Bosnia & Herzegovina's Business Environment (Gobal Market Briefings)

Bosnia and Herzegovina’s Business Environment

GLOBAL MARKET BRIEFINGS

Bosnia and Herzegovina’s Business Environment Consultant editors: Marat Terterov Alica Henson Associate Publisher: Vanja Ivkovic Foreword from: Bosnia and Herzegovina Ambassador to the United Kingdom, Dr. Tanja Milasˇinovic´

Publishers’ note Every possible effort has been made to ensure that the information contained in this publication is accurate at the time of going to press and neither the publishers nor any of the authors, editors, contributors or sponsors can accept responsibility for any errors or omissions, however caused. No responsibility for loss or damage occasioned to any person acting, or refraining from action, as a result of the material in this publication can be accepted by the editors, authors, the publisher or any of the contributors or sponsors. Users and readers of this publication may copy or download portions of the material herein for personal use, and may include portions of this material in internal reports and/or reports to customers, and on an occasional and infrequent basis individual articles from the material, provided that such articles (or portions of articles) are attributed to this publication by name, the individual contributor of the portion used and GMB Publishing Ltd. Users and readers of this publication shall not reproduce, distribute, display, sell, publish, broadcast, repurpose, or circulate the material to any third party, or create new collective works for resale or for redistribution to servers or lists, or reuse any copyrighted component of this work in other works, without the prior written permission of GMB Publishing Ltd. GMB Publishing Ltd. Hereford House 23-24 Smithfield Street London EC1A 9LF United Kingdom www.globalmarketbriefings.com

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This edition first published 2008 by GMB Publishing Ltd. © GMB Publishing Ltd. and contributors ISBN-13 978-1-84673-062-7 E-ISBN-13 978-84673-063-4 British Library Cataloguing in Publication Data A CIP record for this book is available from the British Library Library of Congress Cataloguing-in Publication Data Typeset by David Lewis XML Associates Ltd.

Contents Foreword by Dr. Tanja Milasˇinovic´, Ambassador of Bosnia and Herzegovina to the United Kingdom

xi

About the Contributors

xv

PART 1: An Introduction to the Economy and Business Environment 1.1

1.2

1.3 1.4

Historical and Political Background Slobodan G. Markovich, Institute for European Studies, Belgrade

3

Economic Performance and Outlook Walter Pudschedl and Sa´ndor Gardo´, Bank Austria Creditanstalt

17

The Banking System Zˇeljko Pehar, Raiffeisen Bank dd BiH

25

Foreign Trade Anesa Vilic´, Sarajevo School of Economics and Business

39

PART 2: Key Industry Sectors 2.1

2.2

2.3

2.4

2.5

Agriculture and Food Processing Foreign Investment Promotion Agency of Bosnia and Herzegovina

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Forestry and Wood Processing Foreign Investment Promotion Agency of Bosnia and Herzegovina

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Mining and Metal Processing Foreign Investment Promotion Agency of Bosnia and Herzegovina

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Energy Sector Foreign Investment Promotion Agency of Bosnia and Herzegovina

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Tourism Sector Foreign Investment Promotion Agency of Bosnia and Herzegovina and the Tourism Association of the Federation of Bosnia and Herzegovina

71

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2.6

Contents

Automotive Industry Foreign Investment Promotion Agency of Bosnia and Herzegovina

79

PART 3: Commercial Legislation 3.1 3.2

An Introduction to the Legal System of Bosnia and Herzegovina Karanovic & Nikolic Business Structures and Their Incorporation Karanovic & Nikolic and Branko Maric´ Law Office

3.3

Employment Law Karanovic & Nikolic (Branko Maric´ Law Office

3.4

Dispute Resolution Karanovic & Nikolic and Branko Maric´ Law Office Intellectual Property Law Karanovic & Nikolic and Branko Maric´ Law Office

3.5 3.6 3.7 3.8

Real Estate Legislation Karanovic & Nikolic and Branko Maric´ Law Office Taxation Manal Bec´irbegovic´, KPMG Auditing and Accounting Manal Bec´irbegovic´, KPMG

89 91 113 125 135 149 155 163

PART 4: Profiles of Dynamic Companies 4.1 4.2

Raiffeisen Bank DD Bosna i Hercegovina HVB Central Profit Bank

169

4.3

Kosig Dunav Osiguranje AD Banja Luka

181

4.4

Krajina Kopaonik Osiguranje

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4.5

Eurohaus

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4.6

Bobar

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4.7 4.8

The City of Banja Luka Hypo Alpe-Adria-Bank

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175

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PART 5: Appendices Appendix 1 Contributor Contact Details

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Appendix 2 List of Advertisers

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Foreword Bosnia and Herzegovina is situated in the heart of South Eastern Europe and it is a country in process of accelerated transition, open to foreign investments and business. Bosnia and Herzegovina has achieved significant progress in improving the business environment and has the most stable macroeconomic climate in South Eastern Europe, characterized by sustained economic growth, stable currency pegged to the Euro, the fastest real GDP growth in the region, a completely reformed banking sector with a significant number of banks in foreign ownership, and a favourable legal framework for foreign investments offering significant incentives for foreign investors. A combination of the Central Bank of Bosnia and Herzegovina’s Currency Board and fiscal discipline has kept the inflation rate the lowest in the region. The constant and rapid growth of the number of foreign investors investing in Bosnia and Herzegovina every year indicates that the country has developed an environment in which many foreign businesses feel confident to invest. Bosnia and Herzegovina offers numerous investment opportunities in various sectors with the access to the wider regional market, especially since Bosnia and Herzegovina became a member of the Central European Free Trade Agreement (CEFTA) with access to a consumer market of 40 million people. Bosnia and Herzegovina also benefits from autonomous trade measures introduced by the European Union (EU) in 2000 which allow more than 95 per cent of all exportw that meet technical-technological standards and conditions to enter the EU free from duty and quotas. Bosnia and Herzegovina has preferential regimes with the US, Australia, New Zealand, Switzerland, Norway, Russia, Japan, Canada and has also signed a Free Trade Agreement with Turkey. Key sectors in Bosnia and Herzegovina include energy, tourism, agriculture and food processing industry, wood industry, metal industry, mining, infrastructure, ICT, auto-components, etc. Developments in Bosnia and Herzegovina over the past several years illustrate the country’s great commitment to establishing a successful and thriving economy and society which is diligently working towards EU membership. EU integration is one of the main political objectives of Bosnia and Herzegovina and the country is a potential candidate country for EU accession. The current situation in Bosnia and Herzegovina’s integration process into the EU is marked by the European Partnership which defines key priorities that need to be addressed in order to make further progress. Bosnia and Herzegovina expects to sign the Stabilization and Association Agreement very soon and hereby it will have the established formal contractual relations with the EU. In coming years, the EU will play an ever

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Foreword

greater role in the countries of the whole region of the Western Balkans including Bosnia and Herzegovina. Bosnia and Herzegovina has made a significant progress in last couple of years and has achieved satisfactory political stability that guarantees security for business and capital. In order to fight organized crime and strengthen the rule of low, the reform of Bosnia and Herzegovina’s judiciary and security sector were conducted. In 2005, the Bosnia and Herzegovina defence system reform was carried out with new legislation which created united armed forces in Bosnia and Herzegovina, abolished entity ministries of defence, entity commands and recruiting of solders, and just 10 years after the war Bosnia and Herzegovina now has a united armed forces. Bosnia and Herzegovina joined NATO’s Partnership-for-Peace Programme in December 2006, which is a positive recognition of past achievements in the field of defence reform and a major milestone towards full NATO membership. Cooperation with the International Criminal Tribunal for former Yugoslavia has significantly improved with concrete results. The Visa Facilitation Agreement with the EU is initialed and it is a visible step towards Europe for the citizens of Bosnia and Herzegovina. There are two more important achievements for Bosnia and Herzegovina in this year – n May 2007, Bosnia and Herzegovina was elected as a member of the UN Council for Human Rights and the decision was taken that the headquarters of the Regional Cooperation Council would be located in Sarajevo. Bosnia and Herzegovina has succeeded in making significant progress in the economy which has continued to grow in the last year and the newly implemented tax reforms have started to show very good results. The Bosnia and Herzegovina’s economy preformed strongly in 2006 with the real GDP growth estimation at 6 per cent. Value added tax was introduced at the beginning of 2006 and it yielded high revenues. The inflation rate was about 1 per cent in early 2007. Strong export growth and subdued imports reduced the external current account deficit last year to an estimated 11-12 per cent of GDP. Bosnia and Herzegovina is accelerating the privatization process for companies of strategic importance, which offers numerous possibilities such as telecommunications, energy production and distribution, and other public services and utilities. Bosnia and Herzegovina was assigned a B2 credit rating with a stable outlook and has started its process of negotiation to join the World Trade Organization (WTO). In April 2007, the Bosnia and Herzegovina Council of Ministers passed a decision on forming a fund for stimulating foreign investors in Bosnia and Herzegovina. The fund’s resources for 2007 are two million convertible marks. They will be used for financing projects of foreign investors in the production sector, R&D, and other projects. With the support of the UK Government, Bosnia and Herzegovina introduced a new business registration system in June 2007, which will vastly reduce the time it takes to register a company and it is expected to have an impact on creating more jobs in the country. The growth of imports in the last year also appears to reflect growing domestic

Foreword

xiii

investments, with a large share of equipment goods being imported. All this sends a strong and positive message for Bosnia and Herzegovina. Bosnia and Herzegovina still struggles with significant difficulties – unemployment is high and the trade deficit remains large. Living standards are rising, but still not fast enough. There is still a gap between real economic potential and current performance in the country and foreign investors and partners with their activities could support Bosnia and Herzegovina economy in order to overcome these difficulties. This 1st edition of Bosnia & Herzegovina’s Business Environment is of great importance as it increases exposure of Bosnia and Herzegovina’s significant and growing potential as a business and investment destination in South Eastern Europe and the greater Europe region. It will help all of our business partners to familiarize themselves with the economic potentials and environment in Bosnia and Herzegovina since it provides facts and information necessary for anyone who is interested in approaching Bosnia and Herzegovina’s market. It includes contributions on different business topics and gives genuine insights into Bosnia and Herzegovina economy and conditions. I would also strongly encourage companies to contact the Bosnia and Herzegovina Ministry of Foreign Affairs and the Embassy of Bosnia and Herzegovina in London as well as the Bosnia and Herzegovina Foreign Investment Promotion Agency who are able to help and to advise on market entry. We would like to wish to all of our business partners much success in conducting business in Bosnia and Herzegovina. Dr. Tanja Milasˇinovic´, Ambassador of Bosnia and Herzegovina to the United Kingdom

About the Contributors

GMB Publishing Ltd. and the consultant editors would like to extend their sincere gratitude to Ms Emma Markovic, without whom this book would not have been completed. In particular, her assistance in developing the taxation and accounting section of this book was invaluable. Branko Maric Law Office was established in 1973 and since then has become one of the leading law practices in Bosnia & Herzegovina. The firm is recommended by the European Legal 500 for corporate and commercial work. The firm’s practice is in Investments, Corporate Law, Commercial Law, Banking Law, Privatization Energy and Litigation. The leading lawyer is Branko Maric who is highly spoken of by domestic and international colleagues alike. Assisted by other lawyers, Branko Maric has represented a number of major clients and is a legal advisor to the World Bank. He specializes in advising foreign clients on investments into Bosnia & Herzegovina. Branko Maric is also the president of the FBiH Bar Association Steering Committee. The firm can provide services in English, French, and German. Foreign Investment Promotion Agency (FIPA) of Bosnia and Herzegovina is a State Agency established with the mission to: • Attract and maximize the flow of foreign direct investment into Bosnia and Herzegovina, and encourage existing foreign investors to further expand and develop their businesses in Bosnia and Herzegovina. • Facilitate the interaction between public and private sectors, and play an active role in policy advocacy in order to contribute to continually improving environment for business investment and economic development. • Promote a positive image of Bosnia and Herzegovina as a country that is attractive to foreign investors. Bosnia and Herzegovina has mandated the Foreign Investment Promotion Agency to facilitate and support foreign direct investment. The Agency offers practical assistance in dealing with government institutions, by working directly with investors and, more structurally, by assisting the government in improving the legal framework for foreign investments. FIPA will also assist investors to develop contacts with the public and private sector.

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About the Contributors

FIPA provides data, information, analysis and advice on the business and investment environment; identifies and presents available investment opportunities; and assists both potential investors and those that have already invested in the country. The Institute for European Studies (IES) in Belgrade is a unique research institute in Serbia conducting integral research of political, economic, social and cultural changes n Europe. IES has been focused on: processes of European integrations, association of Serbia with the European Union, transition in Central and Eastern Europe, questions of democracy, federalism, regional development and cultural identity. Problems and perspectives of Serbia and the Balkans have been analysed within European and global changes to which the world has been exposed. Dr. Slobodan G. Markovich completed an MPhil in Historical Studies at the University of Cambridge, in 2000 and obtained PhD in Political Science in 2004 from the University of Belgrade. He was a Visiting Faculty Fellow at the London School of Economics in 2005 and 2007. He is currentlya Research Fellow at the Institute for European Studies, Belgrade, Assistant Professor at the Faculty of Political Science, Belgrade, and advisor in the Belgrade Fund for Political Excellence. He co-edited Bukvar demokratije [A, B, C of Democracy] (Belgrade, 2001), a textbook for civic education (in Serbian, Albanian and Hungarian). With Vukasin Pavlovic and Eric Beckett Weaver he co-edited: Challenges to New Democracies (Belgrade: Cigoja Press, 2004), and Problems of Identities in the Balkans (Belgrade: Anglo-Serbian Society, 2006). Established in 1995, Karanovic & Nikolic is a market leader practising business law in Serbia, Montenegro and Republika Srpska. Our first rate reputation is based on the experience and skills our lawyers have gained over many years. Drawing on the international education and experience of its lawyers in both civil and common law, Karanovic & Nikolic provides professional services of the highest possible standard to our clients. Our understanding of the sometimes complex and risky environment in the region together with our international education and approach ensures that clients are securely advised on their investment. Karanovic & Nikolic activities include all aspects of legal practice form consultation with clients, negotiation, drafting agreements, legal research, assistance before the authorities, mediation, dispute resolution and litigation. Our lawyers possess excellent language skills ensuring good communication with clients and the ability to draft complex legal documents in English, German, French and Serbian. Our success has grown out of clients’ willingness to entrust us with their most important legal and business affairs in this dynamic market.

About the Contributors

xvii

Our independence is a valued tradition and advantage which is highly valued by our clients. We collaborate with our SEE Legal colleagues and other international law firms who recognize the flexibility this brings. KPMG established its office in Sarajevo in 2000 and currently employs 30 people. Multifunctional teams of professionals provide a full range of professional services: Audit Services; Taxation and Regulatory Services; Financial Advisory Services; Business and Risk Advisory Services. KPMG in BiH is a member of KPMG in Central and Eastern Europe, with shared centres of excellence and infrastructure help to ensure a high level of client service throughout the region, taking into account national characteristics as the key to any successful business venture where local developments must be seen in a larger, global context to enable thinking in strategic dimensions. Manal Bec´irbegovic´, Office Director, Tax Manager, KPMG B-H d.o.o., joined KPMG in 2000. Prior to this she spent five years in the tax and financial institutions teams of the office of technical assistance of the US Treasury Department in Sarajevo. During her work with the US Treasury Department she gained significant experience in the process of harmonising the tax legislation between the entities. Manal has previous experience of running a commercial company in Jordan. Since joining KPMG, Manal has been closely involved in the development of the local practice, offering both tax and market entry assistance to KPMG clients. Raiffeisen Bank dd BiH was founded on 7 November 1992, under the name of Market Banka d.d. Sarajevo, as a joint-stock company with predominant share of private capital. In 2000, Raiffeisen Zentralbank Osterreich AG (RZB) acquired a major stake of shares and the Bank changed its name into Raiffeisen Bank d.d. Bosna i Hercegovina. The following year, Raiffeisen Zentralbank Osterreich AG became 100% owner of Hrvatska posˇtanska banka dd Mostar, which soon changed its name into Raiffeisen Bank HPB dd Mostar. With Raiffeisen Bank HPB’s integration into Raiffeisen Bank dd Bosna i Hercegovina in 2003, a new era in the Bank’s business operations began and the Bank strengthened its position in the BiH market. The Bank has ultimately integrated into the RZB Network with its banks in 15 countries of the region of Central and Eastern Europe. With headquarters in Sarajevo, the Bank operates via branches in the following towns: Sarajevo , Mostar, Banja Luka , Tuzla , Bihac´, Zenica, Brcˇko, Tesˇanj, Vitez, Gorazˇde,Visoko, Trebinje, Orasˇje, Kakanj, Zˇepcˇe, Sˇiroki Brijeg, Livno, Bijeljina, Cazin, Prijedor and Gradisˇka. Investments in new technologies, experienced and continually trained staff, emphasis on an individual approach to the customer, and introduction of new contemporary products and services are the alpha and omega of Raiffeisen Bank’s competitiveness in Bosnia and Herzegovina.

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About the Contributors

In addition to Raiffeisen Bank, Raiffeisen Group in Bosnia and Herzegovina consist of the Raiffeisen Brokers and Raiffeisen Leasing. Zˇeljko Pehar was born in Mostar, Bosnia and Herzegovina. In 1998, he earned a Bachelor of Science degree in economics at the University of Mostar, and from 2000-2004 he studied Economic Sciences-Financial Markets and Institutions, gaining a Master of Science in Economics, again at the University of Mostar. (His dissertation research focused on the structural characteristics and efficiency of the Bosnia and Herzegovina banking system.) Zˇeljko has a lot of banking experience which he started to gain after he graduated in 1999. He worked as a FX and MM dealer at a local bank in Mostar for two years and then joined Raiffeisen Bank HPB d.d. Mostar where he was the Head of the Trading department from 2001-2003. Following his post-graduate studies, Zˇeljko became a macroeconomic analyst at Raiffeisen Bank d.d of Bosnia and Herzegovina where he remains now. The School of Economics and Business in Sarajevo was established in 1952 as the Faculty of Economics. Even during the war in Bosnia and Herzegovina in 1992-1995, teaching activities did not cease, primarily owing to the enthusiasm and dedication of the employees and students. Endeavouring to make the curriculum and syllabus as modern as possible, as well as to broaden the scope and international recognition of the degrees, the School was the first in Bosnia and Herzegovina to adopt and start to implement (in the 2001/2002 academic year) a curriculum based on the European Credits Transfer System – ECTS. The School has achieved an enviable level of cooperation with elite schools of economics in Europe and across the world, which will provide students with a wider choice and allow them to influence the development of programs they attend and take exams in, as well as studies at partner institutions. The second step in implementing the ECTS-based concept of study at the School started in 2005, with the introduction of the “3+2” system. Anesa Vilic´ is a Referent in the center for teaching development at the School of Economics and Business in Sarajevo. Anesa graduated from the School of Economics and Business, in the department of Marketing in 2005. She is current pursuing postgraduate study at the same School in the department of International Trade. She has participated in the formal student evaluation of the Faculty of Economics, which is organized by vice dean each semester. Anesa has also worked in the department of teaching process at the School and E–net Center at the Faculty of Economics as a technical administrator. In 2004, she has been involved with various surveys and projects, including: “Economic rationale of giving concessions for the Bjelasˇnica–Igman Complex”, “Development strategies of Novi Travnik municipality”, and “A study on sustainable development through ecotourism in Bosnia and Herzegovina” for an Institute of the School. In March

About the Contributors

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2007, Anesa conducted study visits to most institutions of the European Union. UniCredit Group. With a market capitalization of approximately €70 billion, UniCredit ranks among the top financial groups in Europe, and has currently a presence in core 20 countries, with over 35 million clients and 7,500 branches, approximately 142,000 employees and total assets of approximately €869 billion as of 30 June 2007. Additionally, it is by far the Number 1 banking group in Central and Eastern Europe (CEE). CEE is an area featuring faster rates of economic growth than the rest of Europe. In this important market, UniCredit Group is serving around 24 million customers in more than 3,000 offices in 17 countries. Within the banking network, customers have access to all international financial centers and profit from the knowledge of a leading European bank. Mag. Walter Pudschedl, Senior Country Analyst, graduated in economics at the Vienna University of Economics and Business Administration and is currently senior country analyst at Bank Austria Creditanstalt, a member of the UniCredit Group. He has been covering the markets of Central and Eastern Europe since the early 1990s and is therefore well-acquainted with the problems and opportunities encountered in Bosnia and Herzegovina. Sa´ndor Gardo´, Senior Economist, 1993-2002 Studies and post-gradual studies of economics at the Vienna University of Economics and Business Administration; 2003-October 2006 Country analyst for Bulgaria, Romania and the Baltic States at Bank Austria Creditanstalt’s Department of Economics (a member of the UniCredit Group); October 2006-present Country analyst for Hungary, Slovenia and the Balkan region at BA-CA’s CEE Research department Tourism Association of the Federation of Bosnia and Herzegovina. The National Tourism Board of Bosnia and Herzegovina is a nongovernmental and non-profit organization. There are two types of tourism associations in BiH which are the Tourism Association of the Federation of BiH (which consists of cantons), and the Tourism Association of the Republika Srpska (which consists of municipality levels.) The National Tourism Board has multiple aims and a long term strategy for tourism development. They concentrate on the coordination of the laws in accordance with EU standards and they aim to speed up the privatization process and set up transparent mechanisms for the granting of concessions in order to encourage foreign investment into the tourism sector, including enabling domestic and foreign interest groups to develop tourism products. They aim to raise the consciousness of the importance and the potential of tourism for Bosnia and Herzegovina. The National Tourism Board aims to establish sustainable growth of the tourism sector in Bosnia and Herzegovina from 6% a year, raise the overall

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About the Contributors

tourism-generated income, and increase the importance of domestic products in satisfying tourist demands. They want to make each tourist destination more attractive, provide better quality accommodation and educate their managers and other employees in the tourism sector to make it more efficient.

PART 1

An Introduction to the Economy and Business Environment

1.1

Bosnia and Herzegovina: Historical and Political Background Slobodan G. Markovich, Institute for European Studies

Historical background The Wars for Yugoslav Succession waged in Bosnia and Herzegovina in the period 1992–1995 between three constituent peoples (Serbs, Croats and Bosniaks) have radicalized public opinion. There are now three historical narratives (one told by each of the nationalities in Bosnia and Herzegovina) on almost every historical event of any significance. Therefore, one should take this fact into account when trying to learn about Bosnia’s history. The mediaeval Bosnian state was conquered by the Ottoman Empire in 1463, while Herzegovina fell in 1485. Subsequently, Bosnia was an Ottoman province or vilayet. Ottoman rule lasted for some 400 years (1463–1878). Bosnia was the major Slavic area of Ottoman Europe in terms of conversions to Islam. Thus, it happened that both the ruling nobility that was Muslim and the oppressed peasantry that was Christian were both Slavs. Christian Slavs were mostly Orthodox at least since the re-establishment of the Serbian Patriarchate of Pech (1557–1766). However, many Roman Catholics also lived in Herzegovina and in some areas of Central Bosnia. Different national historical narratives have completely dissonant views on the Ottoman era. Serbs view it as the darkest part of their national history and have still not forgotten devshirme – blood tax – which stipulated that a certain number of boys from Christian families had to be given to the Ottomans to be taken to Istanbul in order to be trained as janissaries. They also insist that Christian peasants were oppressed and were serfs of Muslim landlords. Bosniak historians insist that the Ottoman era in Bosnia was a flourishing period when important monuments were built (famous bridges and mosques), when the economy grew and when Islamic culture was at its height. They also point out that the Ottoman administration was supranational and that any adherent of Islam was able to become Grand Vizier or Prime Minister of the Ottoman Empire. Croatian historians view this period as double oppression against Catholics: by the Ottoman administration and

4

An Introduction to the Economy and Business Environment

by the Serbian Orthodox Patriarchate of Pech that was occasionally favoured by the Ottoman administration against Catholics. National movements of the 19th century affected Bosnia as well. As early as the 1840s, Serbian propaganda became very strong in Bosnia. It was more or less fused with pro-Yugoslav propaganda that took root in the last decades of the 19th century. It firstly advocated the unification of Bosnia with Serbia and later a creation of a single state for South Slavs. In 1878, the Congress of Berlin decided that Bosnia and Herzegovina should be administered by Austria-Hungary. The Habsburg Empire was known for its fervently Roman Catholic dynasty and this could not have been popular among non-Catholics in Bosnia and Herzegovina. AustroHungarian occupation created initial resistance by Bosnian Muslims and also by Orthodox Serbs. Austria-Hungary introduced its rule and made some efforts to modernize Bosnia, but was unable to stop strong national movements of Serbs and some Muslims who agitated for a Yugoslav state. In 1908, Austria-Hungary annexed Bosnia and Herzegovina. By this time, the Serbian national movement advocated unification of Bosnia with Serbia as well as unification of all South Slavs, while a Croatian movement demanded that Bosnia should be united with Croatia which was a part of Hungarian lands within Austria-Hungary. National antagonisms grew, and in 1914, a member of Young Bosnia, a mixture of secret anarchist and nationalistic organizations, Gavrilo Pincip, killed Archduke Franz Ferdinand, heir to the throne of Austria-Hungary, and his wife in Sarajevo. The assassination took place on St. Vitus Day, a holiday when Serbs commemorated the Kosovo Battle of 1389. This served as an excuse to Austria-Hungary to declare war on Serbia on 28 July 1914. In the several days that followed, this conflict became the First World War. In spite of national movements during the First World War, most of Bosnia’s residents remained loyal to the Habsburg Empire.

Bosnia and Herzegovina in Yugoslavia In December 1918, the Kingdom of Serbia united with the so-called State of Slovenes, Croats and Serbs that was an interim body governing Slovenia, Croatia and Bosnia. The new state, the Kingdom of Serbs, Croats and Slovenes, followed the French model of local administration. Therefore, it was very much centralized. This was legalized by the Constitution of 1921. In 1929, the Kingdom was divided into geographic units named after rivers. Every new unit was called banovina (the closest word in English would be principality) in a desperate attempt of the Yugoslav King Alexander (1921– 1934) to preserve the centralized system and to reduce national antagonisms. Bosnia was divided between three banovinas: the Banovina of Drina (a combination of areas in Bosnia and Serbia), the Banovina of Vrbas and the Banovina of Sava. The census of 1931 registered only religious affiliations and not national ones. The census recorded 2,323,555 citizens of Bosnia and

Bosnia and Herzegovina: Historical and Political Background

5

Herzegovina. Of them 1,028,139 were Christian Orthodox (44.25 per cent), 718,079 (30.9 per cent) were Muslims, 547,949 were Roman Catholic (23.58 per cent) and 7,094 (0.31 per cent) were Protestant. Other denominations, mainly Sephardic Jews, numbered 22,294 (0.96 per cent). Efforts conducted since 1929 to restrain national antagonisms and to favour Yugoslav unity failed, and in 1939, the new ruler of Yugoslavia, Prince Regent Paul (1934-1941) agreed to decentralize Yugoslavia and to essentially partition Bosnia between Serbs and Croats by creating a separate Croatian unit called the Banovina of Croatia. In 1941, the Third Reich attacked Yugoslavia and crushed its resistance within 10 days. The Nazi-created Independent State of Croatia included the whole territory of Bosnia and Herzegovina. This state was administered by Croatian fascists known as Ustashi. The Ustasha regime claimed that Bosnian Muslims were Croats (‘Croatian flowers’), but it initiated a campaign of extermination of Jews, Roma and Serbs. This caused a series of Serbian revolts against the new state. In Eastern Bosnia, the royalist chetnik movement prevailed. It was directed against the Independent State of Croatia but also against Bosnian Muslims. A communist-led partisan movement also developed in Bosnia and became a dominant resistance movement in Bosnia in 1942. The partisan movement gained further ground when its leader, Josip Broz Tito, convened a council in November 1943 in the Bosnian town of Jajce. The Council decided that the new state would be a federation and that Bosnia and Croatia would be separate republics. This encouraged many Muslims and Croats to join the partisans, originally recruited predominantly from Serbs, and consequently, partisans won both the civil war against the chetniks (in the summer of 1944) and later with the support of the Soviet Red Army against German Nazi troops. In November 1945, the Yugoslav monarchy was abolished, and in the next year, the new constitution was enacted. The new state was the People’s Federal Republic of Yugoslavia consisting of six republics including Bosnia and Herzegovina. Five peoples were recognized as constituent peoples (Serbs, Croats, Slovenes, Montenegrins and Macedonians). Muslims were not originally recognized as a separate people. Political parties were abolished in communist Yugoslavia, and the Communist Party took over full control of the state. Although Bosnia became a separate republic, it was very much dominated by former partisan commanders, mostly ethnic Serbs. The new state recognized Bosnian Muslims as a separate nation only in the early 1970s. Therefore in the census of 1971, Muslims were listed as a separate nationality with a capital m (in Serbo-Croatian, names of religious adherents were listed with small letters, so ‘musliman’ meant adherent of Islam, and ‘musliman’ since 1971 meant ethnic Muslim). Muslims were mostly listed in earlier censuses (in 1948, 1953 and 1961) as persons who did not declare their national affiliation, but some persons of Muslim background identified in these censuses as Serbs, Croats and later as Yugoslavs. With the official recognition of a separate Muslim ethnic identity, Muslims became the biggest national group in Bosnia and Herzegovina

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An Introduction to the Economy and Business Environment

since the vast majority of people with Muslim background declared themselves Muslims, but also due to the higher birth rate than among Serbs and Croats. In 1948, there were 2,565,277 citizens of Bosnia and Herzegovina. Of them 1,136,116 were Serbs (44.28 per cent), 788,403 were nondeclared Muslims (30.73 per cent) and 614,123 were Croats (23.94 per cent). However, the 1971 census recorded that Muslims became the biggest national group in Bosnia and Herzegovina. Out of 3,746,111 citizens of Bosnia, there were 1,482,430 (39.43 per cent) Muslims, 1,393,148 (37.96 per cent) Serbs, 772,491 (20.55 per cent) Croats and 43,796 (1.16 per cent) who declared themselves Yugoslavs. Original domination of Serbian partisan elites was ended in the 1960s. By the early 1970s, political elites in Bosnia were dominated by Bosnian Muslims. The first high-ranking Bosnian Muslim was Dzemal Bijedic (1917– 1977), who became the Prime Minister of Yugoslavia in 1971. Another Bosnian Muslim, Hamdija Pozderac (1924–1988), became the most powerful man in Bosnia in the 1970s. The foreign policy of Josip Broz Tito had focused since the early 1960s on non-aligned countries, mostly African and Asian countries including almost all Arabic countries. Yugoslavia was, together with Egypt and India, one of the group’s informal leaders. Under such circumstances, Tito began favouring Muslims in Bosnia to show his openness to his Arab friends. In 1967, Yugoslavia broke off diplomatic relations with Israel and displayed solidarity with the Arab world. During the communist period, the most important international event in communist Bosnia was the 1984 Winter Olympics in Sarajevo; indeed it was the most important international sporting event that took place in communist Yugoslavia. The economy of Bosnia grew substantially during communism, but Bosnia remained one of the underdeveloped republics. It had the smallest percentage of urban population in 1945, but reached 36 per cent by 1981. The underdeveloped status of Bosnia prompted many educated Serbs and Croats to leave Bosnia. However, at the same time, Bosnia’s capital, Sarajevo, was the most ethnically Yugoslav in the entire Yugoslavia. In 1981, 23.6 per cent of the Sarajevo Centre population declared themselves Yugoslavs.1 Although the economy in communist Bosnia grew in absolute figures, in relative figures the Serbian province of Kosovo and Bosnia and Herzegovina were the two areas of ex-Yugoslavia that had the worst performance. Bosnia’s gross domestic product (GDP) was 83 per cent of Yugoslavia’s GDP in 1953, falling 67 per cent in 1971, and improved to only 68 per cent of the Yugoslav average by 1988. In the same period, Central Serbia grew from 91 to 101 per cent, Croatia from 122 to 128 per cent and Slovenia from 175 to 203 per cent.2 This means that the underdevelopment which characterized the Bosnian economy was maintained during the communist period and even industrialization was not sufficient to alter it. 1

2

Cf. John Lampe, Yugoslavia and History. Twice there was a Country (Cambridge: Cambridge University Press, 2000), p. 337. Lampe, op. cit.

