Business in the Balkans: The case for cross-border co ... · Business in the Balkans Introduction 3 The ﬁrst chapter argues that trade liberalisation and improved customs efﬁciency

Centre for European Reform29 Tufton Street London SW1P 3QL UKT: 00 44 20 7233 1199 F: 00 44 20 7233 [email protected]

July 2002ISBN 1 901 229 32 7 ★ £5/SS8

Businessin theBalkans:The case for cross-borderco-operation

Liz Barrett

July 2002

Businessin the Balkans:The case for cross-borderco-operation

Liz Barrett

ABOUT THE AUTHOR

Liz Barrett is currently based at St Antony’s College, Oxford,researching political corruption in Eastern Europe. In 2000 and2001, she worked as a freelance journalist in the Balkans, based inZagreb and writing for The Economist and Business CentralEurope, among other publications.

AUTHOR’S ACKNOWLEDGEMENTS

The author would like to thank all those who shared their viewsand expertise during interviews undertaken for this report.Valuable contributions were made by the CER team and by friendsand colleagues in the region, including Biljana Dakic, Tamás Dávid,Ivo Prokopiev and Sinan Ülgen. Thanks are also owed to membersof the TRANSFUSE Association, whose hard work has convincedme that cross-border co-operation in the Balkans is both possibleand fruitful. The conclusions and any errors are the author’s own.

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Foreword

The Centre for European Reform would like to thank the Richard C. WeldenFoundation and Raiffeisenbank Austria Zagreb for supporting this publication.

RICHARD C. WELDEN FOUNDATION

The Richard C. Welden Foundation is a private non-profit organisaton based inNew York. The Foundation sponsors studies on EU integration and onreconciliation between Turkey and Greece, and between the Catholic and theOrthodox Churches. The Foundation also gives scholarships for the educationof Balkan students in the EU and US. This year, the Foundation launched aninternational competition on EU-US Relations: ‘The US and the EU:Transatlantic Drift or Common Destiny’. For further details, please seewww.welden.org.

Raiffeisenbank Austria Zagreb is a member of the RZB Group, winner of TheBanker’s ‘Bank of the Year 2001’. As part of its long-term business strategy inCentral and Eastern Europe, Raiffeisenbank Austria has been active in Croatiafor seven years. RBA Zagreb has won numerous Croatian and foreign awards,including prestigious ones from Euromoney and Central European, and theZlatna kuna Award of the Croatian Chamber of Commerce for the best bankin Croatia in 2000.

★

Contents

About the author

Author’s acknowledgements

I Introduction 1

II Creating a single market 5

III Promoting Balkan investment 19

IV Seamless infrastructure 27

V Conclusion and recommendations 37

I Introduction

Stability is the pre-condition for success in Central and EasternEurope. As the region emerged from communism in the 1990s, theleaders of some countries quickly convinced the world that theyoffered safe havens for investment and were reliable businesspartners. Those countries won political friends, reaped economicbenefits and are now preparing to join the EU. Other leaders insteadearned themselves a bad name for promoting an aggressivenationalism. Their countries, and those in the neighbourhood, sankinto conflict, political instability and economic decline. This was thefate of most of the Balkans.1

A new generation of governments is now in place in the Balkans,elected by voters keen to see living standards improve and to join theEuropean Union. To achieve these goals, the Balkan countries needstability. The catch is that the best guarantee of stability is improvedrelations between countries which were until very recently enemies.Few politicians in the region are willing to risk public disapproval byrebuilding relationships with neighbouring countries.

This paper argues that the way to achieve stability in the Balkans isto promote links among the business communities. Improved cross-border business links will help to bring rapid economic gainsthrough higher levels of entrepreneurial activity and increasedforeign investment. If business leads, politicians will find itacceptable to follow.

1 For the purposes of this paper, the ‘Balkans’ refer to: Albania, Bosnia-Herzegovina,

Bulgaria, Croatia, the Republic of Macedonia, Romania and Yugoslavia (Serbia and

Montenegro). This paper was drafted before Yugoslavia’s change of name, so refer-

ences are to ‘Yugoslavia’, rather than ‘Serbia and Montenegro’. Bulgaria and

Romania are applicants for EU membership.

R O M A N I A

P O L A N D

U K R A I N ESLOVAK

REPUBLIC

CZECHREPUBLIC

HUNGARY

AUSTRIA

SLOVENIA

CROATIA

BOSNIA-HERZEGOVINA

YUGOSLAVIA

B U L G A R I A

MACEDONIA

ITALY ALBANIA

GREECE T U R K E Y

MOLDOVA

MALTA CYPRUS

MontenegroKosovo

Corfu

Crete

Sicily

B l a c k S e a

Me

d i t e r r a n e a n S e a

Ad

r i at i c

Se a

Ae

ge

an

Sea

0 100 miles

0 200 kilometres

Scale

Bucharest

Sofia

Athens

Belgrade

Tirana

Sarajevo

Skopje

Ljubljana Zagreb

The Balkans

Political leaders in the Balkans are used to the idea that their countriesare interdependent, but they tend to be suspicious of politicalintegration. Some even see their linkages with neighbouring countriesas a burden that cannot be escaped. In recent years, Bulgarian andRomanian companies have suffered frequent disruptions to theirexport routes through Yugoslavia. Foreign investors steered clear ofMacedonia and Albania as the Kosovo crisis developed. Holiday-makers deserted Croatian resorts during the Bosnian and Croatianwars and have only recently begun to return. And Bosnian companiesare still struggling to regain business with Hungary and Croatia thatwas lost when war destroyed crucial rail links.

This paper focuses on the positive aspects of economicinterdependence. It argues that Balkan countries can acceleratetheir own economic development by exploiting the potential forcross-border trading. And it seeks to offer a strategy for regionalintegration that is politically and economically realistic and doesnot compromise more ambitious future aims, such as EU accession.

In addition to promoting economic development, regional co-operation could bring direct benefits for Balkan stability andsecurity. The experience of the EU suggests that economicintegration can help to promote security. Co-operation among ahandful of national coal and steel industries in Western Europe halfa century ago laid the foundations not just for economic prosperity,but also for improved political relations among participating states.

The Balkan countries do not function as a single market at present,however, and the barriers to doing business – especially acrossborders – are enormous. These barriers deter foreign investmentand make it difficult for local firms to co-operate with firms inneighbouring countries. This paper highlights the existing obstaclesto business across borders and identifies steps that need to be takento overcome them.

2 Business in the Balkans Introduction 3

The first chapter argues that trade liberalisation and improvedcustoms efficiency are essential to make trade within the region freeand easy, rather than slow and costly. The paper discusses severaloptions for liberalising trade, taking into account politicalfeasibility and the likely impact on national economies.

The second chapter identifies ways of encouraging both foreigncompanies and local entrepreneurs to invest in the Balkans.Greenfield investment, in particular, brings concrete economicbenefits: foreign capital and know-how from committed long-terminvestors. But greenfield investment is in short supply in theBalkans, where privatisation has shaped the investmentenvironment, frequently attracting second-rate foreign investorsthat are unwilling or unable to overhaul a company. This sectionsuggests that a Balkan-wide investment promotion campaign couldre-package the region as an exciting emerging market with highgrowth potential. This campaign should use the experience offoreign investors in the Balkans to date, identifying what attractedthem to the region when others shied away.

The small business sector also has great potential, but its growth isstunted by the lack of financing options. Chapter two suggests thatchambers of commerce in the region could connect localentrepreneurs with foreign investors, to facilitate the formation ofjoint ventures. It also argues that the countries themselves could setup a regional structure for financing, in the form of a BalkanDevelopment Bank, devoted to cross-border projects and run bybankers from the region.

