Implementation of Infrastructure Projects on Railway

2020

Republic of Serbia GOVERNMENT OF THE REPUBLIC OF SERBIA ANTI-CORRUPTION COUNCIL 72 No: Official July 29, 2020 B e l g r a d e

IMPLEMENTATION OF INFRASTRUCTURE PROJECTS ON RAILWAY

Table of Contents

1. INTRODUCTION ...... 2 1. INFRASTRUCTURE RAILWAYS OF SERBIA JSC ...... 3 2.1. Belgrade-Budapest high-speed rail line project ...... 3 2.2. Main Railway Lines ...... 7 2.3. Regional railways ...... 8 2.4. Žeželj's bridge, road crossings and other projects ...... 8 3. “SERBIA CARGO” JSC ...... 9 4. “SERBIA TRAIN” JSC ...... 10 5. CONCLUSION...... 12 6. RECOMMENDATIONS: ...... 14 7. ANNEXES TO THE REPORT: ...... 15 Annex I ...... 16 Annex II ...... 30 Annex III ...... 36

1. INTRODUCTION

Corporate restructuring of the “Serbian Railways” JSC Belgrade started in accordance with the project task of the World Bank. Assembly of the “Serbian Railways” JSC, at its session held on May 11, 2015, passed a decision on the change of the status of “Serbian Railways” JSC. The Government of the Republic of Serbia, by Decision 05 number 023-7362 / 2015 of July 2, 2015, gave consent to the Decision on the status change of the “Serbian Railways” JSC, (separation with the establishment) of new joint stock companies, as follows:  Joint Stock Company for the Management of Railway Infrastructure “Infrastructure Railways of Serbia”;  Joint Stock Company for Railway Transport of Goods “Serbia Cargo”;  Joint Stock Company for Railway Passenger Transport “Serbia Train”. These three companies represent different technological and business units, marketable in the long run, while the fourth company, the “Serbian Railways” JSC, should primarily solve the problems of redundancy, property and “historical debts”. The separation of the mentioned companies and the reduction of the number of employees, who left the railway with severance pay, is only the first step in the restructuring of the Serbian railways. However, the departure of redundant employees did not solve the problems, on the contrary, many technical jobs were entrusted to private companies and not only technical jobs but also certain administrative ones, which significantly increased the price of those services compared to the same jobs performed by employees for salary. Also, in some services, new employment was performed instead of retraining a certain number of workers, which would avoid paying severance pay. A large number of workers with specific railway experience, after being paid severance pay, went to private railway operators or other companies that do business with the railway. In addition to the above, one of the most important problems that did not even begin to be solved after the restructuring are the unprofitable railways. According to the data published by the internal newspaper “Pruga” in 2016, the traffic on over 800 kilometers of railway is economically unsustainable, and on railways longer than 400 kilometers the traffic does not take place, i.e. trains have not passed for more than a quarter of a century. According to the available documentation, the Council will present in its Report, for each company individually, how much has been invested and how much is being invested in the newly formed companies after the restructuring of the railway and how that investment reflects on the improvement of the condition of the railway and rolling stock, in relation to the invested funds. The subject of the Report is also the spending of credit and budget funds, which are measured in billions of foreign currency and dinar funds from the moment of railway restructuring until today. Such large investments, in the absence of transparent procedures, which refer to the selection of contractors and the source of financial resources, contracted on the basis of interstate agreements, raise suspicions of the possibility of large-scale corruption.