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7

Bosnia and Herzegovina in the wars for Yugoslav succession Ethnic changes that took place in communist Yugoslavia provoked dissatisfaction among the Croat and Serb populations of Bosnia and Herzegovina. In the 1980s, their numbers decreased in relative terms and in the case of Croats even in absolute figures. Bosnia and Herzegovina were described as small Yugoslavia. This was an allusion to the multi-ethnic character of communist Yugoslavia. The rise of nationalism in Croatia in 1970, and particularly the rise of nationalism in Serbia in the 1980s affected Bosnia as well. Although the percentage of Yugoslavs (5.5 per cent), a group that had a pan-Yugoslav identity, was in 1991 higher in Bosnia than in any other Yugoslav republic, antagonism between Serbia and Croatia in 1991 inevitably influenced Bosnia. The Constitution of communist Yugoslavia from 1974 created a loose federation with only two federal institutions: the Yugoslav People’s Army (JNA in Serbo-Croatian) and the League of Communists of Yugoslavia. In January 1990, the League of Communists disintegrated at the federal level and a series of multiparty elections was organized throughout Yugoslavia for the first time since 1939. Federal Prime Minister Ante Markovic made an effort to form a federal pan-Yugoslav party, the Alliance of Reform Forces. In December, he had the highest support in Bosnia (14 per cent), but only 5 per cent at the federal level. Nationalist forces won elections in all the republics with one important difference. In Serbia and Montenegro, slightly reorganized communist parties won elections, while in all other republics, new parties very much based on national rhetoric won elections. In Bosnia and Herzegovina, elections were held in December 1990, and nationalists from all three major groups won more than 200 of 240 seats. Now the power in Bosnia and Herzegovina came into hands of three national parties: Muslim SDA (Party of Democratic Action/Stranka demokratske akcije), Serbian SDS (Serbian Democratic Party − Srpska demokratska stranka) and HDZ (Croatian Democratic Community − Hrvatska demokratska zajednica). Alija Izetbegovic, a Muslim leader who was arrested in communist Yugoslavia for his Islamic beliefs, was elected chairman of the Presidency of Bosnia and Herzegovina. The Serbian SDS was headed by a Serbian nationalist, Radovan Karadzic. In 1991, Croatia and Slovenia proclaimed independence in June and were granted international recognition in December. However, the JNA reacted by siding with Serbs in Croatia who rebelled against the newly-proclaimed Croatian state in August 1991. By this very fact, the last remaining Yugoslav institution increasingly became a Serbian army, and no federal institution was left. With the departure of two western republics, Bosnia and Herzegovina found themselves in a very peculiar position. Serbs and Croats were very much attracted by their national states, while the leadership of Bosnian Muslims had to formulate its position. Soon Bosnian Muslims and

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An Introduction to the Economy and Business Environment

Bosnian Croats agreed to organize a referendum on independence. It was held in February and March 1992. It was boycotted by Bosnian Serbs. The turnout was 63.7 per cent and more than 99 per cent voted for independence. Legally, the referendum failed since it did not have the necessary majority or the support of all three constitutional peoples. Yet, President Izetbegovic proclaimed independence on 3 March. The war between the three ethnic groups broke out on 6 April, the same day that Bosnia was internationally recognized. A 43-month civil war followed. The JNA was quickly transformed into a Bosnian Serb Army, and in July Bosnian Croats established a separate entity called Herceg-Bosna. The JNA’s military equipment was left to Bosnian Serbs, giving them an advantage over the other two groups. They soon established control over 70 per cent of the territory of Bosnia and Herzegovina. Western efforts in 1993 were instrumental in overcoming conflict between Croats and Bosniaks. In March 1994, the US succeeded in convincing Croatian President Franjo Tudjman and Bosnian President Izetbegovic to form the Federation of Bosnia and Herzegovina also known as the CroatBosniak Federation. The position of Bosnian Serbs was further weakened by the efforts of Yugoslav President Slobodan Milosevic to lift international economic sanctions against the Federal Republic of Yugoslavia. In July 1994, Yugoslavia introduced economic sanctions against Bosnian Serbs, and their leader Radovan Karadzic found himself very isolated. The last year of war was 1995, when the most serious massacre took place. The UN Security Council proclaimed Srebrenica in April 1993 to be a ‘safe area’. In spite of this, the Army of Bosnian Serbs captured the town between 6 and 11 June 1995. A massacre of Muslims followed. The number of persons killed in Srebrenica between 10 June and 15 June was established in the latest detailed survey to be 6,657, and the main massacre was on 12 July.1 What followed was increasing international pressure against Bosnian Serbs accompanied by more effective troops of the Federation. The NATO bombing on 1 September finally convinced the Bosnian Serb leadership to begin negotiations. The negotiations were held in Dayton, Ohio and resulted in the Dayton Peace Accord. The military part of the agreement was signed in Paris in December 1995. The agreement opened the way for a heavy international presence. In January 1996, some 58,000 NATO troops separated forces of the Republic of Srpska from those of the Federation.2 The number of casualties in the period 1992–1995 was initially estimated at 200,000. However, the exact figure is now well established. The Research and Documentation Centre was established in Sarajevo in April 2004 to list all war casualties. By January 2007, it has recorded 97,901. In ethnic terms, 1

2

Report by the Research and Documentation Centre Sarajevo, “Human Losses in Bosnia and Herzegovina 91-95, Srebrenica – Municipality of Suffering”: http://www.idc.org.ba/presentation/research_results.htm. For the most balanced account in English on the war in Bosnia and Herzegovina see Steven L. Burg and Paul S. Shoup, The War in Bosnia and Herzegovina, Ethnic Conflict and International Intervention (Armong, N.Y.: M. E. Sharpe, 1999).

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the number of Muslim casualties was 64,027 (49,254 killed and 14,782 missing persons), 24,905 were Serbs (23,584 killed and 1,321 missing persons) and 7,788 were Croats (7,016 killed and 772 missing). This number includes missing persons and therefore it is clear that the total casualties in Bosnia during the war of 1992–1995 were something less than 100,000 or 2.24 per cent of the population recorded in 1991.1 Post-Dayton Bosnia came out as a compromise of opposite tendencies among ethnic groups. Unsurprisingly, its administrative division is one of the most complex in the world.

Administrative divisions Power is shared between four and more often, five levels of power. There are municipalities at the lowest level on the whole territory of Bosnia and Herzegovina, then there are two entities (the Republic of Srpska or Republika Srpska, and the Federation of Bosnia and Herzegovina) representing federal units, there is the level of the Government of Bosnia and Herzegovina, and finally there is a supervisory level that belongs to the Office of the High Representative. Additionally, on the level of one of the entities, in the Federation of Bosnia and Herzegovina, there is another administrative division into cantons. Therefore, there are five levels of power in the Federation and four levels of power in the Republic of Srpska.

Municipalities The first level of municipalities follows the model from the communist period although some new municipalities were created after the Dayton Peace Accord. Altogether there are 79 in the Federation of Bosnia and Herzegovina and 63 in the Republic of Srpska. The sub-level cantons exist only in the Federation of Bosnia and Herzegovina. There are 10 cantons, of which, five are predominantly Bosniak, three are predominantly Croatian and two are mixed.

Entities The second level is of two entities: the Federation of Bosnia and Herzegovina and the Republic of Srpska. Entities have jurisdiction over the economy and postal system. The Federation of Bosnia and Herzegovina covers around 51 per cent of the territory of Bosnia and Herzegovina or 26,310 km2 including the country’s main cities such as Sarajevo, Mostar and Tuzla and around twothirds of the total population of Bosnia and Herzegovina (the population of 1

http://www.idc.org.ba/aboutus/Overview_of_jobs_according_to_%20centers.htm.

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An Introduction to the Economy and Business Environment

the Federation was 2,444,665 in 1996, and is estimated to be around 2.5 million in 2007). The Federation of Bosnia and Herzegovina was formed by the Washington Agreement in May 1994. The Federation consists of 10 cantons: 1. 2. 3. 4. 5. 6. 7.

Una-Sana (Unsko-sanski kanton), with Bosniak majority. Posavina (Posavski kanton), with Croatian majority. Tuzla (Tuzlanski kanton), with Bosniak majority. Zenica-Doboj (Zenicˇko-dobojski kanton), with Bosniak majority. Bosnian Podrinje (Bosanskopodrinjski kanton), with Bosniak majority. Central Bosnia (Srednjebosanski kanton), mixed Croatian-Bosniak. Herzegovina-Neretva (Hercegovacˇko-neretvanski kanton), mixed Croatian-Bosniak. 8. West Herzegovina (Zapadnohercegovacˇki kanton), with Croatian majority. 9. Sarajevo (Kanton Sarajevo), with Bosniak majority. 10. Canton 10 (Kanton 10), with Croatian majority. The Federation is delineated from the Republic of Srpska by the InterEntity Boundary Line which is 1,080 km long. The Republic of Srpska covers somewhat less than 49 per cent of the territory of Bosnia and Herzegovina (25,063 km2) and has a population of some 1.48 million inhabitants (2005 estimate). The Constitution of the Republic of Srpska stipulates that Sarajevo is its capital. However, in reality its capital is Banja Luka. There are only two towns with more than 100,000 inhabitants (Banja Luka 225,000 and Bijeljina 109,800). The District of Brcˇko geographically divides the Republic of Srpska into its western and eastern part. There are no official data on ethnic composition, but an unofficial census conducted by the UN High Commissioner for Refugees in 1996 demonstrated that the percentage of Serbs in the Republic of Srpska reached 96.8 per cent compared to 54.4 per cent in 1991, while number of Bosniaks dropped from 28.8 per cent to 2.2 per cent. In the meantime, the percentage of Bosniaks significantly increased to more than 10 per cent of total population. The Republic of Srpska has a president, a National Assembly of the Republic of Srpska (with 83 seats), a government (with a prime minister and several ministries), a Supreme Court as well as lower courts. It has vast jurisdictions over the economy and taxation and its own postal service and customs service (under the state-level customs service). In 2007, the police force was still under the control of two entities but there is a pressure by the international community to organize a police force on the federal level and to suspend police on the level of the entities. The leading Serbian politicians in the Republic of Srpska have strongly opposed these plans. The District of Brcˇko is a special small administrative unit in northeastern Bosnia and Herzegovina. It was created from both entities and therefore an inter-entity border runs through the district. It is a self-

Bosnia and Herzegovina: Historical and Political Background

11

governing area, which formally belongs to both the Federation and the Republic of Srpska. However, in 2006, all laws of the two entities in the District of Brcˇko ceased to have legal effect and the Inter-Entity Boundary Line lost any significance.

The government of Bosnia and Herzegovina The highest level of authority is sometimes on the entity level, but there has been a tendency since the signing of the Dayton Accord towards empowering the highest level of Bosnia and Herzegovina. Institutions of Bosnia and Herzegovina reflect its division by entity and tripartite ethnic divisions. The highest state body is the three-person Presidency of Bosnia and Herzegovina. Its members must come from all three constituent peoples: Serbs, Bosniaks and Croats. The three members are elected for four years and they rotate every eight months. This means that during their 48 months tenure, every member of the Presidency heads it two times. The members are elected directly by the people. Bosniak and Croatian members come from the Federation and the Serbian member from the Republic of Srpska. The Council of Ministers represents the government of Bosnia and Herzegovina. Its head is nominated by the Presidency and is approved by the House of Representatives. The head then appoints other ministers. There are nine ministries on this level: foreign affairs, security, defense, finances, justice, foreign trade and economic relations, communications and transport, human rights and refugees, and civilian affairs. Defense issues were on entity level since 1995 and each entity had its own army. However, in 2005, a unification of the two armies into one army of Bosnia and Herzegovina began. A conscript army will be replaced by a professional army. The judiciary on this level is organized through the National Assembly. It hosts two houses: the House of Peoples and the House of Representatives. The House of Peoples protects constituent peoples from over-voting. It consists of 10 persons from the Federation (five Croats and five Bosniaks) and five from the Republic of Srpska (five Serbs). Therefore, it has three clubs: the Club of Bosniak people, the Club of Serbian people and the Club of Croatian people each with five members. The House of Representatives consists of 42 members of which two-thirds are elected from the Federation and one-third is elected from the Republic of Srpska. Finally, the Constitutional Court of Bosnia and Herzegovina is a supreme court in Bosnia and Herzegovina. It consists of six ethnic members (four from the Federation and two from the Republic of Srpska) while three members are appointed by the President of the European Court of Human Rights after consultation with the three-member Presidency of Bosnia and Herzegovina.

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The Office of the High Representative This level was introduced in order to supervise implementation of the Dayton Peace Accord in Bosnia and Herzegovina. The Office of the High Representative (OHR) has powers given to it by the Peace Implementation Council (PIC) consisting of representatives of US, Britain, France, Germany and Russia (Contact Group members). Leading international institutions in Bosnia (UN, NATO, OSCE, CoE, IMF, World Bank and EBRD) follow the advice of this body. The PIC was supposed to stay one year only but was extended in December 1996 when it was granted a further a two-year ‘consolidation period’.1 Therefore, the OHR is not responsible to any democratically elected body but rather to a diplomatic circle coming from Contact Group members. In 1997, the powers of this Office were extended. This has provoked a discussion between those who claim that Dayton Accord in Bosnia and Herzegovina would not be sustainable without this Office and those who claim that its broad jurisdiction actually delays democratization. During the tenure of the High Representative from Britain, Paddy Ashdown, Bosnia began to resemble a protectorate due to his extensive use of powers given to the OHR.2 It has traditionally been run by a representative from a European Union (EU) country. Up to 2006, five persons held this office: 1. 2. 3. 4. 5.

Swedish diplomat Carl Bildt (1996–1997). Spanish diplomat Carlos Westendorp (1997–1999). Austrian diplomat Wolfgang Petritsch (1999–2002). British politician Paddy Ashdown (2002–2005). German diplomat Christian Schwarz-Schilling (2005–2007).

In 2007, a Slovak diplomat and expert in Balkan affairs, Miroslav Lajcˇak, was appointed to this post. He is expected to be the last high representative with so-called Bonn powers, and the OHR should be replaced by an EU representative, although similar expectations had been raised on earlier occasions and the previous deadline for the suspension of this office was June 2007.

Religious and linguistic picture of Bosnia and Herzegovina The official languages in Bosnia and Herzegovina are Serbian, Croatian and Bosnian. Until 1991, the official language was Serbo-Croatian. All three 1

2

David Chandler, “Democratization in Bosnia: the Limits of Civil Society Building Strategies”, in Peter Burnell and Peter Calvert (eds.), Civil Society in Democratization (London, Portland OR: Frank Cass, 2004), pp. 225-249. Florian Bieber, Post-War Bosnia. Ethnicity, Inequality and Public Sector Governance (New York: Palgrave Macmillan, 2006), p. 85.

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13

ethnic groups speak exactly the same language and local variations follow regional rather than ethnic patterns. Yet, this has become a political matter. Each nation now speaks its own language and this question is very seriously taken by most citizens. When confronted abroad by another citizen of Bosnia or ex-Yugoslavia, many would now say that they speak ‘our language’ to avoid quarrels. Although both scripts (Latin and Cyrillic) are official, Serbs use almost exclusively Cyrillic and Croats and Bosniaks use exclusively Latin script. Foreign businessmen and entrepreneurs are advised to always be fully aware of these divisions and to take them seriously. Most of the international bodies in Bosnia and Herzegovina use the abbreviation B/H/S meaning bosanski/hrvatski/srpski (Bosnian/Croatian/Serbian). This abbreviation is used only in Bosnia and Herzegovina and is not acceptable in Croatia or Serbia, and sometimes may not be very desirable even in Bosnia and Herzegovina on the local level, especially in the Republic of Srpska. In religious terms, Bosnia and Herzegovina is divided into three major religions: Muslim, Serbian Orthodox and Roman Catholic. Religious divisions currently invariably follow ethnic divisions. Almost all Serbs belong to the Serbian Orthodox Church, almost all Bosniaks are Muslims and almost all Croats belong to the Roman Catholic Church. The fourth traditional religious community in Sarajevo, the Sephardic Jews, has been very much reduced due to very high losses during the Holocaust and emigration to Israel.

Inter-ethnic relations Twelve years after the Dayton Peace Accord, Bosnia and Herzegovina remains a deeply divided society. This division is mostly due to inter-ethnic tensions. This is how the only Nobel Prize winner born in Bosnia, Ivo Andric, described inter-ethnic relations in Bosnia in his Letter from 1920: Whoever lies awake at night in Sarajevo hears the voices of the Sarajevo night. The clock on the Catholic cathedral strikes the hour with weighty confidence: 2 am. More than a minute passes (to be exact, seventy-five seconds – I counted) and only then with a rather weaker, but piercing sound does the Orthodox church announce the hour, and chime its own 2 am. A moment after it the tower clock on the Bey’s mosque strikes the hour in a hoarse, faraway voice, and that strikes 11, the ghostly Turkish hour, by the strange calculation of distant and alien parts of the world. The Jews have no clock to sound their hour, so God alone knows what time it is for them by the Sephardic reckoning or the Ashkenazy. Thus at night, while everyone is sleeping, division keeps vigil in the counting of the late, small hours, and separates these sleeping people who, awake, rejoice and mourn, feast and

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fast by four different and antagonistic calendars, and send all their prayers and wishes to one heaven in four different ecclesiastical languages. And this difference, sometimes visible and open, sometimes invisible and hidden, is always similar to hatred, and often completely identical with it.1 Inter-ethnic relations reach a point of very high tensions on the eve of every election. Politicians take advantage of a difficult heritage of interethnic rivalries during every electoral campaign since it is an efficient way to keep or gain power. Foreign observers should be careful enough to distinguish sometimes very fervent nationalistic rhetoric from realist politics that most politicians of Bosnia and Herzegovina pursue both in domestic and in international terms. Inter-ethnic relations are very much poisoned by ongoing debate on the responsibility for war crimes committed in the 1992-1995 War. Prominent members of Bosniak parties have demanded suspension of the Republic of Srpska as a ‘genocidal creation’. They insist that genocide was conducted on the whole territory of Bosnia and Herzegovina by the Army of Bosnian Serbs against Bosniaks. On the other hand, the leading Serbian politicians admit that crimes against humanity took place in Bosnia, but insist that they were committed against Serbs as well. The UN Security Council on 25 May 1993 established by its resolution 827 the International Criminal Tribunal for the Former Yugoslavia (ICTY). It is an ad hoc tribunal which is expected to complete all trials by the end of 2009, and all appeals by 2010. By the beginning of 2007, the Tribunal accused 161 individuals and sentenced around 100 of them. Six suspects were still at large at the beginning of 2007 including the two most wanted: Bosnian Serb General Ratko Mladic and wartime President of the Republic of Srpska Radovan Karadzic. Additionally to ICTY rulings, a very important decision was brought by the International Court of Justice in The Hague in the case known as Bosnia and Herzegovina v Serbia and Montenegro originally filed in 1993. The judgment was read on 26 February 2007. It confirmed that the Srebrenica massacre was a genocide conducted by Bosnian Serb forces, but rejected claims that the genocide was committed on the whole territory of Bosnia and Herzegovina. It also cleared Serbia from direct responsibility for the genocide in Srebrenica and also from the complicity in genocide, but found Serbia guilty of failing to prevent genocide.2 The judgment was well received among Bosnian Serbs, but not among Bosniaks.

1

2

Ivo Andric, A Letter from 1920 [translated by Lenore Grenoble] (London & Boston: Forest Books and Belgrade: Dereta, 1992). Mark Oliver, Mark Tran, “Serbia cleared of genocide”, The Guardian, Monday, February 26.

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Current political situation In January 2006, Bosnia began negotiations with the EU on the Stabilization and Association Agreement (SAA). Technical negotiations went well. However, one of the political criteria became the hottest political issue in Bosnia and Herzegovina, namely police reform. The transfer of police competences from the level of entities to the state level met widespread opposition in the Republic of Srpska. Its charismatic Prime Minister, Milorad Dodik, has opposed very fervently the suspension of the Ministry of Interior of the Republic of Srpska. This delayed signing of the SAA. Yet, in 2006, an important accomplishment was achieved. At the summit of NATO countries in Riga at the end of November, Serbia, Montenegro and Bosnia and Herzegovina were invited to join the Partnership for Peace programme. This is the first step towards prospective NATO membership. The last general elections were held in Bosnia and Herzegovina in October 2006. They were assessed as free and fair by international observers. They demonstrated that support among Bosniaks is now divided between the Party for Bosnia and Herzegovina (Stranka za BIH – SBIH) led by Haris Silajdzic, an advocate of centralization of Bosnia and Herzegovina, and previously the strongest party among Bosniaks the Party of Democratic Action (SDA) established in 1990 by Alija Izetbegovic. There was also a change among Serbs who gave the highest confidence to the Party of Independent Social-Democrats (SNSD) led by Milorad Dodik rather than the Serbian Democratic Party established in 1990 by Radovan Karadzic that was traditionally the strongest party in the Republic of Srpska. Among Bosnian Croats, bitter divisions have contested the once dominant position of the Croatian Democratic Union. On the level of Bosnia and Herzegovina, the 42 members of the House of Representatives come from the following parties:

Ethnic parties (37 members) • Bosniak ��� The Party of Democratic Action – nine seats. ��� The Party for Bosnia and Herzegovina – eight seats. ��� Bosnian Patriot Party – Sefer Halilovic – one seat. • Serbian ��� The Party of Independent Social Democrats − eight seats. ��� The Serbian Democratic Party − three seats. • Croatian ��� Croatian Democratic Union − three seats. ��� Croatian Unity Coalition − two seats. • Other ethnic parties − three seats.

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An Introduction to the Economy and Business Environment

Non-ethnic parties (five members) • Social-Democratic Party of Bosnia and Herzegovina − five members. On the level of the Presidency of Bosnia and Herzegovina, the Bosniak seat was won by Dr. Haris Silajdzic, leader of the Party for Bosnia and Herzegovina, while the Serb seat was won by Nebojsa Radmanovic from the Party of Independent Social Democrats. The Croatian seat was won by Zeljko Komsic from a non-ethnic party (the Social−Democratic Party of Bosnia and Herzegovina). This provoked huge dissatisfaction among Croatian national parties that claimed that Komsic could not represent the Croatian people. The two strongest men in Bosnia after the election of 2006 have become the Prime Minister of the Republic of Srpska, Milorad Dodik, and the member of the Presidency of Bosnia and Herzegovina, Haris Silajdzic. Personal animosities between two of them are clear and their visions of Bosnia and Herzegovina are completely opposite. While Dodik favours a loose federation, Silajdzic advocates a centralized state. In 2006, there were very serious efforts to adopt a new constitution for Bosnia and Herzegovina. Silajdzic insisted on the abolishment of entity voting, which is guaranteed by the Dayton Accord. Many see the Dayton Accord as a guarantor of peace and stability in Bosnia and Herzegovina and therefore agree that entity voting, although it contains many shortcomings, should be maintained. Along these lines, the main Serbian parties and the Party for Democratic Action made an agreement on constitutional changes. Yet, due to the opposition of Silajdzic who gathered enough allies, the voting for the new constitution failed in 2006 lacking only two votes in the House of Representatives.1 Another important change in 2006 was that some competences were given to the bodies of Bosnia and Herzegovina from the OHR. However, the inability to accept a new constitution has prolonged the life of the OHR. The democracy score for Bosnia and Herzegovina, prepared annually by Freedom House, demonstrates slow but persistent improvement in the field of democratization of Bosnia and Herzegovina. In 1998, it was 5.42 (7 is the worst possible mark), in 2002 it was 4.54 and in 2006 it was 4.04. Another assessment by Freedom House in 2006 still considers Bosnia and Herzegovina as a partly free country, being one of five partly free countries in Europe (together with Montenegro, Albania, Macedonia and Moldova). Still, it notes progress in terms of political rights.2 Overall the post-Dayton economic reconstruction and political stabilization of Bosnia and Herzegovina have been slow but persistent. 1

2

For political developments in B&H in 2005 and 2006 see Kate Fearon, “Bosnia and Herzegovina”, in Jeannette Goehring (ed.), Nations in Transit 2006 (Budapest: Freedom House, 2006), pp. 153-174; Jasna Jelisic, “Bosnia and Herzegovina”, in Jeannette Goehring (ed.), Nations in Transit 2007 (Budapest: Freedom House, 2007). http://www.freedomhouse.org/template.cfm?page=22&year=2007&country=7140.

1.2

Bosnia and Herzegovina: Economic Performance and Outlook Walter Pudschedl and Sa´ndor Gardo´, Bank Austria Creditanstalt

Introduction The Dayton Peace Accord signed at the end of 1995 established a political framework for a new post-war order for Bosnia and Herzegovina, which is in place to this day. The political framework created a state with weak central institutions and two very different entities, the Federation of Bosnia and Herzegovina and the Republic of Srpska. This structure did not make it easy to pursue a path of coordinated legal and economic reforms. Now, more than 10 years since the implementation of the restructuring process, the country still has a long way to go before reaching its objective of an economically independent state. Nevertheless, following pressure from the international community, in recent years significant progress has been made in strengthening the central state and in creating an effective market economy.

Sustained growth under weak conditions With the completion of the first stage of the restructuring process immediately after the war, characterized by exceptionally high GDP growth rates that started from an initially low level, economic growth has in recent years stabilized at a fairly impressive level of around 5 per cent. GDP is nonetheless still lower than before the war, amounting to not quite €9.8 billion in 2006, which corresponds to a per capita GDP of only some €2,500. Therefore, in comparison with other countries in the region, Bosnia and Herzegovina, together with Albania and Macedonia, comes in last (Figure 1.2.1). The economic boom continued in 2006, with GDP growing by a real 6.2 per cent. Growth was largely driven by the services sector. Trade and financial services led the positive trend in the tertiary sector with double-

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Sources: National statistics, UniCredit New Europe Research Network digit growth. In 2006, industrial production was again very buoyant, growing at an average rate of 11.2 per cent in real terms, year-on-year. This favourable development is explained by the progress in the privatization of companies, especially small and medium-sized enterprises, coupled with initial successes in the restructuring of the corporate sector, which was frequently supported by foreign direct investment. Agriculture, affected by adverse weather conditions, did not fare as well. The sustained dynamic growth in Bosnia and Herzegovina from 2006 to date has been significantly helped by the favourable global conditions. In 2006 as a whole, export growth accelerated to almost 30 per cent in average terms (nominal, in convertible marks (BAM)). At the same time imports stagnated at their 2005 level, making foreign demand an important component of GDP growth in 2006. However, domestic demand, and private consumption in particular, remained the key engine of growth, even if the latter was slightly impacted by the introduction of value-added tax (VAT). But relatively strong real wage growth, slightly improving labour market conditions, the buoyant rise of retail sales and continued strong credit growth all point to strong private consumption. In 2006, lending to private households rose by over 25 per cent year-on-year. The significant growth rate of loans to corporates, which averaged 20 per cent, suggests that investments are also providing a significant impetus to growth. Budget data indicate brisk public consumption, which has also made a positive contribution to economic growth given more generous public spending in the run-up to parliamentary elections in October 2006. The inferior quality and the scarcity of statistical data, however, make a detailed analysis of economic developments difficult. The political division of Bosnia and Herzegovina is still reflected in economic developments. Failure to implement reforms in the first few years

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19

Sources: Federal Office of Statistics, Institute of Statistics RS, UniCredit New Europe Research Network after the end of the armed conflict caused economic progress in Republic of Srpska to fall behind that of the Federation of Bosnia and Herzegovina. A slow catching-up process has been under way since 2005. In 2005, industrial production in the Federation grew at a rate of 6.1 per cent year-on-year, compared to almost 20 per cent in the Republic of Srpska. This trend continued in 2006 and was particularly pronounced in the metal-producing industry, which became more competitive following foreign investments in the sector. With average year-on-year growth of 19.1 per cent, industrial production grew much faster in the Republic of Srpska than in the Federation (7.5 per cent) (Figure 1.2.2).