The third chapter focuses on the infrastructure and services whichsustain businesses in the region – transport, energy, telecoms andbanking. It argues that infrastructure development must supportthe regionalising trend in business activity. Foreign investors haverecognised this fact and are seeking to develop new regional servicesto meet the demand, for example, for banking. However, mostinfrastructure industries tend to be in state ownership, so

II Creating a single market

It takes one week to transport goods from Thessaloniki in northernGreece to Ljubljana, the capital of Slovenia, says Samo Ivancic,president of the American Chamber of Commerce in Slovenia – ajourney that should take no more than two and a half days. Thetruck crosses four borders, encountering different trade regimes,currencies and a host of inefficient or corrupt customs officials. It isnot only trade that is problematic. When Ivancic travels around theregion, he has to deal with an array of complicated visarequirements. “Commuting in the Balkans is a nightmare”, he says.“The problem didn’t exist ten years ago and I sincerely hope it willbe better in ten years’ time”.

Ivancic’s story is all too familiar to business-people operating in theregion. Put simply, the Balkans does not function as a single market.But it could if governments liberalised trade faster and morethoroughly, and improved the efficiency of customs services.

Facilitating tradeIf the Balkans region is to achieve sustainable – rather than aid-dependent – growth, it will have to find a way for goods to flowfreely and cheaply across borders. Over the past ten years, politicalinstability and security problems have blocked normal businessdevelopment, leaving economies reliant on inflows of foreign aid.With these risks now subsiding, the Balkans has to focus onrebuilding solid economic foundations so that it can start catchingup with the more advanced transition countries.

Catch-up will depend largely on investment. The Balkaneconomies are unhealthily dominated by labour-intensive sectorslike agriculture and mining. Shifting the balance towards skilledmanufacturing and services will require significant levels of

governments need to think regionally too. Privatisation remains thepriority, but governments should consider the potential for regionalconnections when restructuring and preparing firms for sale. Theaim is to ensure that these services operate smoothly and to increasepressure for reform. The liberalisation of such industries is stillpolitically controversial in the region.

The paper addresses its recommendations to three groups: nationalgovernments, business people and international organisations. Itspurpose is not to analyse the strategies of international organisationslike the European Union or the World Bank, or regional ones like theStability Pact,2 but to consider how the development of the privatesector might promote political and economic integration. Theresearch has been conducted using a bottom-up approach, focusingon the experiences of business people, whether foreign investors orlocals, who currently operate in the Balkans. It attempts to draw aclear picture of how business across borders works, or does notwork, and how it could be stimulated.

Similarly, the paper argues that business people, not politicians orforeign administrators, should take the lead in promoting economicco-operation. Where two firms see an economic reason to worktogether, they should be helped to do so. Policy-makers canfacilitate this by improving the framework in which businessfunctions – for example, by harmonising legislation or improvinginfrastructure. However, the impetus to change the frameworkshould come from business. Where companies see no benefit in co-operation, politicians and international policy-makers should notforce the issue.

4 Business in the Balkans

2 The Stability Pact for South-East Europe was set up in June 1999 by the EU, other

G-8 members, the Balkan states and their neighbours, and international organisa-

tions in the area. It is dedicated to achieving political and economic stability in the

region, and to fostering respect for democracy and human rights.

corruption and crippling delays. In some cases, these costs merelypush up prices; they deter other investors altogether.

Every step towards the creation of a single and efficient tradingzone would boost the Balkan region’s appeal to foreign investors.Individual countries would be able to market themselves as part ofa large, fast-growing region, instead of appearing to be smallcountries with difficult neighbours. And foreign investors would beable to treat the region more like a single market.

★ Local businesses. The Balkans cannot rely solely on foreigninvestment, and no government in the region would want to. Butmost local companies are in a mess. They have been hit hard by thedifficult operating conditions of the past decade – most haveoutdated equipment, high debts and low productivity. For themoment, these firms have no hope of exporting to the EU. A morerealistic and constructive strategy would be to boost trade withneighbouring countries.

Increasing exports to the EU is undoubtedly important in the longerterm, and essential to improving competitiveness in preparation forEU entry. But the Balkan states have achieved little so far: exportsto the EU have only risen over the last decade in sectors such astextiles, metals and mining, where competitiveness is based oncheap labour or natural resources. Very few Balkan companies havebeen able to compete in EU markets for higher value-addedproducts; most are simply too weak financially to invest inupgrading production to meet EU standards. For consumerproducts, in particular, the cost of an extensive advertisingcampaign, necessary to achieve brand recognition in the EU’smature markets, is prohibitively high.

Many governments have exacerbated the problem by failing topush through the structural reforms – privatisation, bank reformand so on – which are a precondition for building competitiveindustries and re-orientating trade. In the worst cases, politicians

foreign investment and sufficient local economic activity tostimulate domestic investment. Both foreign and localinvestment will benefit from trade liberalisation, so thatcompanies can take advantage of the larger regional market, notjust local opportunities.

★ Foreign investors. The Balkan countries, individually, aresimply too small to attract many foreign companies. OnlyRomania, with a population of 23 million, is a sizeable market.Bulgaria and Yugoslavia have less than 10 million people each;and the remaining countries in the region each have a populationof under 5 million. Taken altogether, however, the regionrepresents a market of around 55 million, rising to 130 million ifGreece and Turkey are included. Markets in Ukraine, Armenia,Georgia and Azerbaijan also loom on the horizons of businesspeople in Bulgaria and Turkey.

Many foreign companies already operating in the region haveadopted a Balkan-wide strategy, setting up headquarters in onecountry, while selling to and importing from others in the region.French car manufacturer Renault, for example, which boughtRomania’s Dacia car plant in 1999, aims to produce 200,000 carsa year by 2010, selling them throughout the region. Some firmsproduce in several countries, their suppliers and producers tradingwith each other across borders. Greek dairy firm Delta hasfactories in Romania, Bulgaria and Serbia, with each plantsupplying neighbouring countries too. Russian oil giant Lukoil,which owns the Neftochim refinery in Bulgaria, is creating anetwork of petrol stations across Yugoslavia, Macedonia, Greeceand Turkey, and it hopes to buy oil companies in Croatia,Hungary, Romania and Greece.

At present, though, investors cannot treat these countries as a singlemarket in any real sense, because the cost of cross-border businessis too high. At an average border in the region, trade in goods islikely to encounter not only high customs tariffs, but pervasive

Creating a single market 76 Business in the Balkans

Some companies could increase cross-border trade considerably byresurrecting old trading relationships severed by war. Graspingthese business opportunities does not require massive investment inproduct upgrades or marketing. Indeed, many products alreadybenefit from brand recognition in other countries of the region,especially within the countries of the former Yugoslavia. Serbs, forexample, were happy to see familiar brands from Croatian foodfirms Podravka and Kras back on their shelves in 2001. Not all ofthe old former Yugoslav trading relationships should be resurrected– some only ever existed because of subsidies. But there is certainlymoney to be made in pursuing deals with neighbours. And thatmoney could enable struggling Balkan firms to start investing inimproving productivity and standards.

This is as much a question of political will as of corporate strategy.Current trading patterns in the region suggest that companiesquickly exploit opportunities once costs are reduced. Countrieswhich have reached bilateral free-trade agreements with theirneighbours enjoy far higher trading levels than those whichcontinue to impose heavy import duties. To some extent, that isbecause free-trade agreements are negotiated when tradingrelationships are good. But the agreement itself can play a crucialrole. When the free-trade agreement between Croatia and Bosniabroke down in 1999, following a dispute over terms, Croatia’sexports to Bosnia, until then its third largest export partner,dropped by around a quarter over the following 12 months.

