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          • Year: 2004
          • Defence Budget Advisor in the Ministry of Finance and Economy of the Republic of Serbia

          • 25. may 2004. Radiša Đorđević, PhD Defence Budget Advisor in the Ministry of Finance and Economy of the Republic of Serbia

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          Reform of the State Union of Serbia and Montenegro’s defence system should be based on the harmony between needs and capacities. The needs for reformed defence system are determined by the necessity to protect vital state’s interests, contemporary security risks, challenges and threats (military and non-military) among which terrorism is particularly important, by geopolitical and geostrategic position, by membership in security-defence integrations and by the situation in the existing defence system and based on the corresponding constitutional and legal regulations, defence strategy and other countries’ experiences.

          On the other side, there are economic, namely budget capacities, with which the state’s defence sector needs must be harmonised. These capacities are limited by demographic potentials (human resources to be counted on) and, above all, the size of the part of gross domestic product, which can (in competition with the other, also necessary needs in the public sector) be located in the budget as an item of the defence sector including, naturally, the resources in the sector itself. Both the capacities and the needs are also influenced by geopolitical and geostrategic position of the country, foreign experiences in planning and exploitation of the available resources, as well as the present condition of the defence system.

          In order to bring good decisions in the defence system reform, it is necessary to have in mind present failures and good sides of this system, including what has already been done within the reform. Current condition of the defence system is characterised by:

          1) very unfavourable global structure of the budget expenses for the defence, dominated by the usual expenses for the units and maintenance of the technique and infrastructure, much higher than the expenses for the equipment which are extremely low;

          2) certain organisational parts and elements of the defence system are structurally and functionally obsolete, professionalization and modernisation are delayed, which as a consequence brings obsoleteness of the important technical systems, weaponry and military equipment;

          3) inadequate basic structure of the employees (too many civilians compared to the number of professional soldiers - at the moment, there are 39% civilians compared to 61% professional soldiers), as well as a very bad rank structure (at the moment, 46% generals, colonels and lieutenant colonels, compared to 54% of all other officers), which makes too many high rank officers (particularly colonels and lieutenant colonels) compared to lower ranks (majors, captains, lieutenant, sub-lieutenants) who are the most important for operative functioning of the defence system, particularly of the SMAF;

          4) very law personal standard of the employees in the defence system, particularly speaking about professional soldiers, compared to their necessary high education and extremely high level of responsibility - currently, an average salary of the professional soldiers plus all extra fees makes 18, 902 dinars (274 euros), while a general’s average salary is 37,310 dinars (542 euros), other officers 25,374 dinars (368 euros), non-commissioned officers 17,303 dinars (251 euros), while contracted soldiers, who are very important for the future professional army are paid only 12,905 dinars (187 euros);

          5) delayed changes in the planning system and financing of the defence system after important reforms had been carried out in 2001 (transfer or the accounting service from the General Staff to the Defence Ministry, which opens the door for the democratic civil control of the army, establishing financial discipline, introduction of functional classification of defence expenses according to the UN standards and economic classification according to the international GFS methodology, as well as establishing regular reports to the OSCE on the defence expenses, according to the Vienna document VD-99).

          However, beside those mostly unfavourable characteristics, there are several features of the present defence system which are particularly important. Those are: 

          1) manifested determination for the reform, especially expressed by present Defence Minister and the chief of the SMAF General Staff, accompanied by very intensive cooperation with the states which are future partners in the international security integrations we are oriented toward;

          2) high professional capacity and level of education of the professional, first of all, executive (operative) military cadre;

          3) transfer of the General Staff to the organisation network of the Defence Ministry and re-organisation of the military security services;

          4) introducing the system of public supplies.

          When we estimate the current situation in the defence system of Serbia and Montenegro, it is very important to assess the place this system has among the other countries’ defence systems - in refer to the part of the budget located for the defence, compared to the gross domestic product (GDP) size of the defence system and expenses planned for each member of the system.