Currency board as a pillar of price stability The currency board remains the cornerstone of the country’s stabilization policy, with Bosnia’s currency, the BAM, being linked to the Euro at a rate of 1.95583 to 1.00000. This measure helps to stabilize prices, even though higher energy prices pushed inflation up to an average 3.6 per cent in 2005. The price differential between the two entities has in the meantime narrowed significantly, a development that heralds the slow integration of both economic regions. The cautious policy pursued by the central bank, whose governor, Kemal Kozaric´, is continuing where New Zealander Peter Nicholl left off at the end of 2004, is moreover ensuring that the money supply is sufficiently covered by foreign currency reserves. These gave the country a

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Sources: Federal Office of Statistics, Institute of Statistics RS, UniCredit New Europe Research Network comfortable 5.1 months of import cover as of year-end 2006. The currency board regime and the peg to the Euro are therefore not at risk currently. As anticipated, at the beginning of 2006, inflation once again surged with the introduction of a flat 17 per cent VAT. The upward pressure on prices eased after the price surge at the beginning of the year, so that inflation settled comfortably in the single-digit range in both entities as of year-end 2006. Consequently, in 2006 inflation averaged just above 7 per cent in Bosnia and Herzegovina. In the Federation it reached 6.0 per cent on average; in Republic of Srpska consumer prices rose more sharply at an average 9.5 per cent, largely due to structural reasons. We expect consumer price inflation to slow to just below 2 per cent in 2007 as the one-off effect of the introduction of VAT wears off (Figure 1.2.3).

Only temporary budget relief through introduction of VAT Efforts at budget consolidation have been successful in recent years, and in 2005 the consolidated budget even ran a surplus of 2.4 per cent of GDP. This was achieved through higher revenues from indirect taxes, supported by strong economic growth, and through cuts in expenditure on public-sector salaries. The spending cuts were in part a consequence of the restructuring of the defence sector and a cutback in investment activity. Contrary to the International Monetary Fund’s (IMF) main priority for the country, the country’s leaders opted for an expansive fiscal policy in 2006 in light of the forthcoming elections and in hopes of increased revenues based on the introduction of VAT. Indeed, budget expenditures grew by a

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21

strong 18 per cent in 2006 as a whole, mainly as a result of a generous public wage policy in the second half of 2006, with expenditures for employee compensation increasing by 22 per cent year-on-year. But budget revenues grew even faster at 21 per cent year-on-year, so that the consolidated general government budget closed 2006 with a huge surplus of €285 million, or 2.9 per cent of GDP. Compared to 2006, the budget laws for 2007, with a balanced budget in the Republic of Srpska and a slight deficit in the Federation of Bosnia and Herzegovina, indicate a highly expansionary fiscal course for 2007, based on strong wage growth and stepped-up public investment activity. Moreover, the generous compensation schemes (for example, restitution, war damage, frozen foreign currency deposits) adopted in 2006 are expected to put an additional burden on the budget in the coming years. Consequently, the surpluses are expected to melt down and the budget might even turn into a deficit in the years ahead. The difference of opinion with the IMF on the fiscal plans for 2006 and the ambitious compensation schemes has brought the negotiations on a new standby agreement to a standstill. The country therefore has no agreement with the IMF at the present time. The IMF has warned Bosnia and Herzegovina that any excessive public expenditure would have a negative impact on the balance of trade and the financing of the economy, especially as the relatively high internal indebtedness burdens public finances. So in order to avoid significant fiscal problems tighter fiscal policy is called for.

Foreign trade imbalance The country has a strong imbalance in its foreign trade, which is explained by high imports of capital and consumer goods and a much lower level of merchandise exports due to Bosnia’s still weak export industry. In 2005, exports amounted to only 34 per cent of imports, so that the trade deficit surged to over €4 billion, or 46.3 per cent of GDP, according to figures provided by the central bank. The current account deficit widened to about €1.7 billion, or 20 per cent of GDP. The foreign trade balance has improved significantly in 2006 given the introduction of VAT, which led to accelerated imports as of year-end 2005. Consequently, in the first few months of 2006 demand for imports was very moderate. Although in the second half of 2006 imports again gathered momentum after the one-off effect wore off, in 2006 as a whole imports stagnated at their 2005 level. In the same period, exports expanded at a rate of about 30 per cent, boosted by the favourable global economy and the improved competitiveness of a number of Bosnian companies after these were successfully restructured (mainly in raw material-based sectors) as well as due to the better statistical coverage of exports as a result of the introduction of VAT. Thus, in 2006 the trade deficit narrowed in absolute terms, a development that was also reflected in the current account. The

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current account deficit fell to €1 billion, or 10.7 per cent of GDP in 2006, a figure that is, however, still relatively high. The central bank contributed to this improvement by tightening the monetary policy (the minimum reserve rate was raised from 10 per cent to 15 per cent in December 2005) as credit growth has eased slightly, which in turn seems to have dampened the demand for imports. With export growth losing some of its momentum, demand for imports will accelerate now that the one-off effect relating to the introduction of VAT has worn off. These developments will lead to an increase of the trade and current account deficits in 2007. The financing of the current account deficit is currently assured through foreign direct investments and other capital inflows, mainly trade credits and loans, as well as foreign exchange reserves at record levels, reaching €2.8 billion (2005: €2.1 billion) as of year-end 2006. Even if the current account deficit is probably overestimated given the underestimation of GDP and workers’ remittances, it is still one of the main problems of the Bosnian economy. The deficit needs to be reduced to a sustainable level in the medium term, however. This cannot be achieved merely by the central bank’s monetary policies as the impact of the measures taken by the central bank is very limited within the framework of the currency board. The macroeconomic imbalance of the country’s foreign trade can be most effectively solved by developing a competitive export base, or in other words, through structural changes at a microeconomic level.

Outlook The strong economic momentum seen in previous years is expected to continue in 2007–2009. However, economic growth will be limited to around 6 per cent unless decisive action is taken keeping institutional and economic reforms in mind. These are not only a prerequisite for stepped-up EuroAtlantic integration, but also an important factor in raising the country’s attractiveness as an investment location for foreign investors and in increasing Bosnia’s competitiveness on international markets. While price stability – bolstered by the currency board arrangement – will remain a crucial asset of the Bosnian economy in the years ahead, in order to enhance macroeconomic stability Bosnian policymakers will have to cope with an increasing fiscal burden, high unemployment and a current account deficit that is unsustainable in the long run. A speeding-up of structural reforms, especially the restructuring and privatization of the corporate sector, would, however, be inevitable not only for fighting the macroeconomic deficiencies described above, but also for improving the investment climate and attracting foreign direct investment (both privatization-related and greenfield). The structural weaknesses reflected in the corporate sector’s low competitive abilities are an impediment to more dynamic growth. After the country’s secession from the former Yugoslav Republic and the consequent disruption of export routes, war damage, heavy-handed legal and bureaucratic

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23

environment and the current scarcity of capital, only a handful of companies are in a position to manufacture products that can be readily sold in the international market. Until now, only very few companies have succeeded in raising fresh capital and in making technological progress, in most cases with the help of foreign investors. Although the formation of new governments at the beginning of 2007 at both the state and entity (Federation) levels has filled the political vacuum prevailing since parliamentary elections in October 2006, political forces in Bosnia and Herzegovina have been unable to reach a broader consensus on pending institutional and structural reforms. The lack of reform commitment, mainly regarding police reform, full cooperation with The Hague and public broadcasting reform, also represents the main obstacle to an acceleration of Bosnia’s European Union (EU) integration process and the signing of a Stabilization and Association Agreement with the EU, which the government hopes to accomplish in the second half of 2007 during the Portuguese EU presidency. The sluggish reform process is one of the main reasons why the international community (International Peace Implementation Council) decided to extend the mandate of the Office of the High Representative (OHR) in Bosnia by one year to end-June 2008. Slovak diplomat Miroslav Lajcak, who at the same time will also be the EU’s Special Representative in Bosnia, succeeded outgoing HR Schwarz-Schilling at the top of the OHR as of July 2007. In order to facilitate political and economic reform the EU recently granted a total €226 million pre-accession financial assistance for Bosnia and Herzegovina for 2007–2009. The reconstruction of the country has been successfully concluded with international assistance for about 10 years after the end of the armed conflict and the beginning of the implementation of the Dayton Peace Accord, but the goal of a politically functioning and economically independent Bosnia and Herzegovina with a sound economic base has not been realized. The progress so far made in the area of structural reforms holds promise for the future, especially as the business environment is steadily improving through

Table 1.2.1 Bosnia and Herzegovina – selected indicators

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the enactment of new legal provisions (for example, introduction of VAT). In the hope that the reforms will be continued or even accelerated, the country’s economic future can be viewed with cautious optimism. (Table 1.2.1).

1.3

Bosnia and Herzegovina: The Banking System Zˇeljko Pehar, Raiffeisen Bank dd BiH

Political and economic environment of the banking system The character and characteristics of the political, legal and economic system in Bosnia and Herzegovina during the 1990s derive from problems inherited from the former socio-economic environment, in particular by the longlasting war and post-war reconstruction that have caused delays in the transition processes in Bosnia and Herzegovina’s economy. Bosnia and Herzegovina is a complex state consisting of two entities: the Federation of Bosnia and Herzegovina (FBiH) and the Republic of Srpska (Republika Srpska (RS)). The Dayton Peace Accord of 1995 established peace in Bosnia and Herzegovina and parts of this accord were incorporated into the Constitution of Bosnia and Herzegovina. Political integration and the development of a relationship with the European Union (EU) commenced in 1997, when the Council of Ministers of the EU adopted an entire set of political and economic conditions related to the development of bilateral relations between the EU and Bosnia and Herzegovina. In addition, the EU Declaration of 1998 established the EU–Bosnia and Herzegovina Consultative Task Force and a year after that a Stabilization and Association Process (SAP) commenced. In 2000, an EU Road Map, consisting of steps to be taken in order to open up the negotiations on stabilization and association, was published. At the end of 2003, the report on Bosnia and Herzegovina’s readiness to initiate negotiations on stabilization and association – the Stabilization and Association Agreement – was adopted; these negotiations were successfully opened on 25 November 2005. Despite the relatively active negotiations at the beginning, issues related to the reform of the police system still prevent the final sign-off of the agreement. Further, the slow process of setting up the authorities after the October 2006 general parliamentary elections, continuous disagreement within the leading coalition and opposition to the political solutions of the High Representative and EU Special Representative in Bosnia and Herzegovina led to instability within the Council of Ministers of Bosnia and Herzegovina and finally the proffered resignation of the prime minister. However, optimism about the

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future remains; there are expectations that the leaders of local political parties, with the assistance of the international community, will reach joint solutions for the benefit of all citizens of Bosnia and Herzegovina. Moves towards further Euro-integration and the implementation of constitutional reforms will help to create the preconditions for a more efficient executive branch, and thus accelerate reforms and ultimately the signing of the Stabilization and Association Agreement with the EU. In the past five years, all parts of Bosnia and Herzegovina’s economic system have undergone accelerated transition processes ultimately aimed at fostering economic growth and sustainable development, as well as at a significant rise in living standards in the country. Implementation of the Mid-term Development Strategy of Bosnia and Herzegovina (PRSP) has resulted in a significant number of goals related to sustainable economic growth and development being achieved by the end of 2007. However, in the forthcoming period, it is necessary to expend additional efforts in preparing and implementing reforms that will create a more efficient business environment in Bosnia and Herzegovina. The main economic reforms for the medium term shall be aimed at the preservation of macroeconomic stability, the continuation of fiscal system reforms, as well as the establishment of a liberalized electric power supply system, a market for telecommunication services and support for agricultural production. In addition, special attention shall be paid to fostering the development of an export-oriented economic sector and the establishment of an adequate social welfare system; one of the primary objectives in the forthcoming period is also to complete the process of admission to the World Trade Organization (WTO). Significant growth rates in GDP and industrial production are basic characteristics of Bosnia and Herzegovina’s economy; however, the low rate of nominal GDP per capita needs to be emphasized as well. The actual growth rate of GDP in 2005 was 4.3 per cent and in 2006 it was 6.2 per cent. At the same time, other fundamental economic indicators showed positive values, which is especially reflected in the growth of industrial production that increased by more than 10 per cent in Bosnia and Herzegovina in December 2006 compared to the same month in the previous year. Compared to the period before 2005 when inflation had continuously low values under the effect of global factors (especially an increase in energy prices in world markets), there was intensified pressure to increase consumer prices in 2005, because of which the average inflation rate was 3.6 per cent. The introduction of value-added tax (VAT) in 2006 led to a continuation of limited inflationary pressure that produced an average inflationary level of 7.4 per cent. On the other hand, the tax reforms in Bosnia and Herzegovina and the introduction of a 17 per cent rate of VAT influenced the fiscal consolidation process, causing a significant growth of the budget surplus, which at the end of 2006 amounted to 2.9 per cent of the nominal GDP. In 2007, inflationary pressure decreased markedly within Bosnia and Herzegovina’s economy. These trends are primarily because the introduction of VAT has ceased to

Bosnia and Herzegovina: The Banking System

27

have an effect. Therefore, by end-2007, inflation should be slightly over 1 per cent. The payment balance deficit decreased significantly from its 20.3 per cent share of GDP in 2005 to a 10.7 per cent share in 2006. Despite this decrease, faster growth of imports than of exports, in the first nine months of 2007, will result in an increase in the payment balance deficit to 13 per cent of the nominal GDP. The main reason for the foreign trade deficit in the past five years is the high level of petrol and petroleum product imports, which in past periods made up over 15 per cent of the total imports to Bosnia and Herzegovina. Also, a permanent deficit in trading of various machines and devices, vehicles, pharmaceuticals, and a deficit in trading of various forms of food products and drink contributed significantly to this trend. External payment indicators point to the need for encouraging foreign direct investments (FDI) with the purpose of strengthening the competitive capabilities of the economy and its export orientation. Therefore, laws regulating FDI were liberalized, which enabled the waiving of customs duties and allowed the repatriation of profits to foreign investors. Of special importance to foreign investors is exemption from income tax in the first five years of foreign investment in the Federation of Bosnia and Herzegovina. At the same time, recent amendments to legislation created a uniform profit tax rate for legal entities. In both the Federation of Bosnia and Herzegovina and the Republic of Srpska, this tax rate is 10 per cent. In September, Bosnia and Herzegovina ratified the Central European Free Trade Agreement (CEFTA), which comprises Albania, Bosnia and Herzegovina, Montenegro, Croatia, Serbia, Kosovo and Moldova. Joining CEFTA will facilitate trade relations among member countries and raise their economic interactions to a significantly higher level. An active Currency Board and the pegging of the convertible mark (BAM) to the Euro (€1 = BAM 1.955830) ensure currency stability. However, the currency policy limits the development of the local money market. Also, there is no developed local debt capital market, but upon adoption of legal regulations aimed at resolving the problem of domestic debt incurred in the early 1990s through the issue of bonds, the development of a debt capital market that will contribute to increasing the investment portfolio can be expected. Total FDI in 2006 amounted to €564 million, compared with €479 million in 2005. At the same time, gross foreign currency reserves amounted to €2.79 billion, while the government’s foreign debt amounted to €2.08 billion. Taking note of the progress made towards EU integration and the improvement in economic indicators, the international rating agency Moody’s Investors Service upgraded Bosnia and Herzegovina’s credit rating in May 2006 from B3 to B2, with sound prospects for an upgrade in the future as well. Bosnia and Herzegovina was awarded its first rating by Moody’s in March 2004. By building a functional state and strengthening political stability through reforms of the existing constitution of Bosnia and Herzegovina, by accelerating EU integration processes as well as by

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preserving economic stability, in upcoming years we can expect even further upgrading of Bosnia and Herzegovina’s credit rating.

Banking system As already mentioned, the characteristics and the development of the banking sector, as well as the overall financial system in Bosnia and Herzegovina, during the 1990s were determined by the inherited weaknesses and deficiencies of the former socio-economic system, as well as by war, that have adversely affected both the economic and the overall financial system. In the second half of the 1990s, the financial system in Bosnia and Herzegovina was based on administrative principles, which, along with pronounced underdevelopment, inefficiency and the low number and type of financial intermediaries, resulted in the inability to respond to the modern needs of the country’s economy. However, accelerated reforms in all parts of the financial system, as well as the entry of foreign financial groups and the support of the international community, enabled the development of the financial and, above all, the banking system, which in the past few years has become the most developed segment of the overall economy in Bosnia and Herzegovina. Dynamic and gradual changes in the structure of the banking system, the implementation of modern principles of development in the banking industry and the current structure of the financial system in Bosnia and Herzegovina illustrate a bank-based financial system. The ratio between the total assets of the banking system and the nominal GDP in recent years indicates the constant increase in the financial strength of this sector; at the end of 2002 this ratio was only 42.7 per cent and in the subsequent four-year period (along with a progressive growth trend) it reached a level of 76.9 per cent, which has gone a long way in closing the gap with the developed countries of East Europe. On the other hand, at the end of 2006, the average ratio in countries of the Euro zone was 235.5 per cent; thus in the forthcoming period, along with a continued increase in banking sector activity, a continuous increase in the assets of the banking sector in Bosnia and Herzegovina can be expected.

Central Bank of Bosnia and Herzegovina The Central Bank of Bosnia and Herzegovina began operating in August 1997 and is headed by the Governing Council of the Central Bank acting as the Currency Board. By law, this central financial institution operates independently. The Governing Council consists of five members nominated by the president of Bosnia and Herzegovina and their mandate is six years. The Central Bank’s management team consists of the governor and three

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29

vice governors who are, upon approval by the Governing Council, nominated by the governor. The main functions of the Central Bank are as follows: • Defining and controlling the monetary policy through the issuance of local currency according to the exchange rate of BAM 1 = €0.511292, with full coverage in free convertible foreign exchange funds; • Maintaining and managing foreign exchange reserves in a safe and profitable manner; • Supporting or establishing, as well as maintaining, the appropriate domestic payments system; • Issuing appropriate regulations on performance of its activities; • Coordinating the activities of the agencies whose remit is issuing banking licences and performing banking supervision in entities (the Federation of Bosnia and Herzegovina and the Republic of Srpska); • Implementing monetary policy in accordance with the Currency Board’s policies; • Taking deposits of state institutions in Bosnia and Herzegovina, as well as deposits of commercial banks, in compliance with the legal reserves requirement. The Central Bank can also hold deposits of entities and other public institutions, as well as any other reserves of commercial banks; and • Releasing and withdrawing out of circulation the local currency by strictly adhering to the Currency Board rules. The Central Bank exercises its influence over the banking sector by requiring legal reserves and using them as a monetary policy instrument. Since 1998, determining the level of legal reserves and how to maintain these reserves have been subject to significant changes; until 1 June 2003, the basis for the calculation of legal reserves was represented by the average 10-day amount of deposits and loans received by the bank denominated in local currency. Legal reserves were maintained at the reserve account with the Central Bank or in the bank’s vaults. Changes and amendments to the Law on the Central Bank, as well as to the Law on Banks, were intended to encourage the decrease of foreign exchange reserves that banks maintain in current accounts held with their direct correspondent institutions abroad. The range of measures also included that the Central Bank pay interest on funds maintained in current accounts with the Central Bank, even when they are not designated as legal reserves. Ultimately, according to a decision adopted by the Governing Council of the Central Bank, the legal reserves consist of all deposits and the funds borrowed by banks regardless of the currency of denomination. To calculate the level of legal reserves, the 10day average balance of mentioned liabilities methodology is used. Maintenance of legal reserves is done exclusively by depositing cash funds into the reserves account with the Central Bank. The Central Bank pays to the commercial banks a fee in the form of interest payments whose level is determined on the basis of the average interest that the Central Bank

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realizes in relation to cash funds deposited in accounts with non-resident banks. The latest changes to the Decision on Determining and Maintaining Legal Reserves and Determination of Fees to Reserves Amount from December 2005 introduced a higher rate (15 per cent) of legal reserves as the established basis for calculation and the Central Bank pays a fee to commercial banks in the form of an interest rate of 1 per cent, while an average interest rate is paid on cash funds exceeding the prescribed legal reserves of commercial banks since this is the interest rate that the Central Bank would earn on the basis of ‘overnight’ deposits with foreign financial institutions. The domestic payments system, as a significant segment of the financial system, underwent reforms before other neighbouring countries. The domestic payments system was regulated by law during 2000, and the transition from performing payments through ‘payments bureaus’ to commercial banks occurred on 5 January 2001. The Central Bank established an overall payment system, which was accompanied by the installation of electronic equipment, enabling interconnectivity of commercial banks and the Central Bank. Payments operations are performed by using two subsystems: a large payments system (real time gross settlement system (RTGS)) and a small payments system (Giro Clearing).

Regulatory structure of the banking system Development of the legislative framework for the banking system in Bosnia and Herzegovina commenced in parallel with the development and organization of the legal framework of the Central Bank, so that in 1998 a new Law on Banks was adopted that since then has undergone significant changes in 2000–2005. This law, and especially its latest changes and amendments, significantly altered and improved the institutional framework of banking operations. In accordance with the provisions of this law, commercial banks are established and operated as shareholder companies and can be established by local physical persons or corporate entities, as well as by foreign banks that, upon special approval by the banking agencies of the Federation of Bosnia and Herzegovina and the Republic of Srpska, can establish their own representative offices and branches in Bosnia and Herzegovina. Commercial banks in Bosnia and Herzegovina, based on the law, can perform the following banking operations or services: • • • •

Receiving all types of cash deposits and other cash funds; Approving and receiving loans and financial leasing; Issuing all types of cash guarantees; Participating in, purchasing and selling money market instruments and capital market instruments for their own and for someone else’s account;

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31

• Payments and funds transfer services; • Purchase and sale of foreign currencies; • Issuing and managing payment means (including credit cards, traveller’s and bank cheques); • Safekeeping and managing securities and other valuables; • Securities trading; and • Other business activities resulting from those previously mentioned. As illustrated by the list above, banks in Bosnia and Herzegovina, aside from engaging in the standard business activities of a deposit–loan nature, are allowed to perform other financial business activity, which in turn enables banks to be classified as universal and semi-functional banks typical of European institutions. The institutional framework for regulating and supervising the banking sector in Bosnia and Herzegovina is different from that in the European countries in that banking supervision is performed by the Banking Agency of the Federation of Bosnia and Herzegovina, the Banking Agency of the Republic of Srpska and, partially, the Deposit Insurance Agency of Bosnia and Herzegovina. Legislation related to the banking agencies is harmonized in both entities and the main tasks of entity-level agencies are reflected in the following: • Issuing a licence for the creation and operations of banks and approvals for each individual change in organizational status, the type of business activities they perform as well as approvals for the appointment of managing staff of banks; • Supervision over operations of banks and undertaking measures according to the law; • Revoking operating licences from banks according to the law; • Managing or supervising the process of rehabilitation and liquidation, as well as initiating bankruptcy proceedings against banks; • Issuing legal regulations prescribing banking operations; and • Evaluating the fulfilment of conditions and giving approvals to banks for the issue of shares. A key task of the entity-level banking agencies is supervision over banking operations that is performed both on-site and off-site, ie. by collecting financial statements. The agencies are regularly defining a series of prudential standards of banking operations with the purpose of more thoroughly organizing the banking system. Following the rules of the Basel Capital Accord and taking into account the fact that capital provides the necessary sources for regular activities as well as coverage against the contingent risk of being taken over, bank management now has the task of creating and developing the procedures necessary for managing the balance and structure of capital. The bank’s capital, according to the provisions of the banking agency, is paid in money

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and should amount to a minimum of BAM 15 million. The capital adequacy rate represents a ratio between net capital and risk-weighted assets, and banks must report this rate to the entity-level banking agencies on a quarterly basis. Changes and amendments to the legal framework in 2002 established a capital adequacy rate of 12 per cent for banks in Bosnia and Herzegovina; previously, the rate was 10 per cent. Bosnia and Herzegovina can boast an enviably high capital adequacy rate across the entire banking system; although in the past six years there has been a noticeable decrease in this indicator. At the end of 2006, this rate was 17.7 per cent, while at the end of 2002 it was 25 per cent. Restrictions on concentrations, which are closely correlated to the diversification of banking sources of funds and facilities, represent a key principle of safe and successful banking operations. Reasonable management as well as horizontal and vertical harmonization of balance sheet and offbalance sheet items are aimed at ensuring the implementation of restrictions as to risk concentrations. Within the prescribed legal framework, large credit risk exposure represents any bank exposure exceeding 15 per cent of the amount of core capital of the bank. The total credit risk exposure of the bank in relation to an individual beneficiary and a group of connected customers cannot exceed 40 per cent of core capital. Also, credit risk exposure above 5 per cent must be secured by quality collateral, while credit risk exposure related to an individual or to a group of connected customers that varies from 25 per cent to 40 per cent of the core capital needs to be secured by marketable collateral whose value can be reliably determined. The total credit risk exposure based on issued guarantee to one customer or a group of connected customers cannot exceed 20 per cent of the core capital of the bank excluding performance guarantees. The sum of all large credit risk exposures of the bank, including also the biggest credit risk exposures of the bank, cannot exceed 300 per cent of the core capital, while the sum of all credit risk exposures of the bank in the form of issued guarantees, except for performance guarantees, cannot exceed 100 per cent of the core capital of the bank. Banking agencies require acceptable management of credit risks that includes planned, controlled and reasonable risk undertakings and the implementation of procedures, technologies and programme techniques for the approval as well as the monitoring of loans. Banks are required to establish a system of monitoring of all loans, except for retail loans in amounts below BAM 10,000. A significant contribution to better credit risk analysis, and therefore safety of banking operations, was ensured by the establishment of the Central Loan Register of corporate entities that became operational in April 2006. Users of this service are commercial banks and banking agencies. The register offers information on the total outstanding indebtedness of corporate entities with commercial banks in Bosnia and Herzegovina as well as the loan indebtedness that has been repaid.

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33

Additionally, liquidity of banks is important for maintaining the stability of the banking sector. In accordance with decisions of the entities’ banking agencies, banks are required to implement and maintain a clear and rational policy that should ensure that individual assets and liabilities are not too concentrated. Also, the following requirements need to be followed when managing assets and liabilities: • At least 90 per cent of sources of funds with a maturity up to 365 days are to be invested in facilities (assets instruments) with a maturity up to 365 days; • At least 95 per cent of sources of funds with a maturity up to 180 days are to be invested in facilities (assets instruments) with a maturity up to 180 days; and • Sources of funds with a maturity up to 90 days are to be fully invested in facilities (assets instruments) with a maturity up to 90 days. Prudential foreign exchange risk management provides a framework to banks by restraining banks from taking over too high liabilities towards foreign institutions by reasonably maintaining foreign exchange positions in such a way so as to monitor, control, and eliminate the potentially adverse effects of changes in foreign exchange rates on the stability of the financial position of banks. In accordance with the law, banking agencies have issued a series of other decisions defining the banking system in Bosnia and Herzegovina, so that the Decision on Supervision and Activities of the Banking Agency of the Federation of Bosnia and Herzegovina and the Republic of Srpska prescribes the main competencies of the agencies that are involved in examining, directing, supporting and improving the success and stability of the banking system in Bosnia and Herzegovina. Further steps in the direction of improving institutional regulations and supervision of the banking sector in Bosnia and Herzegovina should be aimed at their consolidation at the state level. In addition to the harmonized legislation regulating the banking sector, the consolidation of banking supervision would entail the creation of a complete and unified banking market across the entire country.

Deposit insurance system The Deposit Insurance Agency of Bosnia and Herzegovina (DIA) was established in 2002; until that time there were agencies whose operations were limited to the individual country entities. The deposit insurance system in Bosnia and Herzegovina is regulated by special laws and is also characterized by established policies and procedures of deposit insurance, the amount of indirect deposit and the existence of ex ante financing; disbursement of insured deposits is financed mainly by the deposit insurance institution.

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The DIA is headquartered in Banja Luka, but it has two branches in Sarajevo and Banja Luka. The DIA is an independent, non-profit corporate entity. The Law on Deposit Insurance in Banks defines all the significant elements of the deposit insurance system. Insured deposits are defined in the law as cash deposits up to BAM 7,500 of eligible deposits, which are the funds resulting from deposits into savings accounts that depositors have deposited in the bank as a member of the deposit insurance system (programme). Insurance-eligible deposits exclude: • funds acquired through illicit actions; • deposits to specially protected accounts and safe-deposit boxes of the bank; • deposits of local and foreign governments, banks, insurance companies, mutual and pension funds; • deposits of members of supervisory boards, directors, managers, members of audit boards and members of their immediate family; • deposits of companies’ group members, as well as banks; and • funds invested in debt securities issued by the bank. To further the safety and stability of the banking system, the DIA intends to increase the level of deposit insurance up to BAM 10,000 by the end of 2007. A bank can join the deposit insurance system, ie. become a member of this programme, if it meets the preconditions prescribed by the Law on Banks, holds a licence from one of the entity-level banking agencies and is at least 90 per cent privately owned. The rate of insurance premium is 0.30 per cent, and it is paid on a quarterly basis relative to the amount of eligible deposits. Funds collected on the basis of premiums are used exclusively for the purpose of capital increase. By following the legal regulations, the DIA can use collected funds to invest in securities with a fixed rate of return or in other debt financial instruments issued by banks and companies of the EU and the United States, issuers with a high level of credit rating. According to the regulations, all banks are required to be members of the deposit insurance system starting from August 2003, but due to the inability of state-owned banks to meet the conditions, this deadline was prolonged on several occasions. At the end of the third quarter of 2007, 23 commercial banks in Bosnia and Herzegovina met the conditions for joining the deposit insurance system.