The Macedonian example is also interesting. Macedonia hasconcluded free-trade deals with Albania, Bosnia, Bulgaria, Croatia,Slovenia, Turkey and Yugoslavia – by far the most of any Balkancountry. Now it is negotiating with Romania. Macedonia’s tradewith the region was, of course, disrupted in 2001 by conflict. But in1998 it had the highest proportion of trade with South-EastEuropean countries of all countries in the region, despite the factthat it is producing similar goods to its neighbours.

have seen privatisation as a way of lining their own pockets, ratherthan as a means of improving a company’s productivity. Even wheregovernments have the best intentions, they are often too weak topush through difficult reforms. They lack know-how and arevulnerable to pressures from workers’ unions.

Therefore, while exporting to the EU must remain a key long-termgoal for Balkan companies, it is not necessarily the best place forthem to start. Expanding trade within the Balkans, on the otherhand, can be a profitable – interim strategy. Balkan economiststend to dismiss the importance of intra-regional trade, arguingthat neighbouring countries are too poor to be of interest, andthat they are economic competitors, producing similar goods.They cite as evidence the current levels of intra-regional trade,which the World Bank has estimated at just 12 to 14 per cent oftotal exports and imports, on average.3

Look at the figures in detail, however, and it is clear that intra-regional trade is important for particular countries and sectors.Bosnia, for example, conducts well over a quarter of its trade withCroatia, and Macedonia relies heavily on Yugoslavia for itsexports. Bosnia, Slovenia, Yugoslavia and Greece are amongCroatia’s top ten export destinations; Turkey, Yugoslavia andGreece are in Bulgaria’s top five, together taking more than 25 percent of that country’s exports.4

There are also many business opportunities that have yet to beexploited. Serbia, for example, could provide sheet steel forBulgarian refrigerators, and Croatia components for Bosnian car-assembly plants. Yugoslav firms are keen to enter the Bosnianmarket for agricultural equipment, and planting and seed material,as well as coal and other mining products. In some cases, co-operation could make the difference between production beingviable or not.

8 Business in the Balkans Creating a single market 9

3 World Bank, The road to stability and prosperity in South-Eastern Europe, 2000.4 2000 trade figures.

How best to liberalise trade?The current trend in the region is to follow Macedonia’s exampleby negotiating an increasing number of bilateral free-tradeagreements with neighbours. The current network of agreementslooks like this:

Bilateral free-trade agreements in South-Eastern Europe

Y= has agreement; NEG = in negotiations; * Both CEFTA members5

Where free-trade agreements do not exist, the costs of doing businessacross borders increase significantly, sometimes prohibitively.Croatia’s Podravka might benefit from brand familiarity inYugoslavia, but it has had to face tariffs of 40 per cent or so levied atYugoslav borders. Podravka is considering producing in Macedoniato exploit the country’s free-trade arrangements. That makes sensefor Podravka, which can be reasonably certain about its marketpotential. For other companies, these extra costs may deter themfrom entering the market altogether.

Governments in the region have started to talk about negotiatingfree-trade agreements as a priority. But when it comes to cuttingduties, many are reluctant to for go a major source of state revenue.The Yugoslav Deputy Prime Minister Miroljub Labus, for example,has commented that it would be difficult for Yugoslavia to reduceaverage tariffs below 9 per cent. The Yugoslav government facesdifficulties trying to raise revenue from other sources becausecorporate profits and income levels are so low. In some Balkancountries, customs revenue represents as much as 3 per cent ofGDP. Nevertheless, given the relatively low levels of intra-regionaltrade (as a proportion of total trade), the revenue losses fromliberalisation would be small. More importantly, liberalising tradewould bring economic benefits that, in the medium term, clearlyoutweigh losses to the budget.

10 Business in the Balkans 11

5 CEFTA is the Central European Free Trade Agreement, comprising Bulgaria,

Czech Republic, Hungary, Poland, Romania, Slovakia and Slovenia.

Alb

Bos

Bul

Cro

Mac

Rom

Slo

Tur

Yug

Alb

--

--

--

Y

--

--

--

--

Bos

--

--

Y

Y

--

Y

--

NEG

Bul

--

--

Y

Y

*

--

Y

NEG

Cro

--

Y

Y

Y

NEG

Y

NEG

NEG

Mac

Y

Y

Y

Y

NEG

Y

Y

Y

Rom

--

--

*

NEG

NEG

--

Y

--

Slo

--

Y

--

Y

Y

--

Y

--

Tur

--

--

Y

NEG

Y

Y

Y

--

Yug

--

NEG

NEG

NEG

Y

--

--

--

EU’s membership criteria and what help they need inimplementation. The agreements represent a mutualcommitment. The candidate agrees to implement reforms andharmonise legislation; the EU agrees to assist the country inmaking the necessary adjustments.

The new approach focuses heavily on removing barriers to tradewith the EU. In time, the argument goes, all of the countries of theWestern Balkans will effectively become part of the EU singlemarket. But progress towards this goal is likely to be slow.Negotiations have already highlighted the varied levels ofdevelopment among the Western Balkan countries. Croatia andMacedonia have signed their agreements and are busy withimplementation and harmonisation. Albania stumbled at the firsthurdle when an EU Feasibility Report said the country lacked asound basis from which to start negotiations. However, after morethorough preparations, talks look set to start in 2002. Bosnia hasnot even reached the Feasibility Report stage. It is still trying tocomplete the 18 pre-conditions set by the EU, which include suchbasics as the passage of an electoral law, and it is behind scheduleon those. Yugoslavia, too, is a long way from signing itsStabilisation and Association Agreement. And while it might befeasible to expect all of the countries to have concluded agreementswithin five years, full implementation – will take much longer.South-Eastern Europe needs to liberalise trade within the region ata much faster pace than that.

Numerous Balkan observers have advocated a genuine free-trade zonefor South-Eastern Europe, embracing all of the countries. The Centrefor European Policy Studies, a Brussels think-tank, put forward theidea in 1999.6 In September 2001, German Foreign Minister JoschkaFischer revived the concept, advocating a limited economic union forthe Western Balkans, based on the model of the European EconomicArea – a single market among European states, including some whichare not members of the EU. In theory, Fischer’s idea is a good one. Afree-trade zone would overcome the problem of complexity: goods

In June 2001, Albania, Bosnia-Herzegovina, Bulgaria, Croatia,Macedonia, Romania and Yugoslavia decided to speed up theprocess. Under the auspices of the Stability Pact, they signed amemorandum to create bilateral free-trade networks with all othercountries in the region by the end of 2002. That would allow atleast 90 per cent of goods to be exchanged tariff-free.

This is an admirable undertaking and one that is making steadyprogress, but the bilateral approach has its disadvantages. Thisnetwork of bilateral free-trade agreements will not result in a free-trade zone, but in a tangled web of different trade regimes. Mostagreements do not liberalise trade fully, but stipulate exemptions oncertain products for certain time periods. Macedonia’s agreementwith Croatia, for example, looks different to the one it has withSlovenia. And although all three countries have free-tradeagreements with each other, they do not represent a mini free-tradezone. Macedonian products still face different treatment onCroatian and Slovenian borders, leaving considerable scope fordelays, confusion and corruption. If the aim of trade liberalisationis to reduce complexity, a system of bilateral agreements fails.Foreign investors, seeking to establish a single country export basein the region, will find this web of bilateral agreements a continuingdeterrent to cross-border trade.