1. INFRASTRUCTURE RAILWAYS OF SERBIA JSC

According to the data from the website of the company “Infrastructure Railways of Serbia”, this company performs the activity of protection and management of public railway infrastructure in the part of: maintenance of public railway infrastructure; organization and regulation of railway traffic; providing access and use of public railway infrastructure to all interested train operating companies, as well as legal and natural persons who perform transport for their own needs. Based on the financial statements submitted by the company to the Business Registers Agency, in the period from mid-2015 to 2018, the company's revenue from the sale of products and services and other revenues in the total amount of 13.8 billion dinars was stated. In the same period, the company was awarded subsidies, grants and donations in the amount of 31.2 billion dinars, i.e. 17.4 billion dinars more than the income from the core activity. In addition to the fact that subsidies were awarded, the Infrastructure of the Serbian Railways realized a net loss in the amount of 8.5 billion dinars in the observed period. According to the data also published on the website of “Infrastructure Railways of Serbia”, the total construction length of railways in public transport without station tracks is 3,735 kilometers, of which the main ones are 1,759 kilometers long, while the other lines are 1,976 kilometers long. The total length of electrified railways (open railroad and main passing tracks in stations) is 1,546 kilometers. The carrying capacity of the railway is between 12 and 22.5 tons per axle, with the maximum carrying capacity of 22.5 tons at only 1,886 kilometers, which is a serious obstacle to the development of railway traffic. Bearing in mind that no serious investments have ever been made in the development of the railway infrastructure, this situation on Serbian railways is not surprising. In the previous decades, the state allocated for the railway through subsidies mostly to service obligations towards employees, while for the development of infrastructure and rolling stock, credit funds were necessary. The Council does not have data on how much the railway borrowed on that basis before the restructuring, except for data on borrowing and investments after the restructuring. Namely, according to the data submitted to the Council by the company “Infrastructure Railways of Serbia”, investments were made primarily in the main and regional railways, as well as the Belgrade-Budapest high-speed rail line project. There were smaller investments in road crossings and other projects, as well as in Žeželj's bridge, which can be seen from Annex I of the Report.

2.1. Belgrade-Budapest high-speed rail line project

The Council requested data on sources of financing, financing costs, costs and scope of works, materials and services, as well as data on the degree of realization of each project from “Infrastructure Railways of Serbia” company, the Ministry of Finance and the Ministry of Construction, Transport and Infrastructure.

Information was received from all the above-mentioned entities that the High-Speed Rail Line Construction Project was financed on the basis of interstate agreements and that contractors had been selected on that basis. Namely, part of the Stara Pazova - Novi Sad railway line and the Chortanovci viaduct are financed from a loan from the Government of the Russian Federation, while part of the railway line from Belgrade to Stara Pazova and from Novi Sad to the border with Hungary is financed from a loan from the Republic of China. The participation of the Republic of Serbia in the loan of the Russian Federation is 15%, and according to the data submitted to the Council by the “Infrastructure Railways of Serbia” company, for the part of the open railway Stara Pazova - Novi Sad of 40.44 kilometers, the construction price was agreed in the amount of 247.9 million dollars, of which the participation of the Republic of Serbia is 37.2 million dollars. A value of 337.6 million dollars was agreed for the construction of the viaduct "Chortanovci", in which the participation of the Republic of Serbia is 50.6 million dollars. On December 31, 2019, the degree of physical realization on the open railway in the length of 40.44 kilometers was 44.64%, and a total of 131.2 million dollars was spent, of which from the budget of the Republic of Serbia 37.2 million dollars and 25 million dinars, and the rest were credit funds in the amount of 94 million dollars. For the viaduct "Chortanovci", the physical realization is 72%, and on December 31, 2019, 274 million dollars were spent, of which 50.6 million dollars and 106.2 million dinars from the budget of the Republic of Serbia, while 223.4 million dollars were from credit funds. The contractor for this part of the railway and for the viaduct is the Russian company RZD International, whose registered branch in Serbia, according to BRA data, reported a profit of around ten million euros for 2018. The Council asked the Ministry of Construction, Transport and Infrastructure for information on that and other projects, on the value of materials, as well as on the scope of performed works and services, but the Ministry did not submit that information, which is why a complaint was sent to the Commissioner for Information of Public Importance. Namely, according to the signed International Agreement between the Republic of Serbia and the Government of the Russian Federation, the Ministry of Construction, Transport and Infrastructure has the obligation to monitor the implementation of the provisions of this Agreement, as well as the Ministry of Finance, in accordance with its competencies. (Article 9 of the Law on Ratification of the Agreement between the Government of the Russian Federation on the Approval of the State Export Loan to the Government of the Republic of Serbia, signed on January 11, 2013). Only after the complaint to the Commissioner and after four months from the submission of the request by the Council, on May 25, 2020, the Ministry submitted an answer that it was not in charge of monitoring the realization of the Russian loan (Annex III of the Report). In the mentioned answer, the Ministry pointed out that it was not a signatory of any commercial contract, and that the only commercial contracts were signed between the Republic of Serbia as a financier, “Infrastructure Railways of Serbia” as an investor and the Chinese consortium JV “China Ralway International Co. Ltd” & “China Communications Construction Company Ltd” , as a contractor. In this case, the Ministry of Construction, Transport and Infrastructure ignores the fact that Art. 9 of the Law on Ratification of the Agreement is its obligation to monitor the commercial implementation of the Agreement. This was confirmed by the Ministry of Finance in the response submitted to the Council (Annex II of the Report).

