EXECUTIVE SUMMARY

State Owned Companies: state capture, clientelism and corruption in Czech Republic

Stated-owned enterprises (SOE) are a major player on the market in the Czech Republic. The turnover of publicly-owned enterprises exceeds CZK 680 million (EUR 25 million), which counts for about two thirds of the Czech state budget. Most of the publicly owned enterprises are corporations at least partly owned by regions or municipalities; the number of SOEs is about a hundred, but they are more significant than regionally or municipally owned enterprises.

According to the legislation, the Czech State can carry on business in two ways. The first way is the state’s participation in a joint-stock company or a limited liability company. The second way is via a state enterprise. In our study, we consider both types of companies as a state-owned enterprise, provided that a state, a region or a municipality holds a majority share.

Most companies owned and controlled by the Czech Republic are business corporations under private law. These business corporations usually are of strategic importance of whose activity pursues a specific interest. The particularity of the Czech Republic (and other countries which were governed by the communist regime before 1991) is the existence of a significant number of state enterprises. Today, the majority of 280 state enterprises are in liquidation, only 106 of them are act ive.

Compared to business corporations, the state enterprises have a closer connection with the state and state has greater control over the property of the state enterprise. Lesy České republiky (Forests of the Czech Republic) and Česká pošta (Czech Post) are among the most important state enterprises, therefore we decided to include them in the case study. The other SOEs included in our study are České dráhy (Czech Railways), ČEZ, Dopravní podnik hl. m. Prahy (Prague Public Transportation Company) and the state contributory organization Ředitelství silnic a dálnic (Road and Motorway Directorate).

The importance of SOE is growing, mainly because SOEs can dispose of plenty of resources. The Czech legislation does not contain a sufficient legal framework for a reasonable transparency of management of the state-owned enterprises. The law enables the political representatives to interfere with the functioning of the SOE but does not contain the sufficient restraints against the possible conflict of interests of politicians, the state, and SOE.

The Czech legislation regulates the issue of SOE very briefly. Czech Republic fulfills only five recommendations out of 20 OECD recommendations for state-owned enterprises, which are perceived as a standard for the good practice of SOE. The most significant problem seems to be the non-existence of the state ownership policy, which both Czech and foreign experts repeatedly criticize. Besides, Czech Republic legislation does not cover the rules for the appointment of persons to SOE‘s bodies, which makes the early detection of the conflict of interest challenging and does a service to clientelism. The Czech Public Procurement Act is too lenient and enables the corruption and clientelism; some of the practices were traced back and prosecuted before the courts. The Czech Republic also has a loophole regarding the supervision of SOE‘s economic activities – for example, the companies such as ČEZ do not fall under the jurisdiction of the Supreme Audit Office. The public control also falls flat as the SOE fail to respect the Free Access to In formation Act. The quality of the legislative framework on state-owned companies is weak in the Czech Republic. There is a legislative framework, but provisions are very general. Similarly, the quality of monitoring mechanisms is insufficient. The government cannot assess the performance of the SOE management due to the absence of state ownership policy, public control fails because many SOE refuse to provide the information required by law, and the powers of the Supreme Audit Office (SAO) are too limited. The state needs to adopt rules that would address the SOE control better while pushing for more transparency.

The main problems are the excessive political influence on SOE management and the lack of transparency of its decision-making. The persistent problem is the lack of state ownership policy that causes chaotic leadership in the sectors’ enterprises. A positive element is that the Czech legislation insists on non-financial reporting as part of the company’s annual report, which usually contains sufficient information.

The State-owned enterprises that we have included in the survey have many common features. Nominations of persons in the SOE are politically influenced and non-transparent, there are many publicly known cases of clientelism. For example, the CEZ company led by Martin Roman had excellent relations with political representatives and lobbyists, or the Chief Executive Officer of the Forests of the CR was not allegedly selected by politicians, but by lobbyists.

There was also not one among the selected sectors, which would not be sanctioned by the Office for the Protection of Competition. The highest fines in the history for mistakes in the award of public contracts were received by the Czech Railways; the Road and Motorway Directorate and the Prague Public Transportation Company were also penalised. CEZ was sanctioned by the Office for the Protection of Competition in 2004, the Forests of the Czech Republic state enterprise in 2010. The Czech Post Office was sanctioned by the Office for the Protection of Competition repeatedly and recently investigated for suspicion of abuse of a dominant position.

We conclude that the legislation on state-owned enterprises in the Czech Republic is rather inadequate. The scope of legislation does not reflect the fact that the volume of funds handled by the SOE is equivalent to about two-thirds of the state budget and should therefore be subject to greater public and state control.

There is no state ownership policy in the Czech Republic, a fact due to which neither the state nor the SOE can determine the criteria according to which the members of its organs should be governed and basis on which they should be evaluated. Despite the establishment of the government nomination committee, the process of appointing persons to the SOE bodies is not transparent, the nomination committee’s activity is criticized as insufficient. Putting people into positions is politically motivated, organs often lack the necessary expertise, integrity, and independence. The work of the Supervisory Boards is also insufficiently regulated; it can be said that the Supervisory Board does not know what to supervise and the state does not know on what basis the Supervisory Board’s activity is to be evaluated.

Regarding the regulation of public procurement, the Czech Republic ranks among the worst countries in the European Union. The Czech legislation is inconsistent, in 2016 the third Public Procurement Act was adopted in the last 15 years. The Act brings greater transparency with the requirement to expose the final owner of the public contracts’ winner, but also transfers part of the tender to a less transparent procurement regime. The transparency is reinforced by the law on free access to information and the new law on the register of contracts. The Free Access to Information Act requires public authorities to disclose basic information, and anyone can apply for additional information without giving a reason. The Contract Registry Act orders state-owned enterprises to publish contracts on the Internet.

Governance of state institutions is controlled by the Supreme Audit Office, but it does not have the power to control all SOE. The Chamber of Deputies has tried already three times to extend the SAO’s competence to control the management of the property of the SOE, but the law was rejected three times by the Senate.

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