Structural characteristics and efficiency of operations of the banking sector Compared to the overall financial system, trends in the banking sector of Bosnia and Herzegovina are characterized by those changes to which banking sectors of developed countries too are exposed. The institutional

Bosnia and Herzegovina: The Banking System

35

framework of banking operations is adjusted to modern trends; the intensified consolidation of the banking sector is expressed by the decrease in the number of banks – in 1999 there were 61 banks and by the end of 2006 this number was brought down to 32 commercial banks. Currently, five banks are under provisional administration, but, considering the size of these banks and the long period of the provisional administration process, they do not have any adverse effect on the overall stability of the banking sector in Bosnia and Herzegovina. The process of consolidation of the banking sector is evident by the increase in concentration, which can be measured by the participation of the assets of the five largest banks in the total assets of the banking sector: at the end of 2002 it was 50 per cent and at the end of 2006 it was 78 per cent. On the other hand, the entry of foreign banks that was initiated by the end of 1990s has led to a strong growth in the assets of banks under foreign ownership: in 2000 the participation of their assets as a share of total assets of the banking sector was 50.18 per cent and by the end of 2006 it was 95 per cent. The strong entry of foreign banks that began by the end of the 1990s is still continuing. During 2005, Nova Ljubljanska Banka took over two banks in Bosnia and Herzegovina – Tuzlanska Banka and Razvojna Banka JIE from Banja Luka. Bank Austria Creditanstalt was responsible for the acquisition of Nova Banjalucˇka Banka, while Italian Banca Intesa, through its Luxembourg branch, took over a majority share in UPI Banka from Sarajevo and, in 2006, acquired over 80 per cent of ownership in this bank. Banca Intesa also took over LT Gospodarska Banka dd Sarajevo. Through mergers and acquisitions, foreign banks are trying to consolidate their ownership and so far seven mergers have been performed by foreign banks, and in the forthcoming period, this process will continue through announced mergers and acquisitions of the banks in the Federation of Bosnia and Herzegovina owned by the Italian UniCredit Group. Despite the reduction in the number of banks, the number of employees in Bosnia and Herzegovina’s banking sector is constantly increasing. The dynamic processes of consolidation and expansion of Bosnia and Herzegovina’s banking sector in the future will lead to a further, although not so emphasized, reduction in the number of banks given that mergers of banks owned by the same foreign banking entity are yet to materialize (UniCredit and Bank Austria Creditanstalt have majority ownership in three commercial banks in Bosnia and Herzegovina). In addition, smaller banks will also engage in mergers and acquisitions in order to survive and strengthen their market position and in order to be able to respond to the ever-increasing market challenges. At the same time, intensive steps undertaken by regulatory institutions will lead to the completion of provisional administration processes in certain banks, which, according to current estimates, should end up in ownership of existing leaders in the banking sector or, if no interest is expressed for the same, it will lead to liquidation.

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An Introduction to the Economy and Business Environment

Banks in Bosnia and Herzegovina are characterized as conservative, deposit–credit institutions, with deposits being the dominant source of funds and loans representing the key form of facilities. The banking system is also characterized by a high level of immobilized assets, the cause of which can be explained in different ways from non-existence of money market instruments to a still undeveloped capital market to a certain extent. The total assets of the banking system at the end of 2006 amounted to €7.51 billion, which represents an increase of 25.2 per cent compared with the previous year. The financial strength of the banking sector, given by the ratio of total assets and the nominal GDP, shows a constant and progressive upward trend. This ratio was 42.7 per cent between 2002 and 2006, and at the end of this period it reached 76.9 per cent. Because of the inability to satisfy the need for retail loans and the loans to the private sector during the 1990s, an actual credit boom occurred in Bosnia and Herzegovina that started in 2000 and is still continuing today. Retail loans in 2000 amounted to €193.6 million and at the end of 2006 they reached €2.227 billion or 22.8 per cent of the nominal GDP. Loans to the private sector at the end of 2006 amounted to €2.076 billion, which represents 21.2 per cent of the nominal GDP. On the other hand, an increased trust in the banking system caused a rapid growth in retail deposits, which at the end of 2000 amounted to €274.1 million and at the end of 2006 it had risen to €2.150 billion. At the same time, the ratio of total deposits and loans, which amounted to 123.8 per cent (in 2006), indicates that there is a shortage of non-deposit sources of funds in banks on the one side and a high level of cash funds on the other side. Because of the strong entry of foreign banks and the decrease of state ownership in the banking system, as well as the redefining of the business policies of banks in the past three years, there is evident improvement in the success rate of the operations of the banking sector in Bosnia and Herzegovina. Until 2002, the banking system operated with negative results; at the end of 2003, the average profitability of equity capital (return on equity (ROE)) was 3.7 per cent and at the end of 2006 this ratio reached a level of 7.8 per cent. Average profitability of the total assets of the banking sector (return on assets (ROA)) at the end of 2006 also generated a positive value of 0.9 per cent. The organizational and management-related measures taken in preparation for direct and indirect takeover of operations of other financial institutions are gradually transforming banks in Bosnia and Herzegovina into full-service financial institutions. In parallel with this, there was also a strengthening of the processes of technological improvements, which enabled the adoption of modern technologies and means of communication, as well as the creation of new distribution channels. Therefore, since the beginning of 2003, there has been evident progress in the card operations of banks: at the beginning of 2003, only 17 banks in Bosnia and Herzegovina offered card services and there were 118 ATMs and 3,650 POS terminals installed. The latest information at the end of 2006 indicates that 25 banks perform

Bosnia and Herzegovina: The Banking System

37

card operations, the number of installed ATMs has reached 538 and POS terminals now number 11,448. Card operations in banks are performed via international payment cards – Visa, MasterCard, Diners, and starting from 2007, American Express – and there is also a local payment card, the BamCard. At the end of 2006, the total number of payment cards was 1,121,483, out of which around 80 per cent were debit cards and 20 per cent were credit cards.

Conclusion Taking into account the specific nature of the economic environment, it is necessary to continue implementing financial restructuring processes in Bosnia and Herzegovina with the purpose of aligning it with the financial systems of EU countries, keeping the financial systems of developed countries of East Europe that have already joined the EU as a benchmark.. The process of adjustment of the financial system in Bosnia and Herzegovina needs to be dynamic, with a special emphasis on the elimination of deficiencies and further upgrading as a necessary precondition for more progressive development of not only the banking sector but also non-banking financial institutions. In the future, it will be necessary to implement pension reforms so that the private pension fund can be developed based on principles of capital savings, which in developed financial sectors represent extremely significant financial institutions. Commercial banks in Bosnia and Herzegovina are dominant financial institutions and this will continue in the future if formal and institutional preconditions, as well as the stability of the entire economic environment in which they operate, are improved. Legislation needs to be improved by applying the experiences of European countries. Therefore, a complete Law on Credit Institutions should be developed in the near future, which would create preconditions for more significant development of the financial sector as a whole. Also, it is necessary to adjust the institutionalized supervision to that found in EU countries, where the central banks mostly supervise the credit sector. Therefore, in the upcoming period, we should continue with steps towards bringing the supervision and control of banks under the umbrella of a central monetary authority. Aside from what has been mentioned, new laws and regulations need to be issued and the existing ones related to risk in banking operations improved. In addition, protection of users of banking services as well as adjusting to the legal provisions of the new standards of the Basel Committee on Banking Supervision – Basel II – needs to be ensured. Accordingly, steps need to be undertaken towards more flexible and efficient measurement of credit and operating risks. With the expansion of banking activities, the existing capital requirements are insufficient to cover the entire range of risks to which banks are exposed; as such there is a need for further improvement of the legislative framework on the one side and the

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An Introduction to the Economy and Business Environment

implementation of a sophisticated method of risk measurement on the other side. This approach will improve the banking system in Bosnia and Herzegovina and will enable further growth and development, along with a high level of stability and safety, which is already at a high level.

1.4

Bosnia and Herzegovina: Foreign Trade Anesa Vilic´, Sarajevo School of Economics and Business

Exports have been increasing over the level of import growth over the past few years, resulting in a narrowing current account deficit. However, the lack of a single economic area in Bosnia and Herzegovina is a significant disadvantage and barrier to stable economic growth. Export strength is hampered by the fact that the bulk of exports are based on raw materials and financial intermediation services.

Background Bosnia and Herzegovina’s transition to a market economy was stifled by the war which all but destroyed the economic capacity of the country. Despite over 10 years of success in certain segments of the economy, Bosnia and Herzegovina continues to struggle with post-war reconstruction, uneven economic reforms and a complex socio-political environment. Nevertheless, Bosnia and Herzegovina represents an important bridge between Europe and the Middle East, especially now as new oil and gas routes are being discovered and attempts are being made to reduce Russia’s energy dominance over European Union countries. Although Bosnia and Herzegovina’s unique situation hampers its economic prospects, the country has experienced continuous growth and an increase in inflows of foreign capital. Macroeconomic indicators (as shown in Table 1.4.1) provide a stable environment for market players. However, inadequate institutional and legal frameworks do not provide a sufficiently stable foundation for positive economic activity. Employment creation and economic growth rely upon increased foreign direct investment, which in turn relies upon the stability of a single economic area. A single economic area in Bosnia and Herzegovina requires full freedom of movement of goods, people, services and capital. The lack of these four freedoms form the basis for the inadequate level of economic activity, high unemployment (approximately 40 per cent of the working population), under-developed export capacities (import exceeded exports by 45.3 per cent in 2006) and an insufficiently attractive market for foreign investment.

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An Introduction to the Economy and Business Environment

Table 1.4.1 − Macroeconomic indicators Indicator Nominal GDP, billion € GDP per capita, € Real GDP – a growth rate, % Inflation rate, % Unemployment rate, % Average net wages, € Currency reserves, million € Trade balance, million € Total FDI inflow, million € FDI contribution to GDP, %

2000 5.5 1.449 5.5 4.8 39.7 190 522 –3.000 159 2.9

2001 5.9 1.561 4.5 3.1 40,3 209 1.379 –3.308 133 2.3

2002 6.5 1.713 5.5 0.4 40.9 228 1.260 –3.524 282 4.3

2003 6.9 1.794 3.0 0.6 42,0 247 1.422 –3.671 338 4.9

2004 7.5 1.953 6.0 0.4 43.2 258 1.768 –3.678 534 7.1

2005 8.1 2.100 5.5 3.7 31.1 275 2.145 –3.781 421 5.2

2006(e) 8.8 2.289 6.2 5.7 30.0 300 2.761 –3.183 556 6.3

FDI: foreign direct investment. Sources: http://www.fipa.ba, http://www.cbbh.ba.

Despite these challenges, the year 2006 saw the introduction of value added tax (VAT) in Bosnia and Herzegovina. The introduction of VAT (a single rate of 17 per cent) in January 2006 was a significant step in Bosnia and Herzegovina’s reform process in that it helps to support the creation of a single economic area and reduce the predominance of the shadow economy. The VAT law was established in accordance with the European Union’s Sixth Directive. The current VAT threshold is 50,000 convertible marks (BAM), which is approximately €25,000. Companies can choose to be registered under this threshold in accordance with the acquis communautaire. Since VAT was introduced, there have been discussions about creating an additional rate or allowing exemptions on certain products. However, analyses show that the single rate remains a success and has resulted in an increase in revenue. In addition, Bosnia and Herzegovina experienced a reduction in the current account deficit, an increase in the level of prices and increased activity in the construction, financial intermediation and industrial sectors. Furthermore, the economic recovery of the European Union has had a positive influence on the economy of Bosnia and Herzegovina, which is illustrated primarily in the rising level of exports. So far in 2007, Bosnia and Herzegovina’s economy has continued to grow, exceeding growth over the same period in 2006.

Foreign trade policy The Memorandum of the Foreign Trade Regime of Bosnia and Herzegovina provides that the country’s foreign trade policy shall be based on the principles of an open economy, non-discrimination, transparency and free trade. These principles are embodied in the country’s constitution and the Law on Foreign Trade Policy. The Law was written in accordance with the country’s agreement with the World Trade Organization (WTO) and the

Bosnia and Herzegovina: Foreign Trade

41

principles of the free international flow of goods and services. The ministry of foreign trade and economic relations controls the implementation of the law and supervises compliance with international bilateral and multilateral contracts, agreements and conventions. The provisions of the Law on Custom Policy of Bosnia and Herzegovina define a legal framework for customs procedures, which encourage the fast flow of goods through the territory and across the borders of the country and protect against abuse of customs procedures. In addition, the Law on Foreign Direct Investments is very liberal and states that foreign investors have the same rights as locals. The state, as a signatory to various multilateral and bilateral agreements, guarantees that foreign investments will not be nationalized or expropriated. Bosnia and Herzegovina initialized the Central European Free Trade Agreement (CEFTA) in December 2006 and formally signed in May 2007. Members include Albania, Croatia, Kosovo, FYR Macedonia, Moldova, Serbia and Montenegro. By signing up to CEFTA, goods from Bosnia and Herzegovina will be exposed to a market of 40 million people, and the country can expect an improvement to its balance of payments in the years to come. In addition, CEFTA membership will confirm Bosnia and Herzegovina’s commitment to regional cooperation, strengthened trade relations and will show foreign investors that Bosnia and Herzegovina’s market of 2.5 million people is open for investment. Further free-trade agreements have been signed with the European Union and Turkey, and agreements on preferential status have been signed with the United States, Japan, Canada, Switzerland, Australia, Norway, New Zealand and Russia. Currently, the largest investors in Bosnia and Herzegovina are Austria, Croatia and Slovenia, and the largest investments have been seen in production (40.9 per cent) and the banking sector (28.5 per cent).

Balance of payments According to the Central Bank of Bosnia and Herzegovina, the country’s balance of payments position showed significant improvement in 2006, which demonstrated a reduction in the current account deficit (from 21.3 per cent of GDP in 2005 to 11.4 per cent in 2006) and in the trade deficit (from 49.6 per cent of GDP in 2005 to 37.1 per cent in 2006). This improvement was mainly due to significant growth of exports in certain sectors and the introduction of VAT which itself encouraged exports. In addition, revenue from VAT influenced the increase in price levels and discouraged imports in early 2006. However, the existence of the Currency Board, which regulates the exchange rate, puts the sustainability of deficit financing into question. If the country can avoid a currency crisis and maintain external solvency, the current account should be sustainable.

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An Introduction to the Economy and Business Environment

Table 1.4.2 − Trade partners Croatia Serbia and Montenegro Germany Italy Slovenia Austria Hungary China Turkey US Russian Federation France Romania Poland Czech Republic Netherlands FYR Macedonia Total exchange Export Import Coverage of import by export

2003 28.08 58.22 28.71 39.99 32.25 22.74 2.32 0.17 7.05 16.11 1.00 15.05 1.20 4.69 4.67 12.59 45.63 86.70 21.83 78.17 27.92

2004 37.33 47.11 24.37 57.90 36.02 34.32 5.52 0.04 8.36 21.51 0.42 27.43 6.19 6.53 4.33 18.76 46.33 86.13 23.25 76.75 30.29

2005 43.26 53.06 24.38 51.66 54.67 38.85 5.71 0.48 7.59 59.86 1.52 25.54 19.56 27.67 16.40 29.80 39.53 86.65 24.33 75.67 32.15

2006 50.62 61.52 47.82 70.64 75.54 70.21 42.06 0.05 3.64 84.18 2.90 41.34 19.32 65.87 18.77 39.61 36.52 88.70 31.20 68.80 45.34

Source: http://www.eppu.ba

The growth of exports in 2006 and maintaining imports at 2005 levels is a consequence of an increase in industrial production and opportunities to introduce goods to new markets under more favourable conditions. In 2006, exports grew by 36.5 per cent (BAM 2.6 million), while imports grew by 1.9 per cent only (BAM 5.8 million). In the first half of 2007, total exports amounted to BAM 2.8 million, while imports amounted to BAM 6.4 million. Further improvements to export levels can be expected through the announcement of future large investments in the energy sector and through the privatization of telecoms operators. However, export levels are still constrained by the predominance of exports of raw materials, mainly basic metals and woods, while food, beverages and energy-generating products are imported. Overall, export income remains price sensitive. According to data from the Agency for Statistics, in 2006, more than half of exports (54 per cent) derived from products which were not produced, but were merely assembled or processed domestically. From a geographical point of view, foreign trade is conducted between other countries in the South East European region and the EU15 (86.5 per cent of exports and 74.8 per cent of imports). In exports, there has been a mild redistribution of trade with the EU15 countries, shown by growing trade with Germany. Imports from countries in the South East European region have grown mainly due to the liberalized trade regime in the region. However, weaker trade has been recorded with Turkey, FYR Macedonia and

Bosnia and Herzegovina: Foreign Trade

43

the United Kingdom, with trade with China, Romania, Czech Republic and Russia facing a more significant downturn. Bosnia and Herzegovina enjoys a balance in trade with Hungary, the United States and Poland. The largest increase in exports were directed to Slovenia (7 per cent rise), Germany (6.3 per cent rise) and Italy (5.7 per cent rise). Table 1.4.2 and the Figures 1 and 2 below illustrate trade figures by country and by trade products. Clearly, the European Union is Bosnia and Herzegovina’s most important trading partner, but in order to export to the European Union market on a significant level, Bosnia and Herzegovina needs proper laboratories and institutions for certification. Referent laboratories are in the process of being created to monitor animal health and waste in line with European Union standards, and the Institute for Accreditation of Bosnia and Herzegovina (BATA) has accredited only one laboratory thus far for inspection of food products in accordance with international standards. In conclusion, the openness of the market continues to grow, but with continued dependence on several products and markets. The future of Bosnia and Herzegovina is in the hands of the European Union. The European Union is clearly determined to enlarge further and assist all countries in the Western Balkans in becoming member states. Bosnia and Herzegovina will continue to explore the advantages of a wide, but also demanding European Union market.

Figure 1.4.1 Structure of export for Bosnia and Herzegovina (2006)

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An Introduction to the Economy and Business Environment

Figure 1.4.2 Structure of import for Bosnia and Herzegovina (2006)

PART 2

Key Industry Sectors

2.1

Bosnia and Herzegovina: Agriculture and Food Processing Foreign Investment Promotion Agency of Bosnia and Herzegovina

With over 1.5 million hectares of agricultural land, excellent climatic conditions, as well as fertile soil, much of which is free from chemical fertilizers and routine use of pesticides, Bosnia and Herzegovina has enormous potential in its agriculture and food processing sector. Furthermore, its long tradition in this sector as well as an experienced and skilled workforce provide a superb environment for the production of a wide variety of fruit and vegetables, with the potential to harvest crops and fruits up to three times a year.

Favourable climate The entire country boasts favourable climatic conditions for a wide range of agricultural and food processing projects. The south of the country has slight sub-Mediterranean climate, characterized by long, warm summers and short, mild winters. More than 200 days of sunshine and an average of 1,400 l/m2 of precipitation per year enable almost all sorts of agricultural production. Enough water, available agricultural land and the large number of sunny days make the south of Bosnia and Herzegovina an ideal location for the development of vineyards, fruits and vegetables. There are also excellent conditions for glasshouse production. The central part of Bosnia and Herzegovina has a mountain continental climate. Great mountain grasslands that are full of water enable the intensive and extensive cattle production. These are ideal conditions for the production of potatoes and cabbage, as well as for organic food production. The north of the country has a typical continental climate. Due to the climate and topography, ideal conditions exist for the production of cereals, vegetables and cattle breeding.

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Key Industry Sectors

Table 2.1.1 − Fruit and grape production in Bosnia and Herzegovina in 2006 Product

Trees of bearing number

Cherries Sour cherries Apricots Apples Pears Plums Peaches Quinces Walnuts Almonds Mandarins Lemons Figs Olives

684,858 519,760 77,386 3,711,468 1,658,610 10,803,955 486,121 109,488 495,280 12,683 1,200 3,112 39,880 3,505 Harvested area 1,310 916 Productive vines 10,792,000

Strawberries Raspberries Grapes

Production Total (tons) 8,852 4,348 837 58,109 23,043 123,234 7,239 1,053 5,088 57 5 13 450 41

Kilogram per tree 12.9 8.4 10.8 15.7 13.9 11.4 14.9 9.6 10.3 4.5 4.1 4.2 11.3 11.6

8,409 6,452

6.4 7.0

21,498

2.0

Source: Valuation of the project team: production statistics for 2003.

Production potential Fruit and vegetable products have enormous market potential in Bosnia and Herzegovina. There are an estimated over 14 million trees producing plums, pears, apples and other fruits, which are used for export or for domestic fruit juice production. International food and drink distributors have been greatly attracted to investing in this sector owing to the potential of organic production and pure water supplies (Table 2.1.1). Medicinal herbs grown in Bosnia and Herzegovina are used in the pharmaceutical and cosmetic industries and are known to be of high quality. Large plantations of lavender and other aromatic herbs are located in the south of the country. Conditions for growing tobacco and wine are also traditionally very favourable. Fish farming is also well developed, especially trout and carp (Table 2.1.2).

Organic food Bosnia and Herzegovina has large areas of ecologically balanced, unpolluted and arable land, clean water springs and clean air that represent optimal

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49

Table 2.1.2 − Production and consumption of basic agricultural foodstuffs in 2003 Product

Needs

Production

Difference

Wheat and rye Milk (million of litres) Beef Pork meat Fish, poultry Tobacco Apple Grape Other vegetables Paprika Tomato Other fruits

408,000 408 30,000 18,240 24,240 4,600 36,000 12,000 26,088 16,560 21,360 36,000

78,150 278 14,880 9,052 13,079 3,200 11,200 8,900 20,512 15,851 20,388 9,980

–329,850 –130 –15,120 –9,188 –11,161 –1,400 –24,800 –3,100 –5,576 –709 –972 –26,020

Sufficient supply per cent 19.15 68.13 49.60 49.63 53.95 69.56 31.11 74.10 78.62 95.71 95.44 27.72

Source: Valuation of the project team: production statistics for 2003.

conditions for intensive production of organic foods. Additional advantages are the relatively low labour costs and the rare use of mineral fertilizers and plant protection chemicals in Bosnia and Herzegovina over the last 10 years. The proximity of the largest world markets and constant growth of the need for so-called light, healthy, functional and organic food makes this field extremely interesting for investment. At the same time, the continually decreasing amount of land for growing organic food in Europe makes Bosnia and Herzegovina a leading potential producer in Europe. Bosnia and Herzegovina is a member of IFOAM, the International Federation of Organic Agriculture Movements. Organska kontrola (OK) is the local certification body which has developed standards for organic production and processing in Bosnia and Herzegovina in accordance with IFOAM standards, as well as with EEC legislation on organic production In addition, OK is closely cooperating with the KRAV Certification Institution from Sweden (Table 2.1.3).

Market opportunities Bosnia and Herzegovina is working to win back market share on the domestic market, which was flooded with food imports in the 1990s. The strengths of the food sector on the local market are the following: • Domestic demand is still higher than local production; • Proximity to local markets (important for fresh products, perishable products with low to mid-durability and for products with high storage and transport costs); • Knowledge of local consumer characteristics;

Domestic demand Consumption of about 393,000 tons of wheat flour, of which approximately 45 per cent is processed in bakeries (approximately 177,000 tons); increasing demand for frozen products possible if income increases Consumption of about 90,000 tons slaughter weight; increasing demand for poultry, decreasing demand for expensive beef and lamb; fish demand may increase if income increases

Domestic supply Bread, pastries, frozen pastries, increasing product range

Availability of raw materials Import demand, wheat production covers only about 63 per cent of demand, but sufficient capacities in the mills

Meat and meat products

Except for sausage production, so far little further processing (e.g. bone-free finished products)

Could be increased (sufficient pastures for cattle production, short-term investments in poultry possible), at present huge imports of livestock and frozen meat Could be increased. At present, Milk and milk 300–400 million litre consumption; demand UHT and pasteurized milk, fresh cheese, yoghurt; low level insufficient production, high products for products with long durability and production and collection costs, of product development, diversified processed products, for insufficient quality control, and insufficient cooling logistics example, sour cream, 0.5 litre milk; huge import levels increasing demand for fresh milk in the long term (once the cooling logistics have improved) At present, insufficient raw Increasing efforts in quality Fruit and vegetable At present, demand for cheap fresh and material. Contract production products processed fruits and vegetables. Increasing management and packaging; has gradually developed, local products are generally demand for juices (in future more production of vegetables cheaper than imported ones multivitamin and 100 per cent fruit juices); increasing, but few long-term increasing demand from the gastronomy investments in fruit production sector (eg. 0.2-litre bottles), increasing demand for snack products (eg. potato chips)

Product Pastries

Table 2.1.3 − Food processing

Slovenia (fruit juices), Hungary, Italy, Croatia, Macedonia (processed products)

Croatia, Slovenia, Germany, Hungary

Slovenia, Croatia, Germany, The Netherlands, Austria

Main competitors Croatia, Serbia

50 Key Industry Sectors

Bosnia and Herzegovina: Agriculture and Food Processing

• Many years of experience in various sub-sectors; • Extensive grazing land for cattle farming; and • Price advantages with some fruit and vegetable products.

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2.2

Bosnia and Herzegovina: Forestry and Wood Processing Foreign Investment Promotion Agency of Bosnia and Herzegovina

Bosnia and Herzegovina has a long tradition in forestry and wood processing, going back to the second half of the 19th century. The abundance of hardwood and softwood, as well as the low cost, skilled workforce combined with manufacturing facilities which have capacities for various wood products, furniture and timber production that exceed domestic demand, make this a strongly export-oriented sector. Currently, the largest markets for these producers are Germany, Croatia, Serbia, Italy and the UK, but the potential to export to other countries in both Europe and beyond is enormous.

Forests and forest land Around 53 per cent of Bosnia and Herzegovina’s territory, around 2.7 million hectares, is covered by forest land. Species composition in Bosnia and Herzegovina forests is dominated by deciduous trees by a ratio greater than 2:1, and within this group, beech is by far the most populous species. Beech and oak alone account for almost 50 per cent of the forest species composition in the country. Bosnian beech is particularly famous worldwide, due to its high tree-ring density. Together with oak, ash, pine and fir, as well as more specialized woods such as walnut, apple and cherry, these woods provide a comparative advantage for the development of high quality solid wood furniture production. Average annual volume growth of all forests is around 10.5 million cubic metres (m3) of the cut wood. The forests (80.7 per cent state-owned) have the sustainable potential to provide nearly 7 million m3 roundwood per year. The present level of harvested materials from state-owned land is around 4 million m3, being well within annual limits, providing a solid base, an

54

Key Industry Sectors

array of opportunities for further sustainable growth of the wood sector and development of value-added and export-oriented activities.

Wood processing sector The wood processing sector is characterized by a large gap between current performances and its real potential. Bosnia and Herzegovina enjoyed several large, sophisticated and fully integrated wood processing companies, which disintegrated or even collapsed during the period of transition and privatization. Due to this period of economic uncertainty and inactivity, technologies and equipment became obsolete; as a result, many factories for end-use wood processing are still not working at full capacity. Despite these challenges, the sector still plays an important and measurable role in the domestic and export markets. Within past 10 years, a large number of privately owned firms have been established in the wood processing industry, and it is estimated that there are approximately 1,500 now operating – adapting to new market demands, investing in new equipment and increasing the quality of their products. Some companies have been able to discover their niche markets, such as specializing in handcarved traditional furniture or modern furniture production. Technical skills exist thanks to a long tradition in the sector, but additional investment in continuing education and modernization is needed (eg. design and hand carving). Sales and exports from Bosnia and Herzegovina’s wood sector have tripled over the past five years. Some 60 per cent of wood sector production is exported, and finished furniture products are becoming an important part of this sector’s export product. Compared with 2005, exports of Bosnia and Herzegovina furniture increased by 28.6 per cent in 2006. Overall in 2006, wood industry exports accounted for €350 million (20 per cent of total exports). Furniture alone accounted for almost one-third of the value of the wood products marketed abroad.

Furniture industry Companies are using softwood and hardwood, as well as wood-based panels as raw material. There are also a significant number of sub-suppliers to the furniture industry, producing a broad range of semi-manufactured goods. Since the late 1990s, a large number of privately owned firms were established and encouraged growth in this area. Today, there are an estimated 1,500 companies now operating in the sector, including the following:

Bosnia and Herzegovina: Forestry and Wood Processing

• • • • • • • •

Konjuh d.o.o. Zˇivinice Ukus d.d Tesˇanj Krivaja d.o.o. Zavidovic´i Ruko-tvorine d.d. Konjic Kalea d.o.o. Sarajevo Duka d.o.o. Tuzla Fis d.o.o. Vitez Natron Hayat d.o.o. Maglaj

• • • • • • •

55

Dalas d.o.o. Sarajevo Di-van d.o.o. Vitez Pro-M d.o.o. Zˇivinice Sabix d.o.o. Hadzˇic´i Jadrina d.o.o. Sarajevo Primus d.o.o. Maglaj Standard d.d. Sarajevo

At present there is only plywood and associated veneer production in Bosnia and Herzegovina. There is one MDF (medium density fibreboard) mill, Mediapan (Busovacˇa), but due to its obsolete technology and subsequently poor cost competitiveness the facility is not in operation. Consequently, the local furniture industry is obliged to import particleboard and MDF.

International assistance A number of international organizations, such as the World Bank, European Bank for Reconstruction and Development (EBRD), US Agency for International Development (USAID) and so on provided technical assistance and support on forestry and wood processing sector development, aimed at improving forest organization and management, increasing revenues from state-owned forest lands, enhancing biodiversity as well as improving the overall global competitiveness of the country’s wood processing industry. This support and assistance resulted in numerous institutional reforms and improvement of the overall business environment, including the following: • Development of a GIS-based Forest Management Information System and the implementation of a country-wide forest inventory, accompanied by measures to protect biodiversity and forest conservation; • Certification of compliance with international quality and product standards. Recognizing the importance of sustainable forest management, environmental management, proper certification and marketing of companies and wood products, many of the country’s wood sector companies are striving to achieve certification in the following areas: • Certification of Forest Management Practices and Chain of Custody for Forest Products ��� Responding to the increased demand for timber products labelled by the Forestry Stewardship Council (FSC), as well as the need to enable

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better forest management by means of independent and credible certification of forests, three forest management units in Bosnia and Herzegovina have already been successfully certified according to FSC standards, while other organizations are currently in the process of certification. • Certification of Wood Processing Companies ��� A number of wood processing companies, particularly export-oriented ones, have begun the process of certification or have obtained certificates, following European Union (EU) directives and standards related to wood products, including the following: ■ Quality Management System (QMS) according to ISO 9001 requirements; ■ Environmental management ISO14001:1996/2004; ■ CE marking, and so on.

