BAZAAR GOVERNANCE Costs of clientelism in the local administration and state owned companies EFOR annual report 2018 Authors: Sorin Ioniță Otilia Nuțu Septimius Pârvu Bucharest, 2018 Report #62 The report can be read on www.expertforum.ro/annual-report-2018 The map of clientelism is accesible on www.expertforum.ro/en/clientelism-map EFOR acknowledges the support of www.termene.ro BAZAAR-TYPE GOVERNANCE ................................................................. 2 CLIENTELIZATION OF FUNDS FOR MUNICIPALITIES. BAZAAR-TYPE BUDGETS ............................................................................................... 7 CLIENTELISM IN STATE-OWNED ENTERPRISES……………………………… 26 RISKS OF POLITICIZATION IN ECONOMIC GOVERNANCE .................... 37 INTRODUCTION Romanian), to the salary increases in two waves: for mayors and the other BAZAAR-TYPE GOVERNANCE elected representatives, in fixed amounts provided by law; for civil servants (a great amount), at intervals This is a study on the huge costs of that gave room for a margin of local uncertainty, lack of consistent rules decision-making. and permanent negotiations to share public resources, which have come to The local authorities enthusiastically be synonymous to politics in Romania cooperated in this vandalism. and the region. It is, in other words, a Municipalities ventured to give the study on “bazaar governance”. highest salaries, without any consideration for sustainability; in the We focused in particular on two very end, if it was allowed, why not? The important dimensions of the public future doesn’t matter anyway. The sector: the transfers of local timeline for governance in Romania development funds, which are the was reduced not to an election cycle, main source of investment in the which was bad anyway, but to no public infrastructure at sub-national more than five-six months, which is level in Romania and all over Europe; catastrophic. and State-Owned Enterprises, (SOEs). The effects became visible right before the end of 2017, when not only the The territorial allocation of investment poor communes in Moldova, which had funds (plus the public procurement increased the average salaries of their process that follows) and public, few employees, were left out of State-owned or municipal enterprises, money, but even the municipalities in are the main sources of political Bucharest, which silently started to patronage and illicit resources for the unify and restructure jobs. political parties. If such taps were to be controlled in a more transparent And we said “without measure“, which and objective way, the Romanian is not entirely true. The 3,185 mayors politics would be deprived of 80-90% of the country are rational beings who of the resources it now relies on in respond to incentives. But, in fact we campaigns and party-building. see that: (a) the one who is well- connected politically or irresponsible, Our 2018 report summarizes the who promises money he does not results of more EFOR projects that have, starts three projects and assess clientelism in these two finishes none, so that he can ask for domains that are crucial for the more money, gets more money at the governance system. end of the year when he screams for For instance, let us look at the emergency aid; while (b) the one who deterioration of the administration of is thrifty is taken for a fool, gets in local communities. Ever since the bad with the rest, and sometimes beginning of the year, USL (Social even the money put aside from its Liberal Union) 2.0 has “blessed” the own sources are taken away from him. local administrations with a wealth of This logic applies mutatis mutandis to gifts, from Ordinance 6 with SOE managers as well. engagement loans worth 30 billion, Plan B, i.e. good governance, stands inexistent money (also called no chance, no matter how much the Shhaideh ordinance-beyond measure UE shoves it down your throat. You - ordonanţa-Shhaideh-fără-număr in Policy brief 62 | 2018 Annual Report can be the most honest local long tongue (let’s say, “better representative or manager of state- politicians“ in the Romanian sense owned company, you can have a of the word), but a type of Harvard management diploma: in a governance that erodes the total year or two, you are forced to adapt stock of public resources, by to plan A, the only plan possible in an discouraging the best ones: environment that is highly politicized, motivation moves from reforms to a unpredictable and characterized by chaotic fight for redistribution, and the negotiations of the spoil under the time and energy of a mayor or smart table. You either follow it or you take SOE manager will be spent with lobby off, banished by the voters and rent-seeking. In the end, all of themselves, or your own shareholders society becomes poor, as we know and employees (in other words, the from the sultanists of the 80s, even if State itself). some, who are now privileged, may take pride in an achievement now and This implacable counter-selection