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Mimicking reforms? Why corruption within state owned enterprises remains a key problem in Moldova

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Summary:
The European Parliament recently passed a resolution criticising Moldova’s progress in improving democratic standards and the rule of law. Alexandru Damian highlights the role of state owned enterprises in this wider picture. He argues that standards of reporting, transparency and accountability remain poor despite EU pressure for reforms, leaving the door open for state owned enterprises to be used as a reward system for political allies or a source for extracting public resources. Moldova is once again under the spot light in Brussels. A European Parliament resolution on Moldova, passed on 14 November, continued the harsh and critical tone used by the EU when referring to the country’s lack of progress on its path towards European integration. With macro financial assistance postponed,

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Mimicking reforms? Why corruption within state owned enterprises remains a key problem in MoldovaThe European Parliament recently passed a resolution criticising Moldova’s progress in improving democratic standards and the rule of law. Alexandru Damian highlights the role of state owned enterprises in this wider picture. He argues that standards of reporting, transparency and accountability remain poor despite EU pressure for reforms, leaving the door open for state owned enterprises to be used as a reward system for political allies or a source for extracting public resources.

Moldova is once again under the spot light in Brussels. A European Parliament resolution on Moldova, passed on 14 November, continued the harsh and critical tone used by the EU when referring to the country’s lack of progress on its path towards European integration. With macro financial assistance postponed, budget cuts for insufficient commitments on judiciary reform and a recent European Parliament joint motion for resolution, widely supported, underlining “the deterioration of the rule of law, of democratic standards and the excessive politicisation of state institutions, Moldova’s quality of democracy is decreasing.

However, despite international pressure and EU backed reforms, Moldova remains more vulnerable than ever to state capture, politicisation and the perils of almost non-existent accountability mechanisms. State owned companies, either national or local ones, remain one of the most vulnerable areas and the extent of state capture and clientelism is increasing. While Western Europe is pushing for market liberalisation and enhanced competitiveness of remaining state owned enterprises, the oversized state sector in the EU’s Eastern neighbourhood is subject to discretionary control and clientelistic distribution.

The state owned companies’ sector seems to be particularly overlooked and is rarely under scrutiny at the EU level, largely due to other pressing challenges associated with the rule of law in Moldova. Key headlines in the EU’s recent reports have focused on the lack of real judiciary reforms, the recent invalidation of municipal elections in Chisinau, and the decision to change the electoral system despite the recommendations of the Venice Commission. However, discretionary access to wide public resources is a key component for ruling parties wishing to create networks of loyalties and rewards to help them win elections. More focus must be given to this sector and it should be prioritised in the EU’s recommendations and conditionalities for Moldova.

Political control over public resources – mimicking reforms under EU pressure

In a recent EUROPP article, it was argued that a widespread lack of accountability in managing public resources is threatening the quality of democracy in Central and Eastern Europe, drawing on recent research coordinated by the Romanian Center for European Policies on Romania, the Czech Republic and Bulgaria concerning the state owned companies sector.

Moldova is no exception here. With more than 800 state owned enterprises (228 national ones and 575 local ones), controlling almost a third of GDP and employing more than 20% of employees, such companies are often easy targets for corrupt and clientelistic approaches. Given their non-transparent and opaque activities, and with a scattered distribution across the country, monitoring these companies is a difficult undertaking, which contributes to the lack of public scrutiny and creates opportunities for state capture.

Many civil society actors in Moldova have portrayed state owned enterprises as an oasis for political clientelism. Investigative journalists have also revealed large networks of political appointments and nepotism. State owned enterprises continue to lie outside of the Public Procurement Act and, combined with minimal transparency and almost no accountability, there is fertile ground for state capture, the extraction of public resources for private or political interests, and a lack of merit based appointments.

EU backed reforms in modernising the state owned enterprise sector in Moldova may represent a good start, but without the political will to implement them, their positive impact will be minimal. Reforms are indeed being initiated in Moldova, under EU pressure, but they are largely cherry picked and are not affecting the continuous discretionary use of resources through state owned enterprises.

Moldova’s new legislative framework

The latest reform put forward is a new legislative framework regulating the activity of municipal and national enterprises. But it follows a similar pattern, mimicking real reform, imposing minimal standards for companies, and neglecting critical requirements for modernising the state owned enterprise sector. This is happening despite EU pressure, numerous calls from Moldova’s civil society to adopt modern legislation, and while ignoring most of the OECD standards on corporate governance.

There are at least four major issues with the new reform when it comes to regulating state owned enterprises. First, there are almost non-existent standards for selecting management boards of companies. This is despite media and civil society actors raising concerns about high-level positions being used as rewards for political sponsors and their relatives. Transparency International Moldova, for instance, have stated that such appointments “are politically driven, their transparency being almost non-existent”.

Mimicking reforms? Why corruption within state owned enterprises remains a key problem in Moldova

EU-Moldova Association Council in March 2017, Credit: EEAS (CC BY-NC 2.0)

The legislation also maintains the possibility for the same person to be simultaneously a member of the management board in three state owned companies and three municipal companies. These positions are usually paid at a rate above the average salary in Moldova, which highlights the importance of controlling these appointments for the ruling parties.

Second, there are deficiencies when it comes to accounting and auditing at state owned enterprises. One of the conditions of the EU’s financial assistance to Moldova is that there must be audits and better levels of transparency at state owned enterprises. But following numerous restrictions imposed in the Moldovan legislation, only twenty-three state owned enterprises will be audited in the end (under 3%), underlining once more that EU backed reform is only formally imposed and often fails to produce substantive gains.

Third, Moldovan state owned enterprises publish minimal data for transparency purposes, and such data is usually incomplete and difficult to evaluate from the perspective of an independent observer. Large numbers of companies lack websites or do not update them, nor do they reply to freedom of information requests. The new legislation, although imposing some minimal standards of transparency, foresees no sanctions in case companies fail to comply, perpetuating the current status quo.

Finally, the public procurement process in the case of state owned enterprises is not part of the Public Procurement Law, thus creating fertile ground for state capture. The procurement plans are not public and do not follow the legal framework, making them difficult to monitor by independent bodies. The Court of Accounts showed numerous cases of fraudulent procurements or a strict preference for direct procurements.

Ultimately, the role of state owned enterprises in Moldova risks transitioning from the provision of adequate public services and turning a profit (if they ever achieved this) to acting as a reward system for political allies or a source for extracting public resources. The consequences of this for the country are potentially severe.

The need for accountability and real reforms

Corruption and state capture within state owned enterprises in Moldova has yet to be mitigated. On the contrary, despite the four years that have passed since the signing of the Association Agreement with the EU, the Moldovan public companies have yet to reach minimal standards of reporting, transparency or accountability. The large public resources owned by state owned enterprises are used on a discretionary basis and they have escaped public scrutiny. Meanwhile the reforms initiated under EU pressure have failed to produce any real gains as they have been superficially implemented.

In the recent European Parliament resolution on Moldova, the Parliament “reiterated its concerns over the concentration of economic and political power in the hands of a narrow group of people”. State owned enterprises remain a key part of this wider picture.

Note: This article gives the views of the authors, not the position of EUROPP – European Politics and Policy or the London School of Economics.

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About the authors

Alexandru Damian – Romanian Centre for European Policies
Alexandru Damian is a Researcher at the Romanian Centre for European Policies. He is involved in projects related to foreign affairs, the Eastern Partnership, the judiciary and anti-corruption. He is a graduate of Political Science and has an MA in EU Studies from the Free University of Brussels.

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