Montenegro Integrated State-Owned Enterprises Framework (iSOEF) Assessment Europe and Central Asia | Prosperity Vertical The World Bank November 2025 0 Montenegro – Integrated SOE Framework Assessment (iSOEF) © 2025 The International Bank for Reconstruction and Development/ The World Bank Group 1818 H Street NW Washington, D.C. 20433 Internet: www.worldbank.org All rights reserved Printed and manufactured in Washington, D.C. First Printing: 2025 This volume is a product of the staff of the International Bank for Reconstruction and Development/The World Bank Group. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank Group, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. 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The International Bank for Reconstruction and Development / The World Bank Group encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly. 1 Montenegro – Integrated SOE Framework Assessment (iSOEF) Contents Contents ............................................................................................................................................2 Acknowledgements............................................................................................................................4 Abbreviations and Acronyms ..............................................................................................................5 Executive Summary ............................................................................................................................7 1 Introduction ............................................................................................................................. 10 Methodology ...................................................................................................................................... 10 Data..................................................................................................................................................... 11 Structure of the report ....................................................................................................................... 12 2 SOE Landscape and Performance in Montenegro ....................................................................... 13 Background and Recent Developments in the SOE Sector ................................................................. 13 SOE Portfolio ....................................................................................................................................... 15 Performance of the SOE Sector .......................................................................................................... 20 3 Corporate Governance and Accountability................................................................................. 27 Legal and Regulatory Framework ....................................................................................................... 27 Ownership and Oversight Function .................................................................................................... 30 Performance Management................................................................................................................. 32 Boards of Directors and Management ............................................................................................... 33 Transparency and Disclosure .............................................................................................................. 39 Procurement ....................................................................................................................................... 42 4 Fiscal Costs and Risks from the SOE Sector ................................................................................. 44 Fiscal costs of SOEs ............................................................................................................................. 44 Fiscal risks of SOEs .............................................................................................................................. 48 5 Markets and Competition ......................................................................................................... 51 Competition in Law and Practice in Montenegro: An Overview ........................................................ 51 The Role of SOEs in Competitive Markets .......................................................................................... 52 Policies and regulations can distort the level playing field between SOEs and private companies ... 53 Examples of potential distortions associated with SOEs in selected sectors ..................................... 58 6 Reform Recommendations ........................................................................................................ 63 6.1 Strengthening Ownership and SOE Governance .......................................................................... 63 6.2 Fiscal Risk Management ............................................................................................................... 66 6.3 Leveling the playing field between SOEs and private companies ................................................ 67 References ....................................................................................................................................... 69 Annex 1. List of Stakeholders Interviewed ......................................................................................... 73 Annex 2. A taxonomy of sectors from competition angle ................................................................... 74 Annex 3. List of identified SOEs and MOEs ........................................................................................ 75 Annex 4. SOE and MOE financial performance: A more detailed look ................................................. 80 Annex 4. Laws applicable to SOEs in Montenegro.............................................................................. 82 Annex 5. Policies applicable to SOEs in Montenegro .......................................................................... 84 Annex 6. Audits of 13 largest SOEs (2023) ......................................................................................... 87 Annex 7. Laws relevant to SOEs and market competition ................................................................... 88 2 Montenegro – Integrated SOE Framework Assessment (iSOEF) List of Figures, Tables, Boxes Figure 1.1 iSOEF modules overview ............................................................................................................................10 Figure 2.1 SOEs and MOEs by size, 2023 .....................................................................................................................16 Figure 2.2 SOEs and MOEs by legal form, 2023 ...........................................................................................................16 Figure 2.3. SOE and MOE revenues as % of GDP, Montenegro and comparators, 2023 ............................................18 Figure 2.4. Share of SOEs in GVA and total employment, by sector, 2023 .................................................................19 Figure 2.5. Return on Assets (ROA), 2019-2023 ..........................................................................................................21 Figure 2.6. Return on Equity (ROE), 2019-2023 ..........................................................................................................21 Figure 2.7. SOEs’ ROE and ROA by sector, 2023 ..........................................................................................................21 Figure 2.8. MOEs’ ROE and ROA by sector, 2023 ........................................................................................................22 Figure 2.9. Monthly employee cost (EUR) for SOEs, MOEs, and all establishments, 2019-2023 ................................23 Figure 2.10. Monthly employee cost by sector (EUR), SOEs and all establishments, by sector, 2023 ........................23 Figure 2.11. Operating expenses/ operating revenues for SOEs and MOEs (ratio) ....................................................24 Figure 2.12. Operating expenses/operating revenues, SOEs, 2023 ............................................................................25 Figure 2.13. Operating expenses/operating revenues, MOEs, 2023 ...........................................................................25 Figure 3.1 Who sets SOEs’/MOEs’ performance objectives, relative likelihood .........................................................33 Figure 3.2 Background of board chairs in SOEs and MOEs..........................................................................................35 Figure 3.3 Share of SOEs and MOEs with board committees or external audit committee .......................................37 Figure 3.4 Tenure distribution of current CEOs, SOEs and MOEs, 2024 .....................................................................39 Figure 3.5 Industry and company of CEO’s work directly prior to current role, SOEs and MOEs, 2024 .....................39 Figure 3.6: Reporting lines for the internal audit function in SOEs and MOEs............................................................41 Figure 3.7: Reporting lines for the internal control function in SOEs and MOEs ........................................................42 Figure 5.1 Market-based competition and anti-monopoly policies, Montenegro and selected peers, 2022. ............51 Figure 5.2 Risks as associated with investment, Montenegro and selected peers, 2022. ..........................................52 Figure 5.3 PMR Score, Montenegro and selected peers, 2021. ..................................................................................52 Figure 5.4 Competitive Neutrality gap analysis in Montenegro ..................................................................................54 Figure 5.5 Conglomeration and integration - EPCG and subsidiaries in the energy value chain ................................59 Figure 5.6 Vertical and horizontal integration.............................................................................................................59 Table 0.1 Montenegro SOEs and MOEs footprint, overview.........................................................................................7 Table 2.1 SOEs and MOEs listed on Montenegro Stock Exchange ..............................................................................17 Table 2.2. Ten largest SOEs in Montenegro, 2023 ......................................................................................................19 Table 2.3. Ten largest MOEs in Montenegro (2023) ...................................................................................................20 Table 2.4 Transport infrastructure scores from the Global Competitiveness Report (Montenegro, 2019) ...............26 Table 3.1 Current institutional roles - SOE shareholding, oversight, and sector regulation .......................................30 Table 4.1 The direct net impact of SOEs and MOEs on the general government budget is positive ..........................45 Table 4.2 The ten SOEs and MOEs account for two thirds of the total tax arrears of all SOEs ...................................48 Table 4.3 A Framework for Mapping SOE Related Fiscal Risks ....................................................................................49 Table 4.4 Consolidated guaranteed debt declined over the past five years ...............................................................49 Box 3.1 Legal forms of SOEs and MOEs in Montenegro ..............................................................................................27 Box 3.2 Good Practices for Evaluating BoD Performance ...........................................................................................37 Box 3.3: Good Practices for Internal Control and Internal Audit Functions ................................................................40 Box 4.1 Radio Television of Montenegro (RTCG): Recipient of large budgetary funds but low accountability ..........47 Box 6.1 Depoliticizing SOE Boards: Institutional Approaches from Finland and Lithuania .........................................64 Box 6.2 Decision matrix for portfolio optimization .....................................................................................................66 3 Montenegro – Integrated SOE Framework Assessment (iSOEF) Acknowledgements This Integrated SOE Framework Assessment (iSOEF) was prepared by a multidisciplinary Prosperity Practice Group team from the World Bank Group, led by Anya Vodopyanov (Economist and Task Team Leader), under the guidance of Fabian Seiderer (Practice Manager) and Christopher Sheldon (Country Manager, Bosnia-Herzegovina and Montenegro). The core team was comprised of Stefan Apfalter (Senior Economist), Milan Lakicevic (Economist), Salamat Kussainova (Governance Specialist), Korin Kane (Senior Corporate Governance Consultant), and Sorana Baciu (Senior Corporate Governance Consultant). Significant contributions and inputs were provided by Dennis Sanchez (Economist), Ana Odorovic (Competition Law Consultant), Milan Keker (Senior Legal Consultant), Nedzad Suljovic (Public Finance Consultant), Iva Rolovic (Legal Consultant), Ivan Pejovic (Legal Consultant), Marko Sosic (Corporate Governance Consultant), Regina Paz (Markets & Competition Consultant), and Ana Durnic (Consultant). Peter Ladegaard (Senior Governance Specialist) provided valuable strategic guidance and review for the analysis. Federico Guala provided editorial assistance and support for the finalization of the report. The team wishes to thank peer reviewers for their advice and contributions: Immanuel Steinhilper (Senior Governance Specialist), Josip Funda (Senior Economist), Dusko Vasiljevic (Senior Economist), and Armin Ridzalovic (Country Officer for Montenegro and Bosnia-Herzegovina, IFC). The report was prepared in close cooperation with the Montenegrin Ministry of Finance (MoF). The team would like to express special gratitude to Bojana Boskovic, State Secretary of Finance, Minas Trubljanin, Director General of the Department for Central Harmonization and Internal Controls, and Iva Vukovic, Head of Unit for SOE Fiscal Risks, for their support throughout the activity, including providing access to critical data, documents, and contacts for interviews and an original online survey of companies conducted to inform the assessment. The team is also grateful to the state and municipally owned companies and government institutions that participated in the interviews and surveys, including the Ministry of Finance; Ministry of Economic Development; Ministry of Energy; Ministry of Maritime Affairs; Ministry of Tourism; Ministry of Transport; Ministry of Mining, Oil and Gas; Ministry of Spatial Planning, Urbanism and State Property; Montenegro Stock Exchange; State Audit Institution; Montenegro Chamber of Commerce; Agency for Protection of Competition; Energy regulator REGAGEN; Union of Municipalities; and the University of Montenegro. A special acknowledgement and thanks are due to the MoF and the interministerial SOE Reform Working Group for hosting in May 2025 a half-day workshop to review the key results of the iSOEF and to provide comments on the early draft. The team would like to thank the European Union Delegation to Montenegro for supporting this study, as part of a broader multi-year program of support on public sector reforms in Montenegro under the Bank- executed Building an Effective Sustainable and Transformational Public Sector (BEST-Public Sector) Program. 4 Montenegro – Integrated SOE Framework Assessment (iSOEF) Abbreviations and Acronyms APC Agency for the Protection of Competition BoD Board of Directors BoS Business of State CEDIS Crnogorski elektrodistributivni system / Energy distribution system SOE CEJN Montenegro e-procurement system CEO Chief Executive Officer CG Corporate Governance CGES Crnogorski elektroprenosni system / Energy transmission system SOE CSRD Corporate Sustainability Reporting Directive EBRD European Bank for Reconstruction and Development EPCG Elektroprivreda Crne Gore / Energy holding SOE EU European Union EUR Euro (currency) GDP Gross Domestic Product GMS General Meeting of Shareholders GoM Government of Montenegro GVA Gross Value Added GWh Gigawatt hour HCT Health Check Tool IFC International Finance Corporation IFRS International Financial Reporting Standards iSOEF Integrated SOE Framework JSC Joint Stock Company KPI Key Performance Indicator LLC Limited Liability Company MOE Municipality-Owned Enterprise MoF Ministry of Finance OCU Ownership Coordination Unit OECD Organization for Economic Cooperation and Development PC Performance Contract PE Public Enterprise PFM Public Financial Management PMR Product Market Regulation PPL Public Procurement Law PSO Public Service Obligation REGAGEN Montenegrin energy regulator ROA Return on Assets ROE Return on Equity RTCG Radio and Television of Montenegro SOE SAI State Audit Institution SE Stock Exchange 5 Montenegro – Integrated SOE Framework Assessment (iSOEF) SLA Service Level Agreement SOE State-Owned Enterprise SOP State Ownership Policy TA Technical Assistance VAT Value Added Tax WBG World Bank Group 6 Montenegro – Integrated SOE Framework Assessment (iSOEF) Executive Summary The objective of this Integrated SOE Framework Assessment (iSOEF) is to inform the Government of Montenegro (GoM) on the performance and impacts of its state-owned enterprises (SOE) and municipally owned enterprises (MOEs) portfolios on the economy and to provide recommendations for reform. This report provides the first application of the World Bank Group’s comprehensive iSOEF methodology (World Bank Group 2024a) to Montenegro. It reviews the entire known portfolio of SOEs and MOEs, giving a “360” view of both the challenges and opportunities facing the companies from a financial and non-financial performance, fiscal, market competition, and corporate governance perspectives. Data gaps in several areas necessitated extensive data collection efforts, including through special data requests, interviews, and an original survey of companies. SOEs and MOEs play an important role in Montenegro’s history and economy, but their performance has been far below potential. Although Montenegro lacks an official definition and comprehensive list of government-owned companies, the study identified at least 61 active SOEs and 133 MOEs in the country. These enterprises account for a significant share of total employment and gross value added in the economy, particularly in sectors like energy and transport (see Table 0.1 for a summary overview of SOE and MOE footprint). However, many companies are underperforming on both financial and non-financial measures. A notable share operate at a financial loss, raising concerns about their long-term sustainability, and many underperform on public service dimensions. Data on compensation for public service obligations (PSOs) is scarce and deficiencies in the PSO compensation system may explain some of the observed SOE-MOE financial performance challenges. However available data suggests that factors such as high labor costs and inefficiencies in operations – which point to weaknesses in corporate governance, oversight, and incentives – may also significantly contribute to the poor performance, requiring closer attention. Table 0.1 Montenegro SOEs and MOEs footprint, overview SOEs MOEs Number, total (2025) 61 133 Number, per 100000 inhabitants 10 22 Large size, share of all SOEs/MOEs (2025) 30% 0% Medium size, share of all SOEs/MOEs (2025) 18% 16% Small size, share of all SOEs/MOEs (2025) 52% 84% Joint Stock Companies (JSCs), share of all SOEs/MOEs (2025) 46% 3% Limited Liability Companies (LLCs), share of all SOEs/MOEs (2025) 49% 94% Public Enterprises, share of all SOEs/MOEs (2025) 5% 3% Listed on Stock Exchange, share of all SOEs/MOEs (2025) 41% 2% 100% publicly owned, share of all SOEs/MOEs (2025) 57% 96% Share in total employment (2023) 5.6% 3.5% Gross Value Added (GVA) (2023) 9.4% 2.2% Share, Gross Domestic Product (GDP) (2023) 17.4% 2.7% The primary audience for this report includes the Ministry of Finance as the institution leading the SOE reform agenda, Prime Minister’s Office, and the inter-institutional SOE Reform Group, to inform reform design and implementation. The Government has initiated several foundational reforms to enhance SOE 7 Montenegro – Integrated SOE Framework Assessment (iSOEF) governance and performance, to align its legislation and practices with European Union (EU) standards, in preparation for EU Accession. Indeed, EU Accession has been a key driver of reforms in recent years. Although there is no EU Aquis chapter specifically focused on SOE sector governance, key commitments are captured in the country’s latest Economic Reform Programs (Government of Montenegro 2024a, Government of Montenegro 2025) and Reform Agenda (Government of Montenegro 2024c). Progress on the commitments has accelerated in recent years, with the development of a draft State Ownership Policy (SOP) and a new SOE Law, expected to be adopted in the second half of 2025. Also in 2025 the Government is planning to develop its first SOE Reform Strategy and Action Plan, building on its commitments in the SOP and SOE Law. The Strategy will establish concrete reform priorities and targets for the short and medium term and define institutional responsibilities, timelines, and other practical aspects necessary for effective reform implementation. This iSOEF is designed to provide several key analytical inputs for the Strategy, to ensure it is objective and data driven, including: a succinct summary of challenges, to motivate reforms, and a short list of key reform areas that could deserve priority attention in the Strategy. Corporate Governance Montenegro’s SOEs and MOEs face important corporate governance challenges affecting their performance. These challenges are related to an incomplete legal and policy framework, including the lack of a State Ownership Policy, and fragmented ownership, which follows a decentralized model that conflates multiple conflicting institutional roles and weakens coordination and accountability. These overarching challenges are at the root of other governance weaknesses identified in this study, including contradictory institutional mandates, politicization of boards and management, lack of managerial autonomy, gaps in reporting and disclosure, and insufficient performance monitoring and accountability systems including weaknesses in internal and external audit. Fiscal Costs and Risks While SOEs have a positive net impact on the government budget, data gaps – particularly related to government transfers – may distort results, and significant risks remain. Dividend payments are low, even among profitable companies, and are often driven by the Government’s short-term financing needs rather than by companies’ financial performance. Data on fiscal transfers to SOEs, as well as on transfers between SOEs, is incomplete and not easily accessible to the public; more complete data may show SOEs to have a less positive net fiscal impact than currently thought. Fiscal risks from budget transfers are relatively small, but SOE debt obligations are sizable and could lead to liquidity pressures on the central government budget if companies’ financial performance takes a downward turn. Significant recent investments in transport infrastructure and energy (particularly for green transition) sectors are additional areas to monitor for fiscal risks. The report highlights the need for better monitoring of SOE financial and fiscal risks. Markets and Competition Although SOEs-MOEs can be an important policy tool to meet development objectives or to correct market failures, they can also impact Montenegro’s market competition and private sector led growth. While the existence of SOEs itself is not problematic, it can distort market competition when: (i) SOEs occupy a significant market position; (ii) the SOE is protected from market competition by regulation or policies; and (iii) when the private sector could provide goods or services in an efficient manner. This assessment finds evidence of these distortionary effects in the case of Montenegro, as: many SOEs hold a 8 Montenegro – Integrated SOE Framework Assessment (iSOEF) significant market position or even monopoly power; a competitive neutrality gap assessment suggests that existing policies and laws grant preferential treatment to SOEs and distort market functioning; and that SOEs and MOEs are prevalent in competitive or contestable sectors where they are believed to perform less efficiently than their private competitors and therefore pose a risk of market distortion. Reform Recommendations Recognizing the Government’s commitment to SOE reform, this iSOEF proposes recommendations to improve governance, performance, and economic impact of SOEs, while limiting their fiscal costs and risks. SOE reforms are multidimensional and will require a holistic and integrated approach. Chapter 6 presents a full menu of actionable recommendations, which correspond to the main challenges identified in the preceding chapters and could be operationalized through an SOE Reform Strategy and Action Plan. While all the recommended reforms are critical, two reforms in particular should be prioritized for the near term, as they establish the necessary foundations for other reforms: 1. Building a strong Ownership Coordination Unit (OCU). This reform puts in place the required institutional capacity to drive all other reforms. It will require: o Operationalizing the OCU by establishing at least a directorate-level unit in the Ministry of Finance, with adequate staffing and financial resources, as a matter of priority; o Adopting the State Ownership Policy (SOP) and SOE Law, which enshrine the establishment of the OCU and embed its mandate, role, and powers - including vis a vis institutions currently performing ownership responsibilities, such as line ministries and state funds – in the law. 2. Reviewing and cleaning the SOE / MOE portfolio - and continuing to do so at regular intervals. This action puts the Government in the position of having an accurate comprehensive view of its portfolio and undertaking reforms at the company level in a transparent, data driven, rules-based manner. The latter is critical for ensuring that reforms are appropriate from a technical perspective and have public trust and minimal resistance. o In line with the SOP ownership criteria, develop a transparent, structured process for portfolio triage. The process will involve categorizing SOEs by whether or not they are (a) operating in competitive markets, (b) serving a strategic or policy objective, and (c) performing well on key performance indicators. Based on the categorization, the GoM can take concrete action on each category of companies, such as transferring loss-making companies that do not meet commercial viability thresholds to the general government administration, or opening up to greater private sector participation and investment companies that are performing well but do not serve clear strategic or policy objectives. To be credible, the categorization and follow up actions will need to be grounded in robust evidence and be fully transparent and well communicated to the public and other key stakeholders. Chapter 6 provides a decision matrix that can be used to develop the necessary factually-backed, rules- based approach. 9 Montenegro – Integrated SOE Framework Assessment (iSOEF) 1 Introduction This report applies the integrated State-Owned Enterprises Framework (iSOEF) to comprehensively assess Montenegro’s SOE sector and propose potential key reform options. The diagnostic tool was developed by the World Bank Group to (i) assess the performance and performance drivers of the state- owned enterprises (SOEs) sector in a given jurisdiction, (ii) provide reform recommendations, and (iii) guide technical assistance (TA) and capacity building interventions to improve the sector’s governance and performance, while limiting adverse fiscal, social, and market impacts and risks (World Bank Group 2024a). The primary audience for the iSOEF is the Government of Montenegro, in particular the MoF as the institution tasked with leading the SOE reform agenda, the Prime Minister’s Office, and the various public institutions that comprise the inter-institutional SOE Reform Group and that currently perform the (decentralized) ownership function. Methodology This report provides the first comprehensive, multi-dimensional review of Montenegro’s government- owned companies, from different perspectives, following the World Bank Group’s iSOEF methodology. The report’s analysis and recommendations are informed by four of the five “core modules” of the iSOEF and their respective guidance notes (Figure 1.1): SOE landscape, Corporate Governance, Fiscal Impacts, and effects on Markets and Competition. Although not explicitly included in separate sections, the analysis was also informed by cross-cutting considerations related to specific sectors (energy, tourism), climate, and political economy. Leveraging the World Bank Group’s expertise across all these different core and additional cross-cutting areas, this multidimensional assessment looks at the interrelationships of the challenges and opportunities faced by Montenegro’s SOEs to propose holistic and sequenced recommendations to strengthen their governance and performance. Figure 1.1 iSOEF modules overview 10 Montenegro – Integrated SOE Framework Assessment (iSOEF) Data The availability and quality of data on the SOE sector in Montenegro present a challenge. The country’s legacy of weak central oversight and absence of a standard definition of companies in government ownership has resulted in significant data gaps, including the lack of comprehensive, up-to-date lists of companies owned by the central or subnational governments. Although an initial list of companies was developed by the Ministry of Finance in 2023, at the time of this writing (spring 2025) it remains incomplete. Financial reporting and disclosure by companies is required by law and in practice is widely adhered to and follows internationally prescribed standards, but gaps remain as 8 percent of known SOEs were missing financial statements for one or more years under review.1 Compliance is still lower for audit reports, management reports, and annual reports for companies that are expected to report. The sectoral classification of companies used by different government institutions (MoF, Central Business Registry) often differ, complicating assessments of the companies’ footprints and impacts on their sectors of operation.2 Most of the data on company financial transactions with the central and local government budgets is not publicly available and what is available is incomplete. The data limitations and the study’s wider scope required significant data collection efforts, including primary data collection. At the GoM’s specific request, the iSOEF is focused on both companies with majority central government – state – ownership (SOEs) as well as companies with majority municipal ownership (MOEs).3 To adequately cover this scope and the core questions explored by the iSOEF, the study (i) constructed the most comprehensive to date list of SOEs (61 companies) and MOEs (133 companies) operating in Montenegro, by reconciling several data sources,4 (ii) built a database with financial and non-financial performance data for these companies, for the period 2019-2023,5 (iii) collected a range of data to estimate SOE and MOE fiscal impacts, some of it by special request from the Ministry of Finance, including annual budgets, final budget accounts, and SOE and MOE tax data,6 (iv) 1 The 15 companies with missing data for one or more years include 7 SOEs and 8 MOEs, namely: (1) Comfort DOO Podgorica (SOE), (2) Lovćen AD Podgorica (SOE), (3) Market AD Podgorica (SOE), (4) Montel motel glava Zete DOO Nikšić (SOE), (5) H.T.P. "Miločer" DOO Budva (SOE), (6) Montenegro Airlines AD Podgorica (SOE), (7) Radoje Dakić AD Podgorica (SOE), (8) Budva Holding DOO Budva (MOE), (9) Centar za razvoj durmitorskog područja DOO Žabljak (MOE), (10) Društvo za konsalting i inžinjering Budva-Sv. Stefan-Petrovac DOO Budva (MOE), (11) Javno preduzeće Sportski centar Kolašin (MOE), (12) Parking servis DOO Bar, (13) Radio televizija Kolašin DOO Kolašin, (14) Agencija za projektovanje i razvoj DOO Rožaje, (15) Lokalni javni emiter Radio Andrijevica DOO Andrijevica. These companies are included in charts and statistics involving counts, but are excluded from charts and statistics involving financial data. 2 This analysis relies on the Ministry of Finance’s sectoral classification system, using the Central Business Registry’s information on “predominant business activity” for companies not on the MoF list. 3 There are only two levels of government in Montenegro, the central and municipal. 4 The sources included data from the Ministry of Finance, the Central Business Register of Montenegro, the Dun & Bradstreet commercial establishment datasets, and a dataset produced by the Montenegrin Institute Alternativa think tank, and cross-checking against the World Bank’s Global Business of State (BOS) dataset. The most recent financial data in BOS is from 2019, which made it unsuitable as a primary data source. 