The EU argues that this problem will be solved through its ownbilateral negotiations in the region, as part of the Stabilisationand Association Process. Established after NATO’s bombing ofSerbia and Kosovo in 1999, the process is intended to give Balkancountries a clear prospect of joining the EU. Prior to its launch,only Bulgaria and Romania were considered accessioncandidates, having signed Europe Agreements in the early 1990s,along with the Central European countries. The Stabilisation andAssociation Agreements were designed specifically for thecountries of the Western Balkans (Albania, Bosnia-Herzegovina,Croatia, Macedonia and Yugoslavia). The aim is to assess whatreforms these countries need to undertake in order to meet the


6 Michael Emerson, A system for post-war South-Eastern Europe, CEPS, 1999.

association. Its members are not prevented from joining the EU butcan benefit from free trade with neighbours in the meantime.CEFTA’s impact on non-agricultural trade has been significant.Trade between the Czech Republic, Hungary and Poland hasgrown almost 50 per cent in the past four years alone (see chart).8

The CEFTA option would have three advantages for the Balkans:

★ it would overcome the political sensitivities which surround theissue of increased regional co-operation by de facto creating aBalkan free-trade zone;

★ it would encompass more countries than a purely Balkan cluband lead to a closer relationship to the EU, aiding the Balkancountries’ progress towards EU membership; and

★ it should be faster to achieve than Stabilisation and AssociationAgreements for each Balkan country.

The EU could help by encouraging CEFTA’s existing members toadmit the entire region of the Western Balkans. Croatia’sapplication to join CEFTA was stalled for several years, although it

would be able to move around the region freely and the system wouldbe simple and transparent. There would be fewer delays at bordersand the scope for corruption would be reduced.

In practice, however, negotiating such an agreement would beimpossible. There is very little government support for the regionalfree-trade idea, largely for political reasons. If the Balkan countriesshare anything, it is a fear of being stuck in a group with oneanother. This is a hot political issue. Croatians and Slovenians, inparticular, tend to see regional associations as plots to recreate theformer Yugoslavia. Croatia’s Foreign Minister, Tonino Picula, forexample, described Fischer’s suggestion of a Western BalkansEconomic Union as “isolation from the basic process that leads tothe EU”. Given the difficulties, it could take several years at best toconclude such a deal. By then, if things go well, the countries willbe focusing on free-trade with Central Europe and Western Europe,and a South-East European zone will be outdated.

Looking to the future, the most effective and realistic way ofintroducing free trade might be to incorporate the countries in abroader arrangement. Membership of the WTO represents a start,and Albania, Bulgaria, Croatia, Romania, Slovenia and Turkeyare already members. But the best option might be for all theBalkan countries to join the Central European Free TradeAgreement (CEFTA).7

Founded in 1993, as a way to ensure that greater integration withthe EU did not jeopardise intra-regional trade, CEFTA now hasseven members, including Bulgaria and Romania. Through acomprehensive set of bilateral agreements, CEFTA has succeededin liberalising trade in industrial products almost completely.Initially, there was little enthusiasm for CEFTA, for many of thesame reasons that a Balkan free-trade zone is rejected.Governments viewed CEFTA as a diversion from EU integrationand pointless, given similarly structured economies with littleintra-regional trade. Yet CEFTA has emerged as an important


7 See Stanislav Daskalov and Nicky Mladenov, A comprehensive trade policy plan

for the Western Balkans, European Institute, Bulgaria, September 2000.

8 Source: Budapest Economics.

The project is also creating a website to give traders access toinformation on all of the customs regimes in the region. Acertified training scheme is being offered to freight-forwardingcompanies, teaching drivers how best to prepare thepaperwork required at borders. At present, the project isoperating as a pilot on only a few border crossings, but theidea is to translate the lessons into national policy.

★ The South-East Europe Cooperative Initiative (SECI), a forumfor regional decision-makers, is examining ways to improveborder crossings in 13 countries. SECI’s major contribution hasbeen to bring together customs officials and private-sectorcompanies to discuss the difficulties of using borders. Theexpertise gathered at these sessions is passed onto nationalpolicy-makers, as well as internationally funded programmessuch as the World Bank’s project.

Further steps are needed to complement these initiatives. Businessassociations and chambers of commerce could help by educatingand informing their members about different border regulations,and channelling complaints about practice on the ground topolicy-makers. Countries could also eliminate wasteful delays byrelaxing visa procedures for drivers with good track records. EUmembers are an offender, requiring Balkan freight-shippingcompanies to renew their visas, even multiple-entry ones, everythree months, thereby leading to the loss of one or two workingdays. The Stability Pact’s Business Advisory Council, similar to theSECI forum but with greater foreign-investor representation, couldplay an important lobbying role here.

is now set to join in 2002, as it needed first to meet two pre-conditions for membership – a signed EU Association Agreementand WTO membership. These pre-conditions should be realxed.But more generally, the current members may be opposed tobroadening their club. However, the majority of current CEFTAmembers will be leaving the organisation within the next few years,following EU enlargement.

The customs problem: borders or barricades?The World Bank has documented the delays experienced at bordercrossings in Eastern Europe. It found average waiting times atborder crossings of five hours between Macedonia and Yugoslavia;36 hours in total at borders between Bulgaria and Germany; and 24hours from Albania to its Adriatic neighbour, Italy. Add to thistransit times through the countries, on poor road and rail networks,and exporting within or from the region begins to look pretty costly.Trade in perishable goods is in many cases impossible.

Many customs officials offer a speedier service for those who arewilling to pay. This pervasive corruption is encouraged by thecomplexity of the customs regimes, since few drivers know theindividual laws well enough to challenge officials. Even wherecorruption is not an issue, outdated technology and poorly trainedpersonnel create border delays. Free-trade under such conditions isa fiction – regardless of the agreements signed by governments.

Two initiatives are currently focusing on these problems:

★ The World Bank is running a scheme in six countries, aimed athelping them improve customs procedures on their borders,called the ‘Trade and Transport Facilitation in South-EastEurope Project’. Improvements may be as simple asintroducing a single point of payment, with an itemised bill,for various customs charges; or allowing selective checking –many countries currently require every vehicle to be opened.

Creating a single market 1716 Business in the Balkans

III Promoting Balkan investment

South-Eastern Europe is not an economic black hole. Intrepidforeign investors do venture into the region, and many return toinvest again. Despite repeated bouts of instability, Balkaneconomies have continued to function and the foreign investmentstock has risen steadily, amounting to 14.5 per cent of regionalGDP by the end of 1999. Given the risks, this compares relativelywell with foreign investment levels in Central Europe (the CzechRepublic, Hungary, Slovakia, Slovenia and Poland), at 23.8 per centof GDP.9 The democratic elections in Yugoslavia in 2000 havefurther reduced the perceived risks of investing in the region. TheEconomist Intelligence Unit is forecasting that the flow of foreigninvestment into the region, as a percentage of GDP, is likely toovertake that to Central Europe from 2002.10

That is good news for the Balkans. The region desperately needscapital and foreign business know-how. But the benefits of foreigninvestment depend as much on the type of investment as the quantity.Most of the foreign investment to date in the Balkans has been relatedto privatisation, and the expected increase in investment over the nextfew years is largely due to a pick-up in the pace of such sales.Privatisation is an essential part of transition, but governments shouldnot rely on it to bring in beneficial foreign investment. In the Balkans,privatisation has often been an opaque – if not outright corrupt –process. Officials frequently fail to select the most appropriateinvestor. And, since sales are rarely accompanied by liberalisation oreffective regulation, they tend not to increase competition.

Privatisation programmes can certainly be improved, but the regionneeds to attract investment in greenfield sites, and mergers and

9 Jared Manasek, Back to business in the Balkans, Economist Intelligence Unit, 2000.10 Economist Intelligence Unit, Economies in transition, March 2001.

countries closer to the Balkans had a more realistic picture ofwhere it was possible to do business and where not. The wholeenvironment was more familiar to them. They had historicallinks – the Habsburg Empire once stretched into today’sCroatia, Bosnia and Serbia, while Turks occupied much of thearea for hundreds of years. History fosters cultural links thatfacilitate contacts and even trust between business people:

“An environment which might seem impossible to aLuxembourg company is business as usual to us,” says MuhtarKent, president of Turkish brewery Efes. “Turkish companiesare used to coping with ever-changing rules or long waits forpayments”, says Faruk Erkoç, president of Penta, a Turkishtrade and distribution company specialising in oil products.Their experience is not all positive, however. Some Turkishinvestors say the Balkan business environment is less stableand predictable than that in Central Asia.