The Council also asked the “Infrastructure Railways of Serbia” company for information on whether, in addition to the Interstate Agreement signed between the Government of Serbia and the Government of the Russian Federation, there was an international agreement that would further define some provisions of the Agreement. However, there was no real answer from that Company either, except for the statement that there were some working versions for which they did not have information that they had been officially signed. The Council also requested this information from the Ministry of Finance and received an answer under number 401-1606 / 2020-001 from June 3, 2020, where the Ministry refered the Council to the Ministry of Construction, Transport and Infrastructure. The only thing that the “Infrastructure Railways of Serbia” has at its disposal is the Agreement signed between RZD International, a Russian state company, as a contractor, and the company “Infrastructure Railways of Serbia”, as an investor. Considering that the Council did not receive data from the Ministry of Construction, Transport and Infrastructure on the value of delivered goods, works and services, i.e. costs of construction of infrastructure projects, the only data available to the Council on that basis are data from “Infrastructure Railways of Serbia”. At the request of the Council, the “Infrastructure Railways of Serbia” Company submitted the data as of December 31, 2019 (Annex I, Table 3), according to which for the viaduct "Chortanovci" and the railway section Stara Pazova - Novi Sad, the costs of works referred to 283.1 million dollars, 26.4 million dollars to used and new material (which are shown together) and the value of services was 8.4 million dollars, which made a total of 317.9 million dollars. When we compare the data on the structure of costs (works, materials, services) and the total reported costs for these two projects, which amount to 405.7 million dollars and 131.2 million dinars, we can see the difference of 87.8 million dollars.This difference is equal to the amount of the advance paid from the budget of the Republic of Serbia, which points to the conclusion that it is not known for what purposes the advance from the budget has been spent. By the way, from the “Infrastructure Railways of Serbia”, two months before the officially submitted data in the form of signed tables, which are an integral part of the Report, the same form of tables was sent by e- mail, but only with data that differed from the officially submitted ones by several tens of millions of euros, which raises the question which data are real. In the oral communication, the Council insisted that the company “Infrastructure Railways of Serbia” should provide the data on the purposes for which the advance given from the budget of the Republic of Serbia was spent. On May 26, 2020, the Council received an e-mail with the supplement to the data according to which, of the 87.8 million dollars advance from the budget of the Republic of Serbia, which related to the high-speed rail line project, 31.7 million dollars was unjustified. The Council asked the “Infrastructure Railways of Serbia” to explain why the data on the structure of costs in the tables in the summary and individual presentation were changed, but did not receive it, except for their statement that their “hands are tied” regarding the monitoring of costs for projects financed from the Russian loan. As already stated in the Report, the Ministry of Construction, Transport and Infrastructure did not want to submit data on costs to the Council, referring it to the “Infrastructure Railways of Serbia”. In such circumstances, when data on construction costs were not submitted and when the “Infrastructure Railways of Serbia” and the Ministry transfered competencies and responsibilities to each other, it was not surprising that the director of the “Infrastructure Railways of Serbia” was spectacularly arrested in front of the cameras for accepting bribes related to expropriation costs on the high-speed rail line project. All media reported that the arrested director called out the Minister for giving money to her husband and that the Minister was ready to appear before the prosecutor's office on that basis.