5 The 2024 data was published in mid-late April 2025, too late to be included in the current analyses. The main source for financial data is company unconsolidated financial statements published by the Montenegro Tax Authority, and for non-financial and service delivery data – a range of global indices and secondary sources. As data was lacking for private sector comparators, SOE and MOE financial performance was compared to generic profitability thresholds and own performance across time. 6 Revenue data for all SOEs and MOEs, disaggregated by revenue type for the period 2019 –2023, were obtained from the Tax Administration. The final budget accounts provided information for analyses of government transfers 11 Montenegro – Integrated SOE Framework Assessment (iSOEF) analyzed national laws and regulations and data from academic literature, local NGO reports, and studies by the European Commission and Organization for Economic Cooperation and Development (OECD), (v) administered a structured online survey of 48 SOEs and MOEs conducted in November-December 2024,7 and (vi) conducted in-person interviews during October-December 2024 with representatives of boards and senior management of 9 SOEs, 17 institutions performing the (currently decentralized) ownership and/or oversight functions, and 5 professional associations including the Chamber of Commerce and Union of Municipalities (see Annex 1 for list of interviews, by chapter). Structure of the report The report is structured around six core chapters. Following the introduction in Chapter 1, Chapter 2 presents the landscape of SOEs and MOEs in Montenegro, providing measures of the size and performance of both portfolios, and their evolution over time. Chapters 3-5 are at the heart of the report as they present the main analytical findings. Chapter 3 unpacks aspects of state ownership and SOE governance. While most of the existing studies on the topic tend to focus on the legal framework, this chapter scrutinizes both the de jure and de facto aspects in parallel, to uncover whether the challenges lie mostly in incomplete regulations, gaps in implementation, or both. The de jure discussion draws on a comprehensive Policy Note on the Legal-Policy Framework for SOEs in Montenegro (World Bank Group 2024b), while the de facto analyses draw mostly on the key stakeholder interviews and structured online survey of SOEs. Chapter 4 presents fresh data on the net fiscal costs and risks of SOEs and MOEs. Chapter 5 assesses the potential and actual market-related effects of SOEs on market competition in Montenegro. While SOEs can contribute to de-risking markets, drive innovation, and create spillover benefits, state participation in markets can also translate into market distortions if SOEs enjoy advantages in aspects of regulatory treatment or state aid – and the chapter assesses the risks both de jure and de facto. Finally, Chapter 6 concludes with recommendations for priority reforms to improve SOE sector governance, performance, and positive impacts on the economy. The recommendations include realistic measures that could be implemented in the medium term and that could inform the GoM’s forthcoming SOE Governance Reform Strategy. to SOEs and MOEs, but gaps in this data - and the lack of any data on transfers between SOEs – are a major limitation. 7 All interviewees preferred to keep their remarks confidential, so when citing interview comments the report withholds this information and mentions only the type of institution / company and position. The survey was sent to all SOEs and MOEs and received a high response rate (25 percent of the full sample). 12 Montenegro – Integrated SOE Framework Assessment (iSOEF) 2 SOE Landscape and Performance in Montenegro Background and Recent Developments in the SOE Sector Montenegro’s SOE sector remains large by global standards, owing partly to the country’s statist economic policies prior to the 1990s and partly to more recent developments since the late 2000s. Before 1990, the state dominated most sectors of the economy, with an estimated 347 public companies (or “social enterprises” as they were also called) operating in all key sectors while the private sector remained limited (Vukotic 2001).8 The dissolution of Yugoslavia in 1990 and the transition from a socialist to a market economy spurred efforts to open the better-performing companies to private participation as a means to finance public infrastructure projects, spur economic growth and create jobs (MANS 2015).9 The first privatization legislation, introduced in 1992, aimed to estimate the value of company capital and define the privatization method, while the Privatization Law of 1996 shifted the emphasis towards actual privatization, which began in earnest in 2001 (Koman et al 2013). During the 1990s-2000s an estimated 90 percent of social enterprises changed legal form to allow for shared ownership, and 65 percent were privatized, including large companies such as the aluminum plant Kombinat aluminijuma Podgorica and Montenegro Telekom, both in 2005 (MANS 2015, Koman et al 2013). The initial wave of privatizations came to a near halt after 2010, and the trend reversed with renewed establishment of new SOEs. During 2016-early 2025 only one company was privatized10 while during 2019-2023 at least 15 new public companies were created at the central or municipal level,11 and in March 2024 the operations of the Budva Port were transferred to state ownership.12 The Government’s plans to privatize some of the largest SOEs during 2010-2015 and beyond13 ultimately did not come to fruition (MANS, 2015) and in July 2024 the Privatization and Capital Projects Council announced that no privatizations would be pursued in 2024 (Government of Montenegro, 2024b). The reasons for the stalled privatizations are not publicly stated, but likely reflect a combination of low investor interest in some cases and political economy factors, including resistance from important stakeholders in other cases. 8 Montenegro joined the Socialist Federal Republic of Yugoslavia (SFRY) under Josip Broz Tito’s rule after World War II, and over the 45 years of SFRY rule the economy was defined by a unique model of social ownership of property and worker participation in management of state-linked enterprises that continued until the 1990s (Prašnikar and Svejnar 1991) 9 See also this article referencing the Government’s intention to use proceeds from the Telekom privatization to finance the building of roads: https://www.gov.me/en/article/33491--5012 10 The tobacco processing firm Novi duvanski kombinat AD Podgorica, privatized in 2016. 11 The companies are all limited liability companies (LLCs) and include Fond za zaštitu životne sredine LLC, Zaštita prostora Crne Gore LLC (building demolition), Lokalni javni emiter Radio televizija LLC. Podgorica, and Otpadne vode (waste water utility) LLC Budva, EPCG-Solar gradnja LLC Nikšić, Fond za inovacije Crne Gore (Innovation Fund) LLC Podgorica, ToMontenegro LLC Podgorica (following the liquidation of its failing predecessor AirMontenegro), Agencija za razvoj i podršku poslovanju LLC Cetinje, Pijace LLC Tuzi, and Vodovod i kanalizacija (water supply and sewage) LLC Tuzi, EPCG-Željezara LLC Nikšić, Unispektrum LLC Podgorica, Javno komunalno preduzeće (utilities) LLC Zeta, and Parking servis (parking) LLC Žabljak. 12 SeeNews, “Montenegro takes over Adriatic port operator Luka Budva”, 23 May 2024, https://seenews.com/news/montenegro-takes-over-adriatic-port-operator-luka-budva-1257882. 13 Dedicated annual privatization plans called for the privatization of the national postal services operator, the national airline, several hotel consortiums, and the Plantaže 13 Jul wine distillery, among other. 13 Montenegro – Integrated SOE Framework Assessment (iSOEF) Today, SOEs and MOEs retain a sizeable footprint in Montenegro’s economy. As of December 2024, the World Bank Group estimates the portfolio of public companies to include 61 SOEs and 133 MOEs, accounting for respectively 5.6 and 3.5 percent of total employment and 9.4 and 2.2 percent of value added generated in the economy (2023).14 SOEs are particularly prevalent in the network industries (energy, utilities and transportation), where natural monopoly characteristics and public-service obligations may provide an economic justification for state ownership. But they are also present in more competitive sectors of the economy such as agriculture and tourism where the rationale for state presence is less obvious (see Annex 2 for a taxonomy of sectors by their competitiveness or contestability). The companies’ large footprint is partly a reflection of the country’s statist past and partly of political economic dynamics that took hold in the post-socialist period. In many post-socialist states, studies have observed the evolution of SOEs from engines of industrialization to becoming a source of spoils for political party machines, enabled by weak governance and oversight frameworks. Party affiliation of SOE senior management has been shown to mirror that of the winning party or coalition and these managers, once installed, exploit the companies unofficially to hire party supporters, award lucrative contracts to politically-connected businesses, and provide political party financing (OECD 2023, IMF 2019a, IMF 2019b). These dynamics, in turn, have created powerful political constituencies – including many labor unions, politically connected business elites, and some segments of the general public – that benefit from and perpetuate the current order.15 Some of these dynamics are believed to prevail in Montenegro, although information on specifics is scarce and sensitive (World Bank Group 2021a). The large footprint of Montenegrin SOEs and MOEs means that their performance and corporate governance have significant fiscal and market impacts, yet for years – in part due to their politicization, weak governance and oversight - these have lagged expectations. In 2023, 25 percent of SOEs and 38 percent of MOEs were loss-making, including a high share of those operating in competitive sectors. Many SOEs in competitive industries lag private sector firms in terms of productivity, labor efficiency, and some are considered a source of significant fiscal costs and risks. Many companies with substantial public service obligations lag comparators on other parameters including in service delivery. In many cases, the performance weaknesses are related to shortcomings in the companies’ foundational ownership and corporate governance arrangements, which depart from internationally accepted standards. Successive Montenegrin governments have confirmed their commitment to reforms to put in place the fundamentals for improved SOE governance and performance, although until recently with mixed results. Since 2010, and especially since 2023, a range of reforms have been attempted to increase SOEs’ economic potential and reduce their fiscal risks. The focus has been on: (i) standardizing the legal form of government-owned companies and bringing them under the provisions of the Law on Companies, similar to private companies;16 (ii) strengthening SOE financial management, reporting, and internal audit functions per provisions of the latest Public Financial Management (PFM) Strategy 2022-2026; (iii) 14 Statistical Office of Montenegro (Monstat) data on national employment, Gross Domestic Product (GDP), and Gross Value Added (GVA); World Bank staff calculations. 15 Public opinion is often mixed and split along professional and generational lines, with older workers and those with personal or family employment in SOEs more in favor of maintaining the status quo. See, for example, an in- depth study of public opinion towards SOEs in Bosnia-Herzegovina (World Bank 2023f). 16 The 2010 the Law on the Improvement of the Business Environment transformed the majority of SOEs and MOEs into limited-liability or joint-stock companies, although a number still retain the special legal form of “public enterprise.” 14 Montenegro – Integrated SOE Framework Assessment (iSOEF) introducing in 2024 annual monitoring of portfolio performance and fiscal risks by the Ministry of Finance; and (iv) committing to a sweeping set of SOE sector governance reforms, to align with EU standards in preparation for the country’s EU Accession. Indeed, EU Accession has been a key driver of reforms in recent years, with many ambitious goals captured in the country’s latest Economic Reform Programs (Government of Montenegro 2024a, Government of Montenegro 2025) and Reform Agenda (Government of Montenegro 2024c). More recently, the Government has taken more concerted steps towards these reform goals. It developed the country’s first draft State Ownership Policy (SOP), a new SOE Law, and a medium-term SOE Reform Strategy, as well as revisions to the Laws on Companies, State Audit, and Public Sector Accounting, all expected to be adopted in 2025.17 The Government’s most recent Economic Reform Program for 2025- 2027 recognizes the SOP, the draft Law on SOEs and the SOE Reform Strategy as key reform elements to be adopted or finalized in the upcoming period (Government of Montenegro 2025). Additionally, the 2009 Corporate Governance Code of the Montenegro Stock Exchange, which applies to all listed companies (28 out of 61 SOEs), is expected to be updated in the near term. SOE Portfolio Accurately describing and sizing Montenegro’s SOE and MOE portfolio remains a challenge as the country still lacks a comprehensive definition and list of relevant companies (see also Chapter 3). In 2023 the Ministry of Finance put together the first unified list of public companies with 50 SOEs and 107 MOEs, but at the time of this writing (spring 2025) this list misses some eligible companies while misclassifying a few others.18 Reforms to put in place a clear definition of SOEs and to clean the portfolio are planned but the timing remains unclear. For the purposes of this analysis, SOEs / MOEs are defined as non-financial companies where the central / municipal government has controlling influence or at least a 50 percent direct or indirect ownership as of 2024. This definition is in line with the OECD Guidelines (OECD 2024a) and is commonly used in EU and OECD countries (OECD 2024b). Using this definition, a careful review of various establishment databases identified 61 SOEs and 133 MOEs actively operating in Montenegro as of January 2025 (see Annex 3 for the list of identified SOEs and MOEs). The review also identified an additional 16 companies where the central and municipal governments hold minority holdings of between 1 and 49 percent19 (minority holdings are not a key focus of this report but mentioned for completeness).20 The 61 identified SOEs and 133 MOEs are a diverse group of companies. When it comes to size, a significant share of SOEs are large (30 percent) or medium size (18 percent), but the majority are small or micro size (52 percent), reflecting the highly specialized nature of many companies as well as 17 Several other reforms were attempted during 2021-2022, albeit without durable results. In 2021, a holding company called Montenegro Works was created to monitor SOE performance and advise on SOE policy reforms, but it was liquidated less than a year later with unclear results (OECD 2024). Similarly, a Department for Corporate Governance Improvement was established in a new Ministry of Capital Investments in 2021 and began publishing financial information on a portion of the central SOE portfolio, but since then the Ministry was abolished and the publication of SOE performance results was discontinued (OECD 2024). 18 Some entities on the list belong more accurately on a list of government departments rather than SOEs. 19 13 companies with between 10 and 49 percent. 20 The list of 61 SOEs, 133 MOEs, and 16 companies with minority government shares was established by reconciling data from the Ministry of Finance, the Central Business Register of Montenegro, and Dun & Bradstreet establishment datasets, and cross-checking these against the World Bank’s Global Business of State (BOS) dataset. 15 Montenegro – Integrated SOE Framework Assessment (iSOEF) Montenegro’s overall small economy and market.21 The vast majority of MOEs (84 percent) are small and micro sized companies, while only 16 percent are medium sized and no companies are large sized22 (Figure 2.1). In terms of legal form, 49 percent of SOEs are limited liability companies (LLCs), 46 percent joint stock companies (JSCs) (all of them nominally listed on the Montenegro Stock Exchange), and 5 percent (3 companies) are classified as public enterprises (PEs).23 As for MOEs, 94 percent are LLCs, 3 percent are JSCs, and another 3 percent are PEs (Figure 2.2). Montenegro’s current SOE and MOE portfolio is dominated by companies fully in government hands. Although a number of SOEs and MOEs have private sector shareholders, 57 percent of SOEs (including 21 percent of JSCs and 93 percent of LLCs) and 96 percent of MOEs are fully in state ownership. Even among companies listed on the Montenegro Stock Exchange, a number are fully or almost fully government owned. Table 2.1 presents all listed SOEs and MOEs (all are JSCs), their government stake, and level of free float (percentage of shares available for trading), ordered by the companies’ market capitalization. Only 13 out of the 28 listed companies have more than 20 percent of private shares, and 6 are listed on the top-tier (Prime or Standard) segments of the stock exchange that require a free float of 10-20 percent. Meanwhile 9 listed SOEs and 1 MOE have private shareholdings below 5 percent, which limits the potential for more meaningful private sector participation in these companies.24 Beyond the free float, the fact that 8 out of the 28 listed companies have a share price of zero also points to some challenges. It could indicate either a lack of active trading for these companies (even though some of them have free float) or that investors believe the companies are worth nothing due to significant operational issues, debt, or lack of assets. Figure 2.1 SOEs and MOEs by size, 2023 Figure 2.2 SOEs and MOEs by legal form, 2023 5% 3% 3% 46% 52% 84% 94% 18% 49% 30% 16% 0 SOEs MOEs SOEs MOEs LLC JSC PE Large Medium Source: Montenegro Tax Administration, World Bank Group Staff calculations 21 Large is defined as 250+ employees, medium is 50-250 employees, small-micro is less than 50 employees. The shares were calculated for 54 SOEs with available relevant data. 22 The shares were calculated for 125 MOEs with available relevant data (8 MOEs with no data are excluded). 23 An old legal form that was supposed to be phased out with the adoption of the 2010 Company Law and expected to be eliminated after the adoption of the new SOE Law. 24 While a 5 percent shareholding may not give private shareholders significant influence, this threshold is important because it triggers certain prescribed rights in Montenegro’s Companies Act, notably the right to call a General meeting of shareholders (GMS), to propose agenda items, and to engage external experts to review company operations or accounting. Among listed SOEs, only one (CGES) is listed on the highest-tier Prime Market. 16 Table 2.1 SOEs and MOEs listed25 on Montenegro Stock Exchange SOE/ Legal Economic Market Share Public Private, free # Company # of shares Listing segment MOE form Sector Capitalization price (€) ownership (%) float (%) 1 Elektroprivreda Crne Gore SOE JSC Energy 587,535,925 109,659,921 5.36 98.6% 1.4% Free market - securities (EPCG) 2 Crnogorski elektroprenosni SOE JSC Energy 175,412,251 146,176,876 1.20 55.4% 44.6% Stock exchange - prime market system (CGES) 3 Budvanska rivijera SOE JSC Tourism 58,881,706 8,110,763 7.26 58.7% 41.3% Free market - securities 4 Sveti Stefan hoteli SOE JSC Tourism 40,553,815 8,110,763 5.00 58.7% 41.3% Free market - securities 5 Plantaže 13. Jul SOE JSC Agriculture 32,445,335 179,255,993 0.18 55.6% 44.4% Free market - securities 6 Rudnik uglja SOE JSC Energy 30,386,658 5,064,443 6.00 100% - Free market - securities 7 Institut "Dr Simo Milošević" SOE JSC Tourism 22,176,358 382,351 58.00 56.5% 43.5% Stock exchange - standard market 8 Luka Bar SOE JSC Transportation 18,733,023 56,766,736 0.33 78.5% 21.5% Stock exchange - standard market 9 Ulcinjska rivijera SOE JSC Tourism 12,118,893 1,524,389 7.95 75.4% 25.6% Free market - securities 10 Željeznički prevoz Crne Gore SOE JSC Transportation 12,087,053 7,114,635 1.70 97.7% 2.3% Free market - securities 11 Luka Kotor MOE JSC Transportation 11,761,098 1,378,259 8.53 80.4% 19.6% Free market - securities 12 Održavanje željezničkih SOE JSC Transportation 9,446,425 4,500,012 2.10 96.4% 3.6% Free market - securities voznih sredstava 13 Barska plovidba SOE JSC Transportation 6,897,639 2,299,213 3.00 51.9% 48.1% Free market - securities 14 Marina SOE JSC Transportation 4,786,044 1,519,379 3.15 54.3% 45.7% Stock exchange - standard market 15 Željeznička infrastruktura SOE JSC Transportation 4,067,080 157,638,774 0.03 76.5% 23.5% Stock exchange - standard market Crne Gore 16 Montecargo SOE JSC Transportation 875,110 3,340,114 0.26 87.6% 12.4% Stock exchange - standard market 17 Montepranzo - Bokaprodukt SOE JSC Agriculture 673,644 112,274 6.00 75.1% 24.9% MTP ME market - securities 18 Institut za crnu metalurgiju SOE JSC Manufacturing 639,708 639,708 1.00 51.1% 48.9% MTP ME market - securities 19 Businessmontenegro SOE JSC Human Health 51,840 480 108.00 100% - MTP ME market - securities 20 Tehno baza MOE JSC Transportation 50,773 564,142 0.09 55.3% 44.7% MTP ME market - securities 21 Scientific & Radoje Dakić SOE JSC 1,830 1,829,977 0.00 50.6% 49.4% MTP ME market - bankruptcy Technical 22 Aerodromi Crne Gore SOE JSC Transportation 0 10,150,000 0.00 100% - MTP ME market - securities 23 Castello Montenegro SOE JSC Manufacturing 0 320,505 0.00 89.6% 10.4% MTP ME market - securities 24 Crnogorska plovidba SOE JSC Transportation 0 1,066,425 0.00 100% - MTP ME market - securities 25 Montenegro airlines SOE JSC Transportation 0 3,919,567 0.00 99.93% 0.08% MTP ME market - bankruptcy 26 Montenegroturist SOE JSC Tourism 0 524,697 0.00 65.6% 34.4% MTP ME market - securities 27 Information & Pošta Crne Gore SOE JSC 0 258,437 0.00 100% - MTP ME market - securities Communication 28 Arts & Fudbalski klub Budućnost MOE JSC 0 51,850,000 0.00 99.99% 0.01% MTP ME market - securities Recreation Source: Montenegro Stock Exchange, Word Bank Staff calculations. Note: List excludes recently delisted companies but includes companies in bankruptcy procedure that are still listed. The top-tier segments requiring a free float of 10% or 20%, respectively, are the Standard and Prime markets (CEE Legal Matters 2020). Economic sector classification aligned with the European NACE. 25 Note that there are several different listing segments on the Montenegro stock exchange, with varying rules regarding the level of required free float. 17 SOEs and MOEs are present in many key sectors and account for a significant share of economic activity in Montenegro – higher than averages in comparator economies.26 Montenegro has a high “SOE density” relative to comparators, with approximately 10 SOEs per 100,000 inhabitants27 compared to an average of 3.8 for comparator economies.28 This translates into a bigger economic footprint. SOEs and MOEs are present in most key sectors of activity, including especially energy, transport, agriculture and environment, media, tourism, health care, technology, and industry. In 2023, SOEs accounted for 9.4 percent of gross value added (GVA), 5.6 percent of national employment compared to 3 percent in comparator economies, and 17.4 percent of gross domestic product (GDP) (by revenues) compared to 9.8 percent among comparators.29 The economic footprint of Montenegro’s 133 MOEs is considerably smaller than that of SOEs, but not trivial, at 2.2 percent of GVA, 3.5 percent of total employment, and 2.7 percent of GDP (by revenues). Figure 2.3 illustrates SOE and MOE revenues as a share of GDP for Montenegro and comparators. The figures for Montenegrin SOEs and MOEs may be lower-bound estimates if the lists of companies are incomplete.30 Figure 2.3. SOE and MOE revenues as % of GDP, Montenegro and comparators, 2023 25% 2.10% Centrally-owned Municipality-owned 20% 15.6% 15% 10% 5% 0% Source: Montenegro Tax Administration (Montenegro) 2023, BOS (comparators) 2019, World Bank Group staff calculations. The SOE portfolio is concentrated in a few large companies. The 10 largest SOEs are concentrated in the energy and transport sectors, reflecting the presence of natural monopolies in those sectors, and they 26 The comparators include 19 economies from the EU and Southern and Eastern Europe, including: Albania, Bosnia-Herzegovina, Bulgaria, Croatia, Estonia, Georgia, Hungary, Italy, Kosovo, Latvia, Lithuania, Moldova, North Macedonia, Poland, Portugal, Romania, Russia, Serbia, Slovenia. 27 61 SOEs in a population of 616,000 (2023). The footprint is even higher if MOEs are included. 28 World Bank staff calculations, using BOS database. 29 Sources for Montenegro: Statistical Office of Montenegro, World Bank staff calculations. GVA derived as GDP plus subsidies on products less taxes on products. SOE and MOE GVA and revenues were calculated from the companies’ financial statements (GVA as the sum of earnings before interest, taxes, depreciation, and amortization (EBITDA) and employees’ costs). Sources for comparators: BOS global database, World Bank calculations. Comparators include 19 economies in the EU and Southern and Eastern Europe. The comparison has some limitations due to minor differences in the company coverage, the measurement of ownership stakes, and availability of SOE revenues data, across countries. 30 The expanded list of SOEs and MOEs used here relative to the Government’s current database reveals that the Government’s list substantially underestimates the SOEs and MOEs footprint: the additional 7 SOEs included in the present analysis account for 0.9 percent of the entire central SOE portfolio’s employment, 1.5 percent of its revenues, and 8.8 percent of its total assets, while the 20 additional MOEs account for 4.2 percent of MOE employment, 7.0 percent of revenues and 8.6 percent of total assets. 18 Montenegro – Integrated SOE Framework Assessment (iSOEF) account for nearly 85 percent of all SOE portfolio revenues, 60 percent of assets, 70 percent of equity, 50 percent of debt and 60 percent of employment of all centrally owned companies in 2023 (Table 2.2). The remaining SOEs are quite small: almost half (28 of 61) employ less than 50 people. Nearly all of Montenegro’s top ten SOEs are fully corporatized. It should be noted that, although many Montenegrin SOEs operate in sectors with elements of natural monopoly and market failure, where there is a strong economic rationale for government intervention, 61 percent operate in competitive or contestable sectors such as agriculture, media and tourism, where the rationale for state ownership is weak31 (see Chapter 4 for more detail). Figure 2.4. Share of SOEs in GVA and total employment, by sector, 2023 94.3% 98.1% 100% 80% 57.0% 60% 35.8% 40% 27.5% 18.3% 20% 7.7% 10.8% 7.8% 3.6% 5.7% 0.1% 0.1% 0.9% 0.3% 0.2% 0.2% 0.3% 0.2% 0.4% 0% SOE % Total GVA SOE % Total Employment Source: Montenegro Tax Administration, Statistical Office of Montenegro, and World Bank Group staff calculations. Note: The "Other Sectors" category comprises individually insignificant companies or those that do not fit into any of the other key sector categories. It includes the following: business support, construction, building demolition, postal services, workwear production, and sports activities. Table 2.2. Ten largest SOEs in Montenegro, 2023 State Revenues Assets Equity Liabilities Economic Legal Number of # Company holding (EUR (EUR (EUR (EUR Sector form employees (%) millions) millions) millions) millions) 1 EPCG Energy JSC 98.64% 502.1 1,273.7 1,038.1 234.6 1,124 2 CEDIS Energy LLC 100% 114.8 412.2 334.9 77.3 1,721 3 CGES Energy JSC 55.38% 111.6 352.7 245.1 107.5 324 4 Rudnik uglja Energy JSC 100% 77.0 132.2 92.7 39.5 1,168 5 ToMontenegro Transportation LLC 100% 62.3 30.4 26.1 4.4 141 6 Aerodromi Crne Gore Transportation JSC 100% 35.8 167.1 141.3 25.8 963 7 Monte put Transportation LLC 100% 34.8 51.0 5.0 46.0 294 8 Plantaže 13. Jul Agriculture JSC 55.63% 30.6 448.0 367.7 80.3 637 9 Budvanska rivijera Tourism JSC 58.73% 24.4 203.1 183.0 20.1 595 10 Information & Radio i Televizija Crne Gore PE 100% 21.1 46.1 34.2 11.8 739 Communication Total top 10 SOEs 1,014.5 3,115.4 2,468.0 647.4 7,706 Total all SOEs 1,212 5,008 3,621 1,387 13,694 Top 10 SOEs % in portfolio 83.7% 62.2% 68.2% 46.7% 56.3% Source: Word Bank staff consolidation and Montenegro Tax Administration. Notes: Companies are ranked by value of total revenues (2023). 31 Annex 2 describes the methodology used to classify enterprises by type of sector (competitive, contestable, natural monopoly), and classifies some of the current Montenegrin SOEs and MOEs into each category. 19 Montenegro – Integrated SOE Framework Assessment (iSOEF) Nearly all of Montenegro’s largest MOEs are local public utilities, providing water supply, sewage and other municipal services. An exception is the road maintenance and construction company of the Podgorica municipality, which is the second largest MOE by revenue. In 2023, the ten largest MOEs accounted for nearly 40 percent of total MOE portfolio revenues, 35 percent of assets, 40 percent of equity, 60 percent of debt, and 30 percent of employment (Table 2.3). The largest MOE is Podgorica’s water supply and sewage company Vodovod i kanalizacija DOO Podgorica. Other large municipal enterprises notably provide public lighting in Podgorica, water supply and sewage in Budva and Herceg Novi, and other municipal services in Bar and Budva. Table 2.3. Ten largest MOEs in Montenegro (2023) Municipality Revenues Assets Equity Liabilities Legal Employees # Company Sector holding (%) (EUR (EUR (EUR (EUR form headcount millions) millions) millions) millions) 1 Vodovod i kanalizacija Utility LLC 100% 12.0 56.9 44.1 12.8 568 2 Putevi Transport LLC 100% 9.0 7.1 4.3 2.9 209 3 Vodovod i kanalizacija Utility LLC 100% 8.5 23.2 19.8 3.4 240 4 Čistoća Utility LLC 100% 8.4 18.4 11.3 7.1 641 5 Komunalne djelatnosti Utility LLC 100% 6.7 5.9 2.1 3.8 326 6 Komunalno Utility LLC 100% 6.5 7.0 5.5 1.5 183 7 Deponija Utility LLC 100% 6.3 18.2 .8 9.4 190 8 Vodovod i kanalizacija Utility LLC 100% 5.9 34.5 3.4 31.1 168 9 Komunalne usluge Utility LLC 100% 5.8 7.9 3.4 4.6 120 10 Vodovod i kanalizacija Utility LLC 100% 5.2 48.4 2.8 45.6 171 Total top 10 MOEs 74.2 227.6 105.5 122.2 2,817 Total all MOEs 191,5 576,4 175,2 401,3 8,453 Top 10 MOEs % in portfolio 38.8% 33.3% 39.5% 60.2% 30.4% Source: Word Bank staff consolidation and Montenegro Tax Administration. Notes: Companies are ranked by value of total revenues (2023). JSC=joint stock company, LLC=limited liability company and PE= public enterprise. Performance of the SOE Sector Financial Performance Financial return is an important performance measure for any company, but given the many SOEs and MOEs bear significant PSOs it should be treated with caution and complemented by other performance measures. As data was lacking for private sector comparators, SOE and MOE financial performance was compared to generic profitability thresholds and own performance across time. SOE performance was generally low by private-sector standards over the past five years, including in the pre-COVID period and since 2020, despite a modest rebound (Figures 2.5, 2.6). Although in the aggregate the SOE and MOE portfolios yielded an overall positive result in 2023, the data suggest chronic performance issues in a significant share of companies as 23 percent of SOEs and 36 of MOEs were loss- making.. Even before the COVID-19 pandemic, in 2019, a full 37 percent of SOEs and 39 percent of MOEs reported losses.32 Portfolio-level return on assets (ROA) and portfolio-level return on equity (ROE) was 1.2-1.5 percent in 2019 and 2.5-3.5 percent in 2023 after rebounding from negative territory during 2020- 2022 in the aftermath of COVID-19. Return rates such as these, even though positive, are considered low by private sector standards – it would take 30-40 years for assets and equity to be paid off (as a general 32 Applying the International Monetary Fund’s (IMF) SOE Health Check Tool shows that the financial health of many SOEs is at a high risk, such as Barska Plovidba, Businessmontenegro, Crnogorska Plovidba, and CGES. 20 Montenegro – Integrated SOE Framework Assessment (iSOEF) rule of thumb, a 7-10 percent is considered a good return on investment internationally).33 The 2023 rebound in rates of return was driven primarily by the strong performance of large energy and transport sector SOEs, which account for the largest share of the portfolio by revenue ( Figure 2.7).34 Meanwhile, SOEs operating in the healthcare and agriculture sectors (which constitute a small share of the SOE portfolio by revenues) consistently operated at a loss over the observed period. Figure 2.5. Return on Assets (ROA), 2019-2023 Figure 2.6. Return on Equity (ROE), 2019-2023 6.0% 6.0% 4.0% 3.5% 2.0% 2.5% 1.0% 1.5% 1.2% -0.6% 0.0% 0.5% -0.4% -0.8% -2.6% -2.0% -1.5% -4.0% -4.9% -4.0% -6.0% -9.0% 2018 2020 2022 2024 2018 2020 2022 2024 SOEs MOEs SOEs MOEs Source: Montenegro Tax Administration, World Bank Group staff calculations. Figure 2.7. SOEs’ ROE and ROA by sector, 2023 15.0% 11.5% 9.0% 10.0% 5.9% 4.5% 4.5% 2.1% 5.0% 2.9% 2.1% 2.1% 1.6% 0.1% 1.5% 0.3% 0.1% 0.0% -5.0% -1.8% -1.9% -2.2% -2.1% -10.0% -10.0% -15.0% -15.4% -20.0% ROA ROE Source: Montenegro Tax Administration, World Bank Group staff calculations. Note: Figure excludes data for Health sector, where SOE presence is minimal, and which showed significant volatility / outliers. Over the same period, MOE returns have been lower and more volatile than those for SOEs (Figures 2.5, 2.6). Before the COVID-19 pandemic, MOEs posted small positive portfolio-level ROA and ROE of 0.5-1.5 percent. The return turned strongly negative in 2020, and never fully recovered, registering a negative ROA and ROE of -0.8 and -2.6 percent respectively in 2023. The poor performance was driven primarily by 33 The rates reflect average historical returns of major stock market indices such as the S&P 500. See https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datacurrent.html 34 Energy companies include the national electricity production and transmission companies (ROEs of 5 percent and 14.6 percent respectively in 2023), the state-owned coal mine (ROE of 16.4 percent in 2023) and the national highway management company (90.1 percent). The Innovation and Technology sector is small and its high ROE does not have a large impact on portfolio-level performance. 