★ Easy to penetrate. The lack of competition within Balkan marketsmakes it relatively easy for new entrants to gain a foothold. Themarketing costs required to achieve a significant market share inthe Balkans are a fraction of those needed to penetrate a moremature and crowded market. Thus, doing business in the Balkansis in a sense easier, for some companies, than doing business inWestern Europe. For some companies, brand familiarity can alsoreduce marketing costs in Balkan markets.

★ EU prospects. South-Eastern Europe’s proximity to WesternEurope and, in particular, its prospects for entry into the EU arekey attractions. This helps Turkish and Greek companies decideto invest in the Balkans instead of the Caucasus, and convincesAustrian investors that an investment in a country like Croatiawill complement their Central European strategies. Even ifmembership itself cannot be expected for many years, the factthat these countries are engaged with the EU and could soon bebound into accession preparations sends an important signal.

Promoting Balkan investment 21

acquisition too. The benefits are clear: foreign investors setting upnew businesses bring in foreign know-how and capital and show ahigh degree of commitment. It is far more difficult for a country toattract greenfield rather than privatisation investment. Greenfieldinvestors are more easily deterred by the risk of political or ethnicproblems in a country or its neighbours. They need to be convincedthat the Balkans is a safe and profitable place to invest; and theyneed easy access to information about doing business in the region.At present, the Balkans fails on all accounts – at least in publicperception. This author recommends a Balkan-wide investmentpromotion campaign, to be administered either by a regionalinvestment agency, or by a co-operative task-force formed bynational investment agencies.

Time for a new imageSouth-Eastern Europe is in serious need of a good promotioncampaign to reverse the negative associations of recent conflicts.Yugoslav Foreign Minister Goran Svilanovic has suggested, tongue-in-cheek, that the theme of such a campaign might be “nice peoplelive in the Balkans”. Yugoslav Deputy Prime Minister MiroljubLabus implored a business forum in Thessaloniki in 2001: “Cometo my country – if you want to do business, you will find friendlyand able counterparts.” Both ministers recognise that it is essentialto restore foreign investor confidence in the Balkans.

The campaign should highlight the region’s potential for highreturns that are no longer attainable in the more mature markets ofWestern and Central Europe. It should also focus on the experienceof foreign investors already operating in the region. Most are fromfour countries: Greece, Turkey, Austria and Italy. Investors fromeach of these countries tend to have varying patterns of interest, butthey share certain characteristics and views about why investing inthe Balkans is worthwhile:★ Not as explosive as it looks. Investors from Northern Europe

or the United States were deterred from the whole Balkanregion by television images of fighting in one part. Those from


agencies and non-government organisations around the region andcontains useful information about the legal framework forinvestment in individual countries.

However, the process of information-gathering would be mucheasier if there were a one-stop-shop for the region – a regionalinvestment agency. Investors need to assess overall regionalconditions before setting up a greenfield production site.Comparing different locations is one aspect, but they also need toknow how easy it is to export within the region. If costs are pushedup by poor infrastructure, customs tariffs, corruption or borderdelays, the investment may not be viable. Encouragement, andfinancial assistance from the World Bank or EU, would helpinvestment agencies overcome their distaste for co-operation. Andthe campaign would probably get backing from banks withregional branch networks, which have a clear interest inencouraging cross-border investment.

If investment agencies start to co-operate, a natural spin-off couldbe the establishment of cross-border incentive programmes. Mostcountries in the region already offer investment incentives in theform of tax exemptions on reinvested profits, imported inputs andinvestment in certain regions. Given the benefits of region-wideprojects, governments could be encouraged to offer joint incentiveprogrammes for such investments.

The role of small businessesForeign investment might be the engine of economies in transition,but the long-term prosperity of these countries will require thedevelopment of a strong small and medium-sized business sector.Balkan entrepreneurs have superior knowledge of the localoperating environment and many ideas for promising businessventures. But they have virtually no access to finance: venturecapitalists tend to back foreign investors, and banks are unwilling tolend to start-ups.

Promoting Balkan investment 23

★ Cheap, skilled labour. The Balkans has cheap but skilledlabour. That makes it a good location for producing exportgoods. To date, most of the export-oriented investment inassembly and production plants has gone to the moreadvanced transition countries, like Hungary or the CzechRepublic. But as these countries attract more and more highvalue-added investments, investors will start focusing on theskilled labour base in the Balkans for low value-addedproduction. Asia may still be cheaper, but in the Balkans, thelabour force has, by and large, received a broad, high-qualityeducation. The Balkans can also market its particular labourforce strengths in areas such as languages and technology.Bulgaria, for example, has earned a strong reputation forhaving good mathematicians and computer scientists, makingit a magnet for IT investment.

Promoting the regionIf inward investment agencies are to promote a region rather thanseparate countries, they need to find new ways of co-operating.Currently they compete to attract foreign investment. That isinevitable and healthy, but competition should be accompanied byco-operative efforts to persuade investors of the benefits of theirregion over, say, Central Europe. Bringing foreign investment to theregion as a whole is in each individual country’s national interests.Serbia would gain from the establishment of a new plant in Bulgariawith plans to export to the west through Serbian territory; it mightgain less than if the plant were in Serbia itself, but far more than ifthe investor chose to locate the factory in Hungary.

Bulgaria’s foreign investment agency has already recognised thatinvestors seek access to the regional market. In October 2000, itlaunched the first Investment Guide for South-Eastern Europe atthe South-East Europe Forum, a conference on regional investmentheld in Sofia and attended by more than 2,000 business people. TheGuide was compiled from contributions sent in by investment


11 The members of Black Sea Trade and Development Bank are Albania, Armenia,

Azerbaijan, Bulgaria, Georgia, Greece, Moldova, Romania, Russia, Turkey and

Ukraine.

One way around the problem is for local entrepreneurs to joinforces with foreign investors. This has been the pattern followed bynumerous Turkish firms in the Balkans. In contrast to Greek state-owned companies, like OTE and the National Bank of Greece,which have invested hundreds of millions of dollars in the Balkanbanking sector, Turkish investors have tended to be small, privateplayers. Until recently, they were excluded from most EU fundingschemes, which prevented them from competing for majorinfrastructure or reconstruction projects. As a result, Turkishcompanies are prominent among those seeking partner investors fortheir activities in the region. They hope to find a West European orUS firm to provide the capital that they find difficult to raise, whilethey in return contribute know-how and the experience ofoperating in the region. Many companies in the Balkans couldbenefit from such joint ventures, offering their local knowledge inexchange for capital.

To facilitate such joint ventures, chambers of commerce couldorganise meetings, bringing companies together to swap ideas andestablish the personal relationships that are so important to strongbusiness ties. At present, meetings between national chambers ofcommerce tend to be conducted on a bilateral basis. Sector-specificmeetings would have the advantage of bringing together companieswith similar interests from around the Balkans, as well as foreigninvestors. The institutional structures already exist, and the chamberscould take it in turns to run the events for different sectors.

A Balkan Development BankAnother financing option for local business would be the formationof a Balkan Development Bank, with a mandate to fund cross-border projects. This regional development bank could be set upalong the lines of the Black Sea Trade and Development Bank.11

That bank was set up in 1998, in an effort to overcome the problemof financing investments in countries with high political risk.Around 60 per cent of its lending is directed towards investments

and 40 per cent to trade financing. Projects must benefit more thanone country, but not necessarily incorporate the whole region.