The Council cannot share with the public the optimism that this affair, as well as numerous others on the railways, which the Council processed and handed over to the police and the prosecution, will have a final epilogue. The Council also wishes to note that this arrest was soon followed by the arrest of more persons from the railway who participated in public procurement procedures on the section of the Belgrade-Pancevo-Main Station, which is also financed from a Russian loan. In addition to Russian creditors and contractors, a Chinese creditor and contractors are also involved in the High-Speed Rail Line Project. Namely, the value of the project in the total amount of 350.2 million dollars was agreed for the modernization and reconstruction of the section Belgrade Center - Stara Pazova, of which the loan of the Republic of China is 297.6 million dollars and the budget of the Republic of Serbia 52.6 million dollars. Physical realization of that Project on December 31, 2019 was 15.07%, and 115.5 million dollars and 71 million dinars were spent. Of that amount, 97.2 million dollars refer to the Chinese loan, and the rest to the funds of the budget of the Republic of Serbia in the amount of 18.3 million dollars. A value of 1.2 billion dollars has been agreed for the modernization and reconstruction of the section of the Novi Sad-Subotica-state border railway line, of which a loan in the amount of 988.4 million dollars and budget funds of 174.4 million dollars. On that longest section of the railway line, on December 31, 2019, there was no physical realization, and 3 million dinars were spent on state compensation (Annex I, Table 4). The contractor was selected on the basis of an interstate agreement and it is for both sections of the JV Consortium, China Ralway International Co. Ltd. & China Communications Construction Company Ltd. According to the above data, the total project of the high-speed rail line contracted with Russian and Chinese creditors amounts to about 2.1 billion dollars, noting that this amount does not include a new Russian loan of 172.5 million euros, which would finance the construction of electrical infrastructure project on the section Stara Pazova - Novi Sad. Data on funds spent on December 31, 2019 in the amount of 521.2 million dollars (budget funds 106.1 million dollars, credit funds 415.1 million dollars) and the degree of physical realization, which is zero on the longest section, and on the other two only 15% and 44%, are not optimistic. Namely, a quarter of the contracted funds were spent, and the deadlines for the completion of the high-speed rail line in such circumstances are inconceivable, unless political promises are heard mentioning the completion of the Belgrade-Novi Sad section by the end of 2021 (Minister's statement to Happy TV on August 21, 2019). Before that, President Aleksandar Vučić, then in the position of Prime Minister, told Tanjug on December 23, 2015: "We have to open the Belgrade-Budapest railway in 2018, that is a great thing for our country, we will finish everything in two and a half years." Unfortunately, the above data on the degree of realization and funds spent show the real picture, and that is that the completion of the high-speed rail line and its construction cost are unpredictable. How much the Republic of Serbia will still have to borrow for its completion and from which sources it will procure trains for such a line, the public obviously cannot be informed about. An investment of several billion euros, for which interstate agreements have been concluded, and not transparent public procurement procedures, and where funds are spent non-transparently, will cost the citizens of Serbia and their generations dearly.

Non-transparent spending is reflected in the fact that at the request of the Council on the spending of budget funds for all infrastructure projects from 2013 to the submission of requests, completely different data arrived from the “Infrastructure Railways of Serbia”, the Ministry of Finance and the Ministry of Construction, Transport and Infrastructure (Annexes I, II, III to the Report). Namely, if we look only at the financing from the Russian and Chinese loans, the difference in the data of these two ministries is around 209 million dollars. According to the data of the Ministry of Finance, from 2013 to March 2020, 628.3 million dollars were spent from the budget on the basis of the Russian loan, while according to the data of the Ministry of Construction, Transport and Infrastructure, 52.4 billion dinars or about 440.3 million dollars were spent. Based on the Chinese loan, according to the data of the Ministry of Finance, 96 million dollars were spent from the budget, and according to the data of the Ministry of Construction, Transport and Infrastructure, 14 billion dinars or 117 million dollars were spent. According to the data of the company “Infrastructure Railways of Serbia”, 528.7 million dollars were spent on the basis of the Russian loan from the loan funds, and 125 million dollars from the advance of the budget of the Republic of Serbia, which makes a total of 653.7 million dollars. This amount refers to the infrastructure that does not include the purchase of diesel-engine sets, which with spare parts amounts to one hundred million dollars. According to the “Infrastructure Railways of Serbia”Company, the Russian loan of 800 million dollars has almost been spent, so it is not clear from which sources the completion of the "Chortanovci" viaduct and the Stara Pazova - Novi Sad railway line will be financed, whose physical realization, on December 31, 2019, was only 44.46%.

