If a country borrows 18 billion euros to finance projects in a non-transparent way, and then half of that amount is used for corruption or misspent, the actual level of investment is only nine billion euros
The Executive Board of the IMF approved the third revision of the standby agreement with the Government of Serbia, which was signed in December 2022. The report evaluates the general economic situation and the government's economic policy with good marks. In addition, the IMF commends the government for higher budget allocations for capital projects, as well as for the announced management of such projects for the period 2025-2027. This is a significant evaluative shift, because capital investments were carried out in a non-transparent procedure, and often unclearly/wrongly chosen. How did the IMF come to these optimistic conclusions?
By 2018, capital investment was very low (below 3 percent of GDP) and the IMF warned about this in 2016. Before that, the Fiscal Council warned about the same thing. After that, capital investments began to grow and today amount to about 7 percent of Serbian GDP. This is now the highest percentage share in Europe, while in Serbia it is the third largest expense, after salaries and pensions.
Budget investments in capital projects have been growing since 2018, but based on a specific philosophy of project management in the public sector. A large part of such projects were carried out through special procedures, out of the public eye, with significant circumvention of regular procedures, which often resulted in dumping prices and subsequent sudden increase in costs.
Vague criteria for selecting such projects have also become part of the new philosophy of project management. For example, the choice of building highways is certainly justified, considering that Serbia is insufficiently covered by the road network compared to European standards. But on the basis of which criteria were chosen projects in the field of sports or health, which later turned out to be inadequate or unused? For example, the hospital in Batajnica, completed in 2021, cost 50 million euros, and is now collapsing.
The same philosophy is now being applied to capital projects within the investment cycle "EXPO 2027: A Leap into a Better Future". Within the EXPO, a whole series of projects is foreseen, the choice of some of which is not clear. Highways (500 km), railways (2000 km), metro lines, gas connector to Macedonia, oil pipeline to Hungary, gas storage, national stadium with 52000 seats, campus for 4000 students, new concert hall, etc. are planned. Such projects would have to be chosen in accordance with the government's public policy. On the basis of which public policy were the announced dolphinarium and aquarium in Belgrade chosen?
The choice of capital projects is not the only problem. In 2023, the Serbian Parliament adopted a law that removes all projects related to EXPO 27 from the public procurement system, which in other words means that the projects will not be transparent. Despite this, the IMF positively assesses the commitment of the Government of Serbia, which agreed to publish the costs of each individual project in the fiscal strategy and the EXPO 2027 portal.
Given the level of spending for EXPO 2027, which now stands at 18 billion euros and is likely to rise to 2027 billion by the end of 30, the IMF is rightly interested in this type of public spending. Let us recall that the IMF enters into the internal public policy of a country only if the irresponsible spending of money from the budget can put the country in a risky position of not being able to return the borrowed money to creditors. Hypothetically, if a country borrows 18 billion euros to finance projects in a non-transparent way, and then half of that amount is used for corruption or misspent, the actual level of investment is only nine billion euros. Corruption and mismanagement reduce the benefits that public projects generate for the economy and society, thereby undermining the country's ability to service debt. The IMF has often been the victim of similar unreliable promises, as the recent examples of Greece, Argentina, Ukraine or Pakistan show.
This is basically a question of government credibility, and the IMF believes that credibility is ensured after the introduction of the digital platform PIMIS (Public Investment Management Information System), which is a system for planning, budgeting and monitoring spending. This platform was introduced in 2023, by the Regulation on Project Management in the Public Sector. Now all projects are centralized in one place, which prevents fragmentation of capital investments and enables easier determination of priorities in accordance with the government's public policy.
The PIMIS platform really enables a more focused selection of projects. Unfortunately, the other advantages that this platform offers cannot be found in the Regulation. In countries where it has already been implemented, the platform, in addition to a centralized system, enables greater transparency, accountability, less wasteful spending and auditing. Unfortunately, these aspects were neglected in its Serbian version. Transparency and audit are not mentioned at all. All that the Regulation envisages is centralization and a greater number of institutions of the executive power that will have access to the details of capital projects larger than 20 million euros. The platform is actually only available to the executive branch. Supervisory, judicial or advisory bodies (DRI, Information Commissioner, prosecution or Fiscal Council) are excluded from the process. This is less important for projects to be financed by the European Union, which are also often mentioned in the Regulation, because funds for such projects already come with mandatory audit conditions. It would be useful to define such conditions for non-EU projects as well.
The author is a full professor at the FPN in Belgrade
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