The Black Sea Trade and Development Bank’s first project inDecember 1999 was to grant a loan of $12 million to help Ukrainebuild a gas compressor station to feed the trans-Balkan gas pipeline.The compressor increased the capacity of the pipeline, boosting transitrevenues for the countries through which it passes – Russia, Ukraine,Moldova, Romania, Bulgaria and Turkey. The bank was not the solelender in this deal, which cost a total of $78 million. Indeed, it canfinance only 35 per cent of any one project, or up to 100 per cent fortrade financing. However, its involvement and intimate knowledge ofthe region often helps to attract other creditors and investors whowould otherwise be deterred by the risk of doing business in thisregion. Moreover, the bank is a home-grown initiative set up by thecountries themselves to serve the needs that they know best.

The main restriction on the Black Sea Trade and Development Bank’sactivities is the fairly low level of capital at its disposal, currentlyaround $1.4 billion. Member countries, many of which are relativelyimpoverished, have donated the Bank’s capital in proportion to theirability to pay. Greece, Russia and Turkey has each contributed 16.5per cent of the total capital; Bulgaria, Romania and Ukraine 13.5 percent; and the remaining countries 2 per cent each. A BalkanDevelopment Bank would similarly need to include wealthy members– perhaps the current major investors in the region, namely Greece,Turkey, Austria and Italy. A Balkan Development Bank wouldidentify its own investment projects, giving the countries themselvesfar more input into the way that international money is spent in theregion. To ensure that a proposal had broad credibility, the bankcould demand that it attract matching funding from the EuropeanBank of Reconstruction and Development and other suchorganisations. A Balkan Development Bank could help finance intra-regional trade. And it would provide cheaper financing to locals whohave good ideas for regional investment projects.


IV Seamless infrastructure

Smooth business transactions across borders depend on seamlessservices: in transport, energy, telecoms and banking. Balkangovernments know they must overhaul these basic services, whichcurrently tend to be inefficient and unreliable and thus presentserious barriers to investment and cross-border business activity. Butthey have yet to realise that a regional approach to infrastructurecould bring significant economies of scale and efficiency gains. Co-operation would also mean harmonising standards and enhancingtechnical compatibility – factors which could prove essential toachieving healthy competition among providers in the region infuture, as well as preparing the way for EU integration.

However, most of these industries are still, at least partially, in stateownership. Privatisation is a priority. Indeed, co-operation amongregional firms is likely to be achieved faster if it is left to their newowners – as the banking sector shows. Governments should take theregional dimension into account when preparing companies forprivatisation, by making an effort to harmonise standards and ensuretechnical compatibility. A regional perspective would make the assetsmore attractive to foreign investors, helping the state to secure a goodprice and a long-term commitment from the new owners.

Banking – a regional approachForeign investors are already pursuing a regional strategy in thebanking sector, with Austrian, Italian and Greek banks battling forinfluence. South-Eastern Europe is a more attractive bankingmarket than it might seem at first glance. Much of the populationhas hoarded foreign-currency savings under their mattresses duringrecent years of instability, because they distrust local banks. It isalso common for people to receive remittances from friends and

The establishment of a Balkan Development Bank would, of course,require at least a minimum of collective political will. But theinclusion of members such as Italy and Austria might help toconvince Croatia, for example, that participation would notstigmatise it as part of an underdeveloped region. Smallentrepreneurs, who would have much to gain from theestablishment of the bank, could be expected to lobby theirgovernments to support the initiative. And the key strength of suchan institution – for a region anxious to avoid aid dependence –would be that it was built on the initiative of the countriesthemselves, rather than that of external donors.


The upcoming privatisation of Yugoslav banks will boost interest inthe region’s banking sector, since most will be sold directly to foreigninvestors. In summer 2001, a delegation of Yugoslav bankers visitedZagreb to meet Croatian bankers, in an attempt to encourage them tostart lending in Serbia. The deputy CEO of Belgrade’s Yugobanka,Dragan Pavlovi´c, says that Croatian bankers, with their capital andknow-how, could earn “superprofits” if they entered the Serbianmarket. Slovenia’s largest bank, Nova Ljubljanska Banka, is clearlyconvinced. It recently announced that it would be buying a majoritystake in Yugoslavia’s Continental Banka.

The rush into Balkan banking is good news for foreign investorsgenerally, who will benefit from much-needed innovations in thefinancial sector. More foreign ownership and competition willultimately bring better access to trade financing, cheaper loans forinvestment and more secure conditions for consumers. It also sends asignal: if banks see advantages in entering the region quickly, and inmaximising their presence in several countries, they prepare the wayfor their clients to follow.

Telecoms – time to connectA decade ago, telecom companies throughout the Balkans werestate-owned national monopolies. Now foreign investors, with aclear interest in pursuing a regional-based strategy, own asignificant proportion of the Balkans’ telecoms businesses.Greece’s state-controlled telecoms firm OTE is the most high-profile investor. It owns fixed-line and mobile operators inRomania, a GSM licence in Bulgaria, a mobile operator in Albaniaand a stake – with Telecom Italia – in the Serbian fixed-linemonopoly. In early 2001, it failed to win the tender forMacedonia’s fixed-line monopoly, beaten by a new regionalplayer, Hungary’s Matáv. The owner of Matáv, Deutsche Telekom,in turn owns Hrvatski Telekom, Croatia’s fixed-line provider.


12 ‘Playing with the big boys’, in Business Central Europe, May 2001.

Seamless infrastructure 29

relatives working or living abroad. In addition, public financeproblems throughout the region mean that most governments areimplementing pensions reform, providing opportunities for banksto create private pension funds. When German insurance giantAllianz set up a fund in Bulgaria in 2000, it attracted 230,000customers in its first year.

Allianz has teamed up with UniCredito, an Italian bank with astrong presence in Central Europe, to pursue its regional strategy.The two companies are hoping to expand their Balkan presence byacquiring Croatia’s top bank, Zagrebacka Banka. Zagrebacka is anatural platform for regional expansion, having already madeimportant acquisitions in Bosnia-Herzegovina, where it is now themarket leader. Brand recognition and a good reputation helped it inBosnia, and should also be of benefit in the other former Yugoslavmarkets it is now targeting. For Franjo Lukovic, chairman ofZagrebacka Banka, the potential of South-Eastern Europe as awhole is obvious. “We believe some kind of customs union orcommon market will develop in the next few years, as stabilityincreases”, he says. “This is an opportunity for Zagrebacka Bankato get in early and gain a leading position.” Lukovic is confidentthat economic ties among the former Yugoslav republics will growquickly, enabling a regional bank to service regional clients.

The UniCredito-Allianz-Zagrebacka Banka team has strongcompetitors, especially among the Austrian banks. Raiffeisen has beenquick off the mark in the Balkans, entering Croatia in late 1994 whilewar still rumbled on. Raiffeisen also recently bought banks in Bosniaand Romania, and in 2001 became the first foreign bank to set upshop in Yugoslavia.12 Its aim is to service clients who conduct theirbusiness on a regional basis. Two other Austrian banks, Erste andBank Austria are also present in the Balkans market, while Greek andTurkish banks, such as National Bank of Greece, Alpha Bank andKent Bank dominate in Macedonia, Bulgaria, Romania and Albania.

German, Italian and Greek telecom giants already dominate theBalkan fixed-line telecoms market, with only the BulgarianTelecommunications Company and Albtelecom left to beprivatised. But the mobile market is still open. The UK’s Vodafoneand Orange are OTE’s main competitors while Austria’s Mobilkomis looking for new opportunities following its success with VIPnetin Croatia. The potential is huge: Slovenia, for example, has one ofthe highest levels of mobile penetration in Europe, at well over 60per cent of the population. In neighbouring Croatia, only 23 percent of the population owns a mobile, while the penetration rate inBulgaria is just 10 per cent.

