures taken to elaborate a state ownership policy, to corporatise the country’s large number of statutory SOEs (“public enterprises”), or to strengthen disclosure by individual SOEs (Table 6.3). However, small steps have been initiated in line with two of the Recommendations outlined in the CO 2021. These steps include efforts to introduce a more transparent SOE board nomination process, which is ongoing at the time of writing, and to institute greater transparency of SOEs’ operations through the continued publication of very basic revenue and expenditure figures on SOEs, which commenced in 2020.

North Macedonia has taken steps to begin implementing OECD recommendations from the previous assessment cycle related to SOE board nominations and, to a lesser extent, disclosure by the state on SOEs’ performance. Despite these positive efforts, many of the past recommendations remain relevant, and the authorities are encouraged to:

• Develop a state ownership policy that outlines the rationales for state ownership and the expectations of SOEs. This would constitute a first step towards professionalising state ownership practices in North Macedonia. The policy should provide a clear overview of the reasons for state ownership of enterprises, the state’s expectations of SOEs, and the main principles guiding state ownership decisions, including setting objectives and board nominations. Moreover, it should define the roles and responsibilities of the different state bodies responsible for executing state ownership decisions and for monitoring SOEs' activities. At a later stage, the authorities might consider establishing a co-ordinating entity to monitor the implementation of the state ownership policy and harmonise ownership practices across the public administration.

• Clarify and streamline the legal forms of SOEs. Several SOEs, including some undertaking commercial activities, still operate as "public enterprises". The authorities should review the rationale for keeping SOEs in this separate legal form and consider fully corporatising those that are engaged in predominantly commercial activities to align their legal and regulatory treatment with that of private companies and level the playing field. Where the authorities determine that it is more appropriate for an entity to remain a public enterprise, the rationale for this decision should be clearly and publicly stated.

• Elaborate an SOE board nomination framework that is transparent, merit-based and applicable to all SOEs. New provisions in the Law on Public Enterprises can help strengthen the professional competencies of SOE supervisory boards, ensuring that they comprise qualified professionals with an adequate mix of public- and private-sector expertise. The authorities should build on these strengthened criteria by elaborating dedicated SOE board nomination guidelines – applicable to all SOEs and to be implemented by all shareholding institutions – that establish a transparent and merit-based process for appointing board members. It is considered good practice for SOE board nomination procedures to involve input from independent commissions, to strengthen external scrutiny and to make the process more transparent. The SOE board nomination framework should ultimately ensure that all SOE boards have sufficient skills and independence to make decisions in the interest of the enterprises they oversee and without undue political interference. In line with good practice, the SOE board nomination framework should prohibit acting politicians from serving on SOE boards.

• Further strengthen centralised data and produce publicly available aggregate reporting on SOEs. The publication of basic financial data on SOEs by the Ministry of Finance, initiated in 2020, constitutes a step toward greater transparency and improved central monitoring of SOEs. The state should build on this information to produce more detailed annual aggregate reports on the activities and performance of the SOE sector as a whole. The authorities should also consider strengthening non-financial disclosure requirements applicable to SOEs, particularly concerning, as relevant, their delivery of public service obligations and their contributions to the low-carbon transition.6

• Review and improve the quality of disclosure by individual SOEs. The authorities should undertake a thorough review of SOEs' compliance with reporting requirements and the quality of their disclosures to identify gaps and establish mechanisms to improve disclosure where necessary. The state should clarify SOEs’ auditing requirements and ensure that at least all large SOEs undergo an external audit of their financial statements by an independent audit firm.

[2] BNE Intellinews (2021), North Macedonia’s State-Owned Loss-Makers Await New Owners, https://www.intellinews.com/north-macedonia-s-state-owned-loss-makers-await-new-owners-201261/.

[3] Fokus (2022), “Kovachevski proposes privatisation of the Post” (in Macedonian language), https://fokus.mk/kovachevski-predlaga-privatizatsija-na-poshta/.

[7] OECD (2022), Climate Change and Low-carbon Transition Policies in State-owned Enterprises, https://doi.org/10.1787/e3f7346c-en.

[6] Republic of North Macedonia (2023), North Macedonia. National Inventory Report (NIR)., https://unfccc.int/documents/627668.

[1] Republic of North Macedonia Ministry of Finance (2023), Revenues and Expenditures - Q1 2023, https://finance.gov.mk/wp-content/uploads/2023/06/Revenues-and-expenditures-I-2023-13.06.2023-1.pdf (accessed on 1 March 2024).

[4] State Audit Office of North Macedonia (2023), Press Release: Impact of Energy Crisis on JSC MEPSO Operation, https://dzr.mk/en/230411-impact-energy-crisis-jsc-mepso-operation.

[5] State Audit Office of North Macedonia (2022), Press release: Identified irregularities in JSC ESM operation, https://dzr.mk/sites/default/files/2022-04/40_Soopstenie_mediumi_ESM_FINAL_ENG_2021.pdf.