Formation of wood sector clusters Under USAID sponsorship, Bosnia and Herzegovina has implemented a Cluster Competitiveness Activity project aimed at supporting the development of the wood sector and undertaking innovative and value-added initiatives to make best use of Bosnia and Herzegovina’s abundant resources and potential as a world-class leader in wood products. This project mobilized and gathered together over 200 stakeholders and 140 forestry and wood sector companies in three regions of Bosnia and Herzegovina.

Opportunities for foreign investors Targeted investments in this sector have the capability of bridging the gap between performance and potential and improve the substantial valueadded outcome. The possibilities include establishing new companies or modernizing existing ones, with some capital investments or introduction of new technologies and equipment. Taking into account the abundance of low-cost hardwood and softwood, a skilled workforce, and the fact that many factories for end-use wood processing are still not working at their full capacity, foreign investors have an array of opportunities to benefit from these competitive advantages. The privatization process is still ongoing and thus there remain a large number of previously developed and strong state-owned companies that can offer new owners the chance to buy these companies and introduce new production programs, new management, technologies and so on. Through privatization, the creation of various types of joint venture vehicles or bankruptcy proceedings and additional opportunities for investment in the country’s wood sector come to light.

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In addition to the above-mentioned advantages, there are many other encouraging reasons to invest in the wood sector, including the following: • A sufficiently developed legal framework and enabling investment climate that makes investment in this sector a proposition with competitive returns; • Emerging entrepreneurial class; • Long tradition of manufacturing and forestry; • High quality raw material and relative ease of access; • Promising development of the country’s forest land overall (eg. hunting, tourism and so on); • High level education/professional forestry and wood processing experts at all levels; • Substantial and skilled labour force at reasonable cost (15 per cent of average EU/North America wages); • Attractive and competitive costs (labour and raw materials); • Well-known and established wood product industry; • Commitment to development of international relations and cooperation; • Geographical location that is highly favourable to regional markets; and • Growing international demand for final and semi-final (especially hardwood) products. These impressions have been confirmed and supported by the EBRDfunded Sector Study on Sustainable Forestry and Forest Industry Business in Bosnia and Herzegovina (November 2006). Results of the study identified an array of attractive opportunities for foreign and domestic investors in forestry and wood sector, including particularly as given below.

Wood-based panel production Despite a developed furniture industry, there is no wood-based panel production in Bosnia and Herzegovina at present; companies are completely dependent on imported particleboard and MDF. Thus, there is a clear opportunity for both import supply and domestic production of these materials: 1. Particle board mill – The wood source can be sawmill chips, sawdust, plywood waste or roundwood (can use all kinds of fresh wood as raw material). One state of the art particle board mill with annual production of 450,000 m3. 2. MDF mill – The wood source can be sawmill chips, sawdust, plywood waste or roundwood (can use all kinds of fresh wood as raw material). One state of the art MDF mill with annual production of 250,000 m3. 3. Veneers (plywood) – One or two veneer mills with an annual output of 10,000 m3 appear likely.

Cora Domenico & Figli

Kastamonu Entegre Agac Sanayi ve Ticaret SHP Group Schieder Group

Pilat & Pilat Italsvenska S.P.A. (Crabo Group) Plena Holding

Lipa-Drvo

Natron-Hayat

Nord Ent (Tesˇanj) Abonos Xylon Corporation

Source: www.fipa.ba

SHP CELEX Standard dd

Investor/partner PAHolz

Company Impregnacija-Holz

Table 2.2.1: Foreign investment examples

The Netherlands Italy Luxembourg

Slovakia Germany

Turkey

Italy

Country Austria

Paper sanitary products Furniture manufacturing (specialized in chairs, tables and solid wood cabinets) Furniture manufacturing joint venture Solid wood chairs Solid wood flooring

Production Solid wood glued panels, impregnated PTT poles, railway sleepers, beach wood components Non-edged, square edged, fresh, air dried and kiln dried, white and steamed lumber Containerboard and sack paper

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4. Parquet production – The availability of hardwood and processing tradition points to the possibility of parquet manufacturing. Several new or improved mills appear likely. 5. Edged glued panels – Availability of good hardwood sawn wood, particularly beech sawn wood. A majority of final products could be targeted to the furniture industry in Western Europe. 6. Solid wood-based furniture – Furniture industry has large potential for expansion in Bosnia and Herzegovina. Low labour costs and the availability of skilled labour in Bosnia and Herzegovina support this option. This sector includes a wide range of different products, where quality processing of the valuable resources opens cooperation and investment opportunities in a wide range of final and semi-final products. 7. Joinery (prefabricated houses) – Joinery industry has a high expansion potential in Bosnia and Herzegovina. Low labour costs support this option. 8. Biomass – pellets – Use of residual wood for the purpose of energy production was seen as an interesting option for wood processors, as well as for energy producers in areas of wood processing industries. In respect of foreign direct investment, two main options were screened: ■ combined heat and power production from biomass; and ■ pellets/briquettes from biomass. 9. Non-timber forest products – 95 per cent of Bosnia and Herzegovina’s collected forestry products and herbs (exported) in dried (maximum moisture level 9–15 per cent) conditions are sold in EU countries.

Environmental situation The environmental situation in the country can be described as satisfactory, with low environmental threats. The government of Bosnia and Herzegovina is committed to protecting the rich biodiversity of the country; the legal and institutional framework in environmental management is developing with the aim of being completely harmonized with standards and systems similar to those in the EU countries. Environmental protection is regulated by a framework law that governs corresponding laws and bylaws for the two entities. Below we provide a brief overview of relevant laws.

Framework law on environmental protection This law regulates the preservation, protection, restoration and improvement of the ecological quality and capacity of the environment and of the quality of life, as well as measures and conditions for managing, preserving and promoting the rational use of natural resources and so on.

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Law on nature protection This law regulates the restoration, protection, conservation and sustainable development of landscape, natural areas, plants, animals and their habitats, minerals and fossils and so on.

Law on waste management This law regulates all waste categories, all forms of waste management activities, operations and installations, the prevention of pollution and the minimization of the consequences for human health and the environment.

Law on water protection This law regulates the protection of water, watersides and water lands: water protection planning and programming, organization, supervision, financing and penalties for each legal and natural person.

Law on air This law regulates the technical conditions to prevent or, where that is not practicable, to reduce the emissions into the ambient air from anthropogenic activities, in relation to production processes. The principal entity-level ministries with responsibility for environmental matters are the following: • Federal Ministry of Agriculture, Water Management and Forestry (http:/ /www.fmpvs.gov.ba – local language only); • Federal Ministry of Physical Planning and Environment (http:// www.fmpuio.gov.ba); • Republic of Srpska Ministry of Agriculture, Forestry and Water Management (http://www.vladars.net/en/min/mps.html); • Republic of Srpska Ministry of Urbanism, Civil Engineering and Ecology (http://www.vladars.net/en/min/mgr.html).

2.3

Bosnia and Herzegovina: Mining and Metal Processing Foreign Investment Promotion Agency of Bosnia and Herzegovina

Exploration, exploitation and processing of natural mineral resources, such as silver, iron, arsenic, bauxite, barite, magnesite, pyrophillite and gypsum, have a long tradition in Bosnia and Herzegovina. Additionally, Bosnia and Herzegovina is the largest producer and exporter of zeolite in Europe, and the country also has large deposits of coal and limestone, both essential for the metal production industry. The major part of the metal processing industry is concentrated in the regions of Mostar and Zenica.

Metals The country’s main mining resources are iron, manganese, cobalt, nickel, chromium, lead, zinc, antimony and bauxite.

Figure 2.3.1. Metals

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Industrial minerals

Figure 2.3.2. Industrial minerals

Mineral fuels

Figure 2.3.3. Mineral fuels

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Metal processing industry The metal processing industry is of great importance to the economy of Bosnia and Herzegovina. The country has an active aluminium and steel processing industry, which is comprised of such major companies as Mittal Steel Zenica, Aluminij Mostar, Biracˇ Zvornik and Jelsˇingrad Banja Luka. With the exception of Aluminij Mostar, all of these companies are now under foreign ownership and have undergone major restructuring which has transformed them into more productive, export-oriented enterprises. There are more than 130 companies in the metal processing industry in Bosnia and Herzegovina, 80 per cent of which are small enterprises, 15 per cent medium sized and 5 per cent large enterprises. Metal processing has emerged as a strongly export-oriented industry; reaching a 22 per cent share of total exports, compared with imports to the industry of only 6 per cent of total imports.

Aluminium processing The largest sub-sector by far, in terms of production, is the manufacturing of basic precious and non-ferrous metals, which accounts for nearly threequarters of the value of production. This sub-sector basically represents the aluminium industry: 99.9 per cent of the sales come from this industry and only 0.1 per cent is supplied by the lead, zinc and copper industry. The main products sold are aluminium oxide (alumina), unwrought non-alloy aluminium in ingots and unwrought aluminium alloys in primary form, aluminium alloy bars, rods, profiles and so on, and aluminium foils. In the aluminium industry, there is currently only one producer of primary aluminium, Aluminij dd in Mostar and one alumina plant Birac, in Zvornik.

Iron and steel processing The iron and steel industry accounts for around 20 per cent of the total value of production of metals. Examples of important products sold are hot-rolled non-alloy steel bars and rods, concrete reinforcing bars, welded and seamless tubes, steel wires, ferro alloys, shapes and sections of non-alloy steel. The production of crude steel is mainly in the hands of Mittal Steel Zenica, which is the leading company in this sub-sector.

Processing of ferrous and non-ferrous metals The secondary processing of ferrous and non-ferrous metals including casting of metals, forging, pressing, stamping and roll forming of metal and

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treatment and coating of metals is taking a share of 7 per cent of the total value of production. This industry is less capital and more labour and skillintensive than the other sub-sectors and presents significant potential for Bosnia and Herzegovina, which has surplus skilled labour. Examples of products sold are iron and steel castings, but mainly light metal castings for land vehicles and parts of land vehicles. In a country like Bosnia and Herzegovina, with a strong concentration in certain important sub-sectors, large companies such as Mittal Steel Zenica and Aluminij dd. in Mostar strongly impact on the development of the sector as a whole. • In 2004, LNM Holding bought a 51 per cent stake of Zenica Steelworks, one of the largest steel manufacturers in the world. LNM committed to invest around $450 million in the region over a three-year period, in order to increase output at the steelworks, now called Mittal Steel Zenica, up to 2.2 million tons, while keeping most of the current workforce. The significant inward investment by Mittal Steel Zenica had the effect of spurring a surge in investment in related companies and industries. • In mid-2005, the Republic of Srpska government agreed to the sale of a 65 per cent stake in the Jelsˇingrad steel foundry in Banja Luka to Livar of Slovenia; the new owner pledged a further 10.35 million convertible marks (BAM) ($6.5 million) in investment over the next three years. • Aluminij Mostar, one of the country’s two processing plants, has staged a strong recovery and is now the leading exporter in Bosnia and Herzegovina. Most of its output is exported to Switzerland and Croatia. • Output at Birac Alumina, in Zvornik, which restarted production only in 2003, has grown strongly, spurring growth in the nearby Boksit Milici mine, one of its main suppliers of bauxite. The overwhelming majority of foreign direct investment projects in the metal processing industry exist as a result of the country’s privatization process. Exceptions were Greenfield investments in Bekto International in 1996 and Fe-Al Mostar in 2005. Forthcoming privatizations include the following: • Aluminij Mostar, alumina production; • Energoinvest – Livnica Sarajevo, casting of steel; • Energoinvest Sarajevo, projecting, engineering, consulting Research & Development, business and other activities in the field of energetic industry, automation and telecommunication, informatics and accounting of coloured metals and non-metals; • Unis Igman d.o.o. Konjic, production of metal constructions and parts; • Zˇeljezara Zenica, Zenica, steel making and its processing into forged and long hot rolled products; • Prony, Prozor/Rama, production of metal constructions and parts; • UNIS – TPKS, Mostar, production of metal constructions and parts;

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• SOKO VIL, Ljubusˇki, production of metal constructions and parts; and • Tvornica Kruznih Pila, Posusˇje, production of metal constructions and parts. More information can be found on http://www.apf.com.ba and http:// www.rsprivatizacija.com. An independent study of the metal processing industry in Bosnia and Herzegovina, conducted in 2006 by the Vienna Institute for International Economic Studies, confirmed the positive outlook for the sector, with many companies planning significant increases in output and employment. Furthermore, two of the industry’s heavyweights – Mittal Steel and Aluminij – are behind plans to develop a regional cross-border metal processing cluster. These developments are expected to have important spillover effects that imply interesting prospects ahead both in metal processing and in related sectors and activities.

2.4

Bosnia and Herzegovina: Energy Sector Foreign Investment Promotion Agency of Bosnia and Herzegovina

Bosnia and Herzegovina is currently exporting energy with potential to produce more and become the main exporter in the region. Bosnia and Herzegovina is exploiting its naturally fast flowing mountain streams and powerful rivers through the encouragement of hydroelectric power production and boasts significant reserves of coal and lignite. The increasing need for energy supplies in Europe will influence the development of the energy sector of Bosnia and Herzegovina. One of the key objectives of the country’s energy strategy is to identify the optimal mix of energy sources to support Bosnia and Herzegovina’s economy to 2010, 2020 and 2030. According to the International Energy Agency (IEA) statistics, coal (including electricity generated from coal) currently accounts for about 55 per cent of the primary energy supply, oil and oil products 22 per cent, hydro electricity 11 per cent, gas 6 per cent and fuel wood/biomass 6 per cent. These percentages will shift significantly over the next few years. Due to such factors as rising incomes, increased mobility and demand for transport, substitution of fuels and environmental policies, we expect the proportion of oil and gas to increase, and those of coal and fuel wood to decline.

Non-renewable energy sources – coal and thermal generation All thermal generation in Bosnia and Herzegovina is fuelled by either brown coal or lignite. Coal mines and power plants have developed a mutually dependent relationship. Reserves of various quantities and calorific values are available in four basins: Gacko, Ugljevik, Tuzla and Kakanj. Thermal power plants have been built in direct or close proximity to these areas. Thermal generation plants are in need of repair and investment; by adapting present capacities, they will expand their production. Building on

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their common interests, the Czech energy company, CEZ Group, formed a joint venture with TE Gacko (CEZ – 51 per cent, Gacko – 49 per cent), with plans to modernize the Gacko plant by the end of 2007, with new contracts being accepted from 2008. All other thermal generation plants are looking to create strategic partnerships, potentially with foreign electricity companies. The oil industry accounts for approximately 22 per cent of primary energy consumption in Bosnia and Herzegovina, according to IEA statistics, the second highest share after coal (55 per cent). There are two existing oil refineries in the country at Bosanski Brod and Modricˇa, which completed its privatization process in 2006 with sales to Russian company Zarubezhneft. Bosanski Brod refines a wide range of products from imported crude oil. The theoretical capacity is 4.3 million tons per year from two production lines of 3.0 million tons and 1.32 million tons. That is equivalent to approximately 90,000 barrels per day.

Gas The gas sector accounts for approximately 6 per cent of primary energy consumption in Bosnia and Herzegovina, according to the IEA. Various projections on future gas consumption have been made, with the high-end estimate of 3 billion cubic metres (bcm) in 2020, compared with current consumption of just 0.4 bcm. The need to diversify the supply of gas in Bosnia and Herzegovina is well recognized, and there are various proposals for new gas pipelines in Southeastern Europe. The possible implications of these proposed routes for Bosnia and Herzegovina need to be analysed. The development of the gas sector in Bosnia and Herzegovina is a strategic imperative, but issues remain about the pace of gas sector development and whether the sector can be developed in a consistent and rational manner, in conformity with the national interests and strategic goals.

Renewable energy sources Renewable energy sources (RES) in Bosnia and Herzegovina include the following: • • • • •

Hydro; Solar; Geothermal; Wind; and Biomass.

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Hydro power plants In Bosnia and Herzegovina, the current priority is rehabilitating existing power generation facilities and large hydro power plants (HPPs) (as thermal generation plants). The hydro generation operates as cascades on three different rivers and their tributaries – Neretva/Rama, Trebisˇnjica and Vrbas Pliva. There is one individually operated power plant on the Drina River and one pumped storage power plant operating off the Trebisˇnjica River and used for regulation of the entire Bosnia and Herzegovina power system. Development of small HPPs is most promising at present. In May 2007, the European Bank for Reconstruction and Development reported that Bosnia and Herzegovina has a theoretical hydro-potential of 99,256 GWh/a and a technical potential of 23,395 GWh/a, of which 2,599 GWh/a is in small HPPs. Both entities have prepared action plans that outline how and when the electric sector will be restructured: • Action plan of the Federation of Bosnia and Herzegovina for the restructuring and privatization of the electricity sector in Bosnia and Herzegovina; and • Action plan of Republic of Srpska for the restructuring and privatization of the electricity sector in Bosnia and Herzegovina.

Other renewable resources The development of RES is a shared world goal, and in the not too distant future, Bosnia and Herzegovina is expected to progress towards the development of small hydro and wind power plants. A preliminary study of wind capacity, conducted by GTZ (Germany), estimated an economic wind potential as high as approximately 600 MW. The first systematic wind measurement project was implemented in the Mostar region. By May 2007, three locations have been identified and investors have already indicated their interest. There are a few more locations which warrant further study. The wind potential of Bosnia and Herzegovina has a 30 per cent higher utility coefficient than the European Union average. Solar irradiation figures demonstrate a favourable range from 1,240 kWh/ m2/a in the north of the country to 1,600 kWh/m2/a in the south. While photovoltaics are too expensive for massive utilization except in specific circumstances, applications using solar energy for thermal applications (eg. solar collectors for hot water) may be competitive with traditional sources. Regarding geothermal energy, studies report that Bosnia and Herzegovina has potential for heat production (Bosanski Sˇamac, Kakanj and Sarajevo).

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Biomass traditionally includes fuel wood, wood waste (for heat and/or electricity) and landfill gas. There is currently a pilot project in Sarajevo focused on landfill gas utilization, with an electric capacity of 350 kW of electric capacity.

In general State Energy Policy, laws, regulations and strategic issues fall under the jurisdiction of the Energy Department of Ministry of Foreign Trade and Economic Relations in Bosnia and Herzegovina (MoFTER). The MoFTER Energy Department works very closely with respective ministries of the Federation of Bosnia and Herzegovina and Republic of Srpska and the industry to develop Strategies of Energy Sectors. The production and transmission of energy is under the jurisdiction of ministries at entity level. • Ministry of Energy, Mining and Industry of the Federation of Bosnia and Herzegovina • Ministry of Economy, Energy and Development of Republic of Srpska Foreign companies may be attracted to opportunities that exist to increase productivity of existing capacities and develop new capacities. With the support of strategic partners and additional investment in the energy sector, production will increase.

2.5

Bosnia and Herzegovina: Tourism Foreign Investment Promotion Agency and Tourism Association of Federation of Bosnia and Herzegovina

Bosnia and Herzegovina lies in the very heart of South East Europe and on the crossroads between Europe, the Middle East and North Africa. Bordering the Republic of Croatia to the north, west and southwest, and Serbia and Montenegro to the east and south, the territory covers 51,129 km2. Near the Neretva River’s estuary, Bosnia and Herzegovina has a tiny exit to the Adriatic Sea – a 21.2 km long coastline near the town of Neum. The climate suits every type of tourist, from sun seekers on the Adriatic Coast to the skiers. The Mediterranean and Alpine influences create a mosaic of climate types within a relatively small area. The south enjoys warm, sunny and dry weather, with very mild winters. In the more continental areas, the weather is similar to that of central Europe – hot summers, cool springs and autumns and cold winters with considerable snowfall. The mountains create a climate of their own. Bosnia and Herzegovina is an attractive tourist destination because of its geographic position, exceptionally beautiful nature, cultural and historical heritage and favourable climate. For centuries, different cultures, religions and traditions have been adding value to the creation of a specific tourist product. Bosnia and Herzegovina possesses great reserves of tourism resources. Untouched surroundings, mountains, coasts, valleys and forests, unique and variable flora and fauna, a rich cultural heritage of art, customs and culinary specialties and fascinating and rich history since Ancient Greece and even earlier are the attributes of Bosnia and Herzegovina as a tourism destination. All this natural beauty has enabled Bosnia and Herzegovina the opportunity to develop all kinds of selective tourism – from mountain, sea, spa to religious and eco tourism. There are three distinct periods of the development of the tourism sector in Bosnia and Herzegovina:

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1. 1954–1984: No significant tourist trends; 2. 1984–1992: Increased growth due to the XIVth Winter Olympic Games (1984) and accommodation development; 3. 1995 to present day: (War obstructs the development of tourism in the period from 1992 to 1995) Renovation and accommodation regeneration, human resources development including staff training, renewed efforts to attract tourists and promote the country as a tourism destination.

Winter tourism Skiing, hang gliding and hiking/backpacking have been enjoyed here for over 100 years. But winter tourism has expanded significantly since the XIVth Winter Olympic Games in 1984. There are currently five ski resorts in the country: Bjelasˇnica-Igman, Jahorina, Vlasˇic´, Blidinje and Kupres, possessing more than 50 km of ski terrain, connected by eight cable railways and 24 ski lifts that may service more than 20,000 skiers per hour. The ski season lasts from December until the end of March and the industry has several advantages including the following: • Close proximity to larger cities (eg., Jahorina and Bjelasˇnica Olympic centres are 20–30 km away from Sarajevo); • Well-equipped terrain; and • Prices more than 50 per cent lower than in western Europe (food, skiing, accommodation and so on).

Coastal tourism Bosnia and Herzegovina has 21.2 km of seaside; with 240 sunny days every year attracting a growing number of tourists from all over the world. The town of Neum is located at the seaside door of the country, and its accommodation capacity numbers 5,000 beds, out of which 2,000 are in three and four star hotels. This low capacity cannot satisfy the needs during high season. Private accommodation is also available and pleasant pensions, restaurants and cottages offer unique stays for visitors. From May to September 2005, Neum recorded 250,000 overnight stays.

Adventure and sport tourism Bosnia and Herzegovina offers fantastic opportunities for nature lovers and active tourists. Rafting, canoeing and kayaking on the rivers Una, Neretva and Tara are very popular. There are seven clubs in the town of Konjic, in northern Herzegovina, which offer rafting in the breathtaking canyon of Neretva. For those ones who prefer more relaxing activities, there is also

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the possibility of swimming or fishing in crystal-clear lakes all over the country. Immense forest and hunting wealth are found in Alpine mountains: Bjelasˇnica, Igman, Zelengora, Treskavica, Jahorina, Romanija, Grmec, Kozara, Ozren and many others, with their immense forest and hunting wealth. Hang gliding and alpinism have a very long tradition here. Hiking in mountains over 1,200 metres above sea level as a hobby or as a profession represents a long tradition in Bosnia and Herzegovina. In the late 1990s, hiking experienced a rebirth and is now on track to develop into one of the most attractive tourism opportunities in Bosnia and Herzegovina.

Spa tourism Since ancient times, Bosnia and Herzegovina has a strong reputation for its mineral and thermal springs. The combination of these precious waters and the unpolluted environment, fresh air and the great number of traditional resorts contributed to the reputation of spas in Bosnia and Herzegovina. Today, there are 16 spas in Bosnia and Herzegovina that are registered as health institutions. They have 3,455 beds at their disposal. In 2005, 200,000 overnight stays were registered, 23 per cent of the total number of overnights in Bosnia and Herzegovina. Some of these spas offer medical treatment for people who suffer from rheumatic, heart and other diseases. There are also rare mineral springs which are well-known, for example, Crni Guber near Srebrenica, and several sulphur springs, the most famous of which is a thermal-sulphur spring in Ilidzˇa.

Cultural tourism Bosnia and Herzegovina is rich with cultural and historical monuments dating from the medieval period. For centuries, Bosnia and Herzegovina has represented as a bridge connecting different cultures and religions: from the period of the Bogomils who left stec´ci as a symbol of the Medieval Bosnian State until Ottoman rule, and then the arrival of Austro-Hungarian rulers. This cultural and historical heritage, present even today, is the result of a very long process of symbiosis of several different cultures and religions which adapted to each other and left unique and valuable traces. A walk through Bosnian cities is in fact a walk through its history – from ancient Romanian and the Ottoman oriental squares to their administrative and cultural centres established during the Austro-Hungarian period. While there are several museums in the country exhibiting Roman mosaics, Neolithic pottery, Oriental architecture, Old Catholic and Orthodox ornaments, as well as famous pictures and romantic music, there are also

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‘live museums’ – houses, bridges, architecture and traditional life which can be seen in the major parts of Bosnia and Herzegovina. • Stec´ci, or tombstones, the oldest witnesses of Bosnia and Herzegovina history, can be seen throughout the country, including for example an interesting collection of monoliths found in Radimlja. • Celebrations, festivals and anniversaries are organized throughout the year. Mostar is well known for its festivals: the summer festival, with traditional dances, music, games, traditional costumes, home cuisine and wine, and the Bridge Jumper Festival, where young jumpers from all over the world show their sills. In addition, the country boasts a wine-making tradition and it is possible to tour vineyards and sample the famous ‘Blatina’ (red wine) and ‘Zˇilavka’ (white wine).

Religious tourism Bosnia and Herzegovina is a crossroad of many different civilizations: the West European civilization embodied in Catholicism, the Byzantium one in Orthodox Christianity, then the Ottoman Empire which brought Islam and Sephardic Jews who found their asylum in Bosnia after they had been expelled from Spain. Bosnia hosts a well-known Catholic Pilgrimage called Med-ugorje. Each year, hundreds of thousands of pilgrims visit Med-ugorje. Other important sites include the country’s oldest Islamic shrine, Ajatovica, which has been visited by religious people for almost 500 years; the Loznica Orthodox Monastery, the Church of the Holy Spirit near Doboj and the Zˇitomislic´ Monastery. In addition, the country’s four most representative facilities of Bosnian multi-religiosity are found within 1 km2 of each other in Sarajevo: the Catholic Cathedral, the Bey’s Mosque, the Synagogue, as well as the old and the new Orthodox Church near the Cathedral.

Cave tourism Vjetrenica (which means ‘wind cave’ or ‘blowhole’) is the largest and most important cave in Bosnia and Herzegovina, and one of the most interesting caves in the Dinar mountain range, which is famous world wide for its speleological riches. Its entrance it not far from the village of Zavala in southern Herzegovina. In the warmer parts of the year, a strong blast of cold air blows from its entrance, which is very attractive in the middle of the rocky, hot and arid terrain.

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The cave has been explored and mapped to a total of about 6,000 metres in length; of this the main canal is almost 2,500 metres long. Over the past 100 years or so, Vjetrenica has been visited by thousands of tourists. Since 1964, the cave has been lit by electricity and has a permanent guide, a motel and souvenirs on sale. There are also other caves in Bosnia and Herzegovina such as Megara or Orlovacˇa caves (the locations of cave bear).

Ethno and eco tourism The diversity and abundance of wildlife species, and the opportunity to see rare and endangered animals and birds offers the tourist an experience that is unique in the world. The wildlife experiences available in this country are especially unique to Europe. The abundance of wildlife and the diversity of bird species are created by the occurrence of bountiful and expansive natural habitats. • Sutjeska National Park is the oldest such reserve in Bosnia and Herzegovina with a 1,000-year-old virgin forest of Perucica, covering 1,291 hectares, in its environs. This is the only remaining virgin forest in Europe. The national park also boasts the highest peak in Bosnia and Herzegovina – the 2,963 metre high peak of Mt. Maglic, on the border between Bosnia and Herzegovina and Montenegro. • Kozara National Park was established in 1967. Kozara is a tame mountain with all sorts of game: doe, boar, fox, hare, pheasant, wild duck and partridge, which make it a rare game preserve in this part of the Balkans. The park is well connected with the Zagreb-Belgrade highway and with roads to Prijedor and Banja Luka. The national park, with its coniferous and leaf forests, its flowery meadows, its valleys under snow and its rapid, clear springs full of trout, is a true attraction all year round. • Bardaca swamp in the north of the country and Hutovo Blato swamp in the south are natural parks which are a favourite refuge for migratory birds, named as Ramsar destination by the Ramsar-International convention. • The Dinar Mountain Range is one of the most attractive, yet undiscovered places in the southeast Europe, with many crystal-clear mountain creeks and wells. • There are also ethno and eco villages (e.g. the Lukomir village on Bjelasˇnica and the Bjelimic´i village on Visocˇica). The culture of the Bjelasˇnica highlanders dates back to ancient times and their mountain traditions maintained over centuries.

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Tourism associations in Bosnia and Herzegovina The Tourism Association of Bosnia and Herzegovina promotes the country’s attractions on the state level, while each entity has its own tourism association: the Tourism Association of Federation of Bosnia and Herzegovina and the Tourism Organization of the Republic of Srpska, and cantonal and municipality tourism associations also play a role (Table 2.5.1).

Table 2.5.1. Tourist arrivals and overnight stays, 1997–2006 Year 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Arrival of tourists 268,009 337,175 367,676 391,138 330,326 366,478 380,819 417,694 434,216 499,244

Overnight stays 777,243 890,736 948,032 951,808 775,474 899,959 901,535 1,009,410 1,017,383 1,177,452

Sources: Statistic Agency of Federation of Bosnia and Herzegovina; Statistic Agency of Republic of Srpska; Statistic Agency of Brcko district; Tourism Association of Bosnia and Herzegovina.