The new regional players can now start exploiting their intra-regional connections. One possible strategy would be to offercheap-rate international calls within South-Eastern Europe, or atleast between all the companies in which they have stakes in theregion. Contacts between business people across borders will drivedemand; while family connections, particularly in the formerYugoslav countries, also create demand for cheap phone callswithin the region.

Electricity – out of balanceDifferent patterns of supply and demand create considerable scopefor regional co-operation in the electricity sector. Romania andBulgaria are capable of producing significant electricity surpluses,while Yugoslavia, Croatia and, most importantly, Turkey, need toimport electricity. Greece, unlike the rest of the region, experiencespeak demand for electricity in the summer, owing to tourists’ highusage of air conditioning. Albania, on the other hand, relies onhydropower generators and hence has excess supply in the rainymonths but shortages at other times. Such imbalances representexcellent opportunities to trade electricity within the region.

However, most electricity companies in the Balkans still faceproblems in efficiently supplying their domestic markets. Most arestill in state ownership, are seriously under-funded and face

uneconomic pricing regimes. They often have unhealthyrelationships with other large state-owned firms, where non-payment is overlooked or electricity is provided at cheaper rates.Governments sometimes find their efforts to liberalise and privatisethe companies blocked by powerful labour unions.

Aside from inefficient companies, technical and legal problemsmake regional co-operation virtually impossible:

★ Weak or absent transmission links. Those countries that canproduce electricity surpluses do not necessarily have thetransmission links to export them. In early 2001, for example,the EU provided financing to Serbia and Kosovo to importelectricity from Bulgaria and Romania. But Romania’s physicalnetwork was so poor that exporting large amounts would havecreated risks for the internal Romanian network. In some partsof the region, transmission links simply do not exist.Transmission links between Serbia, Croatia, Bosnia andSlovenia, once part of the same country, have been disruptedsince junctions in eastern Croatia and southern Bosnia weredamaged during the 1991-95 wars. These facilities needsubstantial investment before Bosnia and countries further eastcan be reconnected to the European transmission network.

★ Lack of regional standards. Most of the former Yugoslavrepublics are part of the European transmission network,along with Greece. Bulgaria, Romania, Albania and Turkey arenot. That means that electricity companies in the region arenot working on common standards. Several projects are inprogress to connect the eastern Balkans to the network. Buteven when the technical problems are solved, there needs to bea broader strategy of linking national regulators, to ensure thatregulation promotes compatibility and common standards.

★ Weak trading mentality. Managers at Balkan electricitycompanies have little understanding of the potential and

Seamless infrastructure 3130 Business in the Balkans

Transport – exploiting locationThe Balkans has a key competitive advantage – its location. It ishome to six of the pan-European transport corridors that have beenspecifically designated as such by the EU, linking northern andWestern Europe to the Middle East, Central Asia, Russia andUkraine. But few people use these corridors. The region’s manyconflicts, exacerbated by terrible road and rail infrastructure, havemeant that these routes are seldom fast or safe.

Donors are aware of the importance of transport for economicgrowth. At the Second Regional Conference for South-East Europe,held in Bucharest in October 2001, the EU, World Bank andStability Pact reiterated their commitment to improving transportinfrastructure. The donors earmarked S2.4 billion for infrastructureprojects, much of which will go to improving transport links.Although various international organisations already payconsiderable attention to transport infrastructure in the Balkans,donors would be advised to focus on the following areas:

★ Prioritise intra-regional transport. Balkan governments do notalways see an interest in building roads to countries within theregion, preferring to give priority to links with the EU.Negotiations between Bulgaria and Romania over the locationof a second bridge over the Danube to connect the twocountries were stalled for years, partly because of a lack ofinterest in regional co-operation. Intra-regional road routesshould be given priority in the short term.

★ Find a more innovative and accessible approach to financing.It is difficult for companies in the region to win constructioncontracts because of their poor access to government guaranteesand loans. Western companies also need encouragement to buildin a region perceived as politically risky. To encourage investorsto take on ‘build-operate-transfer’ contracts (whereby a firmagrees to invest in a road if it is subsequently able to collect tollsfor a certain period), the EU could guarantee to make up the

32 Business in the Balkans 33

benefits of regional trading. They are often keen to sell but notinterested in buying. Only training and exposure to efficienttrading systems elsewhere will change this mentality.

★ Financing difficulties. Energy projects are expensive and tendto bring gains only in the long term, which makes financing inthe risky Balkan environment extremely difficult. Mostprojects to date have been supported by international financialinstitutions, like the World Bank, the European InvestmentBank and the European Bank for Reconstruction andDevelopment. Commercial investors often require stateguarantees. The Turkish and Bulgarian governments areparticularly constrained, because they are unable to extendguarantees to private companies.

The two key factors to overcoming these barriers in the short termare privatisation and liberalisation. All of the state electricitycompanies in the region are set to be privatised over the next fiveyears. The common model is for the monopolies to be unbundledinto three parts: generation, transmission and distribution, withpower stations due to be sold first. Government reluctance toprivatise transmission and distribution facilities is likely to betempered by bugetory pressures, and encouragement frominternational organisations.

The EU sees energy liberalisation as a pre-condition to membership.Energy liberalisation is also crucial to boosting competition in theregional electricity market and increasing opportunities for trade.Slovenia, which liberalised its internal electricity market in 2001 andwill open its external market in 2003, might be able to share itsexperiences with the rest of the region. Its market operator, Borzen,could in the long term service the whole region. Bulgaria is alsomaking progress, with the first stage of liberalisation now underway.

Slovenia’s Adria Airways and Hungary’s Malév). Three workinggroups have been established:

★ Commercial Adria Airways is moderating this group, whichis charged with investigating the potential for co-operationon business strategies, marketing and sales.

★ Technical Malév is co-ordinating a discussion of areas inwhich the airlines could harmonise technical standardsand share expertise.

★ Training JAT is leading a debate on proposals for sharingtraining facilities and ensuring that airline personnel usecompatible procedures. JAT has a large training centre forflight and commercial personnel, which is IATA approved.

JAT has already concluded co-operation agreements with Air Bosnia,Air Srpska, and the Macedonian and Montenegrin airlines. It hopes togain similar deals with Malév and Tarom (Romania). Croatia Airlines,though, has expressed reluctance to co-operate closely, partly reflectinghistorical grievances over the routing of flights to the Dalmatian coast.

Preoccupation with such concerns misses the point. The establishmentof new alliances in the region would not remove Croatia Airlines’control over its own flight schedules. It would, however, give thecompany opportunities to operate more efficiently, which could help itto offer more services and stay profitable. Trends in the global airlineindustry, with more and more national carriers joining internationalalliances and operating code-sharing agreements, reinforce theimportance of such co-operation.

Slovenia’s Adria Airways appears ready to move in this direction. Itis taking part in the JAT initiative and is actively seeking a strategicinvestor to boost its capital, aware that its own growth depends oncollaboration. Adria was one of the first airlines to introduce flightsto Belgrade and Podgorica after the fall of former Yugoslav

difference if toll revenues fail to meet projections. Tenders foraid-financed projects should, where possible, be open to allcountries in the region. Efforts should be made to train localcompanies in the techniques of bidding and participating in atender – skills which many local firms lack.

★ Encourage governments to co-operate on transport planningwhen drawing up their national programmes. Investors seeking towin road-building contracts may be faced with competingnational visions if, say, confronted on how a motorway should bebuilt and what services it should offer. Greater standardisationwould help to attract investors as well as improving maintenancestandards on the roads once they are complete.