          Compared by the part of GDP located for each member of the defence system in 2003, which is an average of 6,468 euros, the SMAF is "richer" only than the Army of Ukraine (1,556 euros for each member of the defence system), Bulgaria (3,950 euros), Russia (5,665 euros) and Macedonia (5,696 euros). In Bulgaria, 1% of BDP is located for the defence system, in Ukraine it is 1,67%, in Macedonia 2% and in Russia 2,87%, while in Serbia and Montenegro 2,95% of the planned BDP was spent for the defence system last year. At the same time, the size of our defence system is 0,74% of the population while in other listed countries it is as follows: Macedonia (0,48% of the population), Ukraine (0,6%), Bulgaria (0,73%) and Russia (0,87%).

          If the SMAF, or the defence system as a whole, would be reduced to 60,000 members (0,57% of the population), the money planned for each member would be 8,435 euros (they would be now "richer" than the members of the Turkish army - 7,182 euros and Romanian army - 7,838 euros). However, if the Serbian and Montenegrin defence system would be reduced to only 50,000 members (0,47% of the population), which is rather close to the relative size of the defence system of Hungary (0,45%) and Macedonia (0,48%), and much more than the defence system of Poland (0,35%) and Slovenia (0,38% of the population), then the expenses for each member of the defence system of Serbia and Montenegro would be 10,122 euros. This would mean that, along with all the facts aforementioned, we would make better than the standard in the Croatian Army (9,781 euros for each member of the defence system) and come close to the Czech Republic, which locates 15,146 euros for each member of the defence system, which means 2,21% of the GDP is located for the defence system (which is 0,58% of the population).

          All this relatively complicated mathematics shows that, indirectly, global structure of budget expenses can be significantly improved within the frame of current budget capacities of the state members of the State Union, first of all in the direction of more modern military equipment and weaponry. The structure of professional army members and their salaries could also be improved, which would mean significantly better standard not only for professional soldiers but also for other employees in the defence system. If it is so, and everything indicates it is, then the reform of the defence system and of the SMAF should be accelerated.

          Republic of Serbia started analysing its macro-economic perspective and integration of economic policy for the period of several years, instead of an annual analysis, according to the principle applied in the OECD. More precisely, starting from 2002 fiscal year, the annual decisions will be replaced by those made according to the three-year macro-economic policy. Therefore, the strategic frame for defining priorities has been secured, as well as for connecting sectors' policies, and - according to this, the location of the expenses in annual budgets. Very important result is that forecasting and sustainability of the fiscal policy, as an important part of macro-economic policy, will be easier.

          According to the Memorandum on the Budget and Ecconomic and Fiscal Policy for 2004, with projections for 2005 and 2006, proposed by the Ministry for Finance and Ecconomy and adopted by the Serbian government in May and amended on November 1st 2003, the expenses planned for the defence (not including the money for military pensions, which are - as for comparison with the structure of the public spendings in other countries - bilanced within the total pension sum) are as follows: 3,3% in 2004,  2,9% in 2005 and 2,5% of the GDP in 2006. When we calculate the absolute sums and add the part of the GDP planned to be achieved in the territory of Montenegro, we come to the projected sums of the GDP on the level of the State Unions. The sums are as follows: in 2004 - 1.328,7 milliard dinars; in 2005 - 1.494,3 milliard and in 2006 - 1.636,4 milliard dinars.

          If we apply those percents to the financing of defence system (3,3, 2,9 and 2,5%), we come to the conclusion that we can expect following locations of the Serbian and Montenegrin budgets for defence (not including the expenses for military pensions): in 2004 - 43,8 milliard dinars (as for comparison with the other countries, according to the rate exchange on January 16, 2004 (1 euro = 68,8631 dinar) - 636 million euros), in 2005 - 43,3 milliard dinars (629 million euros) and in 2006 - 40,9 milliard dinars, which makes 594 million euros.