21 Montenegro – Integrated SOE Framework Assessment (iSOEF) MOEs in the utility sector, which account for the largest share of the MOE portfolio by revenue (Figure 2.8). These companies have registered mostly negative return since 2019, including a portfolio return of - 1.6 percent (ROA) and -5.8 percent (ROE) in 2023. For more details on the financial performance of SOE and MOE portfolios, including the identification of top loss-making companies and financial ratios of SOEs in the strategic energy and tourism sectors, see Annex 4. Figure 2.8. MOEs’ ROE and ROA by sector, 2023 300.0% 255.5% 200.0% 149.5% 100.0% 42.2% 19.8% 29.1% 15.5% 7.0% 31.1% 10.3% 1.5% 4.4% 0.0% -2.4% -1.4% -4.4% -11.2% -1.6% -3.1% -4.2% -5.8% -100.0% -200.0% -300.0% -268.4% ROA ROE Source: Montenegro Tax Administration, World Bank Group staff calculations. Note: The MOE Energy sector comprises a single company, Benergo d.o.o. Berane, with a high ROE driven by its low equity value, despite low returns that are nearly three times higher than its equity. The media sector consists of 15 active radio and television broadcasting companies, which collectively operate at a loss. Due to their low equity, this results in an ROE nearly three times in the negative. The low profitability of SOEs and MOEs may be partly attributed to high labor costs and low labor efficiency. The Statistical Office and Tax Administration of Montenegro data show that during 2019-2023 SOEs on average paid a positive wage premium of 43 to 63 percent over the national average wage (Figure 2.9).35 Indeed, they paid a positive premium in every sector of activity except healthcare (Figure 2.10), with the highest premia observed in the innovation and technology sector (116.8 percent premium), agriculture, environment and ecology (62.1 percent), transportation (42.8 percent), and energy (33.8 percent). MOEs were found to pay a 15.2 percent premium relative to the average wages in the relevant sectors. Further research is needed to confirm the robustness of the SOE and MOE wage premia after controlling for individual and job characteristics, however if the premia hold they could be contributing to the companies’ poor financial metrics and could also suggest lower labor efficiency relative to the national average. (For additional findings on labor efficiency see Annex 4.) 35 Ideally the wage gap analyses would compare SOE (and MOE) wages to similar companies in the private sector. This data was not available to the World Bank research team, and national average wages were used instead. The results should be treated with due caution because 1) the national average includes wages in the general government and non-profits, which may be lower than in companies and could make the wage gap appear larger than it is, 2) the national average includes the wages in SOEs and MOEs themselves, which could have the opposite effect on the results by reducing the perceived wage gap. Future research could examine the trends more closely using micro-level data. 22 Montenegro – Integrated SOE Framework Assessment (iSOEF) Figure 2.9. Monthly employee cost (EUR) for SOEs, MOEs, and all establishments, 2019-2023 2,000 1,496 1,500 1,371 1,289 1,329 1,350 1,064 944 921833 939 973944 1,033 1,000 842 824 500 0 2019 2020 2021 2022 2023 SOEs MOEs All establishments Source: Montenegro Tax Administration (SOE and MOE wages), Statistical Office of Montenegro (national average wages), World Bank Group staff calculations. Figure 2.10. Monthly employee cost by sector (EUR), SOEs and all establishments, by sector, 2023 2,339 2,500 1,932 2,000 1,420 1,395 1,444 1,536 1,313 1,500 1,299 1,128 1,095 1,005 996 898 925 919 1,000 876 745 877 765 871 500 0 SOEs All establishments Source: Montenegro Tax Administration (SOE and MOE wages), Statistical Office of Montenegro (national average wages), World Bank Group staff calculations. Note: For the purposes of this analysis, the Agriculture and Environment & Ecology sectors have been combined. Additionally, the Energy and Mining sectors, as classified by the Statistical Office, were combined for the purposes of this analysis. Poor SOE and MOE financial performance in competitive sectors is of particular concern, indicating deep- seated performance challenges . In 2023, only 38 percent of SOEs and 23 percent of MOEs in competitive sectors exhibited a “healthy” financial performance (net profit margins above 7 percent), while a full 28 percent of SOEs and 38 percent of MOEs were loss-making, and another 13 and 11 percent respectively were barely breaking even.36 These numbers place the country in the bottom third globally,37 suggesting deep-seated challenges.38 When it comes to understanding the extent to which public service obligations 36 Profit margins are estimated as the ratio of (net profit after tax/total revenue excluding government grants). As a general rule of thumb, a 5 percent profit margin is low, a 10 percent net profit margin is considered average, a 20 percent profit margin is considered good (NYU Stern (2024) Margins by Sector (US) and other data, January 2025). 37 Global benchmarking suggests that countries with the best-performing SOEs in competitive markets have less than 8 percent of loss-making SOEs. The second-best tercile reports a share of 8–27 percent, indicating medium risk, while the worst-performing tercile has more than 27 percent of SOEs operating at a loss (Apfalter and Sanchez-Navarro, 2023). 38 The team lacked access to systematic data on profitability of private sector firms, preventing an analysis of whether low profitability affected all firms or only SOEs - this would be an important question for future study. 23 Montenegro – Integrated SOE Framework Assessment (iSOEF) (PSOs)39 are properly compensated, the data must be interpreted with caution. Although the transfers are not trivial40 and benefit a significant share of companies,41 understanding their impact is complicated by a lack of clarity concerning their accounting treatment.42 Further analysis is needed to understand the allocation of PSOs to SOEs and MOEs across sectors to understand whether they lead to underperformance. Operational performance The operational efficiency of Montenegrin SOEs and MOEs is low by objective standards. Operational efficiency measures how efficiently firms generate revenues taking into account money spent on operations.43 Conservatively speaking, a ratio of operating expenses to operating revenues that is lower than 1 could be considered a sign of high efficiency, while a ratio exceeding 1 is a sign of low efficiency because operational revenues are insufficient to cover operational expenses. During 2019-2023, SOEs had operational efficiency values exceeding 1 (Figure 2.11). The MOE portfolio showed even worse operational performance, with operational efficiency of 1.3-1.4 during the same period. A deeper analysis of the data reveals significant differences by sector. SOEs in the tourism, transportation and construction as well as in arts and recreation, information and communication (media), manufacturing, agriculture, and environment sectors had very low efficiency, while those in energy, health, and scientific and technical sectors did relatively better (Figure 2.12). MOEs showed very low efficiency in all sectors, with those in agriculture, information and communication, and scientific and technical sectors performing especially poorly (Figure 2.13). The shortcomings in operational efficiency reflect both the large number of loss- making companies in the portfolio and a likely reliance on non-operating income (income not related to core business operations) for revenue generation. Figure 2.11. Operating expenses/ operating revenues for SOEs and MOEs (ratio) 1.50 1.25 1.00 0.75 0.50 0.25 0.00 2019 2020 2021 2022 2023 SOEs MOEs Source: Montenegro Tax Administration, World Bank Group staff calculations. 39 Public service obligations include regulated prices or requirements for universal service provision. For example, Montenegro’s regulated prices in the energy sector remained stable despite significant increases in the costs of imported energy from 2021 to 2023 (see World Bank 2024a). 40 In 2023, government transfers amounted to 61 million EUR to SOEs (including 18.9 million EUR to the top loss- making SOEs), an equivalent of 5.1 percent of total SOE revenues, and 7 million EUR to MOEs (including 0.8 million to the top loss-making) or equivalent to 3.4 percent of total MOE revenues. 41 In 2023 57 percent of SOEs and 32 percent of MOEs received transfers from the government. 42 In some cases, transfers are treated as revenues (inflating SOEs’ financial performance metrics), in others as donations recorded as deferred income (which could conversely inflate liabilities and reduce calculated financial returns), and in others they are treated as capital injections (increasing equity and thus deflating reported returns on equity). In many cases no information is available about the reasons underpinning transfers, including they were meant to compensate for PSOs (2024a). Some of the transfers may include state support that is also available to private companies, for example related to social insurance payments. 43 Unfortunately, data limitations precluded a comparison to private sector companies on the relevant measures. 24 Montenegro – Integrated SOE Framework Assessment (iSOEF) Figure 2.12. Operating expenses/operating Figure 2.13. Operating expenses/operating revenues, SOEs, 2023 revenues, MOEs, 2023 8.00 8.00 7.1 7.7 6.5 6.00 6.00 4.00 4.00 3.3 2.6 1.7 2.0 1.7 2.00 1.1 1.1 1.1 1.2 1.3 1.4 1.0 1.0 1.0 1.3 1.3 1.4 0.4 0.6 0.9 2.00 0.00 0.00 Source: Montenegro Tax Administration, World Bank Group staff calculations. Note: Figure 13 excludes the figure for the Innovation and Technology sector, where the ratio of operating expenses to revenues reached 90.1 percent in 2023. Revenues are operating revenues. Service Delivery Performance The SOEs and MOEs are dominant providers of services in several key sectors, but data on service coverage and quality is scarce. State and municipal enterprises are notably responsible for (i) most of the country’s electricity production and distribution, (ii) water supply and sanitation services on behalf of municipalities, (iii) building and maintaining infrastructure (roads, rail and maritime transport), and (iv) public transport by rail, bus ferry, and air. Although the authorities do not assess individual enterprises’ performance with respect to the coverage, quality and efficiency of their public-service delivery, external research on the electricity, transport and water sectors sheds some light on the challenges hindering the service performance of SOEs and MOEs in these three sectors. Montenegro’s SOE-dominated44 electricity sector is characterized by high access rates but shortcomings in the quality-of-service delivery, including frequent power outages. In 2023, 100 percent of the population was supplied with electricity access and the country’s share of households living in energy poverty45 (8-15 percent) is the lowest in the Western Balkans46 (Energy Community 2021a and 2021b). At the same time, Montenegro ranks rather low on international measures of service (electricity supply) quality, reflecting frequent power outages, ranking 100 out of 141 countries assessed in the 2019 Global Competitiveness Outlook (World Economic Forum, 2019). Montenegro’s reliance on hydropower makes the nationally sourced electricity supply vulnerable to changes in weather patterns; indeed, this was a factor driving down the performance of state-owned EPCG company in recent years (World Bank Group, forthcoming). Furthermore, the country still has some ways to go to make its energy mix more 44 Most of the country’s electricity needs are met by the coal and hydropower plants run by EPCG, but private operators also exist, for example the privately owned Krnovo onshore wind farm which went into operation in November 2017(https://masdar.ae/en/renewables/our-projects/krnovo-wind-farm). 45 Energy poverty connotes the inability of households to secure adequate energy, either owing to insufficient financing or insufficient access. 46 In Albania, Kosovo and North Macedonia energy poverty rate exceeds 30 percent. 25 Montenegro – Integrated SOE Framework Assessment (iSOEF) environmentally green. Montenegro currently predominantly relies on coal (46.7 percent), followed by hydropower (43.5 percent) and wind (9.8 percent) for energy sources (IEA 2022), although positive steps have been taken in the direction of diversifying towards more renewable sources. In the transport sector, research points to shortcomings in the quality of both infrastructure and services, which are crucial to Montenegro’s trade connectivity and future economic growth. SOEs are a key element of Montenegro’s transport infrastructure as the central government owns the railway infrastructure company (Zeljeznicka Infrastruktura Crne Gore), the road construction and maintenance company (Monteput), several seaport operators including the recently nationalized Port of Budva, and the national airport company. According to the 2023 World Bank Group Logistics Performance index, Montenegro achieved a score of 2.5 out of 5 on the quality of trade and transportation infrastructure, compared with 2.92 for the Europe and Central Asia Region (World Bank Group 2023a). Montenegro’s international rankings on transport infrastructure in the 2019 Global Competitiveness Report were particularly low in the domains of road connectivity (129 out of 141) and liner shipping connectivity (108), while performance was higher in railroad density (43 out of 141 countries) and in the efficiency of train services, seaport services and air transport services (63, 67 and 68 out of 141, respectively) (Table 2.4). Table 2.4 Transport infrastructure scores from the Global Competitiveness Report (Montenegro, 2019) Value Rank (out of 141 countries) Quality of road infrastructure (107) 3.9 77 Efficiency of train services (1-7) 3.1 63 Efficiency of air transport services (1-7) 4.6 68 Efficiency of seaport services (1-7) 4.2 67 Source: World Economic Forum (2019), Global Competitiveness Report Note: On the 1-7 scale, 7 indicates the best performance. In the water sector, where municipal firms ensure supply and sanitation services, population coverage is high but there are shortcomings in service quality and efficiency. A 2015 World Bank Group assessment found relatively high overall population access to water services, although the country performs worse than comparators in the region, and there are notable disparities across different parts of the country (World Bank Group 2015). For example, while most municipal water utilities ensure 24-hour service continuity, some municipalities only ensure 4-12 hours per day. The Water Utility Performance Index (WUPI), which includes 10 indicators that assess coverage, quality and management efficiency of water utilities, rates the performance of Montenegro’s water utilities as significantly lagging that of its peers in the Danube region (World Bank Group 2015). Many utility services are marked by low efficiency, while low service-bill collection rates (72 percent of billed amounts are received on average) hinder their revenue generation capacity (World Bank Group 2015). Montenegro also lags behind peers in terms of the percentage of water samples that passed quality and compliance tests in 2012 (85.5 percent) (World Bank Group 2015). In a similar vein, Montenegro’s proportion of the population exposed to unsafe drinking water (13 percent) places it at a ranking of 65 out of 141 countries on this metric according to the 2019 Global Competitiveness Report (World Economic Forum, 2019). The same report highlights scope to improve the reliability of Montenegro’s water supply, scored at 5.2 out of 7 and ranking Montenegro 57 out of 141 countries on this indicator (World Economic Forum, 2019). 26 Montenegro – Integrated SOE Framework Assessment (iSOEF) 3 Corporate Governance and Accountability Good corporate governance (CG) and sound ownership practices are key foundations for stable, financially healthy SOEs and MOEs. Compared to private sector companies, SOEs and MOEs face distinct governance challenges, including having multiple principals and competing goals and objectives, which directly affect the companies’ financial and service delivery performance. Effective exercise of ownership and corporate governance can help to overcome those challenges and enable Montenegrin SOEs and MOEs to unlock higher financial returns, efficiency, and quality service delivery. Following the iSOEF methodology, this chapter assesses six dimensions of corporate governance in Montenegrin public companies: legal and regulatory framework, ownership and oversight function, performance monitoring, boards of directors, transparency and disclosure, and procurement. The analysis focuses primarily on SOEs, due to data availability and the focus of the GoM’s most immediate reform priorities, but MOEs are also discussed whenever is possible. Given their separate regulatory framework and ownership setup, MOEs are treated in less detail – a more comprehensive analysis will require a separate dedicated study. Legal and Regulatory Framework The Montenegrin legal and regulatory framework for SOEs is complex and fragmented. Rooted in German and French civil law traditions, it has been evolving, with significant efforts towards alignment with EU and OECD standards made in recent years. The laws and by-laws applicable to SOEs (and most MOEs) can be grouped into three areas: (i) general legislation applicable to both public and private companies, (ii) laws and bylaws applicable to public sector entities (such as Law on state property management or Law on public sector internal controls and accounting), and (iii) sector-specific laws. Annex 5 provides a detailed list of laws and by-laws applicable to SOEs, in each category. Box 3.1 Legal forms of SOEs and MOEs in Montenegro • Joint-Stock Company (JSC) (28 SOEs): A business entity whose share capital is divided into shares owned by one or more members of the company (shareholders) (Companies Law, art. 104). • Limited Liability Company (LLC) (30 SOEs): A business entity established by one or more legal or natural persons through contributions of monetary or non-monetary assets, for the purpose of conducting activities under a common name. Its share capital is divided into stakes that do not constitute securities (Companies Law, art. 264). • Public Enterprise (PE) (3 SOEs)47: Enterprises engaged in economic activities for the public interest and are indispensable for citizens, operations of other enterprises, or the functioning of public authorities (Law on Public Enterprises, art. 1, repealed in 2010). The majority of SOEs (95 percent) and MOEs (97 percent) in Montenegro are fully corporatized either as Joint Stock Companies (JSCs) or Limited Liability Companies (LLCs). Only a few public sector companies 47 Separately, the public broadcaster RTCG is subject to enterprise-specific legislation setting forth some tailored ownership and corporate governance arrangements, e.g., granting the Parliament the right to appoint its board (Law on the National Public Broadcaster – Public Media Service of Montenegro, 2024). The legal form of RTCG is not specified in its legislation and the entity is classified as an “establishment” in the state register. 27 Montenegro – Integrated SOE Framework Assessment (iSOEF) - 3 SOEs and 4 MOEs - retain the form of public enterprises and are not fully corporatized.48 These few companies persist counter to the requirement of the 2010 Law On Improvement of the Business Environment that abolished the Law on Public Enterprises and the associated legal form, and the legal form is not recognized in the Companies Law, although the legal form is still recognized in some sectoral laws. Box 3.1 provides an overview of the existing legal forms of SOEs in Montenegro.49 Despite being in line with international standards, the current legislative framework has a number of gaps and inconsistencies. Drawing on World Bank Group 2024b, an in-depth analysis of the SOE legal- regulatory framework identified the following key areas of weakness: • Incomplete applicability of laws. For SOEs incorporated as JSCs or LLCs (all but 3), the primary legislation on matters of corporate governance and operations is the Companies Law and other laws applicable to private companies (listed in Annex 5).50 The same laws, however, do not apply to SOEs incorporated as public enterprises, creating legal grey areas. The Law on State Property leaves some ambiguity about the registration of assets ownership in accounting documents, and there is some ambiguity in the applicability of certain laws to companies that are subsidiaries of SOEs. • Conflicting legal provisions: Incomplete harmonization of legislation means that some SOEs face conflicting provisions and unclear legal status. For example, in the case of the Maritime Resources SOE “Morsko dobro” there is a direct conflict between the Law on Maritime Domain, which requires this SOE to retain the legal status of a non-corporatized public enterprise, and the Law on the Improvement of the Business Environment (2010), which abolished public enterprises as a recognized legal form. • Restrictive regulations. The application of public sector laws in some cases hinders SOEs’ ability to operate on a level playing field with private companies. For example, the Law on the Wages of Employees in the Public Sector, which subjects SOE employees, executive directors, and Board of Director (BoD) members to public sector salary provisions can hinder SOEs' ability to compete for top talent with the private sector.51 Similarly, the Law on Public Procurement restricts the ability of SOEs to conduct crucial or urgent procurements in a timely manner, hindering operational efficiency and responsiveness to market demands.52 • Misalignment with internationally acknowledged principles. Some regulations diverge from internationally established good principles. For example, the Law on Management and Internal Controls in the Public Sector, while mostly in line with good practice, is misaligned on certain important aspects such as its requirement for the subordination of the internal audit function to SOE management rather than to the board and its audit committee. Similarly, the Law on Civil Servants and Employees allows civil servants to serve as members or presidents of both supervisory and 48 The three SOEs adopting the PE legal framework are: National Parks, “Mosko Dobro” Maritime Domain, and the public broadcaster RTCG. 49 Legal entities in Montenegro can also take the form of “Public Establishment,” but since they generally do not engage in commercial activities, they were not considered SOEs or MOEs for the purpose of this report or its underpinning dataset. 50 At the time of writing, the Montenegrin Government was developing a new Companies Law planned for approval in 2025 and was also in the process of elaborated an SOE Law to strengthen SOEs’ ownership, governance and disclosure practices. 51 The Law regulates the calculation of basic salaries using government-determined coefficients, the variable salary component (bonuses), and the compensation scheme for the board chair and members. 52 In interviews SOEs stress the need for greater flexibility in applying agile procurement methods in cases such as following natural weather events, to enable continued service (World Bank interview November 2024). 28 Montenegro – Integrated SOE Framework Assessment (iSOEF) executive bodies of SOEs and MOEs, which may hinder the good-practice separation of state ownership and corporate management functions.53 There are notable gaps in Montenegro’s policy framework for state ownership and SOE governance. (Annex 6 lists the key policies applicable to SOEs at the time of writing.) At the time of writing, the following constituted the biggest challenges: • Absence of a State Ownership Policy (SOP) to guide state ownership decisions. Currently, SOE-related policies and corporate governance provisions are scattered across multiple laws and sectoral strategies, which are insufficient for guiding coherent state ownership decisions and setting common standards and strategic directions for SOEs. In the absence of a SOP, SOEs are established and reorganized through ad hoc Government decisions, without a clear strategic rationale, and there is no document clarifying the government’s role in exercising its ownership function. • Absence of a strategic program of reforms to improve the governance and performance of the SOE sector in short, medium, and long term. The absence of such a strategy has left many challenges unaddressed or led to ad hoc half-measures that were inefficient and prevented many companies from achieving their performance potential. EPCG, for example, has undergone multiple costly but only partially successful restructurings. • The Code of Corporate Governance is outdated and applies only to a minority of SOEs that are listed on the Stock Exchange. Montenegro´s Code of Corporate Governance was issued in 2009 and applies only to the 6 SOEs (zero MOEs) listed on Montenegro’s Stock Exchange (SE) top tier segments.54 For these 6 SOEs compliance follows a “comply or explain” mechanism, although in practice all voluntarily disclose the required information annually. • Weak dividend policy for SOEs. Distribution of SOE dividends is regulated by a 2016 Government Decision, which requires companies controlled by the government to transfer 70 percent of their profits to the state budget as dividends55 and is not in line with international good practice.56 The transfer rules are typically not underpinned by structured assessments that balance fiscal objectives with SOEs’ financial sustainability and reinvestment needs, and are not consistently applied by companies57 (for more detail see Chapter 4). Montenegro is making rapid strides towards closing some of the described gaps. At the time of writing this assessment, the Government is developing a SOL and dedicated SOE Law (expected to be adopted in 2025) that would help strengthen its ownership role and harmonize the application of governance and accountability standards for all SOEs. It is also updating a number of the key general laws, including the Companies Law, Law on Audit, Law on Accounting, and Law on Management and Internal Controls in the Public Sector. The Stock Exchange is in the process of updating its CG Code to bring it in line with the latest 53 The Law on Civil Servants and Employees, article 80. Civil servants’ participation in management boards could pose corporate governance risks if these boards end up simply running the daily operations of the company rather than independently overseeing strategy and supervising the CEO. 54 Montenegro SE Listing Rules, Article 78. The top tier segments include the Prime and Standard Markets. 55 Interviews with central government institutions and SOEs, November-December 2024. The World Bank was not able to gain access to the referenced Decision and therefore was not able to review its content in detail. 56 OECD-World Bank (2024). 57 Interviews with central government institutions and SOEs, November-December 2024. Under the Decree on Organization and Manner of Functioning of State Administration, the MOF is responsible for reviewing accumulated undistributed profits, recent financial performance, and anticipated investment needs before making its recommendation about dividend transfers, but interviews suggest that systematic assessments are often not done. 29 Montenegro – Integrated SOE Framework Assessment (iSOEF) standards.58 The new Companies Law under consideration foresees obligating publicly traded companies to adopt a CG code while encouraging other JSCs and LLCs to adopt a similar approach. These foundational reforms are expected to bring the country’s SOE legal-regulatory framework in closer alignment with EU standards and close various gaps. Ownership and Oversight Function Montenegro has a decentralized model of state ownership model. While GoM legally owns most SOEs on behalf of the Montenegrin state,59 shareholder decisions are exercised on behalf of the GoM by sectoral line ministries, specific “state funds,”60 and the MoF.61 The GoM appoints state representatives to SOEs’ general meetings of shareholders, based on proposals of the responsible line ministries, which are reviewed by the Government Commission for Personnel and Administrative Matters.62 Meanwhile the line ministries, state funds, and MoF exercise core ownership functions, including board nominations for SOEs in which they directly exercise ownership rights.63 Disposition of assets and other items in state property above the value of EUR 150 million can be proposed by the GoM and requires approval of the national Parliament.64 GoM’s oversight over SOEs is currently limited to MoF monitoring of SOEs’ financial performance, debt levels, and fiscal impacts via manual-entry Excel based tools, including the IMF’s Health Check Tool (HCT).65 A central database of SOEs exists but it is incomplete and so far includes only financial data required for the IMF HCT. The State Audit Institution (SAI) performs periodic financial, compliance and performance audits of SOEs to verify SOE compliance with laws, financial transparency and efficient use of resources.66 Table 3.1 provides a more detailed view of the roles of key institutional actors. Table 3.1 Current institutional roles - SOE shareholding, oversight, and sector regulation Institution Mandate and Roles Oversight Shareholding Function Regulation Government / Oversees ministries’ Owns shares in SOEs on behalf of the Defines national Cabinet regulatory and policy state; appoints state representatives policies and implementation functions, but in SOEs’ GMS strategies no structured process for exercising or overseeing exercise of ownership function 58 Interview with CEO of the Montenegro SE. 59 Law on State Property, art. 29. 60 State-linked funds became shareholders through early privatization schemes in in the 1990s. They include the Pension and Disability Insurance Fund, Compensation Fund, Republic Fund for Joint Reserves, National Development Bank (technically itself an SOE/JSC), Health Insurance Fund, Employment Agency of Montenegro, Directorate for Capital Projects, University of Montenegro, Montefarm. 61 The MoF is the shareholder of three SOEs: Castello Montenegro Pljevlja (JSC), PIO Ulcinj (LLC), and Sports Center Ada Pljevlja (LLC). Also under the Energy Law, the EEC regulatory requirements grant the MoF direct authority over certain ownership functions related to transmission system operators. 62 Government's Rules on Procedure, Art. 12, 13 and 17. The Commission is a permanent working body of the GOM; it reviews proposals from line ministries and recommends to the GoM a decision in form of a ”Conclusion.” 63 Some SOEs’ Articles of Association additionally grant these line ministries, state funds and/or MoF the responsibility for CEO appointments. 64 Law on State Property (art. 29). 65 Law on Budget and Fiscal Responsibility; Rulebook on Internal Organization and Systematization of Ministry of Finance, 2024, Article 12, para. 10.5. Responsible unit is the MOF Division for Fiscal Risks of Public Enterprises. 66 The Law on State Audit (art. 5) 30 Montenegro – Integrated SOE Framework Assessment (iSOEF) Line ministries Perform administrative Perform ownership functions, Develop sector oversight over the SOEs based including board nominations for SOEs policies, regulate on sectoral laws in which they directly exercise sectors where ownership rights; propose state SOEs operate representatives in SOEs’ GMS State funds Performs ownership functions, including board nominations for SOEs in which they directly exercise ownership rights; Ministry of Monitors SOEs’ financial Performs ownership functions, Develops select Finance performance and fiscal risks. including board nominations for SOEs laws and policies in which they directly exercise applicable to SOEs ownership rights (3 SOEs) (e.g., Laws on Audit, Accounting) Commission for Reviews appointments and dismissals Personnel and of the GoM representatives at the Administrative GMS. Approves appointments and Matters dismissals of the BoD members and executive management in cases where the shareholding entity can appoint executive management. State Audit Conducts periodic financial, Institution compliance, and performance audits of SOEs Parliament Provides legislative oversight Decides on disposal of state assets Adopts laws that surpassing a threshold amount, at are part of the SOE GoM request regulatory framework Source: World Bank Group staff analysis. The current fragmented approach to state ownership hampers a consistent portfolio-wide policy and strategic vision, as well as effective governance, coordination and oversight of SOEs. Specifically, it entails some of the following key weaknesses: • Montenegro lacks a formalized process and guidance regarding board appointments and external audit (see sections 3.4 and 3.5 below). • Strategic guidance and communication between line-ministries and SOEs vary across sectors, and are often not in line with accepted good practices. While the Government exercises a fair degree of control over financial transactions with SOEs and ministerial (or Parliament) approval is needed for significant transactions, SOE boards often lack clear strategic direction from the state, and procedures and frequency of communication between boards and the government vary across ministries.67 Counter to OECD SOE Guidelines, shareholder-SOE interactions in Montenegro are informal, ad hoc, and untransparent, and are not focused on aligning SOE operations with clearly defined public policy objectives. Ministries often participate in board meetings as informal observers and sometimes require detailed reports from the boards, raising concerns about undue interference. • Line ministries simultaneously exercise ownership, policy making, and regulatory functions which can lead to conflicting interests and limit the ability of the state to act as a professional shareholder. 67 Several SOE and ownership-entity representatives interviewed for this report referenced frequent communications between SOEs and state shareholding entities, in several cases weekly or daily, suggesting excessive state involvement in SOE management decisions. 