★ Give priority to maintenance and upgrades of existing facilities,rather than focus solely on new construction projects. There areplenty of roads in the Balkans. The problem is quality:motorways are a rarity; the existing roads are not built to takeheavy European trucks; and maintenance is poor. Withrailways, the situation is even worse. Over 90 per cent ofrailways in the region are single track and less than 40 per centare electrified. Maintenance standards are also poor. InYugoslavia, the average speed on the network is now below 60kilometres per hour and only 20 per cent of rolling stock isoperational.

Air connections within the region itself, vital for business travellers,are poor. There are no scheduled flights at all on some routesbetween Balkan capitals. Vienna currently serves as a hub for theregion, but this makes for long, indirect journeys. Most of thenational air carriers are struggling – some face bankruptcy andothers survive only with substantial state support.

These problems have prompted the airlines to focus on greater co-operation. At the end of 2000, JAT (Yugoslav Airlines) initiateddiscussions on an alliance with several other Balkan carriers (plus

34 Business in the Balkans Seamless infrastructure 35

President Slobodan Milosevic in October 2000. The companyalready has code-share agreements with Germany’s Lufthansa, AirFrance, Croatia Airlines and Israel’s El Al. These alliances improveSlovenia’s ability to service both tourists and business travellers.More regional carriers should follow Adria’s lead for closer co-operation, paving the way for full-scale mergers in the future.

V Conclusion and recommendations

Regional co-operation is crucial to economic development in theBalkans. The ability of individual countries in the region to attractforeign investment depends to a great extent on their being perceivedas part of a larger region – and functioning as such. Taken together,the Balkans represents a market of around 55 million people, risingto 130 million if Greece and Turkey are included. Similarly, localfirms stand a far better chance of attracting financing or investmentif they can trade across borders or exploit efficiencies gained by co-operating with neighbours. Those who have already invested in theregion are generally based in one country while operating in several.But many other potential investors have walked away because theregion does not yet function as a single market.

In order to foster these emerging regional business networks, theinfrastructure and services upon which they rely also need tobecome more integrated. A Balkan energy market could identifyvariations in supply and demand to ensure more reliable provisionof electricity. Foreign investors in telecoms could develop productsto suit the needs of cross-border businesses, as the banking sector isalready doing. Transport companies could work together to achievelower costs while providing a seamless service across borders.

A welcome side-effect of this business co-operation is a firmerfoundation for political stability. The development of relationshipsacross borders gives business-people – both foreign and local – aninterest in the security of the region. This helps to counterbalancethe interest that many powerful players in the black economycurrently have in instability and conflict. Economic interdependencealso fosters better political relations among Balkan governments.


to discuss issues of common concern. However, neither institutionhas the resources or policy instruments to implement whatdecisions taken at its meetings. Hence the success of their effortsrelies ultimately on the political will of national leaders. And fewpoliticians expect to gain any domestic political capital bypromoting co-operation in the Balkans.

Regional leaders, therefore, lack political incentives to foster linkswith neighbouring countries. Business people, however, focus onthe concrete economic benefits of regional co-operation, and aremore natural enthusiasts for integration. Where there is a strongbusiness interest in co-operation, the emotional issues become lessimportant. And that makes life easier for politicians. When theYugoslav and Croatian chambers of commerce lobby for a bilateralfree-trade agreement, for example, their governments find it easierto tell voters that a normalisation of political relations is in thenational interest. Business people are more likely to see that co-operation offers opportunities, and are more likely to overcome theprejudices which pervade the region. A businessman will, after all,only pursue a venture if it offers clear economic benefits – hisdecision does not depend on any special kinship or brotherly love.

Business people in the Balkans are also a great source of expertise.They have continued to operate in the difficult economic andpolitical conditions of recent years. They should now be mobilisedinto effective (and transparent) lobby groups, to shape and givefeedback on policies affecting their operations. Foreign investors,too, would welcome channels through which to communicate theirneeds and frustrations.

Sceptics rightly note that regional co-operation has been lauded asan ideal and promoted as a policy for years, while advances in thisdirection have been few. The concept has been advocated mainly bythe EU, which at one stage made it a pre-condition of progresstowards membership for the Western Balkan countries (Albania,Bosnia, Croatia, Macedonia and Yugoslavia). This linkage provedunhelpful. Leaders in the region were appalled at the prospect thattheir own chances of joining the EU might depend on the behaviourof their neighbours – countries they often regarded as backward,unreliable and aggressive. Croatia, for example, currently enjoys aper capita GDP nearly four times higher than Albania orYugoslavia. Given the vast disparities among Balkan countries, themore advanced and stable states feared that their own accession tothe EU would be sacrificed for the sake of weaker neighbours.Regional co-operation was thus seen as a threat, a measuredesigned to exclude Balkan countries from the bounties ofEuropean integration.

The EU has now altered its stance. The Stabilisation andAssociation Process introduced in 1999 provides a commonframework for integration, but relations with the EU are conductedsolely on a bilateral basis. States follow their own road-maps, workat their own speed and are assessed on their own merits. The newprocedures have successfully re-invigorated Balkan enthusiasm forEuropean integration. A less positive consequence is that the EU isnow reluctant to promote multilateral contacts within the region.

Other institutions and associations have also promoted regional co-operation, with perhaps greater degrees of success. The StabilityPact for South-East Europe has brought together policy-makersfrom regional and western governments, and internationalorganisations, with the purpose of achieving co-ordinated policieson political, economic and security issues. Another worthwhileinitiative has come directly from the region itself – the South-EastEurope Co-operation Process, launched in 2000. This regularlybrings together heads of state and parliamentarians from the region

38 Business in the Balkans Conclusions and recommendations 39

In sum, this paper would support the following recommendations:

★ Governments in the region should accelerate the negotiation ofbilateral free-trade agreements and seek to improve their readinessfor accession to CEFTA. The EU should exert pressure on CEFTAto open up to South-East European countries.

★ Governments in the region should seek to improve customsservices at borders in line with the World Bank’s Trade andTransport Facilitation Programme. International donorsshould make the implementation of such projects a priority.

★ Business associations and chambers of commerce shouldeducate their members about current border regulations andupcoming changes. They should conduct surveys of theirmembers in order to establish a clear picture of the experiencesand complaints faced by business people in using borders.They should also channel this information to governments tohelp them to revise policies.

★ Foreign investment agencies should co-operate to launch aBalkan-wide investment promotion programme, sharinginformation and providing joint assistance to foreign investors.

★ The EU should provide financial assistance to cover the costsof such a campaign. Successful foreign investors in the regioncould sponsor the campaign, share experiences and help toidentify opportunities.

★ Pairs or trios of Balkan governments should consider offeringjoint incentive programmes to attract foreign investment incross-border projects to their countries.

★ Chambers of commerce and business associations in the regionshould co-operate to host sector-specific meetings to bring


together companies with similar interests from around theregion and abroad. This should facilitate the formation of jointventures and intensify contact with potential foreign investors.

★ National governments should set up a regional developmentbank, to improve access to financing for local businesses withcross-border ambitions.

★ In key infrastructure sectors that remain in state hands,governments that are restructuring companies should take intoaccount the benefits of regional co-operation when preparingthem for privatisation.

★ Balkan governments should accelerate liberalisation andprivatisation programmes in these key sectors, to open the wayfor foreign buyers to exploit regional opportunities.

★ National regulators of energy and telecoms sectors should shareinformation and seek to harmonise standards across the region.

★ International donors should give greater priority to supportingintra-regional transport infrastructure.

Conclusions and recommendations 41

Documents

Business in the Balkans: The case for cross-border co ... · Business in the Balkans Introduction 3 The ﬁrst chapter argues that trade liberalisation and improved customs efﬁciency