          However, here we must keep in mind that all the listed macro-ecconomic assessments and indicators, as well as the precise calculations of possible sums located for financing defence, should be considered carefully, if for no other reasons then for the fact that projected results of the local economy are influenced by the international surrounding, particularly when the changes in national growth are being considered, as well as by the situation in the international trade  - especially in the "euro-zone". Besides, the realisation of the projected size and structure of the public expenses, and therefore the projected financing of the defence system, is faced with numerous uncertainities, including - above all, those connected to the lack of officially adopted programme of the comprehensive reforms for a number of the main consumers of the budget, the defence sector included, then the risks connected to the application of the privatisation programme or to still not-regulated issue of the inherited foreign debts. Those uncertainities have, as the final result, so-called fiscal risks, which include the scenarios of unexpected increase of the public expenses or drop of the public income, as result of the unfavourable direction of the industrial growth or structural problems. Due to the unexpected international and particularly local situation in 2003, the rate of the real growth of the GDP in Serbia was changed, as it is well known, to 3,1% instead of previously planned 5%.

          Taking all of these into consideration, Serbian government determined the budget proposal for 2004, on its session held on November 1st 2003, within which 42,1 milliard dinars (3,17% of GDP) out of the Serbian and Montegrin budget are located for financing defence functions exclusively, not including military pensions, due to the lack of the money planned as taxes for professional soldiers’ salaries. This ammount is, compared to the Memorandum (43,8 milliard), smaller for 1,7 milliard, which indicates the need to accelerate the reform process, particularly in the cadre sector, because - for example - the salaries of the employees in the defence system have been planned according to the level in November 2003, so they can be higher only through reduction of the number of employees and improvement of the structure favourable for lower ranks, which is younger people, who mostly have military operative duties.

          The planned amount of the budget expenses for defence in 2004, as well as its structure may certainly be changed, if it is decided by the new government and Serbian Assembly, which will first have to deal with adoption of budget for 2004, having in mind that contemporary financing has March 31st as the deadline. However, taken into consideration the needs expressed and current conditions in the defence sector, great changes cannot be expected although the planned sum should be increased, according to the unexpectedly low outcome in refer to the planned defence budget for 2003, high debts and the need to speed up the reforms. The sum planned should at least be increased for the special expenses of the reform that is to be carried out in 2004, by all means within the percentage of the GDP planned by the amended Memorandum (3,3%).

          However, Montenegro has already made a move to the totally opposite direction. Namely, although it has been planned by the Draft law on the budget of Serbia for 2004 that Montenegro should participate in financing the state affairs of Serbia and Montenegro with 8% (4.766.800.000 dinars, which is 70 million euros), Montenegrin budget determined only 41 million euros, which is about 2,8 milliard dinars (4,7% of the sum planned for financing all functions of the State Union). From this sum, 36 million euros are planned for the army and other defence functions in the territory of Montenegro, while 5 million euros are planned as a part of the budget reserve, aimed for the State Union, while this is also just for the defence function since there are no other functions in the territory of Montenegro. The sum of 41 million euros may, as in the previous year (after the Constitutional Charter had been adopted) cover the salaries and the part of the fees for professional army members in Montenegro, at the present level for which 37,7 million euros are needed, but with the rest of 3,3 million euros only one fourth of the necessary expenses can be covered, for the goods and services which were covered from the Montenegrin budget last year. So, there is no room for paying military pensions (to the citizens of Montenegro) although it was agreed that financing would be carried out according to the territory principle, according to the Constitutional Charter and the Law of Implementation of the Constitutional Charter of the State Union.

          Global structure (for the time being) of the planned budget amount of Serbia and Montenegro for financing pure defence functions (precisely 42.134.873.000 dinars) in 2004 is as follows: (1) salaries and fees of the employees - 21.107.152.000 dinars (50,1%); (2) materials and services for performance and maintenance, including real estate - 17.367.475.000 dinars (41,2%); (3) equipment and reserve - 3.660.246.000 dinars (8,7%).

          Such a structure of the planned defence expenses in 2004 is almost the same as an average structure in the seven-year period 1997-2003 (48,5%, 42,3% and 9,2%, respectively), where the conclusion remains nothing has basically changed in the last seven years. Simply, this is still "a survival budget" which is not useful for the employees in the Army (since there are too many of them, with very bad structure in ranks) or for improvements in the equipment and modernisation of the Army (since too large slice of the small cake goes for covering and maintenance of the existing professional, active and reserve members, infrastructure and technique).