31 Montenegro – Integrated SOE Framework Assessment (iSOEF) Most line ministries lack dedicated units responsible for SOE ownership and monitoring, and often combine these functions with policy making or sectoral duties.68 • No coordination mechanism is in place between the GoM and line ministries / state funds regarding the execution of the ownership function. Line-ministries often consult with other state shareholders only on an ad hoc basis. This results in each institution pursuing its own agenda, and weakens accountability for SOE performance and governance. • The oversight of SOE strategic and operational performance aspects is not clearly defined. Frequent reorganizations within the public administration have further fragmented SOE monitoring efforts and led to the loss of institutional memory, exacerbating challenges related to the insufficient coordination of the ownership function. For example, a unit in charge of SOEs within the Ministry of Capital Investments was closed in 2022, followed by the elimination of the ministry itself in 2023. The Government’s envisioned new reforms could help to address some of these challenges . First, the Government has taken a formal decision in 2024 to transition from a decentralized to a coordinated (and eventually centralized) model of state ownership, which has globally been shown to strengthen ownership and governance. The coordinated model will leave a role for the line ministries in setting sector policies and targets but reduce the potential conflict of interest by professionalizing the exercise of the ownership function, harmonizing standards, and formalizing and improving shareholder-SOE communication. Second, the government’s expected adoption of a strong SOP in 2025 promises to harmonize corporate governance rules and practices across SOEs, including in board selection and accountability. Performance Management The Montenegrin state and municipal governments, as owners, lack an effective monitoring system to keep SOE and MOE boards and management accountable for their performance. Performance monitoring standards and processes for SOEs and MOEs are not included in the existing legal framework, and not standardized through the use of Performance Contracts (PCs) or similar tools, which has led to some inconsistent practices de facto. While most SOEs and MOEs are believed to have formally defined performance objectives and indicators, they vary in quality and are usually set unilaterally by the companies . Counter to international good standards, current decentralized ownership entities lack uniform standards or guidelines in setting clear performance expectations in the form of PCs. Counter to international good practice, a high share (95 percent) of SOEs and MOEs surveyed for this study voluntarily formulate their own strategies, performance objectives and key performance indicators (KPIs) (Figure 3.1), but in the absence of standards these vary considerably in quality and most focus on short-term objectives rather than forward-looking strategic goals.69 Interviews suggest that a key reason for weak shareholder involvement in this area is lack of awareness as well as constraints imposed by the prevailing political environment.70 68 Interviews with Ministries of Maritime Affairs, Tourism, State Property, Economic Development, Transport, and Mining. The Ministry of Energy is an exception in establishing a dedicated SOE monitoring department. 69 There are exceptions. For example, the SOE hotel group Budvanska Rivijera and wine producer Plantaže adopted five-year strategies for attracting investments (2024-2029) and sustainable firm growth (2025-2030) respectively. 70 According to a senior management representative of one SOE interviewed for this study, “SOEs’ corporate governance is influenced by [the] political environment and this complicates … efforts to establish independent, merit-based performance measurement [and] KPI-driven governance.” 32 Montenegro – Integrated SOE Framework Assessment (iSOEF) Figure 3.1 Who sets SOEs’/MOEs’ performance objectives, relative likelihood 80% 66.7% 60% 50.0% 45.0% 40% 23.8% 20% 5.0% 9.5% 0% Company level (incl. Government only (incl. Joint company and boards, senior line ministries, government management) municipalities, GSM) SOE MOE Source: World Bank Group online survey of Montenegrin SOEs and MOEs, November 2024. Note: Responses to this question received from 21 SOEs and 22 MOEs Oversight of SOE performance by shareholding entities is fragmented and reactive. Line ministries apply different reporting requirements and frequency. Monitoring is often triggered by specific events or requests rather than following a structured timeline and system, resulting in oversight gaps and missed opportunities for early intervention. Companies’ public service obligations (PSOs) and their compensation, which affect SOE and MOE performance, are not clearly defined in the legal framework and not consistently monitored . Although majority of Montenegrin SOEs (81 percent) and MOEs (95 percent) surveyed for this study report having non-commercial objectives (PSOs), Montenegro’s existing legal-policy framework lacks a clear definition and methodology for identifying and costing these.71 There is no clear separation of commercial and non- commercial activities in SOEs’ accounts, which impedes transparency, proper performance evaluation, and adequate compensation of the non-commercial component by the state. Indeed, only a small fraction of surveyed SOEs (12 percent) and MOEs (24 percent) with non-commercial objectives report having their PSOs fully funded from the state budget. Meanwhile, a substantial share of companies go against good practice by either cross subsidizing the PSOs from their commercial earnings (47 percent of SOEs, 10 percent of MOEs) or relying on a mix of their commercial earnings and state funding (29 percent of SOEs, 67 percent of MOEs). The lack of proper tracking and compensation of PSOs by the state obscures the actual cost of public mandates, distorts the companies’ financial performance indicators, and undermines SOE financial sustainability, raising fiscal risks.72 Aligning with OECD Guidelines and forthcoming EU obligations will require Montenegro to introduce a transparent PSO framework with clear definitions, costing methodologies, and full accounting separation, as well as adequate and proportionate compensation mechanisms. Boards of Directors and Management Most SOEs and MOEs in Montenegro are required to have a Board of Directors (BoD)- and most have one. The Companies Law requires all JSCs and most LLCs to establish a BoD structure, and all SOEs and 82 percent of MOEs surveyed for this study reported having a BoD.73 Although the Law provides for the 71 Some PSOs are defined in sector laws or by-laws, such as universal service obligations in the postal industry, but most are mentioned in a rather generic manner. There are few if any service level agreements (SLAs) in practice. 72 At the same time overcompensation of PSOs, while rare, is also undesirable as it violates EU state aid rules. 73 Boards are optional for smaller LLCs, and they are mandatory for larger and publicly traded LLCs, like for JSCs. MOEs without a BoD are small or micro-sized LLCs with less than 10 employees. 33 Montenegro – Integrated SOE Framework Assessment (iSOEF) possibility of two-tier boards that separate non-executive and executive management bodies, in practice all but one company have one-tier boards, which combine non-executive and executive management.74 The Company Law requires all companies with boards, including SOEs, to have an odd number of board members, at least one third of whom should be independent.75 Institutions holding at least 5 percent of shares in a company are empowered to propose BoD candidates, including a minimum of 33 percent that are required to be independent members.76 However, the state as owner has not elaborated any separate rules concerning SOE board member independence from the state or from political interests, and the Company Law provides little guidance on required competencies, qualifications and diversity of Board members,77 leaving this to individual companies. Critically, existing laws do not prohibit politicians from serving on SOE boards or civil servants from serving as independent directors,78 leaving room to strengthen provisions ensuring board members’ independence. The forthcoming updated Companies Law and new SOE Law are expected to address this gap, although the final provisions have not been agreed/disclosed at the time of this writing. In practice, SOE and MOE board composition is seen as a critical predictor of firm performance – and it varies significantly.79 Most state ownership entities interviewed for this study consider the composition of BoDs to be a critical factor affecting enterprises’ strategic direction and performance,80 and survey results show significant variation in the size and composition of boards. Five-member boards are the most common (in 56 percent of SOEs and 74 percent of MOEs).81 Non-executives constitute 68 percent of SOE board members and 59 percent of MOE board members, civil servants - 21 and 23 percent respectively, and current SOE /MOE employees - 6 and 11 percent. The high level of non-executive members is a positive,82 but the significant share of civil servants on SOE and MOE boards raises concerns about board qualifications and independence.83 Similar concerns apply to BoD chairs, where survey results suggest a 74 The state-owned Development Bank (SOE) has a two-tier-board. Companies with a single-tier system are required to have the GMS and a BoD or sole executive director. 75 Companies Act, Art. 167. Listed SOEs must have at least 5 board members. 76 An independent member is a non-executive director who has no business, family, or other relationships with the company, executive directors, or controlling shareholders, as well as with related companies, that could create a conflict of interest that would affect their decisions. Publicly traded JSCs are required to have at least 40 percent independent members. 77 The only specific guidance in the Companies Law (art. 155) is the prohibition on persons convicted of criminal offenses, company auditors, and executive directors of the company (except in the case of a sole-member company) serving as BoD members. The draft of the new Companies Law introduces provisions on gender representation for the boards of publicly traded JSCs. Trade JSCs that do not meet this requisite provisions are required to publish a justification on their website as well as the measures to comply with the requirement. 78 By definition, civil servants are not independent directors, as they are employed by the state. 79 Systematic information on acting directors was not available but overall the practice of having acting directors on SOE boards does not appear to be a major problem in Montenegro. In-depth interviews with 8 large companies did not reveal the presence of any acting directors. 80 Out of 7 state ownership entities whose representatives responded to the survey, five rate the link between board composition and SOE performance as strong (4 or 5 on a scale of 1 to 5, where 1 is a weak link and 5 is a strong link). 81 Three-member boards the second most common (29 percent of SOEs and 21 percent of MOEs), and 7-member boards the least common (5 percent of both SOEs and MOEs). 82 The level is higher among large enterprises (80 percent) and JSCs (75 percent) than medium or small sized companies (45 percent, 64 percent) and LLCs (59 percent). 83 The OECD SOE Guidelines note that civil servants on SOE boards can be nominated but based on merit and subject to strong safeguards to prevent conflicts of interest. 34 Montenegro – Integrated SOE Framework Assessment (iSOEF) majority of chairs coming from the private sector (45 percent of SOEs, 58 percent of MOEs) but a sizable share from the civil service (35 percent of SOEs, 26 percent of MOEs) and current or former politicians (25 percent of SOEs, 11 percent of MOEs) (Figure 3.2), which raises concerns about their experience in running a company and unwanted political influence. No SOEs or MOEs reported having board chairs who also serve as a CEO or managing director of the company, in line with good practice. Gender diversity of the BoDs is low: while most surveyed companies (62 percent of SOEs, 68 percent of MOEs) have at least one woman on their BoD, females constitute only 28 percent of all currently sitting BoD members. The current appointment process for SOE and MOE boards is not clearly defined in legislation and is marked by political influence and lack of transparency and merit-basis in practice.84 The Companies Law defines the general shareholder rights and responsibilities with respect to company board appointments, but does not set out clear steps and criteria for appointments to ensure that the process is transparent and merit based. Although this applies to all companies governed by the Company Law, its effects are more problematic for SOEs where there is more room for political interference. Stakeholder interviews suggest that de facto the process of board appointments in SOEs is heavily influenced by political negotiations and coalition agreements, with the responsible line ministry acting as an intermediary that prepares documentation based on political nominations and passes these to the Government and GMS for final approval.85 Figure 3.2 Background of board chairs in SOEs and MOEs 70% 58% 60% 45% 50% 35% 32% 40% 26% 26% 25% 30% 20% 20% 15%16% 15% 20% 11% 5% 5% 10% 0% 0% Primarily Primarily public Academic Accounting or Lawyer Engineer Politician Other/please private sector/civil finance (current or specify sector/business servant former) background SOEs MOEs Source: World Bank Group online survey of SOEs and MOEs, November 2024. Note: Responses add up to more than 100 percent because more than one option could be selected. The Companies Law allows for a board term of up to 4 years, but in practice terms are often much shorter, raising concerns about the autonomy and quality of boards.86 The Companies Law limits board terms for 4 years but defers to companies’ articles of association to set the term for individual companies -- and, in the absence of guidelines in the companies’ internal regulations, it limits the term to the next GMS, which is effectively 1 year.87 In practice, this translates into frequent use of single year terms, while long board tenure remains relatively uncommon. Although board members can be – and are sometimes – reelected after their term expires, among the surveyed enterprises only 14 percent of SOEs and 11 84 Based on interviews with multiple stakeholders and online survey 85 GMS also dismisses BoD members. GMS approval is not required for SOE board appointments and dismissals where the Government is a sole shareholder, like the Monteput and Pošta SOEs. 86 The Act also allows for the exact length to be defined in company articles of association. 87 Company Law, Article 159. 35 Montenegro – Integrated SOE Framework Assessment (iSOEF) percent of MOEs reported having board members who served 5 years or more.88 These practices are likely to hinder the Boards’ ability to engage in long-term strategic planning, and indicate the need for more harmonized rules on board term lengths that balance the need for continuity and institutional knowledge with the benefits of regular board-member renewal. Board committees are not required by law and, if established, are subject to only limited requirements. The OECD SOE Corporate Governance Guidelines recommend SOEs to establish board committees, especially audit committees, with relevant consideration for firm size and risk profile. The current Company Law does not require firms to have any board committees,89 and in case committees exist only requires them to maintain at least 3 members and one independent director.90 The Company Law does not set any standards or requirements on the qualifications or characteristics of board committee members. The Law on Audit requires a fraction of SOEs and MOEs to establish audit committees91 and assigns the committees a number of critical functions.92 However, counter to prevailing practice across EU member states and OECD Guidelines,93 the law set up the committees as external bodies, not as BoD sub-committees directly accountable to the board,94 which set-up limits the boards’ ability to understand and address gaps in SOEs’ audit and internal control practices.95 Furthermore, the prescribed standards for audit committee composition and qualifications remain weak; the low requirements make it possible for all but one member of the audit committee to be SOE employees, shareholders, or members of the management board of the same SOE, which can present significant conflicts of interest. This contrasts with international good practice, which requires all or at least the majority of members to be independent and have a background in audit, finance, and/or risk management. In practice, only a fraction of SOEs and MOEs have board committees, perhaps due to the relaxed legal requirements. 48 percent of surveyed SOEs and 84 percent of MOEs have no board committees at all. 85 percent of the companies without board committees are too small to need them, but this still does not hold for all the cases. The most common board committees in SOEs are remuneration (19 percent), nomination (10 percent of SOEs), and corporate governance (10 percent of SOEs), while others are less prevalent – and there are very few committees in MOEs (Figure 3.3). 88 Online survey, responses from 21 central SOEs and 19 MOEs. Enterprise size and legal form do not appear strongly correlated to long board tenure. 89 Under the new draft of the Companies Law under consideration at the time of writing, publicly traded JSCs are expected to be required to establish remuneration and nomination committees. 90 Companies Act (Art. 167) 91 An audit committee is required for: public interest entities, large and medium-sized legal entities, and large or medium-sized holding companies, among other (Law on Audit, Art 30). 92 These include monitoring: the financial reporting process in companies, effectiveness of internal controls and internal audit, statutory audit of annual financial statements, and independence of engaged external auditors. It also includes reviewing annual internal control plan and reports, and providing recommendations to company founders or shareholders on the selection of authorized auditors (Law on Audit, Art 31). 93 EU legislation (EU Statutory Audit Directive 2006/43/EC, Audit Regulation 537/2014) requires public interest entities to establish an audit committee. While it does not explicitly require it to be formally subordinated to the Board of Directors, it is generally considered good practice. 94 Although the audit committee can, as per the Law on Audit, be established by the board if stipulated in company articles of association, the assessment team did not undertake to identify whether this was the case in any of the surveyed enterprises. 95 For a discussion of SOE audit committee accountability shortcomings in Montenegro see Centre for Financial and Sustainability Reporting Reform (2024) https://cfrr.worldbank.org/news/enhancing-governance-montenegros- soes-critical-role-audit-committees 36 Montenegro – Integrated SOE Framework Assessment (iSOEF) Figure 3.3 Share of SOEs and MOEs with board committees or external audit committee 100% 84% 80% 60% 48% 43% 40% 19% 20% 11% 10% 10% 0% 0% 0% 5% 5% 5% 0% 0% No Audit Remuneration Nomination Corporate Ad hoc Other/please subcommittees committee committee committee governance committee specify committee SOE MOE Source: World Bank Group online survey of SOEs and MOEs, November 2024. Information on the remuneration of individual SOE BoD members is not collected centrally and disclosure is not required by law. Many SOEs publish only cumulative data. Listed SOEs are required to publish their remuneration policy and interviews suggest that most comply with this requirement. Counter to the internationally accepted standards, Montenegro has no legal requirement for BoD performance evaluation and no established mechanisms in practice. About one half of surveyed SOEs and MOEs reported having no formal board evaluation process; and when such a process is in place, it is usually focused exclusively on the board as a whole and rarely on individual board members. Evaluations are informed primarily by the achievement of company goals, without understating other important dimensions such as the board’s effectiveness in fulfilling its responsibilities related to strategic oversight. Box 3.2 presents internationally accepted good practices for evaluating BoD performance. Box 3.2 Good Practices for Evaluating BoD Performance • Strategic Oversight: Evaluating how well the BoD provides strategic direction and oversight to the company. This includes their involvement in setting long-term goals, approving major decisions, and monitoring the implementation of the strategy. • Governance and Compliance: Assessing the BoD's effectiveness in ensuring that the company adheres to legal and regulatory requirements, as well as best practices in corporate governance. • Risk Management: Evaluating the BoD's role in identifying, assessing, and mitigating risks that could impact the company. • Board Dynamics and Functioning: Assessing the quality of interactions among board members, the effectiveness of board meetings, and the overall functioning of the board as a collegial and strategic body. • Stakeholder Engagement: Evaluating how well the BoD engages with key stakeholders, including shareholders, employees, and other relevant parties. • Individual Contributions: Assessing the contributions of individual board members, including their attendance, participation, and the value they bring to board discussions and decisions. Source: Adapted from World Bank Group (2021b), Leadership Training Toolkit for State-Owned Enterprises: Boards and Owners. There are currently no legal requirements for BoD training, and this has affected practices. Of the surveyed SOEs and MOEs, 95 percent do not require or provide training for their BoD members and in practice none had even a single BoD member attend training during the last 12 months. Since “lack of knowledge and experience” of boards is ranked by SOEs and MOEs as the first or second top constraint 37 Montenegro – Integrated SOE Framework Assessment (iSOEF) on the quality of corporate governance in their companies, a relatively small investment in training could have tangible positive impacts.96 Decision-making responsibilities between the board, management, and GMS are sometimes mixed up. In line with good practices, management is most often responsible for hiring and dismissing staff, and the board decides on commercial objectives in more than half of surveyed enterprises. Also, in most SOEs and MOEs boards and management are responsible for preparing strategic business plans, without shareholder involvement. At the same time, there are areas where good-practice roles are not followed. For example, SOE and MOE BoDs are often directly involved in operational tasks typically reserved for management, such as setting product pricing (38 percent of surveyed SOEs, 36 percent of MOEs) and salary increases (67 percent of SOEs, 41 percent of MOEs). The very high frequency of board meetings in many SOEs and MOEs also points to their potentially excessive involvement in the day-to-day management of companies.97 Furthermore, interviews suggest that shareholding entities (line ministries and state funds) frequently get involved in product pricing, setting of companies’ commercial objectives and performance targets, and other decisions that should normally be reserved for the BoD and/or management. The appointment of Chief Executive Officers (CEOs) does not follow internationally accepted principles either in law or in practice. By law, the CEO position can be held by any individual meeting the conditions stipulated in the company's articles of association and article 157 of the Companies Act,98 which do not provide a standardized guideline for merit-based selection of CEOs nor policies linking CEOs’ contract renewal and remuneration to performance. In practice, while in most SOEs and MOEs boards retain the strategic authority to appoint and dismiss the chief executive, the articles of association of some enterprises assign this role to the state, which is not in line with good practice and hinders the board’s ability to independently oversee senior management. An independent study found 5 such cases (Institute Alternativa 2021) and the World Bank Group’s interviews with 8 large SOEs for this study found another 2 cases.99 CEO appointments in many SOEs are made without transparency and open competition, which reduces accountability and potential for political interference in CEO appointments. CEO tenure length and backgrounds vary significantly in practice and are not always aligned with good practice. The law provides little guidance on CEO tenure terms, and in practice the terms vary according to enterprises’ articles of association. According to interviews and survey of SOEs and MOEs, the variation in tenure lengths is significant. Many CEOs have held their positions less than 2 years (57 percent of SOE CEOs, 55 percent of MOE CEOs) (Figure 3.4) suggesting an elevated turnover rate and potential influence of political changes on this position.100 At the same time, some SOE CEOs have open-ended permanent contracts, which carries the risk of reduced effort and performance. CEOs of MOEs tend to be longer serving on average than CEOs of SOEs. CEOs come from diverse backgrounds, although relatively few come with relevant industry experience except from the same SOE or MOE that they are heading. Most 96 Montenegro’s new SOP and SOE Law are expected to require board member training as a prerequisite for serving or continuing to serve on boards, but this is yet to be confirmed. 97 Internationally boards typically meet quarterly, or in special cases monthly, but in Montenegro quarterly or biannual board meetings are uncommon (10 percent of SOEs, 26 percent of MOEs) and the norm is to meet monthly (50 percent SOEs, 42 percent MOEs) or even more frequently (40 percent SOEs, 32 percent MOEs). 98 Companies Act (art. 157, 172) 99 The two SOEs following such practice are: Monteput (Decision on incorporation of “Monteput,” Article 14) and Morsko dobro (Decision on incorporation of public enterprise “Morsko dobro,“ Article 4). 100 CEO tenure in large companies appears to be longer than the average suggesting greater stability in these companies and more instability in smaller SOEs. 38 Montenegro – Integrated SOE Framework Assessment (iSOEF) currently sitting CEOs rose up through internal promotions in the companies they are heading (43 percent of SOE CEOs, 19 percent of MOE COEs) or were recruited from a different unrelated industry (24 percent and 38 percent respectively), while relatively fewer come from other companies in the same industry or a different related industry (Figure 3.5). Figure 3.4 Tenure distribution of current CEOs, SOEs and MOEs, 2024 50% 50% 38% 32% 24% 19% 19% 14% 5% 0% Less than 1 year 1-2 years 2-4 years Over 4 years SOEs Source: World Bank Group online survey of SOEs and MOEs, 2024. Figure 3.5 Industry and company of CEO’s work directly prior to current role, SOEs and MOEs, 2024 50% 43% 38% 24% 24% 24% 19% 14% 10% 5% 0% 0% Same industry, Same industry, Different Different related Other same company different unrelated industry company industry SOE MOE Source: World Bank Group online survey of SOEs and MOEs, 2024. Transparency and Disclosure Legal requirements and de facto practices related to SOE financial reporting and disclosure are generally in line with international standards, but there are some gaps when it comes to audit reports, non- financial reporting and aggregate portfolio reporting. The Law on Accounting, which applies to all corporatized SOEs and MOEs, establishes clear legal requirements for the preparation and publication of financial statements and management reports.101 Companies listed on the stock exchange or operating as parent companies in a group are also required to report to the Capital Market Authority on both an annual and quarterly basis. At the same time, until recently there were no transparency obligations on the state, as shareholder, to publish annual aggregate reports on the SOE sector addressed to Parliament or the general public, although such reporting is an increasingly established practice internationally.102 Practices 101 All incorporated companies are required to submit annual financial statements and management reports to the Tax Administration by statutory deadlines and these are subsequently made public on the Tax Administration website. Micro and small entities are subject to simplified reporting obligations. 102 Annual reports are recommended by the OECD SOE Guidelines as a way to provide information on the legal and governance structure and corporate governance standards of SOEs, the state’s expectations vis a vis SOEs, and the performance of the SOE portfolio and of key individual SOEs (OECD, 2024). 39 Montenegro – Integrated SOE Framework Assessment (iSOEF) both at company and shareholder level mostly mirror the legal requirements, although compliance with existing requirements is not perfect. Stakeholder interviews and an analysis of publicly available data suggest that SOEs and MOEs mostly fulfill their obligations to report and disclose their audited annual financial statements, but compliance is not universal and several SOEs and MOEs reviewed for this report were missing one or more years of financial statements during 2018-2023. Compliance is still lower for audit reports, management reports, and annual reports for companies that are expected to report. As far as annual portfolio reports, so far these have not been produced regularly by the government, although this has started to change lately. Namely, the first aggregate portfolio report was published by the Ministry of Finance in late 2024, focusing primarily on the financial performance and fiscal risks of 51 central SOEs, and there are plans to build upon this in 2025 with a more expanded report covering additional companies and policy-relevant dimensions. Listing of SOEs on Montenegro´s Stock Exchange has not delivered all expected gains in terms of transparency and good corporate governance practices for individual SOEs. Interviews suggest significant differences in governance practices between private companies and SOEs listed on the Stock Exchange, in particular in the transparency and rigor of board appointments as SOEs face challenges recruiting boards with relevant professional and industry experience. Strengthening SOE corporate governance standards and practices can help the companies better reap the benefits of being listed on the Stock Exchange, including for attracting private sector investment and improving the companies’ performance.103 Both the legal framework and practices related to internal audit and control in SOEs require strengthening. Box 3.3 illustrates the key functions and good practices for internal control and internal audit. In Montenegro, while regulations related to the internal audit function (Law on Audit) are in line with good standards (specifically by requiring SOEs to comply with the Professional Practice of Internal Auditing and apply the same standard to public and private companies104), regulations on internal control rules for SOEs are not in line with good practice as they follow public sector laws rather than inclusive standards applicable to private companies. For example, the Law on Management and Internal Controls in the Public Sector, which regulates internal controls and internal audit, empowers SOE CEOs rather than BoDs to oversee the internal audit function.105 The legal gaps as well as weaknesses in compliance are at the root of weak internal audit and control practices in the majority of Montenegrin SOEs and MOEs. A significant proportion of surveyed SOEs (53 percent) do not have an internal audit function, and a portion of those that do report to the CEO or the external audit board committee rather than to the board (Figure 3.6). When it comes to the internal control function, reporting to the CEO or senior management (per good practice) is practiced only by about half of the companies (Figure 3.7), and the sheer diversity of observed reporting practices suggests a potential need for clarifying related accountability arrangements. Box 3.3: Good Practices for Internal Control and Internal Audit Functions Subordination Functions Internal Audit Committee of the • Adds value and improves organization's operations. Audit Board of Directors or • Evaluates and improves effectiveness of risk management, control, directly to the Board. and governance processes. 103 Interview with a Montenegro Stock Exchange representative. 104 Article 34, Paragraph 1 of the Audit Law. 105 International good standards require internal audit functions to operate independently of management to assess the effectiveness of internal controls and provide related assurances to the board and senior management. The draft new SOE Law is expected to align the rules more closely with OECD and EU standards. 