Investment opportunities Tourism is a booming sector and investment opportunities abound: hotels, spas, restaurants, recreational, natural, historical and cultural attractions. Tourism in the country offers a favourable tourist business investment environment with an increasingly active tourism promotional system. Bosnia and Herzegovina offers 20,356 registered beds in hotels, motels, boarding houses and private lodging. The largest number of lodging capacity is located in small family hotels, motels and so on. These capacities are insufficient for the country’s needs. Bosnia and Herzegovina needs more investments in the tourism sector. According to an estimation of the World Tourism Organization, Bosnia and Herzegovina will experience the third highest tourism growth rate in the world between 1995 and 2020. Thus, with its rich and uniquely complex historical, cultural, culinary and religious heritage, Bosnia and Herzegovina is not only a very interesting destination but also a lucrative place to invest. One of the most successful investments to date in this sector was the investment in a Holiday Inn in Sarajevo. But, Bosnia and Herzegovina offers

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many more opportunities to foreign investors. One of the country’s largest investment projects is the Master Plan ‘Jahorina 2006–2016’ drafted by Hypo Alpe Adria Consulting. This plan envisions the development of the ski area to a high European standard by 2016. The master plan calls for a wide variety of investments, some private, some public and some through publicprivate partnerships. The master plan’s implementation will depend heavily on the privatization process, including, for instance, three hotels in Neum (HTP Suncˇana obala Neum, ‘Zenit-bro’ d.o.o. Neum and HUTP ‘Salus Hotel Stella’ d.o.o. Neum). In addition, in order to improve the further development of Igman and Bjelasˇnica mountains, the ‘Business Plan for Igman and Bjelasˇnica Area’ was conducted by the consultant company Becom and Orgalis. This document sets out clearly how this attractive area offers enormous potential for investment. The European Bank for Reconstruction and Development, in cooperation with the French government, initiated the ‘Bosnia and Herzegovina Property and Tourism Study’, engaging a consultant to undertake a comprehensive study and analysis, in order to attract possible foreign investments in this industry. The ultimate goal is to promote and trigger viable investments in this sector.

2.6

Bosnia and Herzegovina: Automotive Industry Foreign Investment Promotion Agency of Bosnia and Herzegovina

Introduction Bosnia and Herzegovina’s automotive component industry was, like many others, hobbled by the war. However, the basic elements of the former local supply chain remain in place; primary metal production, tool making, metal processing, mechanical and electrical engineering, automotive textile products and vehicle assembly all still exist. As the supply chain revives, the automotive industry in Bosnia and Herzegovina is becoming one of the most attractive sectors in the country and has experienced progressive growth in the last few years. It has enormous potential coupled with a competitively priced workforce. Given the long history of Bosnia and Herzegovina’s automotive industry, dating back to the 1950s, especially in the production of auto components, Bosnia and Herzegovina companies are renowned as suppliers of quality components. For decades, major brands have relied on the skilled workforce of Bosnia and Herzegovina to assemble cars for Western markets. The industry began by producing different parts and components for passenger cars and heavy weight vehicles. Examples of cooperation between Bosnia and Herzegovina and European automotive industry players include the following: • At the beginning of the 1970s, Volkswagen and UNIS-Holding joined forces, and the production of the first vehicles in Bosnia and Herzegovina began. • At the same time, Famos Holding, one of the most important companies involved in the development of the automotive industry in Bosnia and Herzegovina, launched production of the first diesel engines licensed under Mercedes Benz, as well as gears licensed under German ZF. • Volkswagen Group has recognized this tradition, and Bosnia and Herzegovina is well underway to become the Group’s supply base in South East Europe, a market of 120 million consumers. • The revival of Bosnia and Herzegovina’s automotive component industry is also being led by a group of businesses that are suppliers of Volkswagen’s

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worldwide marketing and production organization. ASA Auto started the distribution of Volkswagen vehicles throughout Bosnia and Herzegovina in 1996. The plant, located conveniently near Sarajevo, assembles Sˇkoda and Volkswagen vehicles for the VW Group. • Prevent Sarajevo manufactures seat covers at two facilities in Zenica and Visoko. The production is primarily aimed at the French and German markets. Prevent supplies 95 per cent of VW (Golf A5, Polo and Lupo) seat covers and up to 60 per cent of those used in V.A.G., and the French automobile industry – Renault and Peugeot. • Braking elements intended for export are manufactured for Volkswagen and Audi at Jelah. • German MANN+HUMMEL, a world leader in production of filters, successfully privatized the company Unico Filter. Another successful privatization was Fad Jelah which became part of ASA Prevent Group and is producing parts for Volkswagen group.

Privatization Overall, the privatization of companies in the automotive sector has been very successful. When Slovenian CIMOS invested in Gradacˇac TMD, one of the biggest business concerns in the SEE region entered into Bosnia and Herzegovina. Other examples of noteworthy investments include the following: • The opening of a new production plant in Srebrenica; • The privatization of one of the biggest forges in Balkan BNT Travnik; and • The construction of a gray mould foundry for the needs of the automotive industry in Zenica. A significant amount of foreign capital has been invested in Jajce Alloy ˇ ajavec factory, which makes signalizing Wheels, Bekto International and C devices. Good examples of privatized companies in this sector also include Pobjeda Tesˇanj, Tesla and TMD Group from Brcˇko and UNIS Tok from Kalesija. Saraj-Komerc, from Gornji Vakuf-Uskoplje, is a company that succeeded with its own knowledge, means and efforts to become a supplier to large firms such as MANN+HUMMEL and Bosch. Company Fe-Al Mostar, a joint venture of two very successful companies, Feal and Aluminij, is planning to expand further in this industry. It has great potential in this field, because there is great demand for aluminium parts currently.

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Ownership structure There are certain differences in structure among entities, especially in terms of ownership. In the Republic of Srpska, the privatization process in most of the stateowned or co-owned companies is not finished yet. A number of companies still have at least 30 per cent or even more of state ownership. The Republic of Srpska boasts large units and entire conglomerates of automotive suppliers in auto electrics and electronics, metal processing and engine parts for trucks and buses. Investment in such companies brings some inherited benefits, such as skilled labour and facilities. Privatization is progressing well in the Federation of Bosnia and Herzegovina, with most companies fully privatized and recovering quite well. Ownership structure ranges from the ‘closed share ownership’ (individuals controlling the majority shares) to the domination of workers’ shareholding. A common characteristic of post-war successful Bosnia and Herzegovina companies is that they are mainly the ‘closed ownership’ companies, having a Bosnian or Slovenian owner/intermediary which makes up the missing marketing link to the customer base in Western Europe.

Company structure Of the companies involved in auto components supply at present, the majority is in metal processing, over 70 per cent, and plastics, about 15 per cent. A certain number operates in electrics and electronics (the largest companies are Cajavec, located in Banja Luka, and Zrak Holding located in Sarajevo and Kiseljak), and a few in other segments of automotive supplies, such as filters, batteries, spark plugs, fuses and rubber parts. There is an Automotive Cluster consisting of 23 successful companies from Bosnia and Herzegovina, as well as some governmental institutions such as the Foreign Investment Promotion Agency (FIPA). The auto components sector, mobilized around the newly established Automotive Cluster, comprises approximately 6,000 employees in 26 companies. Besides the cluster association, there are other companies involved in auto components supply, such as Enker d.o.o. Tesanj (fuses), research and development design studios (Bicakcic d.o.o Sarajevo, Unis Alat d.o.o. Konjic and TMD Hanibal Gradacac), in tools design and those created from former industrial conglomerates (Unis, Famos, Energoinvest and Cajavec), located throughout the country.

Equipment Equipment in most companies is outmoded, aging from one year (just a few machines in some companies) to 30 years (in many of them). On average,

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the age of production equipment is 18.5 years. It is clear that privatization is driving investments and accordingly modernization. Privatized and newly established companies usually have up-to-date machines and tools, complemented by qualified management. Two-thirds of them have obtained ISO 9000 and 9001 quality certification; some even have TS 16949 and ISO 14001 standards, specially created for the automobile industry. Equipment is mostly of German, Italian and ex-Yugoslav origin. Technology is rarely advanced – but is usually claimed as acceptable for the existing production.

Raw materials supply Disregarding the opportunity to complete and encircle the production technology chain in vertical production and manufacturing system, raw materials still remains an important issue. Disrupted technology and production chains made a number of companies’ importers of raw material – mostly from Germany, Austria, Slovenia, Croatia, Serbia and Montenegro. Companies import castings, moulds, steel sheets and strips, wire (chrome and nickel), forges, pipes, spare parts, cutting tools, some chemicals, dyes, foils, brass, electro-components, felt, rubber, paper and granulate. However, that should not be seen as an obstacle to the development of a sustainable automotive components industry in Bosnia and Herzegovina. Selective investments could achieve a responsive supply chain concentrating development on those areas that would yield early improvements.

Auto components production and trade Companies operating in automotive sub-sectors produce a wide variety of components, such as brake components and systems, diesel engines, gearboxes, clutches, turbo-compressors, steering systems, bearings, wheels, flexible tubes, pumps, springs, filters, drive shafts, axels, gearings, screws, bolts, nuts, some tools, batteries, suction lines, thread lugs and silencers. The auto components sector is a growing exporter, although there is interrupted continuity in the technology chain, overall processing and manufacturing, but it is progressing as a large-scale importer. Import is primarily necessary to complete assembly from semi knocked down kits, but also to complete the final product of local suppliers and auto components manufacturers. Unfortunately, in reviewing export value data, the import– export ratio remains disadvantageous. What export value is earned comes mostly from suppliers in Republic of Srpska supplying Serbia’s and Montenegro’s ZASTAVA manufacturer at lower prices than in the European Union or other auto components world markets.

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Cooperation between the private sector and technical training faculties In September 2005, the FIPA published a study of the automotive components sector in Bosnia and Herzegovina that was financed and commissioned by the Japan International Cooperation Agency. The report concluded that, together with design and engineering companies, mechanical training institutions form the foundation to realize the enormous potential of the automotive industry in Bosnia and Herzegovina. Universities and institutes which offer mechanical and other related sciences have proven successes in cooperating with companies in the metal and automotive sectors in previous years. Nevertheless, there is a need for modernization and advancement, which is subject to the availability of funding sources. The federal and regional governments should provide stronger support to the education system in accordance with the Bologna Declaration, advancing the position of research and development (R&D), especially at technical faculties. This should improve the base for effective cooperation with companies, aimed at meeting their development needs. Human resources, experience and references on previous successes are readily available. At present, the most reliable education and research institutions are the following: 1. Faculty of Mechanics, University of Sarajevo – Division: Engines and Vehicles; 2. Faculty of Mechanics, University of Banja Luka; 3. Faculty of Mechanics and Computers, University of Mostar; 4. Faculty of Mechanics, University of Zenica – Division for Motor Vehicles; and 5. Faculty of Mechanics, University of Tuzla.

Main characteristics of the automotive market A snapshot of the automotive market in Bosnia and Herzegovina over the past few years illustrates: • • • • •

A 13.4 per cent growth in sales of new cars in 2003–2004; Faster growth in delivery cars versus automobiles; Increased interest in commercial vehicles; About 70 per cent individual buyers in the passenger car market; Dominant brands include Sˇkoda, Volkswagen and Renault (for delivery cars); • Over 40 per cent of new cars were given or sold on leasing; • 673,828 total registered vehicles, as of the end of 2004;

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• Average age of passenger cars: 13.5 years; and • Low level of maintenance on automobiles. The high average age of automobiles on the road is the result of low purchasing power, but also due to the old law on import of used cars which had no limits in age. The new Law (in force from 2000) set the limits on passenger cars up to seven years, and up to 10 years for the trucks and buses. The market for motor vehicles in Bosnia and Herzegovina is gradually developing, reflecting the actual buying power of the population. However, it would be highly desirable to speed up the process of rejuvenation and replacement of the existing old motor vehicles on the roads in the country. At present, exports of automotive parts go mostly to Germany, Italy, Turkey and especially Slovenia. This is the result of the full privatization of TMD Gradacac, purchased by Slovenia’s CIMOS. In addition, a significant portion goes to ex-Yugoslav countries, especially Serbia and Montenegro, which manufacture ZASTAVA automobiles. Currently, only a few companies work for direct partners, such as VW, CIMOS and RENAULT. A widely developed distribution network with post sales support is spread throughout the entire country. There are 15 large distributors in Bosnia and Herzegovina, selling 31 different vehicle brands and models, out of which just ASA Auto and Hyundai are exclusive distributors for Bosnia and Herzegovina. ASA Auto d.o.o. itself manages the distribution of Sˇkoda, Volkswagen, Audi, Seat and Porsche models. Other representatives are based in neighbouring countries, representing manufacturers for the entire South East Europe region, including Bosnia and Herzegovina. Spare parts sold in the Bosnia and Herzegovina market are usually imported, both as an original and substitute. Domestic producers do sell a certain portion of their own products, such as filters, pumps and spark plugs at the local market. However, it is still quite rare to find locally produced auto components on the domestic market.

Conclusion The advantages of investing in the automotive sector in Bosnia and Herzegovina include: • Pre-accession investment rush, as European Union countries can no longer give such generous incentives – Bosnia and Herzegovina is about to meet the requirements and sign the Stabilization and Association Agreement benefiting from pre-accession facilities. • Location at the heart of Europe, with easy access to the new growth markets in the East – and experience of cooperation with perceived difficult markets.

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• Despite the global overcapacity in vehicle assembly, any move to Eastern and Southeastern Europe means component manufacturers must also move unless a components sector is already in place. • Implementation of free trade agreements (FTAs) in South East Europe and more focused and coordinated strategic exploration of opportunities through FTAs with Turkey and the European Union could bring opportunities for export-related foreign direct investment. While challenges remain in completing the entire technical/production chain in Bosnia and Herzegovina, recent investments in mining and metal processing, manufacture of engine parts and leather and rubber production will boost domestic capacity. Local sourcing could help investors lower production costs, monitor quality and offer flexibility in altering product specifications and design. Collaboration in R&D between design and engineering companies and training and education institutions must surely be undertaken more widely. Potential investors should investigate the Automotive Cluster as well as BNT Kovacnica in Novi Travnik which had the country’s largest capacity before the war.

PART 3

Commercial Legislation

3.1

Bosnia and Herzegovina: An Introduction to the Legal System Karanovic & Nikolic

Bosnia and Herzegovina is a complex state composed of three units – two entities and one district: • The entity of the Republic of Srpska; • The entity of the Federation of Bosnia and Herzegovina; and • Brcko District of Bosnia and Herzegovina. The Republic of Srpska is further divided into municipalities, while two towns have the status of a ‘city’: Banja Luka, the capital town of the Republic of Srpska, and Istocno Sarajevo. The Federation of Bosnia and Herzegovina is further divided into 10 cantons and each canton is composed of one or more municipalities. The capital town of the Federation of Bosnia and Herzegovina is Sarajevo, which is also the country’s capital. Brcko District is an independent administrative unit, the status of which was determined through an arbitral award of 1999 stating that this part of the country will fall under the jurisdiction of neither the Republic of Srpska nor the Federation of Bosnia and Herzegovina, but will have autonomy under the competences of the central institutions of Bosnia and Herzegovina. The legal system of Bosnia and Herzegovina represents a classical continental legal system, however, with some influence of Anglo-Saxon legal techniques and practices due to the engagement of foreign legal advisers/ institutions originating from that part of the world in numerous projects involved in restructuring the country’s institutional and legal infrastructure after the dissolution of the former Socialist Federal Republic of Yugoslavia. Generally, both entities have parliaments with the authority to pass laws and other regulations that fall under their competence according to the Constitution of Bosnia and Herzegovina (Annex 4 of the Dayton Peace Agreement of 1995). Brcko District has an assembly with corresponding powers to pass laws and other regulations to be implemented in this part of

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the country, while Bosnia and Herzegovina as a whole has its own parliament operating at the central level, thus enacting laws and other regulations applicable in both entities and in Brcko District. According to the Constitution of Bosnia and Herzegovina, the following is generally determined to be under the competence of the central authority of Bosnia and Herzegovina: • • • • • • • • • •

Foreign policy; Foreign trade policy; Customs policy; Monetary policy; Financing of the central institutions and repayment of the international obligations of Bosnia and Herzegovina; Immigration, refugee and asylum policy and regulations; International and inter-entity criminal law enforcement, including relations with Interpol; Establishment and operation of common and international communications facilities; Regulation of inter-entity transportation; and Air traffic control.

All other governmental functions and powers not expressly assigned to the institutions of Bosnia and Herzegovina shall be considered to be under the competence of the entities. However, entities are free to agree to the transfer of additional functions to the competence of the central institutions of the country. It was at the very beginning of the existence of Bosnia and Herzegovina that the legal systems of the two entities were developing in a separate manner. Discrepancies still exist between the legislation that is in force in different parts of Bosnia and Herzegovina, but the last couple of years have shown that more and more uniformity is being gained in the regulations applicable throughout the country, which will help foreign investors to manage their business projects in cases where the areas of both entities and Brcko District are involved. This overview will focus on the legal systems of the Republic of Srpska and the Federation of Bosnia and Herzegovina and will provide a limited comparative perspective of the legislation applicable in the Brcko District. When referring to parts of the articles that cover the Brcko District please bear in mind that examples have been taken from a much more detailed regulatory framework with the intention to only illustrate sample differences.

3.2

Bosnia and Herzegovina: Business Structures and Their Incorporation Karanovic & Nikolic and Branko Maric´ Law Office

Republic of Srpska Regulatory framework The Company Law of 1998 as amended represents the basic source for the regulation of company structures in the Republic of Srpska. The 2002 Foreign Investment Law as amended provides for equal treatment to foreign investors and domestic investors guaranteeing that foreign investments enjoy full protection and that such investment and profits may be fully repatriated. All forms of business associations regulated by the Company Law, as well as the opportunity for a foreign investor – natural person – to conduct business as an entrepreneur under the Law on Entrepreneurial and Craftsmanship Activities of 2002 as amended (hereinafter referred to as the Entrepreneurial Law), are available to foreign investors.

Doing business without incorporation of a company Rather than establishing a company in the Republic of Srpska, foreign investors may open a representative office. A representative office is treated as an organizational unit of the mother company without having a separate legal personality and it is regulated so that there is no capitalization requirement for its establishment. It is not possible to conduct business operations through a representative office but one can perform all noncommercial representative activities for the purpose of monitoring the market and for advertising and preparing for future corporate operations in the country. The exception to this rule is the representative offices of air carriers, which are entitled to sell tickets in accordance with international conventions and contracts. Representative offices must be registered at the Ministry for Foreign Trade and Economic Relations in Sarajevo.

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Where the foreign investor is a natural person, he or she is entitled to register and perform business activities under the Entrepreneurial Law, without establishing a legal entity. As an entrepreneur, a foreign investor can perform all commercial activities for which it is not mandatory to have a registered corporate entity (eg. banking, insurance). However, in this case the entrepreneur assumes unlimited liability for obligations undertaken through his or her business operations and all the foreign investor’s private property can be claimed by creditors. The entrepreneurial activity shall also be registered at the Ministry for Foreign Trade and Economic Relations in Sarajevo.

Investment in an existing company/establishment of a new company A foreign investor may invest in an already existing company or decide to establish a new company as a sole owner or together with other foreign and/ or domestic investors. There are no limits as to the percentage of share capital invested in a company acquired/established by a foreign investor except for investment in a company that produces arms, ammunition, explosives for military purposes, military equipment and that performs public information activities, in which case the foreign investor can obtain up to a maximum of 49 per cent of the share capital. In addition, such investments require the prior approval of competent state authorities while foreign investments in other sectors must be registered only at the Ministry for Foreign Trade and Economic Relations in Sarajevo. Finally, special regimes are prescribed for investment in other areas, such as banking, and such foreign investment is subject to specific regulations relevant to a particular area. There are four main forms of business entities through which a foreign investor may operate in the Republic of Srpska: • Drustvo sa ogranicenom odgovornoscu, shortened to doo (limited liability company (LLC)); • Akcionarsko drustvo, shortened to ad (joint-stock company (JSC)); • Komanditno drustvo, shortened to kd (limited partnership); • Ortacko drustvo, shortened to od (unlimited partnership). LLCs and JSCs are the most popular forms for business operations, one of the reasons being that founders of unlimited partnerships are deemed to be liable with their entire property for the obligations of the unlimited partnership; similar is the case with limited partnerships where at least one of the founders will also have unlimited liability for obligations of the limited partnership. Even when comparing the two popular forms mentioned, an LLC is often recognized as a more attractive vehicle for business since its corporate governance and procedures for establishment are much simpler

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than that of a JSC. Lastly, for certain activities, such as banking and insurance, a JSC structure is mandatory and one cannot decide freely on the form for these specific businesses.

Limited liability company An LLC is a separate legal entity having a minimum of one and a maximum of 30 shareholders, either natural persons or legal entities. Liabilities of an LLC cannot pass to the shareholders except in rare circumstances (eg. ‘lifting the veil’ in cases of misuse of the company’s property with the intent to defraud creditors). Shares of an LLC are expressed in percentages and one shareholder may have only one share expressed as a percentage of the total share capital. Accordingly, shares of an LLC are quite different from the shares of a JSC and they are not registered in any external registers (such as the Central Register of Securities where shares of a JSC are recorded); the valid evidence of the amount of specific shares is found only in the book of shareholders kept with the company. In addition, an LLC can issue a certificate for the share to its shareholder, but this document is not considered a negotiable security. Finally, the share can be ordinary, ie. it allows the shareholder to participate in the business operations of the company or to receive distributions of profit, or it can entitle its owner to certain priority rights in the same way as owners of priority shares issued by a JSC are entitled. The share capital may consist of both monetary contributions and contributions in kind (eg. equipment, goods, rights to licenses), although contribution in work and services is not permitted by the Company Law. The minimum monetary share capital amounts to 2,000 convertible marks (BAM; approximately €1,000) and each individual monetary contribution may not be less than BAM 100 (approximately €50). Any non-monetary contribution exceeding the prescribed minimum monetary share capital in value shall be evaluated by an authorized appraiser whereas if the value is under the said limit shareholders themselves will be entitled to evaluate the contributions in kind. The organization of an LLC consists of the following: • • • •

Assembly of shareholders; Supervisory board; Management board; Managing director and the board of executive directors (optional).

The managing director is the only mandatory body in an LLC. However, if a company has more than 100 employees it should have both a management board and a supervisory board. An LLC is represented by its managing director who is authorized with limited or unlimited powers to enter into legal transactions on behalf of the

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company. The restrictions on the managing director’s powers may generally be imposed in two ways: 1. Through mandatory approval of the management board or the general assembly for transactions exceeding a certain value; 2. By joint signatures of the managing director and the other employees of the company (eg. executive director) for every transaction or for transactions exceeding a certain value. Shareholders of an LLC are free to regulate the voting and decisionmaking process through a memorandum of association and through articles of association while the Company Law has only the guiding provision that important decisions such as on the increase in capital and changes in the articles of association can be enacted by a three-fourths majority of shareholders present at the assembly meeting if it is not stipulated otherwise by the above-mentioned by-laws of the company. The transfer of shares among shareholders is free, while in the case of transfer of shares to a third party other shareholders are entitled to exercise their pre-emptive rights according to the provisions of the articles of association. The name of an LLC should contain a description of the company’s main activity (eg. advertising company) as well as the actual name of the company, the abbreviation ‘doo’ and the registered seat of the company. Documents required for initiating the registration procedure of an LLC are the following: • The certificate of incorporation of the founder if the founder is a legal entity; if the founder is a foreign natural person, a copy of the founder’s passport is needed and if the founder is a Bosnian national a copy of his or her identity card must be submitted. • A copy of the identity card for a Bosnian founder or a copy of the passport with appropriate notification to the internal affairs authority for the foreign founder entitled to carry out the registration procedure if such individuals are conducting the said procedure personally. In other cases, the power of attorney for an attorney practising law in Bosnia and Herzegovina authorizing him or her to carry out the registration procedure, as well as a copy of his or her identity card. • A copy of the identity card or the passport of the person authorized to represent the LLC. • The founder’s decision or agreement on establishing a company in the Republic of Srpska, ie. a memorandum of association with the signatures verified by the competent court or a memorandum that is notarized (from the moment of commencement of the implementation of the Notary Act of 2004 as amended, expected by the end of business year 2007). • The articles of association; this document must be notarized as from the moment of commencement of the implementation of the Notary Act, as explained herein1 . 1

In the Law on Registration of Business Entities in the Republic of Srpska of 2005 it is not explicitly stated that the articles of association have to be initially submitted but they are often required by the competent court, through broad interpretation of the provisions of the Law on Enterprises that leaves space for this additional requirement.

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• The bank’s certificate on executed payment of the monetary contribution and evidence of the value and contents of the contributions in kind; prior to registration the initial monetary capital that amounts to at least BAM 1,000 (approximately €500) shall be paid; the rest of the minimum monetary capital must be paid within two years from the date of registration of the LLC. • Decision on the appointment of a representative for the LLC, if not appointed through the memorandum of association. • Specimen signature of the authorized representative of an LLC verified by the competent court, municipality administration or notary public (from the moment of commencement of the implementation of the Notary Act of 2004 as amended, expected by the end of business year 2007). • In the case of an LLC with a sole founder, evidence of security provided for unpaid monetary contributions or for the value of untransferred contributions in kind must be submitted. All the submitted copies must be verified or notarized and apostilled in the country of origin. In addition, the originals produced in the foreign country and submitted by this procedure have to be apostilled when required by the provisions of the Hague Convention of 5 October 1961, except for those cases regulated by international contracts entered into between Bosnia and Herzegovina and other countries where legalization of the documents is not required at all (eg. agreement between Bosnia and Herzegovina and Serbia and Montenegro on legal assistance in civil and criminal cases). The incorporation procedure involves submission of all the foundation and other documents to the competent registry court which finalizes the incorporation by issuing the resolution of incorporation. Once this document is issued, an LLC is legally permitted to commence its business activities. Further registrations have to be made after the registration of the company with the competent court, such as statistics registration and registrations with tax and custom authorities. The Law on Registration of Business Entities in the Republic of Srpska of 2005 provides that the registry court will forward ex officio applications for registration of the company to the statistics bureau, as well as to tax and custom authorities, but this provision has not been put into practice yet and the company should expect to complete these further registrations on its own.

Joint-stock company The operations of a JSC, in addition to being regulated by the Company Law, are regulated by the Law on Securities Market of 2006, and the Law on Takeover of Joint Stock Companies of 2002. Furthermore, the Standards of Corporate Governance in a JSC issued by the Securities Commission of the Republic of Srpska in 2006 are also applicable to this type of business organization. The Standards of Corporate Governance in a JSC determine

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in more detail the manner and mechanisms of functioning and protection of interests in mutual relations among potential and existent shareholders, creditors, debtors, employees, management, supervisory board and state. In addition, in order to increase transparency and security of investments, the Regulation on Reporting and Publishing of Information by Issuer of Securities which are the Object of the Public Offer of 2007 stipulates the obligation of the issuer of the securities which are placed on the stock market or other ordered market to produce and publish the following reports: biannual financial report, annual financial report, audit report and report on important events and acts which influence the business of the issuer. The issuer of securities with a share capital of less than BAM 5 million who either has less than 100 shareholders or whose shares are not owned by an investment fund is not obliged to produce and publish biannual financial reports nor the audit reports. A JSC is a separate legal entity that can be established by both individuals and legal entities. The liabilities of a JSC are different from the liabilities of its shareholders as in the case of an LLC. The Company Law envisages two types of JSC: (a) Closed JSC – the shares of which are subscribed by its initial shareholders prior to incorporation without issuing a prospectus or invitation to third parties; the maximum number of shareholders for this type of JSC is 50; and (b) Public JSC – where the prospectus and invitation to third parties to subscribe shares are issued. The initial capital of a JSC is divided into shares expressed in convertible marks with a minimum nominal value of BAM 1 per share (approximately €0.5). Shares are registered and exist in electronic form recorded in the Central Register of Securities. Shares can be issued as ordinary or as priority shares, the latter entitling its owner to certain priority rights, such as the right to priority dividend or the right to receive, prior to ordinary shareholders, a portion of the liquidation and bankruptcy assets. The share capital may consist of both monetary contributions and contributions in kind while contributions in work and services are not permitted, just as in the case of an LLC. The minimum monetary share capital amounts to BAM 50,000 (approximately €25,000) for a closed JSC and BAM 100,000 (approximately €50,000) for a public JSC, while each individual monetary contribution may not be less than BAM 500 (approximately €250). Valuation of contributions in kind in a JSC is regulated as in the case of an LLC. The organization of a JSC has the same bodies as an LLC. However, for a JSC it is mandatory to form a management board and a supervisory board not only when it employs more than 100 persons but also when it is organized as an open JSC with more than 50 shareholders.

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For decisions on most of the important issues involving a JSC (distribution of profits, appointment of the auditor, etc.) a three-fourths majority of votes of the shareholders present at the assembly is needed, while the quorum for such meeting is set at above one-half of the shareholders’ votes in the company; if the meeting is rescheduled because of the absence of a quorum, more than one-third of shareholders’ votes is enough for operating the said body in the rescheduled sessions. In order to enact changes in the articles of associations more than one-half of all the existing shareholders have to vote for the changes. All the prescribed limits mentioned cannot be amended by stipulations of the memorandum of association or articles of association, which is different than in the case of an LLC where the Law on Enterprises has only a guiding provision, leaving it to the discretion of shareholders to regulate voting limits in the company. The Law on Enterprises provides that every shareholder has a preemptive right to purchase shares issued through new emissions; thus every new issue of shares is in principle subject to such pre-emptive rights as regulated by the articles of association of a JSC. Nevertheless, pre-emptive rights can be limited or excluded by the company’s decision on new capital increase and the respective issuance of new shares. The name of a JSC should contain a description of the company’s main activity (eg. trading company) as well as the actual name of the company, the abbreviation ‘ad’ and the registered seat of the company. Documents required for the registration procedure of a JSC are similar to those needed for an LLC although some extra documentation such as the following might be needed: • The permission of a competent state authority when prescribed by law (eg. permission of the Securities Commission of the Republic of Srpska for public issuance of shares and public prospectus); • Evidence of the public announcement of the invitation to third parties to subscribe shares and the text of the prospectus in case of a public JSC; • The extract from relevant public registers determining ownership for contributions in kind or an application for entry in such a register. The rest of the incorporation procedure and further registrations are the same as for an LLC while one has to take into consideration that even more complex liaisons with state authorities are required in the case of a JSC, eg. registrations with the Securities Commission of the Republic of Srpska, registration of shares with the Central Register of Securities and so on. It is worth noting that the Banja Luka Stock Exchange is an extremely well-organized trading place for securities of companies from the Republic of Srpska and Brcko District, increasing its potential daily and attracting a portfolio of foreign direct investment to this region.