          According to the findings presented during several professional seminars in 2003 and at the beginning of 2004 on various issues in the field of the security sector reform, in the NATO members but also in the other developed countries which are members of the Partnership for Peace, but not of NATO, average global structure of the defence budget is as follows: (1) salaries and other personal expenses of the employees (40 to 50%); (2) maintenance, repairs, infrastructure, development and research (25 to 35%); (3) equipment (25%). The SMAF and the defence system as a whole are obviously very far from this standard - directly on the account of equipment and modernisation.

          Budget items located for the defence will certainly finance a part of the expenses of the "reform ad hoc". A part of "internal potentials" should also be added, considering the surpluses of the real estate, weaponry and military equipment as well as possible incomes from the jobs and services done for the users outside the defence system. One of the examples is that the Defence Ministry planned 2 milliard dinars income inside the defence system, almost completely within the SMAF, apart from the Serbian and Montenegrin budget. Certainly, more of such incomes can be provided.

          Based on these facts and according to the legal regulations, a special fund should be established for financing the defence system reform. The fund, as a public institution, should have a certain level of transparency as well as (not only) legally based accounting and financial but also the necessary democratic civil control over the defence system reform, particularly of the SMAF. Such a fund could have many sources beside those listed above, such as donations and supports for destruction of the weaponry surpluses, World Bank credits for solving the problem of surplus of employees, etc. Indirect effects can also be counted on, along with the operation of such a fund, which would reduce the planned and budgeted expenses of the regular functioning of the army, such as:

          - discharging unnecessary so-called military income institutions, in the field that does not directly give logistic support to the army, which means elimination of the expenses where the services of "civil" sector can be more competitive;

          - reduction of the "war army" (reserve), which reduces expenses for the equipment "kept at home" as well as the expenses of the reserve training;

          - reduction of the communal and other expenses for maintenance of real estates and properties that the army will give up;

          - abolishing the right to "civil" cars used by even lowest rank military executives;

          - introduction of the modern system of integral planning, programming and budgeting, compatible to the internationals standards, which clearly defines long-term, middle-term and annual priorities, based on the continual analysis of the defence and according to the Defence Strategy and Military Doctrine, and what is most important, the rational and efficient use of the available resources is secured;

          - establishing modern financial service in the Defence Ministry which must not be delayed and, particularly, establishing competent management of that service, according to the legal regulation of the budget system and long practise of other countries which are likely to become our partners very soon;

          - completion and full application of the legal regulations of public supplies, certainly according to the specific characteristics of the defence system.

          All of these, clearly, lead us to the conclusion that very serious attention must be paid to the defence system reform, and the SMAF reform within it. This is the issue of the national, which means, state importance, and only then the obligation of the defence sector itself.

          The defence system reform should be created and operatively carried out by the Defence Ministry but Serbian and Montenegro government and Council of Ministers are the most responsible for this reform, as a very complex system issue which is to be solved within the reform of the whole social and industrial system (transition).

          This global assessment is also based on the point that certain, very important issues of the defence system reform certainly cannot be solved by the Defence Ministry. Such issues are, for example, adoption (already prepared) Defence Strategy, adopting new laws on defence, army, property of the state members, property which will be used by the army or the defence system, as well as the changes and amendments of the general ("civil") laws which provide the functioning of the military judiciary (in particular field). Judiciary and executive branch of the (new) state authorities have particularly important roles, if for no other reason then for the fact that all those problems cannot be solved without coordinated participation of the number of ministries in charge (Defence, Foreign Affairs, Finances, Economy, Justice, Social Affairs, Local Government, Ecology, etc).

          This extremely complex problem leaves no room for any delay so the serious state programme of the defence system and Army reform must be started almost immediately. This programme should be proposed by the Council of Ministers and harmonised with the governments of the state members and adopted by the Assembly of the State Union of Serbia and Montenegro.

        • Tags: army, reform, Defence, Defense Ministry, Serbia, budget, transparency, money
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