40 Montenegro – Integrated SOE Framework Assessment (iSOEF) • Maintains independence and objectivity, providing unbiased assessments. Internal Reports to senior • Ensures integrity of financial and accounting information. Control management (CFO, • Promotes accountability and prevents fraud. CEO). • Includes segregation of duties, authorization protocols, and regular reconciliations. • Integrated into daily operations and financial reporting processes. Source: Adapted from IFC (2022) Internal Control Handbook. In line with good practice, SOEs and MOEs are legally required to have their annual financial statements audited by an independent audit firm, and compliance is high. The Audit Law requires medium, large, and listed companies106 to undergo external audit in set timelines and for external auditors to be rotated every seven years with a three-year cool off period. In practice, all surveyed SOEs and MOEs subject to the external audit requirement confirmed having undertaken it in 2023, and an in-depth review of the public disclosures of the 13 largest SOEs107 confirms this and also compliance with International Financial Reporting Standards (IFRS) and International Standards on Auditing (ISA) standards. The majority of these SOEs received unqualified auditors’ opinions (Annex 7 provides more details on the audit arrangements and results, by company), although Montenegro’s State Audit Institution (SAI) compliance and performance audits of SOEs have uncovered several critical challenges including non-compliance with public procurement regulations, operational inefficiencies, weaknesses in financial and asset mismanagement. Contributing to these challenges is political interference in SOE affairs and appointment of unqualified candidates to key management posts,108 as well as the lack of a structured process for selecting external auditors and for ensuring the implementation of audit findings and recommendations. The Government, line ministries, and state-linked funds do not engage directly with external auditors in their capacity as ownership entities, nor do they have mechanisms to follow up on issues raised in audit reports or management letters or to enforce SOE compliance with audit recommendations, creating a weak accountability framework. Figure 3.6: Reporting lines for the internal audit function in SOEs and MOEs 100% 90% 80% 60% 50% 50% 50% 40% 20% 10% 10% 10% 0% 0% 0% 0% Chairman of Board as a Board audit Managing Line ministry the board whole committee director/CEO or other state shareholding SOE MOE entity Source: Online survey of SOEs and MOEs, November 2024. Responses not mutually exclusive, do not add up to 1. 106 Audit Law, Article 34. Micro and small companies are exempt, in line with accepted practice. 107 The 13 SOEs were selected by a combination of their revenue and assets. 108 Interviews with stakeholders, November 2024. 41 Montenegro – Integrated SOE Framework Assessment (iSOEF) Figure 3.7: Reporting lines for the internal control function in SOEs and MOEs 60% 54% 47% 40% 38% 40% 31% 20% 13% 7% 8% 8% 7% 0% 0% 0% Chairman of Board as a Board audit Managing Senior Other the board whole committee director/CEO management SOE MOE Source: Online survey of SOEs and MOEs, November 2024. Responses not mutually exclusive, do not add up to 1. On paper SOEs and MOEs show a commitment to ethical standards, but enforcement presents a challenge. 86 percent of surveyed SOEs (57 percent of MOEs) reporting to have a code of ethics, and 81 percent of surveyed SOEs (29 percent of MOEs) have an anonymous whistle-blower reporting channel. However, enforcement mechanisms remain weak: 42 percent of SOEs (and 57 percent of MOEs) do not have policies detailing the board's role in managing conflicts of interest or related party transactions, including 2 large companies where mechanisms to monitor self-dealing behavior is particularly crucial. Last but not least, the majority of companies surveyed do not have shareholder agreements governing the relations between majority and minority shareholders. 91 percent of all surveyed companies with more than 1 shareholder do not have such agreements. This could be detrimental for investor confidence and the companies’ ability to raise capital in the market. Procurement Montenegro’s Public Procurement Law (PPL) is generally comprehensive and in line with good practice.109 The Law clearly sets out the procurement methods and conditions applicable to all procuring public sector entities, including SOEs, and includes several good-practice elements such as requirement for competitive bidding by default and for the selection of the most advantageous bid based on either offered price, best price-quality ratio, or life-cycle cost. A regulatory and institutional framework is in place on integrity and conflict of interest in public procurement and the legislation on the right to appeal is broadly in line with the EU acquis. In practice, there have been no significant delays in the treatment and resolution of the complaints. The transparency and accountability of the PPL’s implementation was enhanced by the introduction of an e-procurement system (CEJN) in 2019. The e-procurement system is mandatory for use by all procuring entities, including SOEs,110 and allows procuring entities to publish tender notices, receive bids and award 109 Amendments to the PPL since 2017 have aimed to align the Law with EU Directives. In 2023 the European Commission assessed Montenegro to be “moderately prepared” for accession on Public Procurement. 110 According to PPL Articles 18-19, the exceptions are when an SOE alone or jointly controls the legal entity carrying out the contract, when that controlled entity awards a contract to its controlling purchaser, or when SOEs cooperate exclusively to provide a public service in the public interest. 42 Montenegro – Integrated SOE Framework Assessment (iSOEF) contracts electronically in a transparent and efficient manner. The CEJN has a Reporting Module and tools for monitoring compliance with procurement regulations.111 At the same time, the PPL may be overly restrictive for certain transactions involving SOEs. SOEs interviewed for this assessment indicated that complying with public-sector procurement rules is in some cases a burden to doing business. In particular, the applicability of the PPL could be adjusted to SOEs and SOE activities that do not fulfill a PSO and operate in a competitive marketplace. 111 Additional functionalities of the CEJN were implemented in the course of 2022, enabling more accurate and timely collection of data and further improving reporting. 43 Montenegro – Integrated SOE Framework Assessment (iSOEF) 4 Fiscal Costs and Risks from the SOE Sector Fiscal costs of SOEs This section looks at the fiscal costs of SOEs and MOEs by quantifying transfers and transactions between the Montenegrin government and the companies. Direct transfers from the central and local governments to SOEs and MOEs, respectively, include subsidies, equity injections and payments of called guarantees issued to the companies. On the other hand, revenue-increasing transactions for the budget include payments of taxes, and dividends and profit shares of the companies. Indirect budget support includes deferred taxes, tax credits or tax arrears, foregone dividend transfers and any other kind of preferential treatment. Capturing both direct and indirect state support is equally important for measuring fiscal costs of SOEs but data limitations prevent a full assessment of indirect support from the budget. The chapter does, however, discuss tax arrears of SOEs. This chapter thus covers direct transfers and revenues from SOEs and MOEs, with a caveat that the transfers likely underestimate the full extent of fiscal costs and impact. According to the latest available data, during 2019-2023 SOEs and MOEs had a positive (direct) net impact on the general government budget. For the 60 SOEs and 133 MOEs for which data was available,112 budget revenues in the form of paid taxes and dividends surpassed identified direct transfers, although both the net contributions and net fiscal costs associated with the companies have steadily declined in recent years. Revenues from taxes have declined partly due to the tax reforms Montenegro implemented since 2022113 and partly due to the COVID-19 pandemic. Over the last three years, SOEs and MOEs contributed on average 1.7 percent of GDP in taxes and 0.3 percent of GDP in dividends annually, although with significant per year variations. At the same time, during 2019-2023 subsidies and transfers to the companies have amounted on average to 1.3 percent of GDP per year, though these have declined in the last three years to 1 percent of GDP during 2022-2023. The total transfers to SOEs are likely underestimated considering incomplete data on direct transfers and almost complete lack of data on indirect transfers. With the available data on transfers and after factoring in the called guarantees114 in this period, the net effect of SOE fiscal costs and contributions on the government budget has been positive every year for which data is available, averaging 0.8 percent of GDP annually in 2019-2023 period (Table 4.1). However, this positive net impact may partially reflect the privileged or monopoly positions of certain SOEs in key sectors. In such cases, the fiscal balance may understate the broader economic opportunity cost of limited market competition, particularly in areas like electricity generation or rail cargo transport. 112 Detailed financial data was not available for 1 SOE during the reference period. 113 The “Europe Now 1” reform abolished healthcare contributions, introduced progressive personal and corporate income taxation, introduced a tax allowance, and increased the minimum wage from EUR250 to EUR450. In 2024, the government implemented the 'Europe Now 2' reform, which halved pension contributions and will result in lower wage taxes being collected, including from SOEs. 114 Called guarantees, where the central government of Montenegro covers debt obligations on behalf of SOEs unable to repay, are included as a fiscal cost due to their direct impact on public finances. When activated, these guarantees require immediate government expenditure or increased borrowing, contributing to the fiscal deficit and public debt. Historical evidence suggests that repayment of such guarantees by SOEs is often unreliable, effectively rendering them a net cost to the state budget. 44 Montenegro – Integrated SOE Framework Assessment (iSOEF) Table 4.1 The direct net impact of SOEs and MOEs on the general government budget is positive Percent of GDP 2019 2020 2021 2022 2023 1. Taxes (excl. VAT) and social 2.3 2.5 2.1 1.4 1.5 security contributions 2. Dividends 0.8 0.0 0.7 0.0 0.2 3. Total transfers (incl. 1.5 1.9 1.1 1.0 1.0 subsidies)115 4. Called guarantees 0.6 0.0 0.2 0.0 0.0 Net impact (1+2-3-4) 1.0 0.6 1.5 0.4 0.6 Source: Ministry of Finance, Tax Administration, State Audit Institution, World Bank Group staff calculation Revenues from SOEs and MOEs The majority of revenues collected from SOEs and MOEs come from taxes, social security contributions and dividends. More than half of revenues collected from SOEs come from personal income taxes paid by SOE and MOE employees and social contributions paid by both employees and employers, although both revenue streams declined from 2 percent of GDP in 2019 to 1.2 percent in 2023. Revenue from SOE corporate income taxes over 2019-2023 has averaged around 0.2 percent of GDP, while revenue from SOEs’ net Value Added Tax (VAT) contributions has averaged 0.3 percent of GDP over the same period. The top ten SOEs with the largest tax contributions accounted for more than 60 percent of all taxes paid by the portfolio companies in 2023. The largest share of all SOE tax contributions was paid by SOEs in the energy sector, in the form of personal income tax and social contributions, reflecting the large numbers of workers employed in these companies. These companies are also highly profitable and pay substantial amounts in corporate income tax and dividends. However, dividend payments are often deferred, and generally, SOEs pay less than the obligations set by the government. Over the past several years, many SOEs have posted positive net profits but very few have paid dividends. A 2016 government decision116 requires all companies with more than 50 percent government ownership to transfer 70 percent of their profits to the budget as dividends, but this requirement is often bypassed as the government permits deferrals and/or exemptions. Applying a uniform dividend payout rate across all SOEs disregards the companies’ diverse industry characteristics and investment needs, and risks jeopardizing their growth opportunities and financial standing. Additionally, the high dividend rate set by the government might put at risk companies with slim margins and/or high investment needs, leading to cash flow shortages and operational losses despite reported profitability, although this is difficult to confirm definitively due to a lack of systematic data on dividend payments and deferrals. Concerns over the lack of dividend payments by profitable SOEs for 2021 and 2022 prompted the government in June 2023 to require them to transfer 30 percent of net profits from 2021 and 70 percent from 2022 to the budget, but the payments have still not been realized. Support to SOEs and MOEs Direct support to SOEs and MOEs comes in different forms, mostly through transfers and subsidies. Although support to SOEs and MOEs has fallen steadily over 2019-2023 from 1.5 percent of GDP in 2019 to 1 percent of GDP during 2022-2023, it remains significant. Most of these budget transfers and government guarantees are granted without clear differentiation of support for commercial and non- 115 The level of total transfers is likely underestimated. 116 Decision No.08-1770 from June 30, 2016 45 Montenegro – Integrated SOE Framework Assessment (iSOEF) commercial activities, which is inefficient and potentially increases the opportunity costs of the spending.117 The recent decrease in overall volume of support was driven primarily by a fall in the level of subsidies and transfers from the central government to SOEs. MOEs meanwhile saw an increase in total transfers from local governments during the same period, with the total level of support averaging 0.5 percent of GDP. Transfers remain the largest and most common form of government support to SOEs and MOEs, and they are characterized by several challenges. One challenge is the frequent lack of transparency about their purpose. Transfers are typically allocated to SOEs for various purposes like debt repayment (e.g., Željeznicki prevoz Crne Gore, Barska Plovidba, Crnogorska plovidba), restructuring, or general financial assistance – but sometimes they are allocated without any explicit justification. This practice is compounded by the lack of costed and accounted PSOs, as noted in Chapter 3. A second, closely related challenge is the low accountability and effectiveness of some of the largest transfers. The most substantial transfer in the past five years was granted to Montenegro Airlines when in December 2019 the Montenegrin Parliament enacted a law allocating EUR 150 million to cover its accumulated losses and support its restructuring, however the effectiveness of this large financing remains unclear as the company declared bankruptcy in April 2021. The case of state support to Montenegro Airlines illustrates another problem, namely that state subsidies are sometimes given without prior approval of the Agency for the Protection of Competition (APC),118 further weakening checks on potentially unproductive and costly budget transfers that may distort the level playing field (see Chapter 5 for a more detailed discussion of this dynamic). The SOE Radio Television of Montenegro (RTCG) presents another telling example: it is among the largest recipients of budgetary funds, but some concerns have been raised about the effectiveness and transparency of those transfers (Box 4.1). In general, tracking government transfers to SOEs and MOEs presents a challenge as they are often recorded under various budget lines, and the resulting estimates likely understate the true volume.119 Some government transfers to SOEs are misclassified as direct payments for goods and services (these are actually prepayments for services or goods yet to be delivered, and can put SOEs at an advantage relative to other market players).120 Subsidies form another key form of government support to SOEs and MOEs. Some of the largest subsidies (amounting to 0.37 percent of GDP on average during 2019-2023) are allocated to railway 117 The lack of clear separation between commercial and non-commercial mandates weakens SOEs’ and MOEs’ incentives for financial discipline, crowds out private sector participation, and limits the impact of public spending. This creates inefficiencies and increases opportunity costs as the budgetary resources allocated to SOEs and MOEs could be directed to more critical public needs and services. 118 The State Audit Institution’s (SAI) final budget account audits have found that funds continue to be disbursed from the state budget to SOEs without the APC’s endorsement. For instance, in 2022, EUR 2.15 million was disbursed to SOEs “13 Jul Plantaže” and “Institut Dr Simo Milošević” without the APC’s approval, and in 2023, EUR 0.4 million was allocated to “To Montenegro” without prior assessment or APC approval. The SAI’s 2019 report uncovered transfers from the budgetary reserve to Luka Bar, Skijališta C rne Gore, Regionalni vodovod Crnogorsko primorje, and Montenegro Airlines companies totaling EUR 8,372,649.31 without a prior approval from the APC. 119 The data on transfers for MOEs, for example, are likely underestimated because support from local governments is not always captured in the dedicated budget line labeled "Support to MOEs" but is added to other lines where it is not always easily identifiable. 120 In its 2022 Final Budget Account Audit, the State Audit Institution found that the Government mandated the Traffic Administration to contract with "Monteput" LLC, Podgorica, for the transfer of funds intended for the reconstruction of part of the R-13 Bioče – Mateševo – Kolašin regional road, and payments totaling EUR 7,033,767.37 were made from capital expenditure accounts, violating regulations as these were transfers, not direct payments to contractors for project execution. 46 Montenegro – Integrated SOE Framework Assessment (iSOEF) companies for covering their PSOs, including maintaining unprofitable lines. The central government also provides loans to SOEs at favorable interest rates. The Ministry of Finance maintains auxiliary records for loans provided to SOEs and municipalities that pertain to transfer loans, but this list is not publicly available, and in general there is a lack of data on both subsidies and loans to SOEs and MOEs. Additional budgetary support comes in the form of payments of called guarantees issued to SOEs by the state and equity injections. Over the past five years, there have been four repayments of guarantees issued to SOEs: in 2021, two guarantees issued to Barska plovidba and Crnogorska plovidba were paid in the total amount of EUR 8.2 million, or 0.2 percent of GDP; in 2022, the state paid a guarantee of EUR 0.5 million issued to Regionalni vodovod, and in 2023, EUR 2.9 million (0.04 percent of GDP) was paid in guarantees for the maturing debt that Crnogorska plovidba was not able to service in time. Some of these funds have been returned to the state budget, but there are no precise data on the total funds owed by the companies, as the Ministry of Finance does not have records of claims based on total state guarantees paid and other loans to SOEs. During the past five years, there were several equity transactions – during 2019 and 2022, the government repurchased shares of Elektroprivreda Crne Gore in the total amount of EUR 72 million, and had a few equity injections during 2022-23 into the Investment and Development Fund, Luka Bar, and Montenegroberza, totaling EUR 13 million. In 2021, the government paid for the establishing capital of To Montenegro in the total amount of EUR 26 million, but without an opinion from the APC. Box 4.1 Radio Television of Montenegro (RTCG): Recipient of large budgetary funds but low accountability The Radio Television of Montenegro (RTCG) is among the largest recipients of budgetary funds. The Law on the National Public Broadcaster mandates RTCG to receive 1.34 percent of the current government budget121 to ensure it can fulfill its public service role without commercial influence. However, the state audit report on RTCG highlights deficiencies in the scrutiny of the substantial budgetary transfers from the state, resulting in the State Audit Institution issuing a conditional opinion on RTCG's financial statements in 2021. The audit points to significant gaps in the justification of funds as well as in compliance and financial accountability for the use of funds. The report indicates that RTCG has not effectively demonstrated that expenditures align with allocated budgets, showing a lack of transparency in its financial operations. Additionally, the Final Budget Account indicates that RTCG failed to provide adequate information in sections related to program budgeting, particularly lacking data on performance indicators and outcomes of funded activities. Finally, an important form of indirect support to SOEs comes in the form of tax arrears waivers and deferrals. In 2023, tax arrears of the 60 SOEs and 133 MOEs for which data are available reached 1.4 percent of GDP, with just 10 companies accounting for over 1 percent of GDP in arrears (Table 4.2 ). The majority of tax arrears owed by SOEs and MOEs are for employee personal income taxes and social security contributions, and consist of both the principal amounts due and accrued interest on late payments.122 In 2023, 21 SOEs and MOEs had tax arrears exceeding EUR 1 million each, and two companies undergoing bankruptcy procedures - Montenegro Airlines and Radoje Dakic - accounted for almost a third of the total SOE tax arrears, with combined arrears of more than 0.4 percent of GDP in 2023. Given the persistently high levels of tax arrears among Montenegrin companies (8.5 percent of GDP, 2023), including among SOEs and MOEs (1.4 percent of GDP, 2023), the Parliament enacted the Law on the Waiver of 121 Law on the National Public Broadcaster - Public Media Service of Montenegro. 122 The interest begins to accumulate from the due date of the tax payment until it is fully paid, thereby increasing the total amount owed. 47 Montenegro – Integrated SOE Framework Assessment (iSOEF) Interest on Outstanding Tax Obligations in 2024, which came into effect on January 1, 2025. This law allows for the waiver of unpaid interest on tax debts that were due before December 31, 2024, provided that taxpayers submit all required tax declarations by that date and settle their principal tax debt within 60 days. Besides, the law includes a mechanism for tax authorities to automatically waive interest for taxpayers who, as of December 31, 2024, have accrued interest but have no recorded principal tax debt. This initiative builds on previous efforts under the Law on Tax Debt Restructuring, where several SOEs and MOEs participated in tax debt rescheduling programs, though not all successfully.123 Table 4.2 The ten SOEs and MOEs account for two thirds of the total tax arrears of all SOEs Top 10 SOEs with the highest tax arrears in 2023 SOE EUR % of GDP Montenegro Airlines AD 16,440,505.20 0.2 Radoje Dakić AD 12,143,291.44 0.2 13. Jul - Plantaže AD 7,590,973.75 0.1 Željeznički prevoz Crne Gore AD 6,513,176.18 0.1 Održavanje željezničkih voznih sredstava AD 4,964,869.95 0.1 Željeznička infrastruktura Crne Gore AD 4,799,706.10 0.1 DOO Komunalno, Nikšić 3,790,918.71 0.1 DOO Komunalno, Cetinje 3,744,275.76 0.1 DOO Crnogorski fond za solidarnu stambenu izgradnju 3,517,209.39 0.1 DOO Komunalno - Lim, Bijelo Polje 3,438,465.37 0.0 Source: Tax Administration, World Bank Group staff calculation Fiscal risks of SOEs Fiscal risks are factors that may cause fiscal outcomes to deviate from expectations or forecasts. Fiscal risks from SOEs can be organized in the following broad categories, summarized in Table 4.3: • Explicit liabilities are those for which the state has contractual obligations. These can be further divided into: o direct (e.g., subsidies); and o contingent, which depend on the occurrence of an event, such as for example an SOE defaulting on a loan guaranteed by the state, • Implicit liabilities are those for which there is a moral or political obligation for the government to respond, even in the absence of a contractual obligation, to meet public expectations. Such implicit liabilities can also be divided into: o direct (e.g. the government assuming the cost of social security payments for SOE staff); or o contingent (e.g., bankruptcy, expenses related to the sale/privatization of an SOE, etc.). 123 As of December 31, 2023, the total matured debt of municipalities along with their public enterprises and institutions under the debt restructuring agreement amounts to EUR 37,833,174.10, while the amount collected is EUR 36,696,620.01. 48 Montenegro – Integrated SOE Framework Assessment (iSOEF) Table 4.3 A Framework for Mapping SOE Related Fiscal Risks STATE LIABILITIES Direct Contingent Explicit Obligations • Subsidies • State guarantees to SOEs and MOEs (direct government • Capital transfers • Unpaid net debt of SOEs to the liability under law or • Other transfers government (loans not covered by contract) state guarantees) • Increased SOE borrowing to • Unexpected SOE liabilities associated Implicit Obligations finance capital investment with adverse shocks (e.g. natural required to maintain access (moral obligation to meet disasters, climate change) and quality of public services public expectation or • Total debt of SOEs not covered by and meet growing demand, as political pressure) guarantees well as EU requirements. There are fiscal risks associated with SOEs’ and MOEs’ guaranteed and non-guaranteed debt, though some is already accounted for in the central government debt. Under the Law on Budget and Fiscal Responsibility, the central government can issue guarantees solely for financing capital projects, with the total capped at 15 percent of GDP annually. Furthermore, before contracting new loans, all public legal entities including SOEs and MOEs must obtain approval from the Ministry of Finance, ensuring strict oversight and adherence to financial policies. The Ministry of Finance regularly collects and publishes data on issued guarantees. Overall, total consolidated SOE guaranteed debt decreased from 3.2 percent of GDP in 2019 to 1.5 percent in 2023, while MOE guaranteed debt remained steady at a low 0.1 percent of GDP (Table 4.4). Fiscal risks from budget transfers are relatively small, as explicit budget subsidies to SOEs are less than the taxes and dividends they generate. However, SOE debt obligations are relatively large and, although some are included in the government debt, financial underperformance of companies could lead to liquidity pressures on the central government budget. Moreover, non-guaranteed SOE debt can pose contingent liabilities in practice, especially in the event of financial distress. Even in the absence of formal guarantees, the government may be compelled to intervene to preserve essential services or maintain financial stability. As such, improved reporting and disclosure of SOE debt—both guaranteed and non- guaranteed—is critical for a more accurate assessment of fiscal exposure. Table 4.4 Consolidated guaranteed debt declined over the past five years Percent of GDP 2019 2020 2021 2022 2023 SOE debt included in government debt 0.9 1.0 0.7 0.6 0.5 Guaranteed debt of SOEs (consolidated) 3.2 3.3 2.6 2.1 1.5 - of which central government guaranteed 3.2 3.3 2.5 2.0 1.5 - of which local government guaranteed missing missing 0.1 0.1 0.1 Implicit (direct) fiscal obligations associated with the announced large infrastructure projects and capital investments necessitate caution. Limited fiscal space, combined with the government’s large investment needs and plans, with SOEs as key implementing entities, present long-term fiscal risks. The government announced it will significantly expand its transport infrastructure with an investment program nearing EUR 9 billion, focusing on enhancing connectivity within the Western Balkans and the EU. This comprehensive initiative includes constructing about 500 kilometers of motorways and express roads, modernizing key railway lines such as the Bar-Vrnica route, and upgrading the Podgorica and Tivat airports. These investments will require new borrowing, which will significantly increase Montenegro’s debt burden and potentially expose the budget to risks associated with fluctuating interest rates, loan repayment obligations, and economic downturns that could impact the government's ability to service other obligations. Additionally, the execution risks associated with large-scale projects—including cost 49 Montenegro – Integrated SOE Framework Assessment (iSOEF) overruns, delays, and challenges integrating new infrastructure into existing systems—could further strain fiscal resources. Significant fiscal risks stem from Montenegro's determination to restructure its energy sector for a green transition. In recent years, the holding SOE Elektroprivreda Crne Gore (EPCG) has outlined an ambitious investment strategy focusing on expanding and diversifying its energy portfolio, primarily through renewable energy sources. EPCG plans to invest approximately EUR 300 million over the next three years, with a substantial focus on developing renewable energy projects such as wind farms and solar power installations. While EPCG's strategy involves cooperating with international financial institutions like the German development bank KfW and the European Bank for Reconstruction and Development (EBRD) to secure funding for these capital-intensive projects, these will still require government guarantees, thus increasing the government´s explicit (contingent) risks. Meanwhile, the temporary shutdown of Montenegro's thermal power plant Pljevlja (a subsidiary of EPCG) for ecological reconstruction during April-November 2025 will significantly impact EPCG’s energy output and bottom line. During this period, EPCG will face a substantial electricity shortfall of about 750 Gigawatt hours (GWh), necessitating the import of electricity to fill the gap, expected to cost over EUR 160 million. The shutdown will convert Montenegro from a (historically) electricity exporter to a net importer, and could lead to increased national trade deficits, potential slowdown in GDP growth, and increased fiscal risks. The government has initiated significant reforms to strengthen the fundamentals of SOE sector governance and monitoring of SOE performance and fiscal risks. To date, notable achievements include establishing the first registry of companies with majority government ownership, covering 50 SOEs and 107 MOEs, which is updated annually to enhance oversight. Additionally, a detailed analysis of the operational and regulatory framework of SOEs has been conducted, identifying key vulnerabilities and setting the course for future reforms (see Chapter 3 for more in-depth discussion). These efforts form part of a broader strategy to reduce fiscal risks and ensure that SOEs contribute positively to the state’s budget and overall economy. The government, led by the Ministry of Finance, has also begun reporting on fiscal risks associated with SOEs, primarily through the assessment of their financial performance using the IMF’s Health Check Tool (HCT). Its first published fiscal risks report124 found evidence of a notable post- COVID recovery in the financial performance of the 50 monitored SOEs in 2023 and a reduced level of fiscal risk at the portfolio level but still considerable challenges for individual companies, including high or very high profitability and liquidity risk for 16 SOEs(see Chapter 2 for more in-depth discussion of SOE and MOE performance). At a broader level, there is still considerable scope for strengthening the government’s monitoring of SOE financial and fiscal risks. In particular, there is room to expand coverage and begin systematic reporting on on-lending, contingent liabilities, or financial flows between SOEs and the central government. In addition, quasi-fiscal activities related to public service obligations, potential inter-SOE loans or arrears, and risks associated with MOEs remain largely unmonitored and should be made the subject of systematic scrutiny. The existing gaps in monitoring can create hidden fiscal costs and contingent risks that are not captured in official fiscal accounts, and weaken the government’s ability to manage fiscal vulnerabilities effectively. Addressing these gaps through more systematic monitoring and comprehensive reporting would significantly strengthen fiscal risk management and support more informed policymaking. 124 Montenegro Ministry of Finance (2024), “Aggregate analysis of financial operations of the state-owned enterprises sector for the year 2023 with a statement on fiscal risks .” https://wapi.gov.me/download- preview/0aa01656-880c-40b3-853a-386cf03d13c5?version=1.0 50 Montenegro – Integrated SOE Framework Assessment (iSOEF) 5 Markets and Competition Competition in Law and Practice in Montenegro: An Overview Montenegro’s legal and regulatory framework for competition is sound but there is room for improvement to bring the country even closer to its aspirational peers. Montenegro has come a long way in aligning its legal framework with the requirements of the Competition Chapter of the EU acquis, by adopting the Law on Protection of Competition (2012) and Law on State Aid (2011) and updating both periodically to ensure alignment with the EU Acquis (European Commission 2023), as well as strengthening the competencies of the Agency for Protection of Competition (APC), an important regulator in this space. Today Montenegro’s legal and regulatory framework for competition is still in transition (see Annex 8 for list of key applicable laws). It matches or surpasses its structural peers125 on market-based competition and anti-monopoly policies but lags aspirational peers (Figure 5.1),126 and investors still perceive many challenges in this area (Figure 5.2). Some of the observed weaknesses stem from Montenegro’s restrictive regulatory environment, including distortions caused by state-owned enterprises (SOEs). The OECD-World Bank Group Product Market Regulation (PMR) index assesses existing regulations that promote or inhibit competition in areas of the product market where competition is viable (OECD-World Bank Group 2021). Montenegro’s PMR indicator value of 2.16 suggests that the country has a more restrictive regulatory environment than both its aspirational and structural peers ( Figure 5.3 ). Contributing to this high score are (i) state regulations permitting state (SOE) presence in sectors where such presence is not justified by strategic goals or by the need to address market failures - sectors like lodging, manufacturing, or construction - and (ii) issues related to SOE governance regulation. Figure 5.1 Market-based competition and anti-monopoly policies, Montenegro and selected peers, 2022. Market-based competition scores Anti-monopoly policy scores 10 8.8 9.0 10 8.0 7.0 6.9 7.3 5 5 0 0 Source: Bertelsmann Transformation Index (BTI), 2022. Score range: 1 (worst) to 10 (best). 