2.2. Main Railway Lines

As can be seen from Annex I, Tables 1, 2 and 3, the reconstruction of sections on the main lines was financed from the Russian loan and the EBRD loan. The construction of the second track of the railway Belgrade Center-Pancevo Main Station, in the length of 14.8 kilometers, was financed from the Russian loan, for the construction of which 89.9 million dollars and 9.2 million dinars were spent. In addition to that section, six 65.7-kilometer-long north sections of Corridor X were reconstructed from the Russian loan, as well as the 46.5-kilometer-long south section of Corridor X and 77.6 kilometers of the Resnik -Valjevo section, for which a total of 157.9 million dollars and 15.7 million dinars were spent. Based on the above-mentioned data, it can be seen that the reconstruction of 204.6 kilometers of railway was financed from the Russian loan, for a total value of 247.8 million dollars and 24.9 million dinars. From the EBRD loan, a value was agreed for the procurement of materials, equipment and rehabilitation of railways in the amount of 77.2 million euros (Tables 1 and 2). Reconstruction and modernization of the section Rasputnica G-Rakovica - Resnik in the length of 7.4 kilometers has been completed and construction costs amount to 24.4 million euros and 7.7 million dinars.

Reconstruction of the section Jajinci - Mala Krsna of 57.9 kilometers has not been completed, physical realization amounts to 31.43%, and 17.4 million euros have been spent. Totally reconstructed from the EBRD loan on December 31, 2019 was 25.6 kilometers of railway. There was a tender for the reconstruction of these main lines and the procurement of materials and equipment from the EBRD loan, on the basis of which contractors and suppliers of materials and equipment were selected. Based on the tables submitted by the “Infrastructure Railways of Serbia”, the Council cannot determine whether and how much more expensive the reconstruction of the railway was, performed by the contractor who was selected on the basis of an interstate agreement or the contractors selected through a tender. Such data can be determined by an independent professional institution, having in mind that the construction of certain sections was accompanied by corruption scandals, which the Council has already stated.

2.3. Regional railways

Reconstruction of regional railways, according to the data of the company “Infrastructure Railways of Serbia” (Annex I, Table 5), was financed from the own sources of “Infrastructure Railways of Serbia” in the total value of about seven billion dinars, or over fifty million euros. On December 31, 2019, about 315 kilometers of railways and four tunnels were completed. According to the data from Table 5, the costs of works amount to 2.3 billion dinars, the costs of procurement of goods (used and new material) amount to 4.3 billion dinars, the costs of services 313.3 million dinars and other costs are 81.3 million dinars. In the cost structure shown in this way, the largest amount is the cost of materials in the amount of about 36 million euros. With these data on costs, it is disputable, first of all, that the values of new and used material are given in aggregate form and that the value of used material is determined by an internal commission formed by the management of the “Infrastructure Railways of Serbia”, whose director was arrested on suspicion of corruption, so the credibility of the commission is questionable.

2.4. Žeželj's bridge, road crossings and other projects

According to the data of the “Infrastructure Railways of Serbia” Company, 60.7 million euros and 39.3 million dinars were spent for Žeželj's bridge, of which about 28 million euros from the budget of AP Vojvodina, 25.4 million euros from EU donations and from the budget of the city of Novi Sad 7, 3 million euros. The contracted value of the Project was EUR 45.3 million, but it was increased by EUR 15.4 million through annexes (Annex I, Table 6). About 211 million dinars were spent for road crossings, i.e. slightly less than two million euros, and they were financed from their own sources (Annex I, Table 7). For other projects shown in Annex I, Table 8, 774.5 million dinars or over six million euros were spent. The table shows the diversity of procurement of goods and services, for which the Council cannot determine whether they are necessary and whether they have been procured at the real value. What creates suspicion of excessive spending, among other things, is the rehabilitation of only nine station buildings for nearly eight hundred thousand euros.

Since the moment of restructuring, the most credit and budget funds have been invested in the company “Infrastructure Railways of Serbia”, and they are measured in hundreds of millions of euros. The Council could not determine exactly how much was invested because the Ministry of Finance, the Ministry of Construction, Transport and Infrastructure and the “Infrastructure Railways of Serbia” have completely different data, and they should be completely the same. It is inconceivable that the data of the two ministries differ by more than two hundred million dollars. If we analyze what was done with the obviously huge amount of money, it can be concluded that the effects are very modest. Of the 1,759 kilometers of main lines, according to the “Infrastructure Railways of Serbia”, about 230 kilometers have been reconstructed in five years. For the same period, out of 1,976 kilometers of other railways, 315 kilometers were reconstructed. The problem of unprofitable railways and railways on which traffic does not take place for more than a quarter of a century has not even begun to be solved. The Belgrade-Budapest high-speed railway, whose completion was announced in 2018, its construction on the longest section did not even begin in 2020, and on the other two the percentage of realization is only 15% and 44%.