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Commercial Legislation

Federation of Bosnia and Herzegovina The Law on Business Companies of the Federation of Bosnia and Herzegovina was published in the Federation of Bosnia and Herzegovina’s Official Gazette, No. 23, of 21 June 1999. Since that date, the Law on Business Companies was amended on several occasions as published in the following: • Federation of Bosnia and Herzegovina’s Official Gazette, No. 2, of 21 January 2002; • Federation of Bosnia and Herzegovina’s Official Gazette, No. 4, of 14 February 2002; • Federation of Bosnia and Herzegovina’s Official Gazette, No. 29, of 30 June 2003. A company may be established by domestic and foreign natural and legal persons, unless otherwise provided by the law. A company may be organized in one of the following forms: • • • •

General partnership; Limited partnership; Joint-stock company (JSC); and Limited liability company.

A company may conduct activities only within the scope of operations as entered in the court register. A company may conduct activities other than those usually conducted within the scope of the operations entered in the court register, to the extent and in a manner necessary for its business, otherwise conducting these activities as a regular operation. A company may have its branch offices in a location different than that of its head office. Branch offices are business units that do not have the capacity of a legal entity, but may conduct all the activities within the scope of operations of the company that is entered in the court register and may acquire rights and obligations in the name and for the benefit of the company. Branch offices shall be entered in the court register with the registry court at which the company is registered. A company shall terminate upon loss of its legal capacity, on the day of entry of its termination in the court register. Unless otherwise provided by this law, a liquidation procedure shall be initiated upon termination of the company. A company shall cease to exist in following cases: • Upon expiration of the period for which it has been established; • Upon its consolidation, merger and division;

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• Upon termination of a bankruptcy proceeding or on denial of request for initiating bankruptcy proceeding caused by the lack of property; • Upon termination based on a court decision; • Upon the decision of the company’s general meeting of shareholders.

General partnership Definition and establishment A general partnership is a company that consists of at least two members jointly and severally responsible for the obligations of the company. A general partnership shall be established by a contract. The contract for the establishment of a general partnership shall contain the first name, the family name and the address of the domicile or the name and head office of the company members, name, head office and scope of operations of the company and the rights and responsibilities of its members. Amendments to the contract shall be made with the consent of all the members. All the partners shall sign an application for the entry of the general partnership in the court register.

Contributions of partners The contributions of members of the general partnership may be in the form of money, items, rights and services. The value of contributions in items, rights and services shall be determined by the contract on establishment of the partnership. The contributions of partners shall have equal value. Each partner shall pay or enter his or her contribution within the time frame determined by the contract, and in case the contract was not entered into, no later than two months after entry of the establishment of company in the court register. The contributions of partners shall become the property of the partnership.

Management and representation Each member of the partnership shall have the right and responsibility to manage the partnership in accordance with the contract. It may be determined in the contract that for a certain period of time the company shall be entirely or partially managed by one or more members, with the effect of forfeiture of the right of management by other partners to the same extent. A general partner may transfer his or her right to management to a person who is not a partner only with the consent of other partners. If the contract determines that the partners may only act jointly, each action and operation must be carried out only with the consent of all authorized members.

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Termination of general partnership A general partnership shall terminate in the following cases: • When a partner submits a notice in writing on his or her quitting and termination of the contract entered into for an unlimited period at least six months before the end of the calendar year, unless otherwise provided by the contract. • Death of a partner, unless the contract provides for a successor. • Termination of partner–legal entity. • Bankruptcy of one of the partners. • Loss or limitation of legal capacity of one of the partners. • Court decision on termination of partnership. In case of liquidation of the partnership, the partners shall have a right to a proportional part of the remaining partnership property after liquidation. Partnership property after liquidation shall first be divided among the members up to the amount of their respective paid contributions, and then in equal parts. Partnership property remaining after liquidation that is not sufficient for the return of paid contributions shall be divided among members in proportion to contributions if not otherwise provided by the contract.

Limited partnership A company in which one or more members are jointly and severally liable for the company obligations with their entire property (general partners) and one or more members are liable for company obligations only up to the amount of their contributions as entered in the court register (limited partners) is a limited partnership. Limited partnerships may be transformed into limited partnerships with shares. Limited partnerships shall be established by contract, which shall contain the following: • Name and head office of company; • First name, family name and the address of the domicile, company name and head offices of partners; • Designation of general and limited partners; • Type and amount of contributions for each member; • Scope of operations of limited partnership.

Management and representation General partners shall manage the business operations of the limited partnership. Each general partner shall represent the limited partnership,

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unless the contract expressly provides otherwise. Limited partners may represent the limited partnership only upon special authorization given by the consent of all the members.

Profits Profits of the limited partnership shall be divided into the part for general partners and the part for limited partners, in the proportion provided by the contract. Part of the profits that goes to general partners shall be divided among them into equal parts. Part of the profits that goes to limited partners shall be divided among them in proportion to paid contribution unless the contract provides otherwise.

Termination of limited partnership Every member of a limited partnership shall have the right to a proportional stake in company property that remains after liquidation. If the property remaining after liquidation of the limited partnership is insufficient for the return of paid contributions, limited partners shall have the right to priority in getting back their contributions. Property remaining after the return of the debt shall be divided among the partners in proportion to a profitsharing ratio. The contract may determine different ways to divide the property of a limited partnership after liquidation. Limited partnerships shall not terminate in case of death, loss or limitation of legal capacity, or on compulsory sale and charges against the property of a limited partner.

Joint-stock company A JSC is a company whose registered capital is divided into shares.

Founders and the act on establishment One or several founders may establish a JSC. Founders shall be the shareholders in the JSC. A JSC shall be established by a contract (act) on establishment, which shall contain the following: • First name and family name or company name, and the address of the domicile or the head office of founders; • Name and head office of the JSC; • Scope of operations; • Rights and responsibilities of founders; • Amount of the registered capital; • Designation on type, entire number and nominal value of shares; • Description of rights contained in a share; • Number of shares subscribed by each of the founders;

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• Procedure and schedule of sale and the bank for payment of shares; • Description and evaluation of the value of contributions in items and rights; • Way of settling costs of establishment; • Consequences of failure to meet the obligations by the founders; • Way of settling disputes among the founders; • First name and family name of the person that represents the JSC in the establishment procedure.

Registered capital upon establishment The registered capital of a JSC shall be no less than BAM 50,000. The nominal value of a single share shall not be less than BAM 10.

Increase of registered capital Registered capital shall be increased in accordance with the decision of the general meeting of shareholders of the JSC, upon the recommendation of the supervisory board, by a two-thirds majority of the represented shares with voting rights, by each class of shares. The supervisory board of the JSC may be authorized by the company bylaws or by the decision of the general meeting of shareholders to decide on an increase of registered capital, as follows: • By emission of new shares; • From the reserve fund over the amount provided by articles 187 and 188, paragraph 3, of the Law on Business Companies; • By emission of shares for employees from profits.

Decrease of registered capital Registered capital shall be decreased based on the decision of the general meeting of shareholders made by a two-thirds majority of the represented shares with voting rights.

Management The bodies of the JSC are as follows: • • • •

General meeting of shareholders; Supervisory board; Management; and Audit board.

General meeting of shareholders The general meeting of shareholders of the JSC shall consist of shareholders and shall make decisions on the following:

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• Increase and decrease of the registered capital; • Emission of new shares of the same class, in an amount larger than onethird of the total nominal value of all the shares of the JSC; • Emission of shares of a new class; • Annual financial report, with the reports of auditors, the supervisory board and the audit board; • Distribution of profits and payment of dividends; • Manner of loss coverage; • Consolidation with other enterprises and merger of other enterprises by the JSC, except for consolidation or merger of a subsidiary company; • Division and termination of the JSC; • Transformation of the JSC; • Purchase, sale, exchange, leasing in capacity of lessor or lessee, credit taking or granting and other transactions, directly or through subsidiary companies, during the business year, in the scope exceeding one-third of the book value of the JSC property according to the balance sheet at the end of the previous year, and any such transactions of a smaller scope if it must be approved by the supervisory board and the latter did not approve it unanimously; • Election and removal of the members of the supervisory board on an individual basis; • Selection of an outside auditor and election and removal of members of the supervisory board; • Establishment, reorganization and liquidation of subsidiary companies, and approval of their respective by-laws; • Compensations for the members of the supervisory board and the audit board; • Amendments to by-laws; • Other issues important for business operations of the JSC, in accordance with the law and by-laws of the JSC. The general meeting of shareholders decides with a two-thirds majority of present voting shares on issues specifically provided by the Law on Business Companies, which include separate voting procedures by share class, while it decides by a simple majority (one-half) of the present voting shares, with the joint vote of all share classes on all other issues within its competence, except for the election of supervisory board and audit board members.

Supervisory board The supervisory board shall consist of the chairperson and at least two members, appointed and removed by the general meeting of shareholders, provided that the entire number of members of the supervisory board is odd. The supervisory board of the JSC shall be competent to do the following: • Supervise the business operations of the JSC; • Supervise the work of administration;

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• Adopt the report on administration of business operations upon the semiannual and annual balance sheet, with balance sheet and success balance sheet and the report on auditing; • Submit an annual report to the general meeting of shareholders on business operations of the JSC, which shall include the auditor’s report, report on the work of the supervisory board and the board for revision, as well as the plan on business operations for the following business year; • Appoint management of the JSC; • Propose distribution and manner of use of profits and the manner of loss coverage; • Approve purchase, sale, exchange, leasing and other property transactions, directly or through subsidiary companies, during the business year to the extent ranging from 15 per cent to 33 per cent of the accounting value of the entire property of the JSC; • Appoint chairpersons and members of the committee for compensation and the committee for appointment; • Establish ad hoc commissions and determine their composition and tasks; • Convene the general meeting of shareholders; • Approve emission of new shares of the existing class amounting to onethird of the sum of the nominal value of the existing shares and determine the amount, time of sale and the price of these shares, which must not be less than the average market value of the existing shares of the same class in 30 consecutive days prior to the day of decision making. To hold a session of the supervisory board, a quorum of two-thirds of the entire number of members is required. The supervisory board shall issue its decisions by majority of votes of the members present.

Management Management shall organize the work and direct the business operations, represent and present the JSC and shall be responsible for the legality of business operations. The management of the JSC shall consist of a director or a director and one or more executive directors.

Audit board The audit board shall be formed within the JSC.

Transformation A JSC may transform into an LLC, based on the decision of the general meeting of shareholders with voting rights who have a two-thirds majority of represented shares, so that the shareholders in an LLC gain shares in proportion to their participation in the registered capital of the JSC.

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Merger and consolidation A JSC shall be merged by the transfer of property and obligations (hereinafter referred to as merged company) to another JSC or LLC (hereinafter referred to as successor company) that shall issue its shares or stakes in exchange for shares of the merged company.

Termination of joint-stock company A JSC shall terminate, in accordance with law and its by-laws, upon the following: • • • •

Decision of the general meeting of shareholders; Merger, consolidation and division; Decision of court; and Bankruptcy.

Liquidation When an LLC terminates pursuant to a decision of the general meeting of shareholders or a court decision, a liquidation procedure shall be initiated.

Limited liability company Definition An LLC is a company with its registered capital divided into stakes. Company members shall be liable for obligations of the LLC with his or her stake. Stakes of the founders of the LLC may be different, and each member may acquire only one stake. An LLC shall be established by a written contract entered into by founders, whose signatures shall be certified in accordance with the law. When only one founder establishes an LLC, the act on establishment shall be the decision on establishment.

Act on establishment The act on establishment of the LLC shall contain the following: • First name and family name and the address of domicile of the founder; • Firm, head office and operation of the company; • Amount of registered capital of the company, amount of contribution in money, description and value of contributions in items and rights, number and amount of members’ contributions; • Rights and responsibilities of company members;

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• Procedure in case one of the founders fails to pay his or her debt by the agreed deadline or fails to fulfil other obligations; • Manner of settlement of costs of company establishment; • Appointment of persons authorized for the conduct of business and representation of company and application for entry of company establishment in the court register; • Special provision if the company is being established for a fixed period of time.

Registered capital The registered capital of an LLC with several founders shall be no less than BAM 2,000. The value of an individual share may not be less than BAM 200. The total contributions in money may not be less than BAM 2,000. The founders shall cover the costs of establishment of the company, unless otherwise provided by the contract, in proportion to their respective stakes. The costs of establishment may not be paid out of registered capital; nor can they be assigned to the registered capital as contribution.

By-laws An LLC shall have its by-laws, which must be adopted by the founders within the deadline determined by the act on establishment, which should not be longer than 60 days from the day of entry of company establishment in the court register. The by-laws of the company shall regulate the following: • Company name and its head office; • Scope of operations; • Amount of registered capital and amount of contributions for each of its members; • Conduct of business operations and representation of company; • Manner of determination and division of profit and loss coverage; • Rights and responsibilities of members; • Organization of company; • Management and manner of decision making, composition, manner of appointment and removal; authorities and responsibilities of the bodies of company, if such bodies are formed; • Manner of keeping members informed about the business operations of the company and maintaining the share register; • Manner of change in the amount of registered capital; • Manner of accession to the company and termination of membership in the company; • Termination of company; • Procedure for amendments to company by-laws.

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Management Company’s general meeting of shareholders The company shall have its general meeting of shareholders, consisting of all the company members. The entire amount of registered capital of the company shall be represented in the general meeting of shareholders with 100 votes, and a company member shall have the number of votes that is in proportion to his or her stake in the registered capital of the company. The contract or the company by-laws may determine that on all or certain issues decisions shall be made by write-in vote without convening the general meeting of shareholders. The general meeting of shareholders shall decide on the annual balance sheet and the distribution of profit and loss coverage. In an LLC with a single member, the authority of the assembly is carried out by the member of the LLC. The general meeting of shareholders of the company shall be convened by the following: • Management; • Member or members whose shares comprise at least one-tenth of the registered capital.

Company management Company management shall conduct the business operations of the company and represent the company. Management shall consist of one or several persons who do not have to be company members, appointed in a manner and for a period determined by the act on establishment or by-laws of company. When management has several members, their rights and responsibilities shall be regulated pursuant to the act on establishment or company by-laws.

Supervision The contract or company by-laws may determine that the LLC shall have a supervisory board. A company with more than 10 members and a company with registered capital exceeding BAM 1 million and with at least two members shall have a supervisory board.

Increase of registered capital Registered capital shall be increased pursuant to the decision of the general meeting of shareholders of an LLC by payment or investment of new stakes. An increase in the registered capital out of reserves may be performed if the financial report and the audit report for the last business year determine that there are no uncovered losses. An increase in the registered capital of

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the company out of reserves shall be performed by increasing the nominal value of stakes.

Decrease of registered capital Registered capital of the company may be decreased by the decision of the company’s general meeting of shareholders, in accordance with the act on establishment and the by-laws of company; the amount should not be less than BAM 2,000.

Transformation An LLC may change its form into a JSC, following the decision of the general meeting of shareholders made by a two-thirds majority of votes of all the company members.

Merger and consolidation An LLC may merge with another LLC or a JSC or be taken over by one of these, but not before expiration of the two years from the day of entry in the court register.

Termination of limited liability company An LLC shall cease, in accordance with law and company by-laws, by the following: • • • •

Consolidation, merger and division; Decision of the general meeting of shareholders; Court decision; and Bankruptcy.

Liquidation When an LLC terminates pursuant to the decision of the general meeting of shareholders or a court decision, liquidation proceedings shall be initiated.

Foundation of the LLC The most common company type in the Federation of Bosnia and Herzegovina is the LLC. The following steps must be taken in order to register the company with the competent court in the Federation of Bosnia and Herzegovina: • Making the company incorporation deed; • Registering the foreign investment at the Ministry of Foreign Trade in Sarajevo;

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• Submitting a request to the court for registering the company’s incorporation. The following documents need to be prepared by the foreign founder: • Evidence on founder’s identification: ��� Register excerpt – original document with apostille (depends on the issuing country) if the founder is a foreign entity; ��� Passport copy with apostille (depends on the issuing country) if the founder is a foreign physical person. • Founder’s statement confirming that it has not established other companies in the Federation of Bosnia and Herzegovina – signed by the company’s authorized representative; the signature is certified by a notary and bears an apostille (depends on the issuing country). • Copy of passport or ID of the director of the company to be founded – certified by the municipality (if the director is a citizen of Bosnia and Herzegovina) or by a notary (if the director is a foreigner), with apostille (depends on the issuing country). • Evidence of payment of basic capital. The following documents need to be signed by the director: • Statement accepting the position of director; and • Deposited signature. If the director is a foreigner in the Federation of Bosnia and Herzegovina, he or she must acquire a work and residence permit and register with the Pension Disability Insurance Fund. In accordance with the above, other employees cannot enter into an employment contract and the company cannot register them at the competent institutions prior to the conclusion of incorporation. Apart from the director, the company may also have one or more executive directors and one or more procurers. A procurer may have more authorizations than the director, and if the procurer is a foreign person he or she is not required to obtain a work or a residence permit in the Federation of Bosnia and Herzegovina. The procurer must also sign a statement accepting the position, deposit the signature and deliver a passport copy in accordance with the above.

Post-registration procedure After receiving the court’s resolution on company registration, the following is required in order to make the company operational: • Make the company stamp; • Obtain the resolution on purpose of the business premises;

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• • • • • • •

Register the company at the Federal Office of Statistics; Request a market inspection; Request a tax inspection; Open a transaction account; Request the tax authority for payment of fees in the company’s name; Request the customs number; Request that the company be registered as a value-added tax (VAT) payer; • Request that the company be registered in the register for companies dealing in foreign trade.

Doing business without incorporation of a company A foreign person in Bosnia and Herzegovina may open a representative office. The representative office is not a legal entity, it cannot deal in trade and it may not generate profit. The main activities of a representative office are as follows: • Market research in order to determine the possibilities of the most efficient manner of providing services within the scope of business activities of the founder on the territory of Bosnia and Herzegovina; • Activities in the area of marketing and information, aimed at familiarizing potential buyers with the advantages of the services provided by the founder; • Preparatory activities necessary for creating the possibility for contracting the services of the founder; and • Contacts with current and potential buyers. Representative offices are registered at the Ministry of Foreign Trade in Sarajevo.

Brcko District The Company Law of Brcko District (hereinafter referred to as Brcko Law) was enacted in 2001 and amended six times since then, most recently in 2007. The basic rules are similar to those contained in the Law on Enterprises of the Republic of Srpska and in the Law on Business Companies of the Federation of Bosnia and Herzegovina (FBiH Law), but some significant differences exist. For example: • Brcko Law states that a foreign company can open a branch office in Brcko District fully authorized to enter into business relations on behalf of the founder notwithstanding the fact that it is not a separate legal entity and provided that such foreign company operates for at least one

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year and has a minimum capital amounting to a countervalue of BAM 500,000 (approximately €250,000); • An LLC can have up to 50 shareholders while the Government of Brcko District can approve an even larger number of shareholders to participate in an LLC; • The minimum monetary share capital of a JSC amounts to BAM 15,000 (approximately €7,500). Brcko District has its own securities commission, but a central register of securities has not yet been established and JSCs from this part of the country must register their shares with the Central Register of Securities either in the Republic of Srpska or in the Federation of Bosnia and Herzegovina. Companies from Brcko District are listed either on the Banja Luka or the Sarajevo stock exchange.

3.3

Bosnia and Herzegovina: Employment Regulations Karanovic & Nikolic (Branko Maric´ Law Office)

Republic of Srpska Regulatory framework The Labour Law presently in force in the Republic of Srpska was enacted in 2000, and introduced the modern legal framework for regulating labour relations in compliance with present trends in transitional countries. The Labour Law was amended on a number of occasions, with the last amendment being enacted in 2007. The Labour Law represents the main source of employment regulations although this area is also covered by social security legislation, legislation concerning employment of foreign citizens and tax and contribution legislation. In addition, collective agreements represent an important supplemental source of labour regulations in the Republic of Srpska. There are three levels of collective negotiations and agreements reached between representatives of employers and employees:

1. General collective agreements that are applicable to all employees irrespective of the industry or services where they are employed; 2. Special collective agreements applicable to certain areas of the economy, eg. metal and mining industry; and 3. Particular collective agreements implemented for a specific employer.

Furthermore, every employer with more than 15 workers under contract is obliged to pass labour rules that regulate employment relations in one specific company. Those employers that have not concluded a particular collective agreement for whatever reason are expected to enact these labour rules. Finally, numerous regulations issued by the government and ministries complete the regulatory framework for in the Republic of Srpska.

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Practice The collective agreement and each individual employment contract as well as labour rules can provide more favourable terms and rights for employees in comparison with those guaranteed by the Labour Law unless the opposite is expressly regulated in the Labour Law. At the same time, no collective agreement, employment contract or labour rules can mandate less favourable terms and rights for employees than are found in the Labour Law and other laws.

Types of employment contracts and mandatory content An employment contract can be concluded for an indefinite term or for a fixed period of time. A fixed-term contract may be for a maximum of two years. An employment contract for a definite period of time may be concluded in the following cases: • • • •

Performance of work for a period of up to six months; Temporary increase of the scope of work; Replacement of an absent employee up to one year; Performance of work for a period determined in advance by nature and kind of work.

If a fixed-term contract is concluded for periods of less than two years, it can be renewed but only up to the maximum time limit of two years during which time every interruption of less than two weeks between contracts is also calculated. If the employee continues to work after the expiry of the two-year period, his or her labour contract will be converted by virtue of the law into a contract for an indefinite term. An employment contract must be in writing and must contain the following information: • • • • • • • • •

The name and seat of the employer; The name, the level of education and the residence of the employee; The date of commencement of work activities; The scope of work and the place of work including information on duration and schedule of working hours; Salary and other remuneration stemming from work; The duration of the annual vacation; The length of the contract if it is concluded for a definite term; Notice periods for the termination of the contract concluded for an indefinite term; and Work activities that require special conditions for performance, if such conditions exist.

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The employment contract must explicitly include the first four points from the above-mentioned list while the remainder of the content can be references to provisions of the Labour Law, other applicable laws, collective agreements and labour rules. The employment contract can also include a trial period of up to three months and which can be prolonged by mutual consent for a maximum period of three more months. Before the expiry of the trial period, both parties can terminate the contract with a seven-day notice. For the employee who does not perform his or her work in a satisfactory manner during the trial period, the employment will automatically terminate on the date of expiry of the trial period. In the absence of formal labour relations, the mutual rights, obligations and responsibilities of a director and his or her employer shall be arranged by a special agreement.

Working hours and rest time The full-time working hours of employees are determined to be 40 hours per week. The employee is allowed to have only one full-time work contract but this does not deprive him or her of the possibility of concluding a second employment contract with another employer of up to 20 hours per week maximum (half of the full-time engagement). This additional work can be agreed to without the consent of the primary employer and on the condition that the work shifts of the two contracts do not overlap and that the employee does not breach the competition clause. Generally, overtime work is limited to 10 hours per week although the employer can introduce an additional 10 hours of overtime more per week if the employee consents to such extra work, taking care that this does not exceed the total limit for overtime work of 150 hours per year. In cases when overtime work is introduced for a period longer than three consecutive weeks or an overall length of 10 weeks in one business year, the employer must inform the competent labour inspector. The employee is entitled to a 30-minute break within his or her working hours (calculated in his or her full-time work schedule, ie. a working day of eight hours including the said 30 minutes) and a 12-hour break between two working days and a 24-hour break weekly. The Labour Law and the General Collective Agreement provide that employees are entitled to an annual vacation of at least 18 working days. Employees can use their full annual vacation after six months of uninterrupted work; before the expiry of this minimum period employees are entitled to a proportional part of their annual vacation but it should not be less than one day for each month of completed work. The minimum annual vacation period of 18 working days increases by one day per year for each three completed years of service; other criteria can also be introduced by special or particular collective agreements and labour rules.

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Salary The evaluation of work in different sectors of the economy is agreed to amongst the parties to the respective collective agreements and it should be based on the lowest monthly salary that is determined by the parties to the General Collective Agreement (the Government, the Republic Labour Union and the Republic Union of Employers). The lowest salary is calculated annually and if the parties fail to determine its value for the following year the amount defined for the previous year would apply. The lowest net salary for 2006 and 2007 is 205 convertible marks (BAM; approximately €103). Currently, a decision on increasing the lowest net salary to BAM 250 (approximately €128) is expected to come into force from 1 January 2008. Gross salary is calculated by adding 42 per cent to the net salary on the basis of the contributions payable on personal earnings, plus 10 or 15 per cent of the tax payable (the higher tax rate is applicable when the salary equals four times the average salary in the country) on the basis that is formed by deducting the lowest net salary in the Republic of Srpska from the salary in question. The salary agreed to in the employment contract will be increased on the basis of the following criteria: • • • •

0.5 per cent for every completed year of working service; 35 per cent for night shift work; 35 per cent for overtime work; and 50 per cent for work on state holidays and other non-working days according to the law.

If overtime work is performed during night shifts, the salary will be increased on a cumulative basis. The salary can also be increased on the basis of the complexity of work performed, the achievements of the employee or the special difficult conditions of work, while the amount and method for such calculation can be defined in a special and/or particular collective agreement and the labour rules. An individual who performs the job of a director on the basis of a special agreement without establishing labour relations has the right to remuneration equivalent to a salary.

Termination of employment contract The employment contract may terminate automatically (expiration of period for which it was concluded, imprisonment of the employee for more than three months, loss of working capabilities of the employee, etc.) or by virtue of the will of the parties involved. The parties can mutually agree to terminate the employment contract and each party is also entitled to terminate it by giving written notice to the other. The notice period for the employee is 15 days at a minimum, unless otherwise regulated by the collective agreement, labour rules or the

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employment contract in question. The employer may terminate the employment contract in the following cases: • The employee has performed a severe breach of employment duties; • The employer is introducing changes to his or her organizational structure and surplus employees are identified; • The employee cannot meet his or her obligations under the employment contract in a satisfactory manner; • The employee has not returned to work after five days after the expiry of paid leave or dormant employment period; and The employer cannot terminate the employment contract with the employee on the grounds listed in the third bullet point above if the employee is pregnant, on maternity or parental leave, or is working shorter hours to care for a child. The notice period for the employer depends on the overall working service of the employee during his or her career and is applicable only if the contract is terminated for the reasons given in the second and third bullet points above. The notice period is calculated as follows: • • • •

Working service from two to 10 years – 30 days; Working service from 10 to 20 years – 45 days; Working service from 20 to 30 years – 75 days; and Working service above 30 years – 90 days.

In cases where the employee has committed a serious breach of his or her employment obligations or fails to return to work within the time period allowed, the termination of the contract is effective immediately upon notice of the employer. In the case of surplus employees, every employee that was employed for at least two years under an indefinite term employment contract is entitled to a severance payment that is calculated on the basis of the duration of working service with the employer in question and amounts to the following: • Working service from two to 10 years – 35 per cent of the employee’s average salary paid in the last three months before the termination of the contract for every year of working service; • Working service from 10 to 20 years – 40 per cent of the employee’s average salary for every year of working service; • Working service from 20 to 30 years – 45 per cent of the employee’s average salary for every year of working service; and • Working service above 30 years – 50 per cent of the employee’s average salary for every year of working service. Severance payments will also be disbursed to an employee who was employed for at least two years under an indefinite term employment

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contract and whose contract is terminated because the employee was unable to meet his or her employment obligations in a satisfactory manner. In this case, a lower payment will apply, amounting to one-third of the employee’s average salary for every year of working service performed with the employer in question.

Employment of foreign citizens In order to conclude an employment contract with an employer in the Republic of Srpska, a foreign citizen must obtain a residence permit and a work permit. A work permit will not be issued for a foreign citizen residing in Bosnia and Herzegovina on the basis of a tourist visa or a business visa, but only with a valid residence permit granted for performing work in the country. Work permits are issued for the period of the currently valid residence permit. Once the residence permit is granted for an indefinite term, the work permit can also be issued for an indefinite period of time. Foreign citizens who are employed to perform activities under foreign investment regulations (the Republic of Srpska’s authorities determine this to be a foreign citizen who personally invests in the country) and under authorized representatives of a humanitarian organization are not obliged to obtain a work permit.

Ban on discrimination The Labour Law as of 2007 prohibits direct and indirect employment discrimination while also securing more employee rights and an improvement in social dialogue. Furthermore, for the first time in the Republic of Srpska’s labour regulations, the notion of “mobbing” was introduced. The Labour Law bans mobbing, defined as a specific mode of behaviour at the working place in which, over a sustained period of time, one or more individuals systematically physically abuse or humiliate another individual with the aim of endangering of his/her reputation, human dignity and integrity.

Federation of Bosnia and Herzegovina The Labour Law of the Federation of Bosnia and Herzegovina (hereinafter referred to as the ‘FBiH Law’) was enacted in 1999 and amended twice, the last amendment being enacted in 2003.

Employment contracts Employment is established by concluding employment contracts between employers and employees. The FBiH Law defines two types of employees:

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those employed for an indefinite period and those employed for a fixed term. Therefore, there are two types of employment contract: indefinite and fixedterm. In general, the employment contract is concluded for an indefinite period of time, except in cases provided by FBiH Law: • • • • •

Seasonal jobs; Replacement of a temporarily absent employee; Engagement on a specific project; Temporary expansion in the volume of jobs; and Other cases as determined by the collective agreement.