125 Structural peers are countries that share similar economic characteristics with Montenegro (level of development, economy size, regulatory and institutional challenges): Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Dominican Republic, Georgia, Kosovo, Mauritius, and North Macedonia (Dalvit 2023). 126 Aspirational peers are countries that Montenegro aims to emulate in terms of economic performance, regulatory efficiency, and innovation: Lithuania, Latvia, Estonia, Slovenia, and Panama (Dalvit 2023). 51 Montenegro – Integrated SOE Framework Assessment (iSOEF) Figure 5.2 Risks as associated with investment, Montenegro and selected peers, 2022. 12 10 8 2 6 2 4 2 2 3 0 Vested interests/cronyism Discrimination against foreign companies Unfair competitive practices Price controls Source: Economist Intelligence Unit, 2022. Note: Highest risk per area = 4. The maximum total level of risk = 16. Figure 5.3 PMR Score, Montenegro and selected peers, 2021. 2.5 2.16 1.8 2.0 1.4 1.5 1.0 0.5 0.0 Source: OECD PMR database and OECD-World Bank Group PMR database (2021) Note: Economy-wide PMR Score for Montenegro and selected peers, Scale is 0 –6, from least to most restrictive, 2021 data. The Role of SOEs in Competitive Markets Market competition in Montenegro is impacted by several factors, including the country’s small market and limited regional integration. Montenegro’s small domestic market, combined with limited regional integration in key markets such as energy and transportation, limits economies of scale and makes the country (all things equal) less attractive to investors (Megginson and Netter 2001, WB6 Energy Community Secretariat 2016). Less investor participation, in turn, dampens competition. Capital-intensive sectors like utilities, transportation, and telecommunications, which require scale economies to spread fixed costs, are particularly affected by this dynamic. The presence of SOEs and MOEs in competitive or contestable sectors is a critical factor that risks undermining competition and introducing certain market distortions. As discussed in Chapter 2, from a competition angle there are 3 categories of sectors: competitive, partially contestable, and natural monopolies (see Annex 2 for taxonomy). The rationale for state enterprise ownership in competitive sectors is weak – both economic theory and empirical evidence show that the presence of SOEs and MOEs in competitive sectors can undermine market efficiency by crowding out (often more efficient) private firms. Yet in Montenegro a significant share of SOEs (61 percent) and MOEs (56 percent) are active precisely in those sectors. Moreover, 28 and 38 percent of these SOEs and MOEs are loss-making, and therefore, by global benchmarking, Montenegro would fall in the medium-high risk category of market distortion caused by SOEs operating in competitive markets.127 127 A portfolio of SOEs / MOEs in competitive sectors presents a high risk if more than 27 percent of them are making losses, and a medium risk if 8-27 percent are making losses (Apfalter and Sanchez-Navarro, 2023). 52 Montenegro – Integrated SOE Framework Assessment (iSOEF) Policies and regulations can distort the level playing field between SOEs and private companies A competitive neutrality gap analysis for Montenegro found that a number of existing policies and laws grant preferential treatment to SOEs and distort market functioning. A competitive neutrality gap analysis was conducted as part of this iSOEF to examine the extent to which firms with state participation face rules or conditions that distort the level playing field with private enterprises in Montenegro, along 7 dimensions, de jure and de facto. The analysis identified numerous distortions, summarized in Figure 5.4. The sections below discuss each result in more detail. Dimension 1: Streamlining the operation of government business across sectors At the time of writing Montenegro lacks regulations and policies, defining a clear rationale and economic criteria for state participation in the economy, which raises risks for competitive neutrality. Lacking relevant regulations and oversight, the subsidiarity principle128 is not systematically applied, and Montenegrin SOEs operate across all sectors without consideration as to whether they are there to address market failures or whether the private sector might be better placed to deliver products or services more efficiently. Public-service obligations (PSOs) entrusted to SOEs are not always clearly defined. Existing legislation employs different terms for PSOs, such as “services of public interest”, “services of general interest”, and “services of general economic interest”, and these terms are often used interchangeably without a clear delineation of their economic substance and legal consequences, such as SOEs’ right to adequate related compensation. Besides, PSOs are typically assigned automatically to the incumbent SOE performing the service, without following a clear and transparent procedure for bidding by other market players. In the last decade or more, the Privatization and Capital Investments Council of Montenegro (Privatization Council) has shown limited effectiveness in facilitating privatization or divestment of shares in companies where the rationale for state participation is limited. The Privatization Council has significant discretionary powers over what to maintain under public ownership, and historically its recommendations have served as a basis for the Government’s annual privatization plans and processes. A review of past privatization proposals and plans has not shown them to be clearly rooted in forward- looking policy and strategic considerations. Moreover, since the plans are not binding and do not include indicative deadlines for their completion, many announced privatizations over the past decade have stalled,129 and in 2024 the Privatization Council announced the suspension of privatization efforts altogether, undermining efforts to streamlining the operation of government business across sectors. 128 The Subsidiarity Principle states that the State has a duty to perform only those tasks where private supply is not feasible or not desirable; the private sector should have a primary role by default and the State should step in only when there is a need (e.g. market failures). 129 Over the past decade, Montenegro's privatization efforts targeted notable companies like Budvanska Rivijera, the Dr. Simo Milošević Institute, Luka Bar, Montecargo, Institute of Ferrous Metallurgy, Marina Bar, and Montenegro Post. These entities have yet to be privatized. There were also unsuccessful efforts to sell Montenegro Airlines, NIP Pobjeda, and the Tobacco Plant, which ultimately ended in bankruptcy. 53 Montenegro – Integrated SOE Framework Assessment (iSOEF) Figure 5.4 Competitive Neutrality gap analysis in Montenegro Competitive neutrality gap analysis and benchmarking The subsidiary role of the State in the economy Firm-level principles: Separation of commercial and non-commercial activities 1 Streamlining the operation of government 2 Identifying the costs of any given function and 3 Achieving a commercial rate of return business across sectors separation of commercial and -non-commercial activities ▪ Montenegro lacks a clear SOE ownership policy, and ▪ There is little structural or accounting separation ▪ SOEs are not systematically required to achieve a the subsidiarity principle is not applied. between commercial and non-commercial commercial rate of return (for non-PSO activities), Montenegro ▪ Public-service obligations (PSOs) entrusted to SOEs activities of SOEs. and their transactions are not generally are not always clearly defined. ▪ There are no clear methodologies for calculating benchmarked against those of private operators ▪ PSOs are typically assigned automatically to the PSO, nor is there a mechanism to compensate where this is meaningful and adequate. incumbent SOE, without following an open and SOEs for PSO. transparent selection procedure. ▪ A clear SOE ownership policy is based on the ▪ Accountancy for separating commercial and non- ▪ State commercial operations and investments are subsidiarity principle. commercial activities. required to have positive NPV, market consistent Benchmark ▪ PSOs are clearly defined in relevant laws and ▪ Clear allocation of competencies exists to monitor rate of returns and to being measured based on regulations and assigned to an SOE or a private and control. private sector performance. enterprise following an open and transparent selection procedure. Principles embedded in cross-cutting regulatory frameworks and sectoral policies 4 5 6 7 Debt neutrality and outright subsidies Regulatory neutrality Public procurement Tax neutrality ▪ Enforcing competition rules is limited due to ▪ Public procurements involving SOEs ▪ SOEs are subject to the ▪ Aid to SOEs performing services of public interest is exempt from capacity constraints, particularly in issuing fines. are exempt from the general rules on same tax law and the definition of state aid if a restrictive set of conditions is met; ▪ Lack of consistent interpretation regarding public procurement if a restrictive set corporate rates as the however, it remains unclear how the APC ensures that SOEs are Montenegro whether SOEs performing activities of public of conditions is met; however, it private entities. not overcompensated. interest can be exempt from the application of remains unclear whether and how ▪ The APC has no legal mandate to enforce the return of unlawful competition law. their fulfillment is monitored. state aid through the courts. ▪ In the public utilities and healthcare, ownership ▪ SOEs are subject to the same bankruptcy rules as private and regulatory functions are held by the state. companies; however, in practice, the government, acting as a creditor, is often reluctant to initiate bankruptcy proceedings. ▪ Companies compete on a level playing field. ▪ Market based competition in public ▪ Tax exemptions, subsidies and debt guarantees granted following competitive neutrality Benchmark ▪ Sectors where competition is feasible are procurement. principles. open to private investment. ▪ Bids / auctions designed to reduce ▪ Allocation of state support through transparent mechanisms and supported by ex-ante ▪ There are independent regulators with clear the risks of bid rigging. assessment for the potential risks for competition and distorting a level playing field. separation of SOE ownership and policy making, and regulations. Control of state support measures to SOEs and private sector operators Level playing field in the market between SOEs and privately-owned operators. Source: World Bank Group, building on OECD (2024c) 54 Montenegro – Integrated SOE Framework Assessment (iSOEF) Dimension 2: Separation of commercial and non-commercial activities of SOEs There is little structural or accounting separation between SOEs’ and MOEs’ commercial and non - commercial activities in both law and practice, which can tilt the playing field in favor of SOEs . International good practice requires a clear separation of companies’ commercial activities from non- commercial activities and accounts (OECD 2024c, OECD 2024d). However in Montenegro, the separation of commercial and non-commercial activities is not consistently implemented,130 and in some cases laws provide explicit exemptions that advantage SOEs.131 At the same time, without a clear methodology for calculating, compensating, or reporting PSOs (as discussed in Chapter 3) the compensation received by SOEs for serving the public interest may not align with the incremental expenditures incurred in executing these PSOs. This raises the risk of under-compensation but also of over-compensation, which may be used by the firm to cross-subsidize other parts of its business, distorting competition.132 Dimension 3: Achieving a commercial-based rate of return A key potential source of competition distortion derives from the fact that SOEs operating in competitive sectors are not systematically required to achieve a commercial rate of return for non-PSO activities. As previously noted, a significant proportion of SOEs and MOEs operating in competitive markets (28 and 38 percent, respectively) were outright loss-making in 2023 and many of these enterprises exhibit high risk for future under-performance. While SOEs are permitted to compete while operating at a loss, private competitors are expected to generate sufficient surplus to meet their corporate performance objectives. This double standard distorts the level playing field in SOEs’ favor. Dimension 4: Regulatory effectiveness and neutrality Montenegro has adopted key regulatory and institutional reforms needed to uphold competitive neutrality. To achieve competitive neutrality, SOE-related competition regulations need to be effectively enforced. In line with international good practice, Montenegro has a law regulating competition (adopted in 2006) and an independent competition authority – the Agency for Protection of Competition (APC) - with an arm’s length relationship with the government (established in 2013) tasked with (i) enforcing rules on competition protection and (ii) performing the functions of a state aid control body. The Competition Law remains ambiguous on the conditions under which SOEs performing activities of public interest are exempted from the provisions of the Competition Law. The provisions of the Law on Protection of Competition apply to all market participants, including those engaged in activities of public interest, unless doing so significantly hinders the performance of those activities (Article 5). However, both the Competition Law and sector-specific laws lack of a clear definition of the exempted qualifying public interest activities, and this has led to an inconsistent application of principle by the APC: 130 This holds even in instances where sector-specific laws prescribe separate accounting records and financial statements for different services, such as in the Law on Energy (Art. 91) or the Law on Public Utilities (Art. 20). 131 In particular, the Law on Energy provides for an explicit exemption from maintaining separate accounting records for retail supply services, where an SOE holds a monopoly (Art. 91(5)). 132 Over-compensation heightens the risk of increased fiscal costs and reduces the incentive for SOEs to ensure proper separation in their accounts. 55 Montenegro – Integrated SOE Framework Assessment (iSOEF) investigating and fining some SOEs with PSOs for breach of the Law,133 and dismissing similar cases for other similar SOEs.134 The APC has, on several occasions, called out government actions that unfairly tip the playing field in favor of SOEs, to the disadvantage of their competitors. In a recent case initiated by the private company 'Sea Pioneer Montenegro' d.o.o. Herceg Novi, the APC determined that the government unjustifiably favored the SOE 'Luka Kotor' by entrusting it with maritime pilotage services before the concession awarding procedure was formally completed. Similarly, the APC stated that the government unjustifiably favored the SOE Coastal Zone Management by assigning it maritime transport services (for vehicle and passenger transport) on the Kamenari-Lepetane route before the formal concession awarding procedure. Nonetheless, there are significant weaknesses in enforcement aimed at deterring anticompetitive behavior due to structural limits on APC powers. According to the Law on Protection of Competition, APC lacks the authority to issue fines for anticompetitive behavior. This power rests in misdemeanor courts, — in case APC determines a breach of the Competition Law, it has to request the relevant court to begin a misdemeanor proceeding. However, antitrust cases managed by misdemeanor courts usually take long, and seldom reach fining. Moreover, even when fines are issued, they are often too low to have a deterrent effect.135 Finally, the lack of separation between the functions of owning and regulating SOEs may result in market distortions. Out of 14 utility services recognized in the Law on Public Utilities, only water supply and wastewater management are regulated by an independent agency (REGAGEN). REGAGEN’s regulatory mandate covers various sectors, including energy, water utilities and municipal water and waste management) but its tariff setting power is exercised jointly with local governments. Tariffs set by REGAGEN can easily be overruled by local governments. In the case of unregulated utility services, the local government typically acts both as the owner of the utility company and policy maker, approving utility prices. The lack of separation between ownership and regulation functions is also evident in the health sector, where the Ministry of Health issues and revokes authorizations/permits for healthcare institutions—thus effectively regulating market access—while simultaneously owning the healthcare institution Institut Dr Simo Milosevic - Igalo. Dimension 5: Public procurement SOEs remain subject to the Public Procurement Law (PPL) when acting as contracting authorities or as offerors, but they are exempt in a few cases which may limit competition. SOEs are frequently exempt from PPL provisions when: (i) procurements awarded to an SOE whose PSOs account for more than 80 percent of all its activities and the contracting authority exercises oversight over the SOE (Art. 18); and (ii) procurements between SOEs where they cooperate to jointly provide a public service (Art. 19). These 133 For example, Decision on existence of Abuse of Dominant Position (MOE "Komunalno Nikšić") ; Decision on existence of Abuse of Dominant Position (MOE "Komunalno stambeno" Herceg Novi); Decision on existence of Abuse of Dominant Position (MOE “Vodovod i kanalizacija” Budva) 134 The MCA issued several decisions rejecting the request to initiate proceedings for abuse of a dominant position, arguing that the Competition Law does not apply to participants carrying out activities in the public interest. For instance: Decision of Incompetence of MCA (Deponija doo) and Decision of Incompetence of MCA (JP "Čistoća"). 135 According to the 2023 APC report, of the 21 cases decided by misdemeanor courts between 2018 and 2023, only in 7 instances were fines issued. The highest fine imposed was EUR 1,467.50, which amounted to 1 percent of the guilty company’s annual income. According to Article 67 of the Law, the legal range is between 1 and 10 percent of the offender's total annual income from the financial year preceding the offense. 56 Montenegro – Integrated SOE Framework Assessment (iSOEF) exemptions are subject to little oversight and may be abused, limiting competition in the public procurement process. For example, only the contracting authority is responsible for assessing whether the conditions for exemptions are fulfilled, and there is no formal oversight by the Commission responsible for the protection of rights in public procurements. Finally, there is no registry documenting procurements conducted outside the public procurement framework.136 Dimensions 6 and 7: Tax and debt neutrality and outright subsidies The APC has been highly active in exercising its role in controlling the allocation of state aid. The 2018 State Aid Control Act regulates the conditions and procedure for granting and controlling the use of state aid, with APC serving as the State Aid Control Commission.137 APC carries out a preliminary control of the compliance of the declared state aid, as well as a subsequent control of the granted state aid in accordance with the State Aid Control Act.138 In 2023, the APC initiated seven different proceedings, issued 13 decisions, and published over 20 opinions, along with an annual report on the implementation of the State Aid Control Act.139 The Law on State Aid Control can potentially give SOEs and MOEs an advantage over privately-owned companies. A range of SOE and MOE investments fall outside the scope of what is defined as State Aid. For example, Article 6 of the Law stipulates that investments in infrastructure not intended for commercial exploitation by the aid recipient are considered non-commercial activities not subject to state aid control. It remains unclear how the APC ensures that the compensation received for building infrastructure does not overcompensate (or undercompensate) the recipient, particularly when the recipient performs both commercial and non-commercial activities. Furthermore, aid grantors are not obligated to report to the APC the total amount of funds distributed as compensation for performing services of general economic interest, nor is there a registry for this type of aid. In several cases the APC ruled and issued opinions against favorable treatment of SOEs in the form of government subsidies, debt write-offs, tax exemptions, and other fees owed to the State. In December 2019, the Government granted a state aid of EUR 155 million (around 3 percent of GDP) to the highly indebted SOE Montenegro Airlines, without requesting the APC’s opinion, as required by state aid regulations. Nine months after the law granting aid to the airline was adopted, the APC issued a negative opinion on the provision of state aid (European Commission, 2021). Moreover, in 2022, the APC ruled that four payments of 1.5 million euros each, transferred by the state of Montenegro to the SOE Barska Plovidba to settle its obligations to Exim Bank, constituted unlawful state aid.140 Most recently the APC discovered two instances of unlawful state aid provided in 2023, including one involving the energy 136 It should be mentioned that no actual abuse of the exemptions has been observed as part of the research. 137 Following the adoption of the State Aid Control Act, the responsibilities in the field of state aid, previously under the jurisdiction of the Ministry of Finance and the Commission for State Aid Control, were transferred to the APC. 138 For further details, please see Art. 16 – 21 of the State Aid Control Act. 139 For details on decisions and annual reports, please visit: https://azzk.me/odluke-drzavna-pomoc-2023-godina/ 140 APC decision from August 18th, 2022, https://azzk.me/wp-content/uploads/2022/12/Rjesenje-Savjeta-MKI- Barska-plovidba-17.08.pdf. 57 Montenegro – Integrated SOE Framework Assessment (iSOEF) holding company Elektroprivreda Crne Gore (EPCG).141 The precise amount of state aid provided to EPCG remains unclear, and the APC has extended the deadline for EPCG to provide all relevant information.142 The APC has no legal mandate to enforce the return of unlawful state aid, regardless of whether it was granted to SOEs or private firms. According to the current Law on State Aid, the APC cannot initiate court proceedings in which the court would oblige the grantor of the unlawful State Aid to recover the unlawful state aid. This has resulted in several cases where the APC has ruled the provision of state aid unlawful without the state aid having been returned. An attempt to increase transparency in the return of unlawful state aid by establishing a registry of returned state aid has so far failed. The registry contains only two cases of returned state aid. SOEs are subject to the same tax law and bankruptcy rules as private companies, but the government acting as a creditor is often reluctant to initiate bankruptcy proceedings. Since the vast majority of SOEs and MOEs are incorporated as limited liability companies (LLCs) or joint-stock companies (JSCs), they are not exempt from the application of the Bankruptcy Act. In practice, though, the government often defers initiating bankruptcy proceedings, despite insolvency conditions being met, which provides a competitive advantage to the SOEs/MOEs in violation of the principles of competitive neutrality. Examples of potential distortions associated with SOEs in selected sectors This section provides selected insights into the role of SOEs in three sectors: Energy, tourism, and transport. The analysis focuses on identifying opportunities for increased competition and identifying regulatory restrictions that would have to be addressed to enable greater private sector market entry. Energy Sector The energy sector – and energy sector SOEs – are critically important for the Montenegrin economy.143 The sector functions as one of the key contributors and enablers of economic growth, contributing approximately 3-5 percent of total gross value added (GVA) and 4 percent of GDP. Although the energy sector is not formally closed to private investments, SOEs are the largest firms in the sector and dominate each of the six energy market segments, from generation to retail distribution. 144 In addition to occupying 141 The purpose of the aid was the purchase of Željezara in Nikšić by EPCG in 2022 which signed a contract on 30 December 2022 to purchase the assets of Željezara from the Turkish company Toscelik to prevent it from being shut down. EPCG acquired the assets of Toscelik’s steel plant without a restructuring plan and without any prior economic analysis of the investment. Since EPCG is a state-owned company, the acquisition could be a considered a form of state aid. However, EPCG did not notify state aid to the Agency nor did it request the Agency’s opinion on the proposed acquisition. It is questionable whether money will be returned because Montenegro Airlines is bankrupt, and the other two companies are in financial straits. 142 https://bankar.me/2024/03/20/agencija-za-zastitu-konkurencije-epcg-dala-zeljezari-nezakonitu-drzavnu- pomoc-od-65-miliona-eura/. 143 The energy sector plays a crucial role in supporting other economic sectors, including industrial and manufacturing, agriculture, tourism, and agriculture. (For a deeper look at energy sector SOE footprint, performance, and governance see World Bank 2024.) 144 The electricity generation market segment has 13 licensed operators, but the SOE EPCG dominates with a 96 percent market share (2022). Likewise, the transmission market segment has one dominant operator, the SOE Crnogorski elektroprenosni system (CGES) with an 88 percent share in 2022. Electricity distribution is provided by the SOE CEDIS. Wholesale and trade activities are provided by three SOEs holding almost 100 percent of the market (2022): Montenegrin Electricity Market Operator (COTEE), Coordinated Auction Office in Southeast Europe 58 Montenegro – Integrated SOE Framework Assessment (iSOEF) prominent positions in key segments of the energy value chain, some SOEs own other SOEs, which allows them to wield power beyond their core market segment in other parts of the value chain (Figures 5.5, 5.6).145 Figure 5.5 Conglomeration and integration - EPCG and subsidiaries in the Figure 5.6 Vertical and energy value chain horizontal integration Source: Ministry of Finance, Institut Alternativa, ORBIS database. World Bank Group Staff elaboration. Several segments of the energy sector where currently SOEs dominate have a potential for enhanced private sector participation. SOEs in the Montenegrin energy sector are not confined to natural monopoly sectors, like transmission and distribution, that are characterized by high barriers to entry, economies of scale, or sub-additive cost structures that preclude the viability of multiple operators. SOEs are also found in partially contestable sectors, like power generation, where market imperfections such as externalities could result in service under provision. SOEs are even present in competitive market segments, like power wholesale and trade, engineering and consultancy. The experience of other countries shows that with proper regulation and successful unbundling, the power sectors can be opened to private investors, for example, in the segments of power generation and wholesale and trade. 146 Market entry by private power generation companies is constrained by the small size of the domestic retail market and the dominance of SOEs. With only 396,000 customers and overall demand of approximately 3,000 GWh annually, the size of the domestic retail market for energy is limited, thus giving LLC Podgorica, and Electricity Exchange LLC Podgorica. 144 Electricity supply is nominally licensed to six entities, the only active one is the SOE EPCG. 145 The holding company EPCG, for example, holds the license for electricity production and electricity supply but in addition it also ownership in six subsidiaries in the energy value chain including the coal mine Rudnik uglja AD, an electricity producer Zeta Energy Doo, a producer of heavy equipment EPCG-Željezara Nikšić Doo, an enterprise for procurement, design, installation, and maintenance of photovoltaic systems EPCG - Solar Gradnja Nikšić Doo, the electricity market operator COTEE, and the distribution system operator CEDIS. The SOE Transmission System Operator (TSO) CGES holds two subsidiaries in the wholesale and trade segment of Montenegro. The SOE Montenegrin Electricity Market Operator holds one subsidiary in the wholesale and trade segment. 146 Montenegro’s high PMR score of 3.52 confirms a restrictive regulatory framework and need to enhance competition between SOEs and private operators in the energy sector. Montenegro has made efforts to harmonize its legal framework with EU standards, including through the adoption of the Renewable Energy Law, but the dominance of various market segments by SOEs remains a challenge. 59 Montenegro – Integrated SOE Framework Assessment (iSOEF) little incentive to private operators to sell electricity. In the wholesale market, while private power generation companies do have incentives to sell their electricity, entry is constrained by the market dominance of EPCG, which charges below-market electricity prices in the retail market. On top, the vertical integration of EPCG as the producer of electricity and the only retail supplier deters entry in the retail supply market.147 Also the OECD WB PMR Indicators indicate that Montenegro’s electricity sector with a score of 3.52 has a more restrictive regulatory environment compared to its aspirational and structural peers, with a score of average scores of 2.02 and 1.90, respectively. Tourism SOEs play a prominent role in tourism subsectors, frequently justified by the sector’s strategic relevance for the economy as well as profit-generation opportunities for the state. Even though SOEs and MOEs accounted for only for 1.2 percent of firms in the tourism sector, SOEs and MOEs produced 11 percent of revenues in tourism in 2022. For example, in leisure activities including spa and recreational services, the SOE Institut Dr. Simo Milošević is an important player, with 17 percent market share by revenue in 2022, followed by the National Parks of Montenegro SOE with 5 percent market share in 2022. In addition, the State has a presence in the hotel and accommodation business with 6 percent market share in total, and with Hotel Group Budvanska Rivijera alone holding 5 percent of the market, in addition to other large hotel and tourism SOEs (Sveti Stefan and Hotel Miločer).148 Furthermore, the ski resort sector is almost entirely operated by two fully state owned companies – Skijališta Crne Gore and Turistički centar Durmitor.149 (For a deeper analysis of SOEs in the tourism sector, see World Bank Group forthcoming.) The state presence in tourism cannot be justified from a market failure or a profit-generating perspective. The tourism market is competitive and there is no market failure that state presence needs to address. Aspects of managing “cultural heritage” (for example, in the case of Sveti Stefan) could be addressed by the government in a less intrusive manner, by regulation instead of direct ownership. Meanwhile, current financial performance indicators suggest that state ownership and operation of these entities is not efficient, and leads to misallocation of resources. Although many of the SOE in the sector occupy prime real estate150 their financial performance is very weak, and in some cases even at risk of financial failure (World Bank Group forthcoming). There is also a risk of conflict of interest with the state’s participation in the hotel market because the state acts both as a hotel owner or lessor as well as a grantor of rights to use of “sea goods.” 151 Sea shores, the country´s most profitable and important tourism asset, are considered “sea goods”, and can only be leased for a 5-years period by following a public tender procedure (Arts. 2nd and 7th of the Law on Sea Goods). However, the GoM and the Marine Resources SOE in charge of operating sea goods have considerable discretion in defining geographic areas of the seacoast that can be leased for different purposes, as well as criteria for evaluating bids from different offerors. In practice, the discretion has 147 Although there are six licensed companies in the retail supply sector, only EPCG is currently active and its pricing policies make the entry in the retail supply market unprofitable. 148 Since markets for accommodation are often based on substitutability at the city, neighborhood or even resort level, the market share of these large SOEs might be much higher on that basis. 149 The only private player in this sector is Ski Resort Kolašin 1450. 150 Budvanska Rivijera, operates five hotels and occupies a large area of land along the coast of Budva. 151 According to the Law on Sea Goods, all land connected to the sea and belonging to the state are considered “sea goods.” This includes the coast, harbors, beaches, underwater territory. 