3. “SERBIA CARGO” JSC

“Serbia Cargo” JSC is the only state operator dealing with cargo railway transport. In addition to it, five private operators in the Republic of Serbia are engaged in cargo railway transport. In order to realize a significant income from the transport of goods, in addition to good railways, a sufficient number of fully operational locomotives and wagons is necessary. At the request of the Council to submit data on the rolling stock at its disposal, the company “Serbia Cargo”, in response no. 1/2020-903 from February 13, 2020, stated that according to the last inventory, it had 69 electric and 46 diesel locomotives and 1864 freight wagons. According to the above data, it can be concluded that the Serbian Railways, in addition to having over fifty estimated low-capacity lines, also has an extremely modest rolling stock. On that occasion, the Council addressed the company “Serbia Cargo” for an explanation that at the end of 2019, only 1,864 freight wagons were available for freight traffic, and that at the end of 2014 (one year before the restructuring) there were over four thousand of them functioning in the traffic at that time, according to the railway data. The Council would like to note that in 2015, it prepared a report related to the procurement and overhaul of rail vehicles financed from the budget of the Republic of Serbia, as well as the overhaul and reconstruction of freight wagons from its own railway sources. From the budget of the Republic of Serbia, in the period 2009-2014, through the Development Fund, about eight billion dinars were transferred to repairmen in order to repair, reconstruct and procure four thousand new rail vehicles, primarily freight wagons. Although eight billion dinars were transferred to repair companies, according to the railway, they performed the service in the amount of 6.7 billion dinars and allegedly delivered about 3,500 both repaired and new rail vehicles. Where 1.3 billion dinars was spent had never been determined by the Ministry of Economy, which was in charge of monitoring the implementation of the Project. Also, even after five years, the facts related to that Project have not been established by the Ministry of the Interior and the Prosecutor's Office, to which the Council submitted the Report. The Prosecutor's

Office did not even act on the previous 1000 Wagon Reconstruction Project in the period 2005- 2008, where there is a suspicion that the Project damaged the railway with more than a billion dinars. If we do not look at the transferred funds, but the number of overhauled, reconstructed and new wagons, which only for those two projects should have been around 5,000 at the end of 2014, because the general overhaul and procurement of new wagons was paid for that number, the question arises as to why they were not presented in that number in the inventory in 2015, when the restructuring was carried out. Such data may cast doubt on whether there was ever a serious overhaul and procurement of new wagons in the observed period for those eighty million euros spent. Also, the data on how many wagons were actually transferred to the company “Serbia Cargo”, both those that were used in the traffic and wagons that were not used, can be debatable. According to the data submitted by the company “Srbija Cargo” to the Council, the conclusions of the Government of the Republic of Serbia after the restructuring enabled the sale of 3,000 old wagons. It is not known how much income was generated from the sale of old wagons and what the total number of wagons is now, having in mind that the wagons are in the bookkeeping records, and that they are not physically present. These facts can only be established by the competent authorities, on the basis of credible documentation and the situation on the ground, and not by the Council. According to the data received by the Council from “Serbia Cargo”, in the period from mid-2015 to December 2019, 1.4 billion dinars were spent on current maintenance (procurement of materials, spare parts and maintenance services with technical inspection of wagons). In the same period, the investment costs amounted to 1.1 billion dinars, which with current maintenance is 2.5 billion, or about 20 million euros. In addition to the mentioned investments, in 2019, 16 locomotives with parts were procured from the EBRD loan, in the amount of 64 million euros. From all of the above, it follows that over 160 million euros have been invested in rail freight vehicles in the last seven years, and that the active rail freight vehicle fleet is several times smaller compared to the period before the investment. According to the data of the Business Registers Agency, the company “Serbia Cargo”, in the period from restructuring to 2018, reported revenues based on subsidies, donations, premiums, grants in the amount of two billion dinars, or about 17 million euros, and achieved a net financial profit of 915 million dinars, or slightly more than seven million euros. Comparing the stated amounts, it is evident that the subsidies in the stated period are about ten million euros higher than the achieved net financial result, and that the company would be operating at a loss without them.

