SERBIA'S PENDING PUBLIC SECTOR REFORM NOT ENOUGH

UNCLAS SECTION 01 OF 03 BELGRADE 001228

SENSITIVE
SIPDIS
USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH

E.O. 12958: N/A
TAGS: ECON EINV ETRD EFIN SR
SUBJECT: SERBIA'S PENDING PUBLIC SECTOR REFORM NOT ENOUGH

Summary
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1. (SBU) Serbia is moving forward in cutting its bloated state
bureaucracy in an effort to pacify the IMF's calls for Serbia to
shrink its budget deficit. In its first step, the Serbian Government
adopted a draft law that cuts state administration by 10% and sent it
to the Parliament with the promise that this is just the beginning of
serious public sector reform. Independent trade unions and analysts
accused the Government of hastily doing such a complex task only to
please the IMF, without any real consideration of the impact.
Officials in the Finance Ministry told us the action would have a
minimal impact on budget costs since it excluded core spending in
education, health, and security institutions. Experts claim this
would be a small - and easy - step in the right direction, but the
desperately needed public sector reform had to be much broader. End
summary.

Law on Reducing State Employees Sent to Parliament
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2. (U) On October 9, the government agreed to send a draft Law on
Establishing the Maximum Number of Employees in Administration to the
Parliament for adoption. This was the first step in public sector
reform, Prime Minister Cvetkovic told the press after the government
session. Cvetkovic said the law would cut administration by 10%, or
by 3,400 employees, by January 1, 2010. The cut would include all
agencies and ministries except Interior, Defense, the State Security
Agency (BIA),and prison administration (part of the Justice
Ministry). The proposed law would also restrict the total number of
full time employees working for the state administration to 28,400,
and the number of part-time employees to 2,840 (10% of the number of
permanent employees). Parliament plans to debate the law by the end
of October.


3. (SBU) In addition to this draft law, on October 22 Government
forwarded to the Parliament the draft Law on Establishing the Maximum
Number of Employees in Local Administration limiting it to four
employees per 1,000 citizens, what would result in 5,468 job cuts.
Several local mayors told us on October 19 that the government had
done little to consult with them on these potential local cuts. In
addition, Cvetkovic said that separate from the central and local
administration cuts, the Government had adopted plans to lay-off
2,500 persons from the judicial system.

The State Keeps Growing and Growing
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4. (U) Local press reported that since the end of the Milosevic era,
Serbia's central administration has grown from 8,100 employees in
2000 to over 30,000 in 2009. Currently there are an estimated 34,000
workers supporting the administrative work of the government
ministries. Essentially these are policy people and support staff
based primarily in Belgrade. While some of this growth was due to
unchecked political patronage, a significant portion of the growth is
because the Serbian state apparatus assumed many functions from the
former federal administration (around 12,000 employees) after the
dissolution of At that time, Serbia assumed responsibility for the
Ministries of Foreign Affairs and Defense, as well as various
offices, such as the Weather Service.


5. (U) Serbia's public sector (i.e. state administration, local
governments and public companies) employs roughly ONE quarter
(619,000) of the 2.6 million persons currently working in Serbia,
World Bank Country Economist Lazar Sestovic told us on October 20.
Out of this number, the Central Government employs 34,000 in central
administration. Local self-government (municipalities) have 38,000
employees paid from their local budgets. The police, military and
security agencies employ around 90,000 people. Education and HEALTH
services have around 130,000 employees each. Public companies,
including local utilities and state companies such as JAT Airways,
Serbian Railways, Serbian Electric Power(EPS),Telekom, and Srbijagas
have over 170,000 people on their payrolls.

Objective Standards, But No Savings until 2011
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6. (U) Staff cuts would be determined by the "necessity of the
position" and the "professional and unbiased evaluation" of each
employee, Deputy Prime Minister Mladjen Dinkic told the press on
October 9. To compensate for the hit, laid-off workers would receive
severance packages, while employees with less than five years until
retirement would not be cut. Both PM Cvetkovic and DPM Dinkic
avoided stating the actual savings for the upcoming 2010 budget and
would not speculate as to whether the cut would be enough to satisfy

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the IMF's request for Serbia to cut its projected 2010 budget deficit
by 0.5% of GDP to 3.5%. Instead, Cvetkovic and Dinkic explained that
the real savings would be visible beginning in 2011 and that the job
cuts would bring more indirect savings by simplifying procedures for
citizens and businesses by reducing bureaucracy. Cvetkovic said he
hoped that Serbia would gain more credibility with the IMF once it
showed it was serious about reform.