60 Montenegro – Integrated SOE Framework Assessment (iSOEF) allowed in some instances for seashores to be leased outside the regular tender procedure and for selection criteria to be used that favors incumbent SOEs.152 Transportation The railway freight transport sector is operated by SOEs and characterized by barriers to entry.153 While state presence in rail passenger operation is quite common globally, private sector participation can be feasible in rail cargo operation. A vital precondition for private sector participation in rail cargo operation is unbundling of infrastructure provision and services operation. The unbundling process for the railway sector took place in the late 2000s and involved the division of a single economic entity into four independent SOEs, categorized by sector.154 Yet, private sector market entry has been minimal and SOEs still operate in all its segments, including in rail cargo. The OECD WB PMR indicators suggest that at least part of the reason is the regulatory framework of the Montenegrin transportation sector, which is restrictive compared to both aspirational and structural peers, with the main restrictions found in rail, air and water transport. A potential private sector operator that intends to enter the rail transport market as a cargo carrier must enter into an infrastructure usage agreement with the ZICG, as the infrastructure manager, based on a public call, typically issued one year prior to the commencement of the new timetable. The lengthy period for the approval and the strict definition of the route and driving time that the carrier must adhere to before the commencement of transport activity represent a significant inconvenience for new carriers seeking to initiate transportation operations. Airport transport is open for private-sector entry, but remains so far predominantly state-owned. The air transportation sector is divided into three subsectors: (i) airlines, (ii) infrastructure (airports), and (iii) air traffic management, navigation and control. Montenegro has a single airline, an SOE (Montenegro Airlines AD). Despite receiving significant state financial aid and guarantees, the company is currently undergoing bankruptcy proceedings due to its poor performance. The country's two international airports, located in Podgorica and Tivat, are also state-owned. While many countries have successfully opened up the operation of airports to the private sector,155 other countries have retained ownership of airports and ATM functions with reference to national security, equitable access, and long-term strategic control, and some have adopted hybrid models involving public-private partnerships (PPPs) or partial privatizations. The GoM has corporatized airports in the JSC “Airports of Montenegro”, which has so far failed to deliver the expected level of services and is being put forward as a candidate for a concession. Finally, air navigation and traffic control services are exclusively served by the state-owned Serbia and 152 For instance, in the last public tender, considerable weight was given to whether hotels are on the seacoast and whether bidders were lessors in the past. 153 The described entry barriers are applicable to both cargo and passenger railway transport, even though in most countries rail cargo attracts more private interest. The conditions that have to be met are applicable to both. 154 Pursuant the 2007 Strategy for Restructuring Montenegro Railway and the 2008 Decision on Restructuring the Montenegro Railway, two SOEs were established to provide transport services: (i) Railway Transport of Montenegro JSC, responsible for passenger transport, and (ii) Montecargo JSC, responsible for freight transport. Additionally, (iii) Railway Infrastructure of Montenegro JSC (ZICG) was established to oversee the management of railway infrastructure and (iv) Maintenance of Railway Rolling Stock JSC (“MRRS”) was set up to provide railway maintenance services. All the aforementioned companies remain state-owned to this day. 155 As of 2020, nearly 20 percent of the world’s airports had been privatized. Private equity (PE), usually through dedicated infrastructure funds, is playing an increasing role in privatization, purchasing 102 airports out of a total of 437 that have ever been privatized. They find that between 1996 and 2019, airports owned by PE funds improved their performance across many dimensions. (Howell et al 2023) 61 Montenegro – Integrated SOE Framework Assessment (iSOEF) Montenegro Air Traffic Services LLC.156 SOEs are the largest players in the water transport market, but opening the ferry market to private sector participation through competitive bidding could improve market outcomes. Currently, the largest firms in sea, coastal, and inland passenger and freight water transport are the majority state-owned Barska Plovidba (52 percent government stake) and Crnogorska Plovidba (100 percent government stake), both generating positive returns largely due to improvements in global shipping market conditions. Montenegro’s only ferry line is operated by the state-owned enterprise Marine Resources which also manages the country’s seashores. The Lepetane–Kamenari ferry route in Boka Kotorska constitutes a marine resource over which usage rights were granted in 2004 to a private operator, including control over the operational coast and two piers. Following an initial 15-year contract, the operator was granted an open-ended extension. However, in 2023, the state unilaterally terminated the contract, transferring monopoly rights from the private to the public sector. Since then, the ferry market has remained closed to competition. Implementation of a new law aimed at fostering competition through open public tenders for water transport licenses has been slow. Amendments to the Law on Safety of Sea Transport (LSST) in 2020 introduced a regulatory framework for scheduled water transport authorizations through public calls. In practice, however, there is no transparent information on open online tenders since the introduction of the amendments, leaving the markets closed to new private entrants. Under the LSST, public calls are required for scheduled transport, while non-scheduled transport can be conducted on demand. Ferry transport operates based on concessions, but the implementation of these mechanisms remains elusive. The Law on Ports permits private sector use of ports, but the majority of them is operated by SOEs. Montenegro has four ports: Bar, Kotor, Adria and Zelenika.157 According to the Law on Ports (Art. 2), ports represent an “asset in the general use” and therefore must remain in state hands. The Law (Art. 14 -20) allows for commercial exploitation of ports by the private sector under concession agreements, yet in practice the ports are almost exclusively operated by SOEs (except only a part of the Port of Bar, Montenegro’s sole intermodal port.158 Moreover, while the Law on Ports requires that the usage of ports be entrusted through a public tender, no such procedure was followed in the cases of SOEs Port of Bar (JSC) and “Luka Kotor”,159 relying on exceptions provided in Article 34 of the Law on Ports. 156 At present, SMATSA is owned and operated jointly by Montenegro’s Civil Aviation Agency and a Serbian SOE. 157 https://me.visit-montenegro.com/transport/transportation-ports- marinas/#:~:text=Postoje%203%20luke%20u%20Crnoj,Crnu%20Goru%20sa%20cijelim%20svijetom.&text=Luka%2 0Kotor%20je%20locirana%20u,blizini%20zidina%20Starog%20grada%20Kotora 158 Intermodal port enables connections between rail and maritime transportation. The SOE Port of Bar is not a competitor to the Port of Adria as they handle different types of cargo: the former manages liquid and bulk cargo, while the latter handles containers. 159 Port of Kotor was registered as a JSC, owned by the Municipality of Kotor (57 percent), the Pension and Disability Insurance Fund (17.5 percent), Joint Custody Account (11.5 percent), and others (14.3 percent). Source: https://www.portofkotor.com/en/port-of-kotor/ownership-and-management-structure/ 62 Montenegro – Integrated SOE Framework Assessment (iSOEF) 6 Reform Recommendations Three sets of cross-cutting recommendations are proposed to the Government of Montenegro.160 When implementing these at the enterprise level, the authorities are invited to adopt a flexible and proportionate approach, taking into account individual SOEs’ size, strategic importance and fiscal impact, and prioritizing measures expected to most positively impact SOE value creation in the public interest. 6.1 Strengthening Ownership and SOE Governance Strengthening the Legal and Regulatory Framework • Develop and formalize a State Ownership Policy (SOP) that sets clear criteria and priorities for SOE ownership and performance objectives, and separates policy, regulatory and ownership functions for SOEs. • Adopt a dedicated SOE Law to establish a unified and transparent governance framework, defining ownership roles, governance principles, and performance expectations. • Adopt an SOE Reform Strategy that outlines priorities for a phased implementation plan for legal, operational, and structural reforms, aligned with Montenegro’s economic policy objectives. The Strategy should include clear milestones, timelines and responsible entities to ensure its implementation. • Update other parts of the SOE legal-regulatory framework to be consistent with the SOE Law and to ensure that SOEs are the furthest extent possible subject to the same laws, regulations and tax requirements as privately owned companies.161 • Establish and commence implementation of a dividend policy in line with international good practice. Enhancing the State Ownership and Oversight Function • Establish a (at least) directorate level Ownership Coordination Unit (OCU) within the Ministry of Finance, with a clear mandate, adequate staffing, and financial resources to oversee SOE governance and performance. • Define clear ownership roles, ensuring line ministries focus on policymaking, while the OCU is responsible for ownership oversight and coordination, financial reporting, and strategic monitoring. • Strengthen accountability mechanisms, including parliamentary oversight and annual reporting on SOE performance, to enhance transparency and ensure effective state ownership. Improving SOE Performance Management and Financial Monitoring • Institutionalize a structured SOE performance evaluation system, integrating financial, fiscal, and operational risk assessments, and including clear definitions and performance targets for any public policy objectives. • Clearly and transparently communicate the State’s expectations to individual SOEs, including through KPIs set out in Letters of Expectations. • Enhance financial transparency through an Annual Aggregate Report on SOEs, providing sector-wide performance data, financial results, and information on governance. 160 More specific sectoral recommendations fall outside the scope of this report. 161 While not explicitly stated in the SOP, implementation of this objective implies the full corporatization of Montenegro’s remaining public enterprises insofar as they undertake commercial activities. 63 Montenegro – Integrated SOE Framework Assessment (iSOEF) Strengthening SOE Board Governance and Professionalization • Implement a transparent, merit-based board appointment process, ensuring at least one-third of directors meet relevant criteria for expertise and independence aligned with international standards, including independence from the state and political interests. Leverage international experience for strengthening compliance, including by empowering by OCU to systematically monitor board appointments and composition (Box 6.1). • Ensure gender diversity on SOE boards, with at least 30 percent representation of the underrepresented gender, aligning with international best practices. • Institute standardized SOE board-term lengths of 3 to 4 years, with a limit of no more than two successive mandates, to ensure institutional continuity while allowing for regular and predictable board-member renewal. • Introduce mandatory board evaluations, including annual self-assessments and external independent reviews every three years to assess performance and governance effectiveness. Ensure that board and executive remuneration adequately incentivizes performance in the interest of long-term value creation. • Empower SOE boards to appoint and dismiss CEOs, eliminating state interference in SOE management. In the short term, the SOE Coordination Unit may play a supportive or oversight role in ensuring that both board and CEO appointments follow good governance standards. • Establish a structured professional development program for SOE board members, covering corporate governance, financial oversight, and risk management training. • Implement succession planning for each SOE board to ensure a continuous pipeline of qualified candidates and support long-term board effectiveness. Enhancing SOE Transparency, Accountability, and Public Disclosure • Institutionalize the preparation of an Annual Aggregate Report on SOEs by the OCU, covering financial performance, governance, and sustainability practices. The report should be publicly disclosed and underpinned by data for a complete list for SOEs, managed by the OCU. • Align internal audit, control, and external oversight functions with international standards by ensuring that, at a minimum, all large SOEs establish independent internal audit functions that report directly to the board. • The audit committee should be ideally a board committee rather than an external committee reporting directly to shareholders. • Enhance SOE disclosure requirements by requiring SOEs to publish strategies, financial statements, board remuneration details, and governance decisions on government and SOE websites. • Strengthen sustainability reporting, ensuring SOEs align with the EU Corporate Sustainability Reporting Directive (CSRD) and IFRS Sustainability Disclosure Standards (IFRS S1 & S2). Optimizing the SOE Portfolio and Rationalizing Government Ownership • In line with the SOP ownership criteria, develop a structured process for portfolio optimization. See Box 6.2 for a decision matrix on portfolio optimization. • Encourage private sector participation in SOEs, particularly through Public-Private Partnerships (PPPs) and partial privatizations, where feasible. Box 6.1 Depoliticizing SOE Boards: Institutional Approaches from Finland and Lithuania The politicization of boards remains a central governance challenge in many countries, with board appointments frequently reflecting political affiliations rather than merit. Board politicization undermines SOE performance, erodes public trust, and weakens accountability, yet it can be very difficult to resolve. Some countries have succeeded in professionalizing and depoliticizing their boards, and these cases provide useful examples for 64 Montenegro – Integrated SOE Framework Assessment (iSOEF) countries to do the same. The approaches adopted in the last 10-20 years by Finland and Lithuania, both EU and OECD member states, offer valuable insights in this regard. Finland: Centralized Ownership and Structured Appointments Finland undertook comprehensive SOE governance reforms in the early 2000s, driven by the need to improve performance and address political interference. A cornerstone of the reform was the centralization of the ownership function in the Ownership Steering Unit (OSU) within the Prime Minister’s Office, with the powers to coordinate ownership policy implementation and lead the appointment of competent board members to state- owned companies. The OSU ensures high-quality board appointments by assessing candidate profiles against predefined skill matrices reflecting the specific needs of each SOE, and in more complex cases commissioning executive search firms. The unit also oversees board evaluations, whose results are used to inform reappointments and succession planning. The centralization of board appointments in the technically strong and active OSU has served to largely depoliticize the SOE governance system, significantly reduced the scope for discretionary or ad hoc nominations, and reinforced consistency and professionalism across the SOE portfolio. Finland’s experience highlights the importance of locating the ownership function at the center of government, where it can be both politically influential and operationally shielded. The structured, expert-driven nomination process significantly limits political interference while maintaining formal oversight. Lithuania: Coordinated Ownership with Transparency and Benchmarking to Drive Board Professionalism In Lithuania, SOE reform gained momentum during the country’s EU and OECD accession processes between the late 1990s-early 2010s. Politicized boards and weak governance frameworks had undermined SOE effectiveness and public confidence, and to address these issues Lithuania established a coordinated model of ownership with the Governance Coordination Centre (GCC) under the Ministry of Finance (formed in 2012) as the coordinating entity. Unlike the Funning OSU, the GCC does not make board appointments directly (this responsibility rests with the line ministries) but plays a central role in setting expectations and promoting transparency through several instruments: • The Corporate Governance Index (CGI): A key innovation was the GCC’s introduction in 2015 of the CGI, which ranks Lithuanian SOEs on a range of governance dimensions, including board independence, gender balance, nomination practices, and the presence of key governance instruments such as board charters and evaluation mechanisms. By publishing the CGI scores annually, the GCC has shed light on core SOE governance challenges and motivated line ministries to improve their SOEs’ performance on the CGI. • Standard guidelines and capacity building: To complement the CGI, the GCC developed standard templates, guidelines, and training modules to support shareholding ministries in adopting more structured and merit-based board nomination processes. Although these tools are not legally binding, being rolled out in parallel with the CGI they have gradually shaped practices by encouraged increased focus on board professionalization and accountability. The Lithuanian approach demonstrates that even without formal appointment authority, a central coordination and oversight body can drive improvements in board composition and governance quality through transparency, reputational pressure, and advisory support. Overall lessons from the two case studies Finland and Lithuania adopted different approaches to reducing board politicization and increasing board independence and professionalism – a more centralized and direct approach in Finland, and a more indirect incentives-and standards-based approach in Lithuania. The success of both approaches suggests that there is no single “correct” path, but both cases teach several lessons that may be useful for countries still grappling with politicized SOE boards and looking for reform: • Establishing a central ownership or coordination unit with clear responsibilities and technical capacity is critical for shaping consistent and professional board nomination practices. • Formalizing nomination procedures—using tools such as skills matrices, selection criteria, and evaluation mechanisms—can help depoliticize appointments while respecting ministerial mandates. 65 Montenegro – Integrated SOE Framework Assessment (iSOEF) • Transparency, particularly through public disclosure of governance practices and outcomes, can create strong reputational incentives for reform, even in the absence of binding legal rules. • Benchmarking tools such as governance indices can complement formal oversight by stimulating peer learning and public accountability. Box 6.2 Decision matrix for portfolio optimization The below decision matrix for portfolio optimization could assist the GoM in putting in place a structured process for portfolio optimization – and making decisions about which SOEs to keep in public ownership, which to divest, and which to strengthen through structural and governance improvements. The matrix proposes to classify companies first according to whether they fulfill a clear policy rationale justifying their maintenance in state ownership and secondly whether they are performing well or under-performing. For companies that have a strong policy rationale for state ownership (e.g. public service obligations for which private provision is not feasible or efficient, or broader strategic goals such as energy security), efforts can focus on further strengthening those companies that are profitable and restructuring those that are not. Commercial viability will be an important consideration here: non-commercial entities should be transferred to general government administration, where appropriate, while companies that meet the commercial viability threshold should be strengthened or restructured. For companies without a clear policy rationale for state ownership and that are well-performing, efforts can focus on putting in place transparent processes to either bring in more private sector participation, including through PPPs (and in some cases potentially privatize) or divesting from those that are under- performing. In each scenario, the process should be transparent, and informed by clear and transparent criteria for classifying SOEs into the different categories. Efficient/profitable Inefficient/loss-making Strong policy rationale for Strengthen , improve Restructure, strengthen corporate state ownership corporate governance, governance, review / adjust costing of (e.g. public interest, attract additional PSOs, attract additional capital. Or (if do strategic importance ) (including some private) not meet commercial viability capital, including through thresholds) transfer to general PPPs. government administration Weak policy rationale for Open up to private sector Divest / close state ownership participation, use PPPs, (e.g. operates in potentially / or privatize, but ensure competitive sectors ) level playing field 6.2 Fiscal Risk Management Strengthen the Government’s role in actively monitoring fiscal risks • Establish a centralized system to monitor and systematically assess the financial health of both SOEs and MOEs using a unified database for data aggregation. • Improve the SOE fiscal risk management framework, to be able to: identify all major risks to the budget emanating from SOEs and policy measures to mitigate these risks; disclose the fiscal risks to enhance awareness. • Provide training and support to local governments on risk assessment tools, to build capacity for effective oversight. Strengthen controls and accountability mechanisms • Introduce a system to regularly clear accumulated arrears among SOEs and with public sector. 66 Montenegro – Integrated SOE Framework Assessment (iSOEF) • Consider imposing caps on liabilities, including arrears, that SOEs are allowed to accumulate.162 • Hold SOEs to account for financial, operational and fiscal performance, and transfer or share risks by introducing explicit no bail-out clauses. 6.3 Leveling the playing field between SOEs and private companies Ensure the state's presence in the market is justified, effective and with appropriate scope • Consistent with the parameters of the SOP, use the Subsidiarity Principle 163 to guide the strategic rationale and objectives for SOEs. Reduce the state’s presence in competitive markets • As part of the portfolio optimization process outlined in the first set of recommendations, identify SOEs that are operating in competitive markets and explore options for partial divestment if state presence does not serve a strong strategic rationale. Clarify the scope and funding of PSOs and establishing market-consistent financial performance expectations • Ensure that PSOs, including the use of below-market pricing mechanisms, are clearly defined in line with the EU framework for Services of General Economic Interest and state-aid, including through more consistent terminology in legislation, and compensated based on EU accepted methodologies. • Ensure that any support to SOEs is either linked to PSOs or channeled through the country state aid control system. • For SOEs maintained in competitive sectors, establish rate-of-return requirements benchmarked against private sector counterparts (and/or similar SOEs in other countries). • Establish full accounting separation of commercial and non-commercial activities Implement full competitive neutrality 164 by: • Grant the APC a mandate to issue fines directly, rather than relying on misdemeanor courts. • Strengthen APC capacity to implement the Competition Law, particularly in markets where SOEs face private-sector competition. Require APC opinions to be made public to enhance transparency and impact. • To ensure clear separation of ownership, policy and regulatory functions, for unregulated utility services: develop a unified methodology for presenting service prices to facilitate comparisons across municipalities; for regulated utilities, make REGAGEN’s price approvals final, preventing local governments from overruling cost-based pricing. Additionally, extend REGAGEN’s remit to cover all local and regional utility companies. 162 Liability caps can be used in specific contexts to manage fiscal risk and limit SOE exposure to commercial ventures. The measure, however, is not applicable to all contexts, including for SOEs operating on commercial terms as they may reduce the companies’ competitiveness. Liability caps also should not be used as a substitute for corporate governance reforms, which provide the only sustainable way to ensure sound and strategic management of company finances, operations, and risk. 163 The Subsidiarity Principle is an analytical tool for assessing state participation in economic activities. According to this principle, the State has a subsidiary duty to perform only those tasks where private supply is not feasible or not desirable. In this sense, SOEs should not replace or interfere in any manner with private businesses when they are fully capable of meeting a particular social need. 164 Competitive neutrality ensures that all market participants, including SOEs and private firms, operate on a level playing field, avoiding any undue advantages or disadvantages (whether regulatory, financial and non-financial support, etc.) 67 Montenegro – Integrated SOE Framework Assessment (iSOEF) • Enhance the transparency and oversight over cases when SOEs are exempted from PPL provisions, such as when operating in commercial sectors: require ex-ante approval for exemptions, and establish a public registry of procurements conducted outside the regulatory framework. • Improve state aid oversight: Develop a clear methodology for APC to verify that exemptions from state aid rules for services of general economic interest meet strict conditions, including the proper calculation of adequate compensation. • Increase transparency in state aid by establishing a public registry of aid granted for services of general economic interest, similar to the existing de minimis aid registry, and introduce a legally binding requirement for grantors to report aid. • Enforce state aid compliance by empowering the APC to enforce the return of unlawful state aid through the courts and making reporting on returned state aid a legally binding requirement. • Prevent the deferral of bankruptcy proceedings for SOEs, particularly in competitive sectors, to ensure a level playing field with private-sector firms. 68 Montenegro – Integrated SOE Framework Assessment (iSOEF) References Apfalter, Stefan and Dennis Sanchez Navarro (2023). “Businesses Of The State (BOS) and Private Sector Development - A Policy Toolkit for Practitioners (English).” Washington, D.C. : World Bank Group. 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Leadership Training Toolkit for State-Owned Enterprises (SOEs): Boards and Owners, https://www.ifc.org/content/dam/ifc/doc/mgrt/wbg-soe-leadership-toolkit.pdf World Bank Group (2015), Water and Wastewater Services in the Danube Region: Montenegro Country Note, May 2015, https://documents1.worldbank.org/curated/en/859881468178184081/pdf/97241-WP-P146139- PUBLIC-Box391472B-SoS-Montenegro.pdf World Economic Forum (2019), Global Competitiveness Report. Geneva, Switzerland https://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2019.pdf 72 Montenegro – Integrated SOE Framework Assessment (iSOEF) Annex 1. List of stakeholders interviewed Interviews for Chapter 3 1. Ministry of Finance 2. Ministry of Economic Development 3. Ministry of Energy 4. Ministry of Maritime Affairs 5. Ministry of Tourism 6. Ministry of Transport 7. Ministry of Mining, Oil and Gas 8. Ministry of Spatial Planning, Urbanism and State Property 9. State Audit Institution 10. Montenegro Stock Exchange 11. Chamber of Commerce of Montenegro 12. University of Montenegro 13. Union of Municipalities 14. SOEs: Pošta / Post office, Monteput, Luka Bar, Budvanska rivijera, JP Morsko Dobro, EPCG, Rudnik uglja coal mine 15. MOEs: various utility and parking companies Interviews for Chapter 5 1. Ministry of Finance 2. Ministry of Economic Development 3. Ministry of Energy 4. Ministry of Maritime Affairs 5. Ministry of Tourism 6. Agency for Protection of Competition (APC) 7. REGAGEN (Energy Regulator) 8. State Audit Institution 9. Chamber of Commerce of Montenegro 10. Stock Exchange / Capital Market Authority 11. Podgorica Commercial Court 12. SOEs: Hotel Group Budvanska Rivijera, Port of Bar JSC, Elektroprivreda Crne Gore (EPCG) 73 Montenegro – Integrated SOE Framework Assessment (iSOEF) Annex 2. A taxonomy of sectors from competition angle A recent World Bank Group research initiative (World Bank Group 2023d) introduced a novel sector taxonomy that classifies all (560) NACE4-digit industry codes into three categories: • Competitive sectors comprise activities that can be efficiently provided by the private sector (with little to no entry barriers and are commercially viable for multiple firms to operate). Examples are the manufacturing of food and the manufacturing of apparel. • Partially contestable sectors include activities that exhibit some market failures (such as externalities) that may lead to under-provision of service. Examples are aviation and banking. Examples in Montenegro include: ToMontenegro DOO Podgorica (100% owned by the state) in air passenger transport, and Zeta Energy DOO Danilovgrad (51% owned by the state) in electricity production. • Natural monopolies cover activities that are not economically viable for more than one operator (high entry barriers, scale economies, or sub-additivity cost structures). Examples: water distribution and electricity transmission. Examples in Montenegro include: water collection, treatment, and supply through municipal SOEs (Komunalne djelatnosti DOO Gusinje, Vodovod i kanalizacija DOO Bar, etc.), services incidental to land transportation such as bus stations and parking services (e.g., Autobuska stanica DOO Nikšić, Monteput DOO Podgorica, Parking servis Budva DOO Budva, etc.), and sewerage (Društvo za odvođenje i prečišćavanje otpadnih voda za opštine Kotor i Tivat DOO Tivat and Otpadne vode DOO Budva). The classification is based on the industries’ economic structure, underlying market failures, and rationale for state participation, and provides both a deeper understanding of the sectors and potential reform options for the SOE sector. The specific underlying methodological principles of this taxonomy are detailed in Dall’Olio (2022). 