4. “SERBIA TRAIN” JSC

“Serbia Train” JSC is the only state operator in passenger traffic and there are no private operators. The company “Serbia Train ” sent a letter number 1/2020-196 dated 12 February 2020, by which it informed the Council that it had three electric, five diesel and one steam locomotive. In addition to locomotives, there are 42 electric trains, 54 diesel trains and 104 passenger wagons in the “Serbia Train” fleet.

As far as passenger traffic is concerned, from the answer submitted to the Council, it can be seen that the railway has a very modest number of passenger cars and locomotives, i.e. only 104 passenger cars of different series and 37 locomotives. In the period of 2015-2019, 27 sets of two-part diesel-motor trains with the corresponding spare parts and components in the value of 100 million dollars were procured. In addition to diesel- motor trains, 21 sets of four-part electric-motor trains worth 99 million euros were procured. From the middle of 2015 to 2019, 2.2 billion dinars or about 18.6 million euros were spent on the current maintenance of such a modest vehicle fleet in passenger traffic, while 533 million dinars or about 4.5 million euros were spent on investment maintenance in the same period. In the name of investment maintenance, an additional 3.5 million euros were spent from the EBRD loan for the modernization of five electric motor trains, which was done by Shinvoz Zrenjanin. The Council asked the company “Serbia Train” for an explanation as to whether the costs based on current maintenance in the amount of almost twenty million euros were realistic and justified and to which vehicles they referred, but it did not receive an answer. The listed investments, which in the past few years amounted to more than two hundred million euros, did not affect the net financial result of this company. Namely, according to the BRA, in the period from 2015 to 2018, the company realized a net loss in the amount of 3.8 billion dinars or about 32 million euros, despite the received subsidies in the amount of 14.4 billion dinars or about 118 million euros. As could be seen from the text of the Report, all railway companies used subsidies, i.e. budget funds of the Republic of Serbia, as well as loan funds for regular operations and investments, in addition to modest operating revenues. The Council requested information on the costs of the loan from the Ministry of Finance (Annex II of the Report). Based on the response of the Ministry, in the period of 2013 with the projection of costs for 2020, the interest costs for the Russian loan amount to 85.7 million dollars and for the Chinese loan 4.7 million dollars, which is about 90 million dollars. For EBRD loans, interest and commission costs amount to 2.6 million euros, and the interest costs of the Kuwaiti loan amount to 1.5 Kuwaiti dollars. Based on the data submitted by all three railway companies, as well as data from the financial statements published in the BRA, the spent loan funds and costs related to them, as well as the given subsidies from the budget of the Republic of Serbia amount to over one billion euros in the period after restructuring.

5. CONCLUSION

All public companies in the Republic of Serbia are the biggest initiators of corruption, because they have public property of great value, which is managed by persons primarily appointed along political lines, and not on the basis of moral and professional credibility. In their election campaigns, political parties promise that as soon as they come to power, as one of the most important economic measures, they will restructure public companies. However, for more than a decade, only unfulfilled promises remain, and there is no real restructuring of public companies. The only public company that started the restructuring process in 2015 is the Serbian Railways. The competent Ministry and the management of the Serbian Railways informed the public that the procedure was successfully carried out. Successful restructuring of the railways means that the “slow” railways have become more efficient, with reduced operating costs, which implies a reduction in operating losses, and thus higher operating revenues and lower government subsidies. It also means choosing professional management and, in accordance with large investments, which are from expensive international loans, building and reconstructing a significant part of the railways within the set deadlines and seriously renewing vehicles in both freight and passenger traffic. And whether that really has happened, the best picture is given by the data presented by the Council in the Report. Namely, all three railway companies with a market orientation, which were the subject of the Council's analysis, have been operating at a loss in the period from the restructuring to 2018. The fact that some companies have expressed some financial profit in certain years is not a realistic picture, because without state subsidies, it would also be at a loss. According to the only available financial statements from BRA, which is the end of 2018, the total reported business and other income for all three companies in the period of 2015-2018 is 53.4 billion dinars, revenues from subsidies 47.7 billion dinars and a loss of 12.2 billion dinars. This means that from the budget of the Republic of Serbia, about four hundred million euros were given to three railway companies in a period of less than four years, and that two companies “Serbia Train” and the “Infrastructure Railways of Serbia”, despite so many subsidies, showed a loss of about one hundred million euros. In the past period since the restructuring until 2019, serious investments have been made in railway companies, international agreements worth more than two billion dollars have been concluded, and that is good. It is not good that the credit arrangements were concluded in non-transparent procedures, i.e. the Law on Public Procurement was not applied either when it comes to the selection of contractors or the source of financial resources. Non-transparent contracting also results in non-transparent spending of credit funds, which the Council has already stated in the Report. The Ministry of Construction, Transport and Infrastructure has a legal obligation to monitor the spending of credit funds on two bases, because it is regulated by an international agreement and because the railway is in the competence of that Ministry. Avoiding to submit a response to the Council for more than four months, and in the response submitted in this way with the explanation that the Ministry of Construction, Transport and Infrastructure is not a signatory to international agreements and that the Russian loan has been monitored only since 2017, not only is it not the right answer to the Council's request, but such an answer raises certain doubts. This is also contributed by the fact that the data on the funds spent