then. takes us back, step by step, to the model of administration of the last The European good governance years of the Ceaușescu era, called by system creates stability and certainty; the researchers of that time the other breeds uncertainty and tight sultanism: the most perverse and timeline for programming and carrying cynical version of authoritarianism, out any investment. The former based on tribal connections and system maximizes the use of money, systemic corruption instead of a because it can be planned ahead and specific management ideology or spent wisely. The latter system doctrine, in which the official rule and reduces the value of the same amount reality were far apart from each other. of money, for obvious reasons: And why is this a problem? In the (1) The money obtained by lobby end, someone might honestly ask why comes when least expected and must this fuss around clientelism, if it be spent fast, otherwise you lose it makes things work? After all, this is and don’t know whether you are going how politics works everywhere in the to receive it the following year. Any world: whoever is on top, wins. This whole trader knows that prices of time, our party is in power, so we get goods and services are higher when to cream off; next time, you will be in you buy them last minute, under the power and do the same. At country pressure of time. For instance, when level, the resources are the same, the the municipality receives the funds in only difference is that they are December and throws them out the directed to municipalities or window on God knows what, with the companies that are “smarter” and sole intention of not giving them back know how to elbow their way. That’s to the State budget. life, communities that want to grow (2) Second, companies that work with www.expertforum.r must find more cunning managers. municipalities or the State company This report is meant to answer this will automatically increase the price of particular question: what is wrong goods and services, charging a risk with clientelism in the public sector. premium, which is even higher as o Our arguments in the sections below allocations are discretionary and is that a bazaar-type governance is unpredictable. Uncertainty in a not only a neutral allocation to the bazaar-type governance comes costs. 3 advantage of some, who have a Bazaar-type governance (3) Third, if the national budget Moreover, a severe counter-selection makes bazaar allocations, then the on the long term arises, which mayors and company managers will discourages professionalism in be drawn in such “soft” game; their institutions and public and private interest in absorbing EU funds will companies. continue to drop, through projects that are more difficult to develop and easier to check, as it really happens: In a nutshell: in the second EU financing cycle Bazaar-type governance and (2014 - 2020), absorption is lower budgets create more expensive than in the first cycle on the same public goods and services; date, a phenomenon that the Minister of European Funds himself pointed to Misuse of money with a short at the beginning of 20181. life and affected by the uncertainty of allocation, low (4) Fourth, if on a YOY basis funds are efficiency and ad-hoc priorities; allocated to smart beneficiaries, which are well connected politically, instead Bazar-type governance of those that make the best technical discourages innovation and projects, people will learn and will investment in real expertise, on adapt to the rules of the game: the long term; it is locally, nobody will invest in the opportunistic and favours spot capacity to write and carry out good transactions; projects, but in lobby mechanisms. As long as the rules of the People are not that irrational to invest game encourage bazaar-type in something that does not bring them budgets, the public any advantage. stakeholders’ interest in the In other words, a counter selection absorption of EU funds, more will occur in the public administration difficult and more transparent, and SOEs: fewer experts, more smart will continue to drop, despite people and intermediaries, plus jaded the official statements and obedient civil servants, who sign declaring them as priorities; anything the boss tells them to. Only stable and transparent Politically and economically solid rules, which enable real networks appear, with companies that prioritization and multi-annual win most of the tenders most of the planning, increase the value of times, although they do not have the the public resources spent; best offers and sometimes not even Good governance and the capacity to deliver, as shown in innovation will occur only if we the latest EFOR report. change the system of And what is most important for us incentives for the local elected www.expertforum.r citizens, as a result of all such effects, representatives and SOEs; in is that the same amount from the other words, if we change the public funds is worth differently, rules of the game.