74 Montenegro – Integrated SOE Framework Assessment (iSOEF) Annex 3. List of identified SOEs and MOEs Government # By Direct / Public Ownership Legal Gvt Company Name Sector or Status Ownership Level form level Indirect % 1 Aerodromi Crne Gore AD Podgorica Transportation 100.00% Central Direct JSC Registered 2 Barska plovidba AD Bar Transportation 51.90% Central Indirect JSC Registered 3 Berza električne energije DOO Podgorica Energy 100.00% Central Indirect LLC Registered 4 Businessmontenegro AD Podgorica Human Health 100.00% Central Indirect JSC Registered 5 Castello Montenegro AD Pljevlja Manufacturing 89.57% Central Direct JSC Registered 6 Centar za ekotoksikološka ispitivanja DOO Podgorica Environment and Ecology 100.00% Central Direct LLC Registered 7 Comfort DOO Podgorica Construction 100.00% Central Indirect LLC Registered 8 Crnogorska plovidba AD Kotor Transportation 100.00% Central Direct JSC Registered 9 Crnogorski elektrodistributivni sistem DOO Podgorica (CEDIS) Energy 100.00% Central Indirect LLC Registered 10 Crnogorski elektroprenosni sistem AD Podgorica (CGES) Energy 55.38% Central Direct JSC Registered 11 Crnogorski fond za solidarnu stambenu izgradnju DOO Podgorica Construction 93.02% Central Direct LLC Registered 12 Crnogorski operator tržišta električne energije DOO Podgorica Energy 100.00% Central Direct LLC Registered 13 Elektroprivreda Crne Gore AD Nikšić Energy 98.64% Central Direct JSC Registered 14 EPCG-Solar-gradnja DOO Nikšić Energy 100.00% Central Indirect LLC Registered 15 EPCG-Željezara Nikšić DOO Nikšić Energy 100.00% Central Indirect LLC Registered 16 Fond za inovacije Crne Gore DOO Podgorica Scientific & Technical 100.00% Central Direct LLC Registered 17 Fond za zaštitu životne sredine DOO Podgorica Environment and Ecology 100.00% Central Direct LLC Registered 18 H.T.P. "Miločer" DOO Budva Tourism 100.00% Central Direct LLC Registered 19 H.T.P. "Ulcinjska rivijera" AD Ulcinj Tourism 75.41% Central Indirect JSC Registered 20 Hotelska grupa "Budvanska rivijera" AD Budva Tourism 58.73% Central Indirect JSC Registered 21 Inovaciono preduzetnički centar "Tehnopolis" DOO Nikšić Scientific & Technical 100.00% Central Direct LLC Registered 22 Institut "Dr Simo Milošević" AD Igalo Tourism 56.48% Central Indirect JSC Registered 23 Institut za crnu metalurgiju AD Nikšić Manufacturing 51.12% Central Indirect JSC Registered 24 Investiciono-razvojni fond Crne Gore AD Podgorica Scientific & Technical 100.00% Central Direct JSC Registered 25 Javno preduzeće Radio i Televizija Crne Gore (JP RT Crne Gore) Information & Communication 100.00% Central Direct PE Registered 26 Javno preduzeće za nacionalne parkove Crne Gore Environment and Ecology 100.00% Central Direct PE Registered 27 Javno preduzeće za upravljanje morskim dobrom Crne Gore Environment and Ecology 100.00% Central Direct PE Registered 28 Lovćen AD Podgorica Construction 76.45% Central Indirect JSC Registered 29 Luka Bar AD Bar Transportation 78.55% Central Direct JSC Registered 30 Marina AD Bar Transportation 54.34% Central Indirect JSC Registered 31 Market AD Podgorica Trade 66.00% Central Indirect JSC Registered 32 Montecargo AD Podgorica Transportation 87.59% Central Direct JSC Registered 33 Montenegro airlines AD Podgorica Transportation 99.93% Central Direct JSC Bankruptcy 34 Montenegro Bonus DOO Cetinje Energy 100.00% Central Direct LLC Registered 35 Montenegroturist AD Budva Tourism 65.57% Central Indirect JSC Registered 36 Montepranzo - Bokaprodukt AD Tivat Agriculture 75.06% Central Indirect JSC Registered 37 Monte put DOO Podgorica Transportation 100.00% Central Direct LLC Registered 38 Montel motel glava Zete DOO Nikšić Tourism 50.00% Central Indirect LLC Bankruptcy 75 Montenegro – Integrated SOE Framework Assessment (iSOEF) 39 Naučno-tehnološki park Crne Gore DOO Podgorica Scientific & Technical 100.00% Central Direct LLC Registered 40 Održavanje željezničkih voznih sredstava AD Podgorica Transportation 96.37% Central Direct JSC Registered 41 PIO DOO Ulcinj Tourism 100.00% Central Indirect LLC Registered 42 Plantaže 13. Jul AD Podgorica Agriculture 55.63% Central Indirect JSC Registered 43 Pošta Crne Gore AD Podgorica Information & Communication 100.00% Central Direct JSC Registered 44 Project - Consulting DOO Podgorica Environment and Ecology 100.00% Central Direct LLC Registered 45 Radio-difuzni centar DOO Podgorica Information & Communication 100.00% Central Direct LLC Registered 46 Radoje Dakić a.d. Podgorica - u stečaju Scientific & Technical 50.58% Central Indirect JSC Bankruptcy 47 Regionalni ronilački centar za podvodno deminiranje i obuku ronilaca DOO Environment and Ecology 100.00% Central Direct LLC Registered 48 Regionalni vodovod Crnogorsko primorje DOO Budva Environment and Ecology 100.00% Central Direct LLC Registered 49 Rudnik uglja AD Pljevlja Energy 100.00% Central Indirect JSC Registered 50 Skijališta Crne Gore DOO Mojkovac Tourism 100.00% Central Direct LLC Registered 51 Sportski centar "Ada" DOO Pljevlja Arts & Recreation 94.29% Central Direct LLC Registered 52 Sveti Stefan hoteli AD Budva Tourism 58.73% Central Indirect JSC Registered 53 ToMontenegro DOO Podgorica Transportation 100.00% Central Direct LLC Registered 54 Turistički centar Durmitor DOO Žabljak Tourism 100.00% Central Indirect LLC Registered 55 Unispektrum DOO Podgorica Scientific & Technical 100.00% Central Indirect LLC Registered 56 Univerzitetski sportsko-kulturni centar DOO Podgorica Arts & Recreation 100.00% Central Indirect LLC Registered 57 Zaštita prostora Crne Gore DOO Danilovgrad Construction 100.00% Central Direct LLC Registered 58 Željeznička infrastruktura Crne Gore AD Podgorica Transportation 76.52% Central Direct JSC Registered 59 Željeznički prevoz Crne Gore AD Podgorica Transportation 97.71% Central Direct JSC Registered 60 Zeta Energy DOO Danilovgrad Energy 51.00% Central Indirect LLC Registered 61 EPCG DOO Beograd, Serbia Energy 100.00% Central Indirect LLC Registered 1 Agencija za gazdovanje gradskom lukom Herceg Novi DOO Herceg Novi Tourism 100.00% Local Direct LLC Registered 2 Agencija za izgradnju i razvoj DOO Berane Construction 100.00% Local Direct LLC Registered 3 Agencija za izgradnju i razvoj DOO Podgorica Construction 100.00% Local Direct LLC Registered 4 Agencija za izgradnju i razvoj Herceg Novog DOO Herceg Novi Construction 100.00% Local Direct LLC Registered 5 Agencija za izgradnju i razvoj Ulcinja DOO Ulcinj Construction 100.00% Local Direct LLC Registered 6 Agencija za projektovanje i razvoj DOO Rožaje Construction 100.00% Local Direct LLC Bankruptcy 7 Agencija za projektovanje i planiranje DOO Nikšić Construction 100.00% Local Direct LLC Registered 8 Agencija za razvoj i podršku poslovanju DOO Cetinje Scientific & Technical 100.00% Local Direct LLC Registered 9 Agencija za razvoj i zaštitu Orjena DOO Herceg Novi Environment and Ecology 100.00% Local Direct LLC Registered 10 Agencija za stanovanje DOO Podgorica Construction 100.00% Local Direct LLC Registered 11 Agencija za upravljanje zaštićenim područjima Glavnog grada DOO Podgorica Environment and Ecology 100.00% Local Direct LLC Registered 12 Akademija znanja DOO Budva Tourism 100.00% Local Direct LLC Registered 13 Aquapark DOO Budva Construction 100.00% Local Direct LLC Registered 14 Autobuska stanica DOO Nikšić Transportation 100.00% Local Direct LLC Registered 15 Autobuska stanica DOO Tivat Transportation 100.00% Local Direct LLC Registered 16 Benergo DOO Berane Energy 100.00% Local Direct LLC Registered 17 Budva Holding DOO. Budva Construction 100.00% Local Direct LLC Registered 18 Centar za sport i rekreaciju DOO Pljevlja Arts & Recreation 100.00% Local Direct LLC Registered 19 Centar za razvoj durmitorskog područja DOO Žabljak Environment and Ecology 100.00% Local Direct LLC Registered 20 Čistoća DOO Herceg Novi Utility 100.00% Local Direct LLC Registered 21 Čistoća DOO Pljevlja Utility 100.00% Local Direct LLC Registered 22 Čistoća DOO Podgorica Utility 100.00% Local Direct LLC Registered 23 Deponija DOO Podgorica Utility 100.00% Local Direct LLC Registered 24 Društvo za izgradnju vodovodne i kanalizacione infrastrukture DOO - Herceg Novi Utility 100.00% Local Direct LLC Registered 76 Montenegro – Integrated SOE Framework Assessment (iSOEF) 25 Društvo za konsalting i inžinjering Budva-Sv. Stefan-Petrovac DOO Budva Construction 60.00% Local Direct LLC Registered 26 Društvo za odvođenje i prečišćavanje otpadnih voda za opštine Kotor i Tivat DOO Utility 100.00% Local Direct LLC Registered 27 Društvo za upravljanje sanitarnom deponijom "Lovanja" DOO Kotor Utility 100.00% Local Direct LLC Registered 28 Društvo za uzgoj, zaštitu, lov divljači i riba DOO Danilovgrad Agriculture 100.00% Local Direct LLC Registered 29 Fudbalski klub Budućnost AD Podgorica Arts & Recreation 99.99% Local Direct JSC Registered 30 Grijanje DOO Pljevlja Utility 100.00% Local Direct LLC Registered 31 Javno komunalno preduzeće DOO Zeta Utility 100.00% Local Direct LLC Registered 32 Javni radio difuzni servis "Radio televizija Herceg Novi" DOO Herceg Novi Information & Communication 100.00% Local Direct LLC Registered 33 Javno preduzeće za uzgoj i zaštitu divljači Ulcinj - Ulcinj Agriculture 100.00% Local Direct PE Registered 34 Javno preduzeće za uzgoj, zaštitu i lov divljači Dr. Zoran Kesler Agriculture 100.00% Local Direct PE Registered 35 Javno preduzeće sportski centar Nikšić Arts & Recreation 100.00% Local Direct PE Registered 36 Javno preduzeće Sportski centar Kolašin Arts & Recreation 100.00% Local Direct PE Registered 37 JP Centar za informativnu Tivat / Javni emiter Radio Tivat DOO Information & Communication 100.00% Local Direct LLC Registered 38 JP Radio-difuzni servis Televizija Budva DOO Budva Information & Communication 100.00% Local Direct LLC Registered 39 Komunalna djelatnost DOO Petnjica Utility 100.00% Local Direct LLC Registered 40 Komunalne djelatnosti DOO Bar Utility 100.00% Local Direct LLC Registered 41 Komunalne djelatnosti DOO Gusinje Utility 100.00% Local Direct LLC Registered 42 Komunalne djelatnosti DOO Plav Utility 100.00% Local Direct LLC Registered 43 Komunalne djelatnosti DOO Šavnik Utility 100.00% Local Direct LLC Registered 44 Komunalne djelatnosti DOO Ulcinj Utility 100.00% Local Direct LLC Registered 45 Komunalne usluge - Gradac DOO Mojkovac Utility 100.00% Local Direct LLC Registered 46 Komunalne usluge DOO Pljevlja Utility 100.00% Local Direct LLC Registered 47 Komunalne usluge DOO Podgorica Utility 100.00% Local Direct LLC Registered 48 Komunalno - Lim DOO Bijelo Polje Utility 100.00% Local Direct LLC Registered 49 Komunalno DOO Andrijevica Utility 100.00% Local Direct LLC Registered 50 Komunalno DOO Berane Utility 100.00% Local Direct LLC Registered 51 Komunalno DOO Budva Utility 100.00% Local Direct LLC Registered 52 Komunalno DOO Cetinje Utility 100.00% Local Direct LLC Registered 53 Komunalno DOO Danilovgrad Utility 100.00% Local Direct LLC Registered 54 Komunalno DOO Kolašin Utility 100.00% Local Direct LLC Registered 55 Komunalno DOO Nikšić Utility 100.00% Local Direct LLC Registered 56 Komunalno DOO Rožaje Utility 100.00% Local Direct LLC Registered 57 Komunalno DOO Tivat Utility 100.00% Local Direct LLC Registered 58 Komunalno DOO Tuzi Utility 100.00% Local Direct LLC Registered 59 Komunalno i vodovod DOO Žabljak Utility 100.00% Local Direct LLC Registered 60 Komunalno Kotor DOO Kotor Utility 100.00% Local Direct LLC Registered 61 Komunalno Plužine DOO Plužine Utility 100.00% Local Direct LLC Registered 62 Komunalno stambeno DOO Herceg Novi Utility 100.00% Local Direct LLC Registered 63 Lokalni javni emiter "Radio - Kotor" DOO Kotor Information & Communication 100.00% Local Direct LLC Registered 64 Lokalni javni emiter "Radio i televizija Cetinje" DOO Cetinje Information & Communication 100.00% Local Direct LLC Registered 65 Lokalni javni emiter Radio Andrijevica DOO Andrijevica Information & Communication 100.00% Local Direct LLC Registered 66 Lokalni javni emiter Radio Bar DOO Bar Information & Communication 100.00% Local Direct LLC Registered 67 Lokalni javni emiter Radio Berane DOO Berane Information & Communication 100.00% Local Direct LLC Registered 68 Lokalni javni emiter Radio Danilovgrad DOO Danilovgrad Information & Communication 100.00% Local Direct LLC Registered 69 Lokalni javni emiter Radio i televizija Nikšić DOO Nikšić Information & Communication 100.00% Local Direct LLC Registered 70 Lokalni javni emiter Radio televizija Pljevlja DOO Pljevlja Information & Communication 100.00% Local Direct LLC Registered 71 Lokalni javni emiter Radio Televizija Podgorica DOO Podgorica Information & Communication 100.00% Local Direct LLC Registered 77 Montenegro – Integrated SOE Framework Assessment (iSOEF) 72 Lokalni javni emiter Radio televizija Rožaje DOO Rožaje Information & Communication 100.00% Local Direct LLC Registered 73 Lokalni javni emiter Radio televizija Ulcinj DOO Ulcinj Information & Communication 100.00% Local Direct LLC Registered 74 Lokalni putevi DOO Pljevlja Transportation 100.00% Local Direct LLC Registered 75 Lovstvo DOO Bar Agriculture 100.00% Local Direct LLC Registered 76 Luka Kotor AD Kotor Transportation 80.35% Local Direct JSC Registered 77 Mediteran reklame DOO Budva Information & Communication 100.00% Local Direct LLC Registered 78 Mediteranski sportski centar DOO Budva Arts & Recreation 100.00% Local Direct LLC Registered 79 Možura DOO Bar Environment and Ecology 100.00% Local Direct LLC Registered 80 Otpadne vode DOO Budva Utility 100.00% Local Direct LLC Registered 81 Park prirode Dragišnica i Komarnica DOO Šavnik Environment and Ecology 100.00% Local Direct LLC Registered 82 Park prirode Komovi DOO Andrijevica Environment and Ecology 100.00% Local Direct LLC Registered 83 Park prirode Piva DOO Plužine Environment and Ecology 100.00% Local Direct LLC Registered 84 Parking servis DOO Bar Transportation 100.00% Local Direct LLC Registered 85 Parking servis Budva DOO Budva Transportation 100.00% Local Direct LLC Registered 86 Parking servis DOO Berane Transportation 100.00% Local Direct LLC Registered 87 Parking servis DOO Bijelo Polje Transportation 100.00% Local Direct LLC Registered 88 Parking servis DOO Tivat Transportation 100.00% Local Direct LLC Registered 89 Parking servis Herceg Novi DOO Herceg Novi Transportation 100.00% Local Direct LLC Registered 90 Parking servis Nikšić DOO Nikšić Transportation 100.00% Local Direct LLC Registered 91 Parking servis Podgorica DOO Podgorica Transportation 100.00% Local Direct LLC Registered 92 Parking servis Ulcinj DOO Ulcinj Transportation 100.00% Local Direct LLC Registered 93 Parking servis DOO Žabljak Transportation 100.00% Local Direct LLC Registered 94 Pijace DOO Tuzi Agriculture 100.00% Local Direct LLC Registered 95 Plodovi Crne Gore AD Podgorica Agriculture 78.70% Local Direct JSC Registered 96 Pogrebne usluge DOO Budva Utility 100.00% Local Direct LLC Registered 97 Pogrebne usluge DOO Podgorica Utility 100.00% Local Direct LLC Registered 98 Pomorsko-turistička agencija Kotor-mar DOO Kotor Transportation 100.00% Local Indirect LLC Registered 99 Putevi DOO Podgorica Transportation 100.00% Local Direct LLC Registered 100 Radio televizija Kolašin DOO Kolašin Information & Communication 100.00% Local Direct LLC Registered 101 Regionalni biznis centar DOO Berane Scientific & Technical 100.00% Local Direct LLC Registered 102 Regionalni edukativni centar za održivi razvoj i poljoprivredu DOO Andrijevica Agriculture 100.00% Local Direct LLC Registered 103 Ski centar Hajla DOO Rožaje Arts & Recreation 100.00% Local Direct LLC Registered 104 Sportski centar Cetinje DOO Cetinje Arts & Recreation 100.00% Local Direct LLC Registered 105 Sportski centar DOO Berane Arts & Recreation 100.00% Local Direct LLC Registered 106 Sportski centar DOO Rožaje Arts & Recreation 100.00% Local Direct LLC Registered 107 Sportski centar Igalo DOO Herceg Novi Arts & Recreation 100.00% Local Direct LLC Registered 108 Sportski centar Žabljak DOO Žabljak Arts & Recreation 100.00% Local Direct LLC Registered 109 Sportski objekti DOO Podgorica Arts & Recreation 100.00% Local Direct LLC Registered 110 Sportsko rekreativni centar Budva DOO Budva Arts & Recreation 100.00% Local Direct LLC Registered 111 Sportsko-rekreativni centar DOO Bar Arts & Recreation 100.00% Local Direct LLC Registered 112 Tehno baza AD Nikšić Transportation 55.29% Local Direct JSC Registered 113 Tržnice i pijace DOO Podgorica Agriculture 100.00% Local Direct LLC Registered 114 Vaterpolo klub Budva-Budvanska rivijera DOO Budva Arts & Recreation 100.00% Local Direct LLC Registered 115 Vodacom DOO Tivat Utility 100.00% Local Direct LLC Registered 116 Vodovod "Bistrica" DOO Bijelo Polje Utility 100.00% Local Direct LLC Registered 117 Vodovod DOO Pljevlja Utility 100.00% Local Direct LLC Registered 118 Vodovod i kanalizacija - Cetinje DOO Cetinje Utility 100.00% Local Direct LLC Registered 78 Montenegro – Integrated SOE Framework Assessment (iSOEF) 119 Vodovod i kanalizacija DOO Andrijevica Utility 100.00% Local Direct LLC Registered 120 Vodovod i kanalizacija DOO Bar Utility 100.00% Local Direct LLC Registered 121 Vodovod i kanalizacija DOO Berane Utility 100.00% Local Direct LLC Registered 122 Vodovod i kanalizacija DOO Budva Utility 100.00% Local Direct LLC Registered 123 Vodovod i kanalizacija DOO Danilovgrad Utility 100.00% Local Direct LLC Registered 124 Vodovod i kanalizacija DOO Herceg Novi Utility 100.00% Local Direct LLC Registered 125 Vodovod i kanalizacija DOO Kolašin Utility 100.00% Local Direct LLC Registered 126 Vodovod i kanalizacija DOO Nikšić Utility 100.00% Local Direct LLC Registered 127 Vodovod i kanalizacija DOO Podgorica Utility 100.00% Local Direct LLC Registered 128 Vodovod i kanalizacija DOO Rožaje Utility 100.00% Local Direct LLC Registered 129 Vodovod i kanalizacija DOO Tivat Utility 100.00% Local Direct LLC Registered 130 Vodovod i kanalizacija DOO Ulcinj Utility 100.00% Local Direct LLC Registered 131 Vodovod i kanalizacija Kotor DOO Kotor Utility 100.00% Local Direct LLC Registered 132 Vodovod i kanalizacija Tuzi DOO Tuzi Utility 100.00% Local Direct LLC Registered 133 Zelenilo DOO Podgorica Environment and Ecology 100.00% Local Direct LLC Registered 79 Montenegro – Integrated SOE Framework Assessment (iSOEF) Annex 4. SOE and MOE financial performance: A more detailed look Top ten loss-making SOEs and MOEs. As discussed in the report, a number of SOEs and MOEs are consistently loss making. Tables A3.1 and A3.2 present the top 10 loss-making SOEs and MOEs in 2023, by earnings before interest and taxes (EBIT). While half of these companies are in network sectors (notably energy and transport sectors), it is worth noting that several of Montenegro’s top loss-making SOEs operate in predominantly commercial sectors. The latter include the state-owned wine producer Plantaže 13. Jul, the agricultural production company Montepranzo - Bokaprodukt AD Tivat, and the tourism company Montenegroturist AD Budva. When it comes to MOEs, all but one of the top loss-making MOEs are public utilities providing water supply, sanitation and general municipal services in several municipalities – likely linked to their high and not fully compensated PSOs. The only top loss-making municipal SOE that is not a public utility is the sports facility Sportski objekti DOO Podgorica. Table A3.1 Top ten loss-making SOEs by EBIT, 2023 Government Government EBIT Net loss # Company Sector transfers transfers as % (EUR (EUR ROA ROE (EUR mil.) of revenues mill) mill) 1 Plantaže 13. Jul Agriculture 0.2 0.7% -3.8 -5.9 -1.3% -1.6% 2 EPCG-Željezara Nikšić Energy - - -3.5 -3.5 -1432.3% -427.2% 3 EPCG-Solar-gradnja-Nikšić Energy 0.01 0.2% -2.7 -2.7 -1496.2% -92.9% 4 Željeznička infrastruktura Crne Gore Transportation 15.0 83.5% -2.4 3.1 -0.5% -0.6% 5 Montepranzo - Bokaprodukt Agriculture - - -2.1 -2.1 -117.7% -27.6% 6 Institut "Dr Simo Milošević" Tourism 3.5 33.0% -1.7 -1.9 -1.6% -2.2% 7 Montenegroturist Tourism - - -0.9 -0.9 -140.8% -292.5% 8 Castello Montenegro Manufacturing 0.03 34.0% -0.5 -0.5 -50.1% -88.9% 9 Održavanje željezničkih voznih Transportation - - -0.5 -0.9 -5.0% -7.2% sredstava 10 Montecargo Transportation 0.06 0.8% -0.5 -0.6 -1.4% -2.1% Total top 10 loss-making 18.9 -18.5 -22.2 -1.8% -2.2% Total negative EBIT of SOEs -18.8 -22.5 Share of top 10 loss-making in total SOE portfolio 98.3% 99.0% Source: Montenegro Tax Administration, World Bank Group staff calculations. Table A3.2 Top ten loss-making MOEs by EBIT, 2023 Government Government EBIT Net loss # Company Sector transfers transfers as (EUR (EUR ROA ROE (EUR mil.) % of revenue millions) millions) 1 Vodovod i kanalizacija Utility 0.4 3.0% -2.7 -3.8 -6.7% -8.7% 2 Čistoća DOO Podgorica Utility 0.3 3.7% -1.8 -1.8 -9.5% -15.5% 3 Vodovod i kanalizacija - Cetinje Utility - - -1.3 -1.5 -21.8% -13.2% 4 Komunalno - Budva Utility 0.01 0.2% -0.8 -0.9 -13.1% -16.5% 5 Društvo za izgradnju vodovodne i Utility - - -0.4 -0.02 -0.1% -1.3% kanalizacione infrastrukture - Herceg Novi 6 Komunalno Utility 0.01 0.8% -0.4 -0.3 -20.0% -11.7% 7 Komunalno - Lim DOO Bijelo Polje Utility - - -0.4 -0.4 -9.7% -22.3% 8 Vodovod i kanalizacija DOO Budva Utility 0.07 0.8% -0.3 -1.0 -4.5% -5.3% 9 Sportski objekti DOO Podgorica Other - - -0.3 -0.3 -13.1% -19.9% 10 Vodovod "Bistrica" DOO Bijelo Polje Utility 0.05 4.2% -0.3 -0.3 -8.1% -13.1% Total top 10 loss-making 0.8 -8.5 -10.4 -6.7% 15.7% Total negative EBIT of MOEs -11.0 -12.4 Share of top 10 loss-making in total MOE portfolio 76.8% 83.6 Source: Montenegro Tax Administration, World Bank Group staff calculations. 80 Montenegro – Integrated SOE Framework Assessment (iSOEF) Labor efficiency in SOEs and MOEs. The share of labor cost in total turnover is a common measure of labor efficiency. In 2023, this measure for Montenegro’s entire economy was 10.9 percent, while it was almost double this rate (20.3 percent) for SOEs and quintuple (56.4 percent) for MOEs. Excluding SOEs and MOEs for the economy average lowers the labor cost share in total turnover to 9.5 percent and thereby raises labor efficiency. Sectors with the lowest SOE labor efficiency (highest labor cost share in turnover) include commercial sectors such as industry, media, tourism, and agriculture (Figure A3.1) and those with the lowest MOE labor efficiency include media, agriculture, environment and utilities sectors (Figure A3.2). Sectors with higher SOE labor efficiency include energy and transportation, and these sectors also show higher profitability. Figure A3.1 Average SOE employee Figure A3.2 Average MOE employee costs/turnover, by industry and total, 2023 costs/turnover, by industry and total, 2023 Total (all industries) 20.3% Total (all industries) Energy 14.2% Transportation Transportation 27.1% Innovation and Technology 33.0% Energy Environment and Ecology 34.1% Utility Tourism 36.8% Environment and Ecology Agriculture 37.3% Other 46.8% Other Health care 47.8% Agriculture Media 50.4% Media Industry 50.5% 0% 20% 40% 60% 0% 20% 40% 60% 80% 100% Source: Montenegro Tax Administration, World Bank Group staff calculations. 81 Montenegro – Integrated SOE Framework Assessment (iSOEF) Annex 4. Laws applicable to SOEs in Montenegro General Legislation Applicable to All Relevant Companies, including SOEs • Companies Act • Law on Capital Market • Law on Takeover of Joint Stock Companies • Law on Audit • Law on Accounting • Law on Deadlines for Settlement of Monetary Obligations • Law on Concessions • Corporate Governance Code of Montenegro Stock Exchange • Rules of Montenegro Stock Exchange • Articles of Association of Montenegro Stock Exchange • Law on Improving Business Climate • Regulation on the Closer Criteria, Conditions and Method of Granting State Aid • Rulebook on the List of State Aid Rules Laws/Bylaws Applicable to Public Sector Entities (SOEs and General Government) • Law on Budget and Fiscal Responsibility • Law on State Property • Law on Management and Internal Controls in Public Sector • Law on Civil Servants and Employees • Law on State Audit Institution • Law on Free Access to Information • Law on Prevention of Corruption • Law on Financing of Political Subjects and Election Campaigns • Law on Public-Private Partnerships • Public Procurement Law • Rules of Procedure of Government of Montenegro • Governmental Decision on Dividends in SOEs • Law on the National Public Broadcaster – Public Media Service of Montenegro • Law on Wages of Employees in the Public Sector • Regulation on the Organization and Method of Work of State Administration • Law on Obligations • Property Law • Law on Accounting in Public Sector • Law on Realization of Public Interest in Public Enterprises and Institutions • Rulebook on the Content of the Annual Report on the Work of Internal Audit and the Execution of the Annual Internal Audit Plan • Rulebook on the Methodology of Internal Audit Operations in the Public Sector Sector-Specific Laws Applicable to All Companies in Relevant Sectors, including SOEs Energy Sector • Law on Energy • Law on Cross-Border Exchange of Electricity and Natural Gas • Law on Efficient Use of Energy 82 Montenegro – Integrated SOE Framework Assessment (iSOEF) Environmental Protection and Natural Resources • Environmental Protection Law • Law on Protection and Rescue • Law on Mining • Law on Geological Research • Law on Explosive Materials • Law on Protection of the Marine Environment • Law on National Parks Transport and Infrastructure • Law on Maritime Navigation Safety • Law on Maritime Domain • Law on Bar – Boljare Highway • Law on Roads • Law on Ports • Law on Railways • Law on Safety, Organization and Efficiency of Railway Transport • Law on Contractual Relations in Railway Transport • Law on Transport of Dangerous Goods • Law on Regional Water Supply of Montenegrin Coast • Law on Air Transport Tourism and Hospitality • Law on Tourism and Hospitality • Law on Tourist Organizations • Law on Sojourn Tax • Law on Mountain Trails • Law on Ski Resorts • Law on Rafting Consumer Protection and Economic Regulations • Consumer Protection Law • Law on Societal Activities Public Media and Communications • Law on National Public Broadcaster Radio and Television of Montenegro Healthcare and Social Services • Law on Healthcare Urban Development and Construction • Spatial Planning and Building Construction Law Source: World Bank Group (2024a). 83 Montenegro – Integrated SOE Framework Assessment (iSOEF) Annex 5. Policies applicable to SOEs in Montenegro At the time of writing, Montenegro had no overarching policies, strategies, or plans applicable specifically to SOEs. Therefore, the strategic documents listed below are specific to particular sectors and apply to all companies or establishments operating in the sector, including SOEs, although some include guidance specific to SOEs as well. Policy or Strategy Brief Description Areas Related to SOEs Energy Development The strategy outlines key SOEs should align their objectives with Strategy of objectives for Montenegro's goals of the Strategy. Montenegro until energy sector, including 2030 ensuring a reliable energy supply, fostering a competitive and open energy market, and promoting sustainable energy development through the efficient use of resources and increased reliance on renewables. The strategy is a complex document, involving numerous projects and energy system upgrades The Strategy aims to improve Health Development the healthcare system's The strategy provides that "Dr. Simo Strategy of effectiveness and population Milošević" Institute in Igalo, a JSC, plays a Montenegro 2023- health by focusing on primary key role in Montenegro’s health tourism 2027 care, enhancing multisectoral sector, known for its expertise, collaboration, and adopting a innovation, and community "One Health" approach. It contributions. Despite its significant role, emphasizes better emergency the Institute is facing operational issues preparedness and response, as that necessitate a multi-sectoral effort to well as improving the quality find sustainable solutions. and efficiency of healthcare services across all levels. Focuses on sustainable management of agricultural Agriculture and Rural The strategy mentions Plantaže, a leading resources, ensuring a stable and Development producer of grapes and wine in safe food supply, and improving Strategy of Montenegro, but does not delve into the rural living standards. It aims to Montenegro 2023- development strategy of the company. preserve the environment, 2028 No specific actions or objectives related maintain traditional values, and to SOEs are provided. boost the competitiveness of food producers Transport Assesses the current state of The strategy mentions various SOEs in Development transportation and sets forth the transport sector, such as railway and Strategy of both infrastructural maritime companies, but does not delve 84 Montenegro – Integrated SOE Framework Assessment (iSOEF) Montenegro 2019- and operational goals for the into their business operations or provide 2035 transport system a strategy for their development. The strategy highlights that Održavanje Key priorities include improving željezničkih voznih sredstava AD (Rail railway infrastructure, Vehicle Maintenance), a JSC with 94% restructuring state-owned state ownership, has proven being Railway Development railway companies, ensuring the financially unsustainable. It recommends Strategy 2017-2027 financial stability of both the integrating this activity into the sector and its companies, and passenger transport company (Željeznički aligning railway institutions with prevoz Crne Gore AD - JSC, 96% state- EU requirements owned) and the freight company (Montecargo - JSC, 85% state-owned). The strategy mentions the restructuring of shipping companies Crnogorska Aims to identify and define plovidba AD Kotor (JSC, 99.9814% state- Maritime Economy development directions for owned) and Barska plovidba AD Bar (JSC, Development Montenegro's maritime 18.6% state-owned directly and 33.2% Strategy 2020-2023 economy, enhancing the through agencies) to achieve with Action Plan sector's role in national growth sustainability and financial stability. It 2020-2021 and competitiveness. also mentions reconstruction and modernization efforts for existing port facilities, including Port of Bar (Luka Bar AD - JSC, 78.5% state-owned). Tourism Emphasizes efficient resource The strategy mentions various SOEs in Development use and positions Montenegro the tourism sector but does not delve Strategy of as a green, inclusive, and smart into their business operations or provide Montenegro 2022- tourist destination, aligning with a strategy for their development. 2025 the National Sustainable Development Strategy 2030 and UN sustainability principles. This strategy identifies select SOEs as Elaborated in 2016 by the then entities responsible for the Ministry of Sustainable implementation of specific strategic Development and Tourism. goals, notably the Public Enterprise for Outlines key unsustainable National Strategy for National Parks and the Public Enterprise development trends affecting Sustainable for Marine Property Management of human, social, natural and Development until Montenegro. It does not set forth any economic resources in 2030165 broadly applicable sustainability goals or Montenegro. Establishes targets related to the SOE portfolio as a strategic goals to mitigate these whole. It references company reporting trends, including improving on sustainability practices, but without a social inclusion, preserving specific reference to SOEs. 165 Note that this report has not undertaken a comprehensive mapping of all of Montenegro’s climate-change adaptation policies or strategies, some of which do include references to specific SOEs. The two such documents outlined here (the National Strategy for Sustainable Development until 2030 and the Nationally Determined Contribution) are presented as illustrative examples. 85 Montenegro – Integrated SOE Framework Assessment (iSOEF) natural capital, and introducing a green economy approach. Sets a target of 35% reduction in Montenegro’s greenhouse gas Some specific climate mitigation Montenegro’s emissions by 2030, as compared measures outlined in Annex II are directly Nationally to base year 1990, with applicable to specific SOEs, e.g., the Determined implementation beginning in planned ecological refurbishment of the Contribution (NDC) to 2021. Outlines several specific Pljevlja Thermoelectric Power Plant (a the United Nations climate mitigation measures, subsidiary of state-owned EPCG) and the Framework e.g., related to energy efficiency, foreseen application of specific emissions Convention on renewable energy development, limits to the state-owned aluminum plant Climate Change transport infrastructure and KAP, as well as its participation in an improvements in waste emissions trading scheme. management. Source: World Bank Group (2024a), Montenegro Ministry of Sustainable Development and Tourism (2016) and United Nations Framework Convention on Climate Change (2025). 86 Montenegro – Integrated SOE Framework Assessment (iSOEF) Annex 6. Audits of 13 largest SOEs (2023) SOE Audited FS Auditors Frequency of Auditor's Most common issue raised in audit Accounting Auditing change opinion166 standards standards EPCG Yes BDO Annual Qualified Ownership of tangible assets, inventory balances IFRS ISA CEDIS Yes BDO Annual Qualified Ownership of tangible assets, inventory balances IFRS ISA CGES Yes E&Y Annual Unqualified - IFRS ISA Rudnik Uglja Yes BDO Annual Unqualified - IFRS ISA ToMontenegro Yes BDO Annual Unqualified - IFRS ISA Aerodromi Yes 167 Racio mont Annual Qualified Ownership of tangible assets, other receivables balances IFRS ISA Monte put Yes Reviko Annual Unqualified - IFRS ISA Plantaže Yes Catarro Audit Annual Unqualified - IFRS ISA Budva Riviera Yes MV Konsalt Annual Unqualified - IFRS ISA JP RT CG Yes MV Konsalt Annual Unqualified - IFRS ISA Željeznička Yes ABC Global Annual Unqualified - IFRS ISA Infrastruktura Investiciono- Yes Crowe MNE Annual Unqualified - IFRS ISA razvojni fond Institute Savo Yes HLB Mont Annual Qualified Ownership of tangible assets, provisions and wages IFRS ISA Milošević calculation, share capital unmatched 166 Under the International Standards on Auditing (ISA), there are four types of audit opinions: Unqualified opinion (”clean”) – indication that financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework; Qualified opinion – indication that the auditor identified material misstatements or departures from financial reporting framework; Adverse opinion – issued when the financial statements contain material misstatements that are pervasive and significantly affect the overall reliability and presentation of the financial information; Disclaimer of opinion – issued when the auditor is unable to obtain sufficient appropriate audit evidence to form and opinion on the financial statements. 167 The most recent audited financial statements for Aerodromi Crne Gore (Montenegro Airports) are for the year ending December 31, 2022. 87 Montenegro – Integrated SOE Framework Assessment (iSOEF) Annex 7. Laws relevant to SOEs and market competition • Law on Protection of Competition, bylaws, strategies and policies that regulate Competition • Company Law ("Official Gazette of Montenegro", no. 65/2020, 146/2021 and 4/2024) • Law on Public Enterprises ("Official List of SRCG", no. 6/91 of 19.2.1991 – out of force) • Law on realization of public interest in public enterprises and institutions ("Official List of SRCG", no13/91 i 16/91) • Law on State Aid Control ("Official Gazette of Montenegro", 12/2018) and accompanying regulations and rulebooks • Law on Public Procurement ("Official Gazette of Montenegro", no. 74/2019, 3/2023 and 11/2023) • Bankruptcy Law ("Official Gazette of Montenegro", no. 1/2011, 53/2016, 32/2018 - Decision of the US of Montenegro, 62/2018 - Decision of the US of Montenegro and 1/2022) • Law on Bankruptcy and Liquidation of Banks ("Official Gazette of Montenegro", no. 62/2008, 44/2010) • Law on Foreign Investments ("Official Gazette of Montenegro", no. 18/2011, 45/2014 and 73/2019) • Land Code (Montenegro does not have a comprehensive Land Code, instead, it relies on the Law on property-legal relations, "Official Gazette of Montenegro", no. 19/2009) • Law on Privatization (no. 23/96, 6/99, 59/2000 i 42/2004) • Law on Concessions (no. 8/2009, 73/2019 i 125/2023) • Energy Act ("Official Gazette of Montenegro", no. 5/2016, 51/2017, 82/2020, 29/2022, 011/24), by-laws, Rulebooks, and other acts issued by the Ministry of Energy. • Law on Public Utility Services (Official Gazette of Montenegro", no. 055/16, 074/16, 002/18, 066/19, 140/22) • Law on Development Bank ("Official Gazette of Montenegro ", no. 99/2024) • Laws regulating Tourism Sector, mainly: Law on Tourism and Hospitality, Law on Tourist Organizations, Law on Maritime Property, bylaws and acts issued by the SOE Javno Preduzeće Morsko Dobro and Ministry of Tourism. • Railway Law (no. 27/2013 and 43/2013) • Law on Air Transport (“Official Gazette of Montenegro” No 30/2012) • Law on Inspection Control (“Official Gazette of the Republic of Montenegro” No 29/2003, “Official Gazette of Montenegro” No 76/2009 and 57/2011) • Law on Ports (“Official Gazette of Montenegro” No 51/2008, 40/2011) • Law on Maritime and Inland Navigation (no. 19/78, 8/79, 19/87, 22/90 i 13/91) • Laws regulating Other Sectors, mainly: Law on Health Care, Law on Banks, Law on Electronic Communications, Media Law, Law on Electronic Media, Law on Law on the National Public Broadcaster Radio and TV of Montenegro and other related acts and sub-laws in the covered sectors. 88