12 from the Russian and Chinese loans between that Ministry and the Ministry of Finance differ by several hundred million dollars. It is not clear how the Minister, in her addressing in the media, promised the directors of the railway companies that she would control the spending of every dinar. She may not have that obligation when it comes to millions of dollars. However, if we do not know how much credit funds have been spent, we know for sure that their repayment will cost all the citizens of the Republic of Serbia dearly. The costs of these loans so far amount to close to one hundred million dollars, and their repayment has not started yet. Also, it can be argued with certainty that creditors and foreign contractors will benefit greatly in these projects, bearing in mind that one of them reported a net profit for 2018 in the amount of about ten million euros. In the circumstances when the practice was introduced in Serbia, which is also regulated by the Law, to conclude interstate agreements for all capital projects in an urgent procedure, without public tenders, space is created for huge-scale corruption. This is due to the lack of cost control for each project, as well as the political influence on the judiciary not to prosecute those who break the law and misuse public property. If it even happens that appropriate proceedings are initiated against certain persons, they usually last until they become obsolete. Due to all the problems observed during the analysis of the documentation received from the railway companies and competent ministries, noting that the Council does not have the possibility to determine their truthfulness, as well as the consequences that may arise for the economic interest of the state, the Council gives certain recommendations to the Government.

6. RECOMMENDATIONS:

 that all large state projects should be planned in a timely manner according to priorities, with the broad consent of the public and the profession, and not among a few people in power, most often in the election year and election campaign;

 that the Law on Public Procurement should apply to all infrastructure projects, without exception, both for the selection of contractors and for sources of financing;

 that the Ministry of Construction, Transport and Infrastructure, on its website, in addition to the percentage of financial realization, for each project should publish quarterly data on the value of costs by their structure (goods, works, services);

 that the Ministry of Construction, Transport and Infrastructure should publish on its website, in addition to the percentage of physical realization for each project, data on exceeding deadlines, the reasons for that, as well as the costs arising therefrom;

 that the Ministry of Finance and the Ministry of Construction, Transport and Infrastructure explain the huge discrepancies in the data on spending from the budget of the Republic of Serbia, based on loans from the Government of the Russian Federation and the Government of the Republic of China and publish it on their website;

 that the State Audit Institution exercise control over the spending of funds on the basis of international loans;

 that the Commission for State Aid Control publish information on the amount of subsidies individually for each railway company, as well as the reasons for granting subsidies;

 that the directors of railway companies be elected on the basis of a competition and not on the basis of political affiliation;

 that the Prosecutor's Office for Organized Crime submit an explanation why, according to the Council’s Report on Unintended Spending of Budget Funds on the Program of Production and Repair of Rail Vehicles for the Needs of Serbian Railways JSC, which was handed over to that Prosecutor's Office in 2015, only pre-investigation procedures have been conducted.

7. ANNEXES TO THE REPORT:

1. Annex I - Tables submitted by the company Serbian Railway Infrastructure

2. Annex II - Response of the Ministry of Finance 19 No. 4-00-00021/2020 dated March13, 2020

3. Annex III - Response of the Ministry of Construction, Traffic and Infrastructure No. 012- 00-00031/2020-02 dated May 2, 2020

VICE-PRESIDENT

Prof. dr. Miroslav Milicevic

Annex I

Annex II

Annex III