Resistance By Ministers: No Cuts In My Ministry
-------------- --


7. (SBU) The government's draft law will likely face strong debate
in the Parliament. Opposition Democratic Party of Serbia (DSS) has
already called for the Parliament to oversee the cuts, while several
members of the ruling coalition have criticized the draft law as
well. Infrastructure Minister Milutin Mrkonjic, from the Socialist
Party of Serbia (SPS),stated on September 18 that he was against the
cuts and that he would vote against them at the government session.
"I have 190 employees in my Ministry, they all work and I am happy
with them. The Serbian government's duty is to hire all of its
citizens, and I don't see what we get by firing people," Mrkonjic
said. Dragan Markovic Palma, leader of United Serbia party, said on
September 28 that he was against cuts in any department and that the
government should look for possibilities to create new jobs instead.
However, Palma said he would respect the decision if the law was
adopted. Even Milan Markovic, Minister of State Administration and
Local Self-Government and member of the Democratic Party (DS),stated
in an interview to daily Politika on September 16 that he would not
cut staff in his ministry since it did not have any excess labor.
Rather than cutting staff, many in government have submitted requests
to expand the size of ministries. The head of the Finance Ministry's
budget preparation department Svetlana Anokic told us that she had
received requests for 8,800 new jobs in state administration.

State Secretary, Budget Office Head: Not Enough
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8. (SBU) Finance Ministry State Secretary Vuk Djokovic told us
unofficially on October 14 that this law touches "only the tip of the
iceberg" and does not go deep into reforms. "We are not touching
education, health, defense, police, where the big numbers are. This
is just a cosmetic change done at the wrong time, at a moment when we
need to work on accession to the EU which is a huge task for the
administration," Djokovoic said. Anokic told us on October 15 that
the actual savings that this cut would bring to the 2010 budget was
minimal, due to the need to pay severance packages. As a result, the
government would save in 2010 just $14.3 million compared to an
expected deficit of $1.7 billion. She claimed this would be
insufficient to satisfy the IMF's demand to cut the projected 2010
deficit to 3.5% of GDP, or $215 million.

Trade Union Nezavisnost: Against Draft Law
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9. (U) Trade unions are typically divided on the proposed law: while
the largest trade union (SSSS) supported the draft law, the second
largest trade union Nezavisnost (Independence) rejected the draft and
accused SSSS of always nodding yes to the government. At an October
15 round table, Nezavisnost leader Branislav Canak stated that the
draft law was "very frivolous, irresponsible, hasty and not
statesmanlike" and in direct opposition to Serbia's labor law and
parts of the General Collective Agreement. Instead of taking a few
years for such an important strategic reform, the Government was
doing this quickly on the eve of the IMF visit, Canak said. He
speculated that the IMF would not swallow this and would only give
its support to Serbia under unfavorable terms. Canak said that party
membership would be the key criteria for keeping positions. This
would leave the administration full of incapable employees who had
jobs only because of their party membership, said Canak.


10. (U) Justice and police trade union leaders complained at the
round table they were not even invited to the dialogue with the
government, and claimed this was not a good time to reform the state
when Serbia's unemployment rate was already more than 16%. However,
all union representatives at the round table agreed that public
sector was too large for the size of Serbia's economy and that
eventual rationalization was necessary. The unions, however, said
they were responsible to employees and claimed there were other ways
to save budget funds such as addressing corruption and the gray
economy.

Experts: Reform Must Be Much Broader
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11. (SBU) Miladin Kovacevic of the Economic Institute think-tank

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told us on October 16 that this law was just "one small step in the
right direction." Kovacevic said cutting state administration was
one small part of three goals for wider reform: reducing public
consumption; increasing public sector efficiency; and establishing
sustainable social functions of the state with regard to pension and
health funds. Kovacevic explained that for Serbia, public sector
reform was a must and that Serbia had hit the wall since the current
growth model based on the inflow of foreign funds, previously fueled
by privatizations and FDI, had been exhausted. If Serbia does not
reform its public sector it will "continue to face an economic
crisis, including debt crisis as soon as next year. Serbia will
remain a poor country of poor citizens and pensioners," Kovacevic
said.

COMMENT
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12. (SBU) While Serbia's first attempt at public sector reform is
laudable, real reform needs to be much deeper and broader. Serbia
cannot expect to claw its way out of the economic crisis solely by
trimming the margins of its budget. Only with comprehensive reform
that seeks to reduce the public sector's role in the overall economy
can Serbia reposition itself for a post-crisis economy. To do that
will require greater political will and a firm stance by the IMF
during upcoming negotiations. End Comment.
BRUSH