An employment contract shall in particular contain the following information: • • • • • • • • • •

Name and seat of the employer; Name, surname, residence or domicile of the employee; Duration of the employment contract; Date of commencement of employment; Location of employment; Position in which an employee is employed and a brief job description; Length and schedule of working hours; Salaries, additions to salaries, benefits and periods of payment; Duration of annual leave; Dismissal notice period that both the employee and the employer should comply with; and • Other information related to the terms of employment as determined in the collective agreement. The FBiH Law does not provide for a management agreement to govern the position of manager within a company. According to the law, the manager is also considered an employee in the company and has the same legal protection.

Probation period The FBiH Law provides that the probation period should not exceed six months. When there is an agreement on a probationary period, both the employer and the employee may cancel the agreement prior to termination of the probationary period, provided that they comply with the seven-day notice period. The employer and the employee must agree on the duration of the probationary period. It shall depend on the job complexity, the grade of difficulty, the working conditions and so on; however, it must not exceed six months. Since the probationary period refers to a time during which an employee is supposed to show his or her work abilities, there is a question as to whether, in the event of an employee’s justified non-attendance, the

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probationary period may be extended by the same time as the time of such non-attendance. This is a reasonable problem and this question, together with the commencement of probation work, performance, and supervision and assessment of probation work should be regulated by a separate agreement on probation work. In this manner you will avoid regulation of these issues in the employment contract.

Working hours The full-time working hours of employees are determined to be 40 hours per week maximum. The employment contract may also be concluded for parttime work, and the employee enjoys all the rights deriving from the labour relations in the same manner as full-time employees, except for those rights that depend directly on the number of working hours. Where it is not possible, despite all reasonable measures taken, to protect an employee from detrimental influences in the performance of work, the number of working hours is reduced in proportion with the damage that the working conditions may impose on the health and working capabilities of the employee.

Overtime The Labour Law provides for employees’ overtime work in the event of a major or extraordinary increase in work, as well as in other similar cases of necessity, and in such cases, the employee shall be obliged to work overtime, up to 10 hours weekly. However, if the employee’s overtime work lasts longer than three consecutive weeks, or is more than 10 weeks during one calendar year, the employer must inform the work inspection authority. In any case, the employee will be entitled to an increase in salary of at least 30 per cent, which is provided in the Federation of Bosnia and Herzegovina by the General Collective Agreement. The above-mentioned regulation also refers to night shift work, which is defined as work done between 22:00 and 06:00 hours. When an employee works during this time interval, he or she shall be entitled to a salary increase of at least 30 per cent.

Salary Employee salaries are established through a collective agreement, regulations on labour and the employment contract. The collective agreement and the regulations on labour establish the lowest salary and the conditions and the manner of its adjustment. The collective agreement, regulations on labour and the employment contract stipulate the periods for payment of salaries, which cannot be less than once per month. Employees have the right to a higher salary due to increased difficulties in working conditions, for overtime and night shift work, as well as for work carried out on Sundays and holidays, or on other days established as non-working days by the law.

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Social security Each employer is bound to pay contributions for social, pension and health insurance, as well as for unemployment insurance for its employees. In the Federation of Bosnia and Herzegovina these contributions, based on an employee’s salary, comprise the following:

Contributions paid by the employer: 7.0 per cent pension insurance 4.0 per cent health insurance 0.5 per cent unemployment insurance

Contributions paid by the employees: 17.0 per cent pension insurance 13.0 per cent health insurance 2.0 per cent unemployment insurance

Maternity leave According to the FBiH Law, all women employees are entitled to maternity leave during pregnancy, childbirth and childcare for one year uninterrupted. Any woman may start this leave 28 days prior to the expected date of birth. This is, however, not obligatory and the woman can choose note to begin her leave as early as 28 days. In the event an employee decides to use the leave, she must submit a medical report certified by a competent doctor. A woman employee may, without any obstacles, take maternity leave for a shorter period than the one stipulated by the law, provided that it is not less than 42 days from the day of childbirth in the Federation of Bosnia and Herzegovina. During maternity leave, employees are entitled to their salaries.

Vacation allowance An employee who works full time has the right to a break of at least 30 minutes during the working day, a daily break of at least 12 continuous hours between two consecutive working days and a weekly break of at least 24 continuous hours. An employee may not be deprived of the right to these breaks. For each calendar year, the employees have the right to paid annual vacation of at least 18 working days. Under-aged persons have the right to vacation of at least 24 working days. An employee working in places where protection against detrimental influences is not possible, in spite of protective measures, has the right to annual vacation of at least 30 working days.

Termination of employment contract The employment contract may be terminated in the following cases: • On the death of the employee; • By mutual agreement between the employer and the employee;

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• When the employee turns 65 years of age and has 20 years of work, or 40 years of insurance; • If the employer and the employee come to another kind of arrangement; • On the day when a decision certifying loss of work capacity is delivered; • On completion of the period for which the temporary employment contract has been concluded; • If the employee is sentenced to imprisonment for a period longer than three months starting on the day when such sentence starts for the employee; • If a security, corrective or protective measure has been pronounced against the employee, on the day such measure starts to apply; and • In case of a competent court’s decision which results in a cessation of labour relations. An employer may terminate the employment contract of an employee with the required notice, if such dismissal is justified due to economic, technical or organizational reasons or if the employee cannot perform his or her obligations under the contract. However, terminating an employee’s contract for economic, technical or organizational reasons is only possible where there is no reasonable prospect of providing the employee with an alternative job, or to educate and prepare the employee for a different workplace. The employer may terminate the employment contract without the required notice period, when the employee is guilty of a serious offence, or of a serious violation of work obligations stated in the employment contract, these being of such a nature that it would not be reasonable to expect the employer to continue the labour relation. In case of minor offences, or minor violations of work obligations of the employment contract, the employment contract may not be cancelled without giving previous notice to the employee. An employee may terminate the employment contract without previous notice if the employer is guilty of an infraction or violation of the obligations comprising the employment contract, these being of such a nature that it would not be reasonable to expect the employee to continue the labour relation.

End-of-service payment The end-of-service payment is a type of compensation paid by the employer to the employee under certain circumstances provided by law, namely:

For cancellation of an employment contract by the employer not based on employee liability The FBiH Labour Law (Section 100) binds the employers to end-of-service payments to employees working under an indefinite term contract and the labour relation is terminated by the employer, provided that the employee has at least two years’ uninterrupted work, and that the termination of the employment contract is not due to a breach of work duties by the employee.

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The end-of-service payment amount is set by the General Collective Agreement for the FBiH territory (FBiH Official Gazette 54/05). The General Collective Agreement for the territory of FBiH and the Labour Law of FBiH provide that the end-of-service payment cannot be less than one-third of the average monthly salary paid to the employee during the last three months prior to termination of the employment contract for each year of work with that employer.

Due to pension The FBiH Collective Agreement provides that employees are entitled to endof-service payment due to pension amounting to a minimum of three average monthly salaries in FBiH according to information published by the FBiH Institute of Statistics. At present the average salary in FBiH is BAM 640.

Trade union/council of employees The law provides that in cases when the employer has at least 15 employees, the employees have the right to establish a council of employees that shall represent them before the employer, with the purpose of protecting employee rights and interests. The council of employees is created upon the request of at least 20 per cent of employees or of the trade union. If the council of employees has not been established in a company, the trade union, pursuant to the law, carries out the obligations and competences of the council of employees.

General Collective Agreement All employers and employees in the Federation of Bosnia and Herzegovina are obliged to respect the Labour Law of the Federation of Bosnia and Herzegovina (Official Gazette of the Federation of Bosnia and Herzegovina, Nos. 43/99, 32/00). The General Collective Agreement (Official Gazette of the Federation of Bosnia and Herzegovina, No. 54/05) is also binding on all employers in the territory of Bosnia and Herzegovina. Still, the Labour Law of Bosnia and Herzegovina anticipates that the collective agreement binds only contractual parties and that only the competent ministry may widen its application to other entities, which has not been done thus far. That is why, and in accordance with the very hierarchy of legal acts, the advantage is on the side of the law.

Employment of foreign citizens The manner and the conditions for employing foreign citizens are stipulated by the Law on Employment of Foreign Persons (Official Gazette of the Federation of Bosnia and Herzegovina, No. 8/1999). The above-mentioned law provides that a foreign person (a physical person who is not a citizen of

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Bosnia and Herzegovina) may conclude an employment contract or an agreement on performing temporary and sporadic jobs pursuant to his or her work permit, as long as he or she complies with the law and the general by-laws of the employer. The approval for employing foreigners is issued by the Federal Employment Institute, upon the recommendation of the employment department. The work permit is issued to a foreign person under the condition that he or she has the approval for permanent residence or temporary stay in the Federation of Bosnia and Herzegovina (residence permit) and that the employment department states that there are no other Bosnian citizens who match the employer’s criteria for filling full-time, temporary or sporadic jobs. The work permit is issued for a limited period, up to one year, although if the foreign person has a permanent residence permit in the Federation of Bosnia and Herzegovina, the work permit may be issued for an unlimited period.

Brcko District The Labour Law of Brcko District (hereinafter referred to as the ‘Brcko Law’) was enacted in 2000 and amended on a number of occasions, the last amendment being in 2007. The basic rules are similar to those contained in the Labour Law of the Republic of Srpska and the FBiH Law, but some considerable differences do exist. For example, the probationary period under the Brcko Law can last up to 12 months; the mandatory period for termination notice is the same for the employer and for the employee and is regulated to at least 14 days prior to termination of the contract; overtime work can be introduced but is limited to 12 hours per week while the employee can agree to work overtime up to 10 hours per week in addition and on the condition that the maximum overtime engagement should not exceed 22 hours weekly.

3.4

Bosnia and Herzegovina: Dispute Resolution Karanovic & Nikolic and Branko Maric´ Law Office

Republic of Srpska Regulatory framework Civil proceedings before the courts of the Republic of Srpska are governed by the Law on Civil Procedure of 2003 as amended, and the Law on Enforcement Procedure of 2003 as amended. In addition, the Law on Courts of the Republic of Srpska of 2004 as amended, the Republic of Srpska Constitution of 1992 with numerous amendments and the Constitution of Bosnia and Herzegovina represent the general legal framework for the court system of this Bosnian entity. Further relevant sources of regulation are the Law on Settlement of Conflicts of Laws enacted in 1982 and valid in the Republic of Srpska as part of the legal system of the former Socialist Federal Republic of Yugoslavia, and the Law on Mediation Procedure of 2004, published in the Official Gazette of the Republic of Srpska in 2007. The Law on the Chamber of Commerce of the Republic of Srpska of 1992 as amended and the Law on the Foreign Trade Chamber of Commerce of Bosnia and Herzegovina of 2001 contain provisions on arbitral tribunals that are organized to operate with their support. The Rules on Foreign Trade Arbitral Tribunals were enacted in 1998 and published in the bulletin of the Chamber of Commerce of the Republic of Srpska, while corresponding rules for arbitral tribunal organized within the Foreign Trade Chamber of Commerce of Bosnia and Herzegovina were enacted in 2003 and published in the Official Gazette of Bosnia and Herzegovina. Finally, the 1985 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards regulates the enforcement procedure for foreign arbitral awards in the Republic of Srpska, as well as in Bosnia and Herzegovina as a whole. This overview will elaborate only on court and arbitral competences relevant to business operations and will not include the criminal jurisdiction of courts or their jurisdictions in other unrelated areas.

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Practice Court system In the Republic of Srpska three courts exist: • Basic courts; • County courts; and • the Supreme Court. Basic courts are organized to cover an area of one or more municipalities, while a county court is has jurisdiction over two or more basic courts. Presently, there are 19 basic courts and five county courts in the Republic of Srpska. The Supreme Court is the highest court, with its official seat in Banja Luka. As a general rule, every court operates in the place of its official seat, but basic courts can operate through remote departments when explicitly defined by law (eg. the Gradiska Basic Court has a remote department in the town of Srbac). County courts and the Supreme Court are also entitled to operate outside their official seats for reasons of efficiency or for any another valid reason. Finally, courts are also entitled to organize socalled court days in remote areas outside the place of their official seat or of their remote department. The Republic of Srpska does not recognize specialized commercial courts. Instead, special commercial divisions are established within five basic courts based in Banja Luka, Bijeljina, Doboj, Trebinje and Sokolac, whilst the listed courts are competent to act in commercial cases for the entire area of the corresponding county court. The same court is competent to register legal entities and entrepreneurs when an entrepreneur is obliged to register with the court instead of with a municipality authority. Basic courts are competent to resolve all civil matters, while those with special commercial divisions are entitled to also handle all commercial issues such as disputes arising from various types of business operations, bankruptcy proceedings, disputes arising from intellectual property rights, maritime and air transportation issues, monopoly and competition issues and so on. A basic court also conducts enforcement proceedings and keeps land registers and registers of companies and entrepreneurs. County courts in the first instance have jurisdiction mainly in contentious administrative matters and in the protection of individual rights guaranteed by the constitution when no other court protection is available. In addition, county courts also act in cases of recognition of foreign courts and arbitral decisions. County courts have jurisdiction in the second instance to decide on appeals lodged against the basic court’s decisions as well as to decide on other regular or outstanding legal remedies as provided by the law. The Supreme Court of the Republic of Srpska is a court of the second or third instance. In the second instance it decides on appeals filed against

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county court rulings and in the third instance it decides on outstanding legal remedies to lower court rulings, such as a revision. The Banja Luka-based Constitutional Court of the Republic of Srpska is also part of the court system but its operations are not directly relevant to commercial issues. The Constitutional Court of Bosnia and Herzegovina, based in Sarajevo, in addition to having classical constitutional jurisdiction, has the competence to act as a final court of appeal, as regulated by the Constitution of Bosnia and Herzegovina. As such, this court is authorized to overrule any decision of any court in Bosnia and Herzegovina when it recognizes a breach of rights guaranteed by the Constitution of Bosnia and Herzegovina or by the European Convention on Human Rights, which forms an integral part of the legal system of the country. It is competent to react even when a court ruling has not been rendered at all and when actions, such as a breach of the right to a fair and public hearing within a reasonable time, are evidenced. In this case the Constitutional Court of Bosnia and Herzegovina issues an order to the competent court to render a decision without further delay.

Litigation The litigation proceeding is initiated by filing a lawsuit in the competent court. The lawsuit shall include the following mandatory content: • • • • • •

Basis for establishing the competence of the court in question; Determined claim; Facts of the case; Evidences that prove the facts of the case; Value of the case; and Other data that every written submission must include (eg. names and addresses of the parties in the litigation).

In addition, the plaintiff may also state the legal basis of the claim in the lawsuit. The court will decide on the lawsuit within the limits set by the claim but it is not bound by the determination of the legal basis of the claim if contained therein. During a preliminary examination of the lawsuit, the court determines whether the lawsuit contains all the prescribed prerequisites and whether some of the reasons for a rejection explicitly defined in the Law on Civil Procedure exist (eg. the case is not within the court’s jurisdiction but is under the competence of other state authorities; or an irrevocable court ruling has already been rendered). In addition, if the court finds that the case falls under the competence of another court it will announce its incompetence and transfer the lawsuit to the competent court. On the basis of the preliminary examination, the court may decide either to reject the lawsuit as inadmissible with no examination of the merits of the case or to deliver a lawsuit to the defendant for his or her reply.

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The general rule is that the first-instance procedure will be finalized through two hearings – the first is a preliminary hearing and the second is the main hearing. At the preliminary hearing, the parties are obliged to submit for consideration all the evidence and to present all the facts of the case and documents/objects they intend to use to prove their arguments. After deciding on the parties’ objections raised at the preliminary hearing, the court can either reject the lawsuit as inadmissible or arrange for the main hearing to be held in the following 30 days, as defined by the Law on Civil Procedure. During the preliminary hearing, the court will decide which evidence will be examined at the main hearing. The main hearing is usually public and it is the focal point of the civil procedure where all relevant facts of the case are determined. After completing the main hearing, the court will inform the parties present at the hearing on when the decision will be issued and the parties are expected to obtain the court’s written ruling from the premises of the court once it is ready. Only in particular cases, such as when a party was not regularly informed about the issuance of the ruling, will the court decision be transmitted by post. In the case where both parties were regularly informed, the period for lodging the appeal is counted from the moment of issuance of the court decision irrespective of the moment when the parties were in possession of the decision in question. If a party is not satisfied with the court decision it has the right to appeal to the county court, usually within 30 days (eg. 15 days in disputes arising from promissory notes and cheques and in labour disputes). The county court has five possible solutions when deciding on the appeal: 1. 2. 3. 4.

Reject the appeal as inadmissible; Confirm the first-instance decision; Modify the first-instance decision; Annul the first-instance decision and instruct the basic court to re-hear the case and reach a new verdict; 5. Annul the first-instance decision and reject the lawsuit. After the court ruling becomes irrevocable the losing party usually has up to 30 days (eg. 15 days in disputes arising from promissory notes and cheques and in labour disputes) to voluntarily comply with the court’s orders. If the losing party does not comply, the winning party must initiate an enforcement procedure through which the forced collection of monetary claim may be realized by the following means: • Sale of real estate; • Seizure of movable property; • Seizure of claims of the debtor, including but not limited to the removal of funds from his or her bank account; • Seizure of other property of the debtor, including but not limited to registered patents, shares in joint stock or limited liability companies.

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Alternative dispute resolution Mediation The court may instruct parties to submit their dispute to a special procedure of mediation or parties may decide without any court intervention to submit themselves to this alternative dispute resolution process that is regulated by the Law on Mediation Procedure. The parties are free to agree on mediation before the litigation has even started or during the first-instance court procedure until the moment when the main hearing is completed. The mediation procedure will start upon signing of the written agreement between the parties and the mediator from the official list of the Association of Intermediaries of Bosnia and Herzegovina. If the court process is pending, the court will postpone the hearing for a maximum of 30 days, although the mediation procedure can be terminated by each party at any moment without any limitations. If the parties reach a final resolution via mediation, a written agreement on the compromise will be signed and will represent an executive document suitable for enforcement.

Arbitration The Law on Civil Procedure provides the parties with the option to submit their dispute to an arbitral tribunal when such dispute arises from rights and duties that they can freely dispose with. The agreement on arbitration shall be in writing and can set an arbitrational competence for a specific dispute or for a group of future disputes that may arise from certain business relations. The arbitration agreement can be formulated as a side agreement to the principal one or the arbitration clause may be incorporated into the principal agreement, which is usually the case. Arbitral tribunals in Bosnia and Herzegovina are competent to resolve disputes between domestic legal entities as well as disputes with an international element. In the Republic of Srpska, the arbitral tribunal has its seat in Banja Luka and is organized under the auspices of the Chamber of Commerce of the Republic of Srpska. The rules that govern the arbitral procedure with this tribunal, however, state that only disputes with an international element can be submitted for resolution. On the other hand, the Law on Civil Procedure provides that parties are free to refer their disputes to arbitration irrespective of the nature of the relationship, ie. domestic or international; thus we can expect that the Chamber of Commerce of the Republic of Srpska will amend its arbitration rules accordingly. The arbitral tribunal is also constituted under the Foreign Trade Chamber of Commerce of Bosnia and Herzegovina located in Sarajevo, and through its internal rules it explicitly states that parties can submit their dispute to its competence in both domestic and international business relations. Once rendered, an arbitration award is generally considered to be irrevocable and binding on the parties. This regulation is contained in the

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internal rules of both of the above-mentioned arbitrations, while the Law on Civil Procedure provides that parties can agree on the possibility of challenging an arbitral award in front of the higher-instance arbitral tribunal. Domestic arbitral awards will be directly enforceable in the domestic courts while foreign arbitral awards are required to undergo a prior procedure for recognition by the competent county court. Finally, arbitration may also have a mediation function if parties refer to its competence for the purpose of reconciliation of their dispute. This process is completely separated from an arbitral process for dispute resolution and can be triggered even without an existing arbitration agreement between the parties. However, by submitting themselves to this mediation process, the parties do not undertake any obligation to submit themselves to later arbitral competence for dispute resolution.

Federation of Bosnia and Herzegovina The Law on Civil Procedure in the Federation of Bosnia and Herzegovina (hereinafter referred to as the ‘FBiH Law’) was enacted in 2003 and amended two times, the last amendment being in 2006. The FBiH Law has been passed with almost the same text as the Law on Civil Procedure of the Republic of Srpska and no significant differences exist. However, the court system of the Federation of Bosnia and Herzegovina is slightly different from that of the Republic of Srpska due to the differences in the constitutional organization of this part of the country. In the Federation of Bosnia and Herzegovina three court instances exist: • Municipal courts; • Cantonal courts; and • The Supreme Court. Municipal courts are organized to cover the area of one or more municipalities within one canton of the Federation of Bosnia and Herzegovina, while a cantonal court is competent for the area of the whole canton (there are 10 cantonal courts in this entity). The competences of municipal courts are the same as the competences of the basic courts in the Republic of Srpska, while the competences of cantonal courts correspond to those of county courts in the Republic of Srpska. Special commercial divisions are established within 10 municipal courts that are competent to act in commercial cases for the whole area of the corresponding cantonal court. The Supreme Court of the Federation of Bosnia and Herzegovina performs the following functions: • Decides on regular legal remedies against decisions of cantonal courts if provided by law;

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• Decides on extraordinary legal remedies against enforceable court decisions if provided by law; • Decides on legal remedies against the decisions of their councils unless otherwise stipulated by law; • Resolves competence disputes between cantonal and municipal courts from different cantons, unless otherwise stipulated by law; • Decides on the transfer of jurisdiction from one court to another when provided by law; • Executes other activities stipulated by law, except those determined as within the competence of the Constitutional Court. The Supreme Court may also have core competences if provided by federal laws.

Alternative dispute resolution Mediation As the alternative dispute resolution process is regulated by the Law on Mediation Procedure, applicable to the whole state of Bosnia and Herzegovina, the principles stated for the Republic of Srpska apply for the Federation of Bosnia and Herzegovina as well. The Law on Transfer of Mediation Activities to the Association of Intermediaries provides for the transfer of the mediation activities to the Intermediaries’ Association in Bosnia and Herzegovina, which is the only Association of this kind currently operating in Bosnia and Herzegovina, although the Law leaves the option of transfer of mediation activities to another association of intermediaries registered in the whole territory of Bosnia and Herzegovina. The Association of Intermediaries, after the said Law entered into force, passed a series of internal rules which regulate more specifically the mediation segment, namely: Regulations on Register of Intermediaries; Regulations on the List of Intermediaries, Regulations on Consigning to Mediation, Regulations on Intermediary’s Liability for Damage Incurred during Mediation, Regulations on Disciplinary Liability of the Intermediaries, Regulations on Retributions and Compensation of Mediation Costs, Regulations on Training Programme for Intermediaries, and the Intermediaries’ Code of Ethics. The Regulations on Consigning to Mediation provides that in the event that during the before or after court proceedings, the parties decide to resolve the dispute by mediation, they must file a written request on the same to the administrative department of the Association of Intermediaries so this department, after receiving the relevant suggestions of the parties, can appoint the intermediaries and notify the parties on the same, and set the date of the mediation. Prior to mediation, the Association shall deliver to the parties the Mediation Contract and the deposit invoice to be paid by the parties before the procedure commences. According to the provisions of

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the Regulations on Retributions and Compensation of Mediation Costs, the intermediaries’ retributions are calculated per hour of the mediation meeting, and the amount per hour is 100 convertible marks (BAM; €50), provided that the mediation meeting lasts more than four hours. The mediation procedure can only be initiated by one of the parties in the dispute or a third party – a legal or physical person interested in the procedure – by submitting a request to the Association. After that, the Association will contact the other party to acquire its consent to mediation. If such consent is not obtained, the Association shall notify the applicant, which shall be liable to pay BAM 50 (€25) for the request regardless of whether the mediation took place or not.

Arbitration The Law on Civil Procedure of the Federation of Bosnia and Herzegovina provides for the possibility of establishing so-called ad hoc arbitrations. The parties may agree to submit the resolution of a dispute to arbitration, in which case they should conclude an arbitration agreement. The arbitration agreement may be concluded with respect to a certain dispute or with respect to future disputes that may arise out of a specific legal relation. The arbitration agreement is valid only if made in writing and signed by all parties. This agreement may provide for the number of arbitrators, which must be an odd number. If the number of arbitrators is not stipulated by the agreement, each party appoints one arbitrator, and the arbitrators choose the chairperson. In case the arbitrator is not appointed in due time, and the agreement does not stipulate otherwise, the arbitrator shall be appointed by the court on proposal of the parties. Any party may file a lawsuit and demand that the court rule the termination of the arbitration agreement: • If the parties are unable to reach an agreement on the election of arbitrators to be appointed jointly; • If the person appointed as arbitrator in the arbitration agreement will not or cannot perform this duty. The request is heard by the court that would be competent for the dispute in the first instance in case the arbitration agreement has not been concluded, and this court is obliged to call all parties to the hearing where the request shall be discussed. Unless the parties have agreed otherwise, the arbitrators shall provide for procedure arbitration. The arbitration may not use enforcement measures or pronounce penalties. The arbitration may adopt a sentence based on law only if the parties give it such authorization. There is currently no institutional arbitration in the Federation of Bosnia and Herzegovina. For now, the arbitrations in the Federation of Bosnia and Herzegovina are rather unusual, although there is a need for such proceedings since the courts are often slow and overburdened.

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Brcko District The clean version of the Law on Civil Procedure in Brcko District (hereinafter referred to as the ‘Brcko Law’) of 2000 as amended was published in the Official Gazette of Brcko District in 2006. Brcko Law is different from the laws of the Republic of Srpska and of the Federation of Bosnia and Herzegovina and the significant discrepancies that exist are listed herein. For example, under the Brcko Law it is not mandatory to include in the lawsuit the basis for establishing the competence of the court in question and the value of the case has to be entered only in certain situations regulated therein; every court decision shall be distributed to the parties in written form; the court is entitled to issue a so-called interim ruling while this opportunity is not provided in the Republic of Srpska legislation; the period for lodging an appeal is 15 days; Brcko Law has special rules for commercial proceedings while this is not the case in the Republic of Srpska and in the Federation of Bosnia and Herzegovina. The court system of Brcko District is also different from that established in the rest of the country. In Brcko District two courts exist: • Basic court; and • Court of appeal. The basic court is competent to resolve all disputes in the first instance, while the court of appeal is the exclusive court for higher-instance jurisdiction and decides on appeals lodged against basic court decisions, as well as on outstanding legal remedies.

3.5

Bosnia and Herzegovina: Intellectual Property Law Karanovic & Nikolic and Branko Maric´ Law Office

Introduction The current legal regime of Bosnia and Herzegovina regarding intellectual property consists of two laws and five by-laws that regulate both industrial property law and copyright and related rights law (the regulations). The regulations came into force in 2002. Furthermore, Bosnia and Herzegovina has ratified the main conventions relating to intellectual property protection.

Regulatory framework The following laws regulate intellectual property rights in Bosnia and Herzegovina: • Law on Copyright and Related Rights (2002); and • Law on Industrial Property (2002), governing trademarks, patents, industrial design and geographical indications Although the Law on Patents and Distinction Marks (1993) (the Old Law) ceased to be valid as of the moment when the current law, ie. the Law on Industrial Property, came into force, the provisions of the Old Law governing inventions, ie. new forms of figure, picture or drawing created during employment, and technical improvements are still valid. The following by-laws regulate intellectual property rights in Bosnia and Herzegovina: • • • • •

Regulation on Trademark (2002); Regulation on Geographical Indications (2002); Regulation on Patent Recognition Proceedings (2002); Regulation on Industrial Design (2002); and Regulation on Expert Criteria for Performing the Activity of Copyright and Related Rights Enforcement (2002).

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The following conventions relating to intellectual property protection have been ratified by Bosnia and Herzegovina: • The convention establishing the World Intellectual Property Organization (the WIPO Convention) • The Paris Convention for Industrial Property Protection – the Paris Union (the Paris Convention); • The Madrid Agreement concerning the International Registration of Trademarks – the Madrid Union (the Madrid Convention); • The Nice Agreement concerning the International Classification of Goods and Services for the Purpose of Trademarks Registration (the Nice Agreement); • The Locarno Agreement establishing the International Classification for Industrial Design (the Locarno Agreement); • The Bern Convention for the Protection of Literary and Artistic Works – the Bern Union; • The Patent Cooperation Treaty (the PCT); • The Brussels Convention relating to the Distribution of ProgrammeCarrying Signals Transmitted by Satellites (the Satellites Convention); • The Washington Treaty on Intellectual Property in Respect of Integrated Circuits; and • The Trademark Law Treaty.

State authority The state authority competent in dealing with all intellectual property rights is the Institute for Intellectual Property (the Institute). The Institute maintains the registries for each of the industrial property rights as well as the registry of the representatives authorized for industrial property protection. The Institute publishes the Official Journal in which the most important particulars of the industrial property rights entered in the registries are stated. Appeals against registration decisions made by the Institute may be lodged within 15 days with the Institute’s Commission for Appeals. No appeals can be brought against the decisions of the Commission before the courts of Bosnia and Herzegovina, except where the action arises from an administrative dispute, although in order to initiate such an action, the claim must be filed with the Institute. Foreign natural persons and legal entities in Bosnia and Herzegovina enjoy the same rights with respect to industrial property protection as domestic natural persons and legal entities if such rights derive from international agreements or from the principle of reciprocity. However, all foreign natural persons and legal entities may obtain industrial property rights in the proceedings before the Institute only if they are represented by an authorized representative, ie. trademark or patent agents registered with the Institute.

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Copyright and related rights An author enjoys moral and pecuniary rights with regard to his or her work of authorship from the moment of its creation and there are no formal requirements for obtaining copyright. Therefore, there is no need to file an application for registration or deposition of the work of authorship in order to obtain copyright. The author is exclusively entitled to exploitation of his or her work, as well as that pertaining to moral rights. However, he or she may assign the right of exploitation to third persons, both natural persons and legal entities, by an authorship agreement. Furthermore, the rights can be assigned by inheritance. Copyright lasts throughout the lifetime of the author and continues 70 years from the first day of the year following the death of the author; in the case of joint authorship, the term begins from the date of death of the last of the joint authors. In the case of anonymous authors and works under pseudonym, ie. in the case when a legal entity is the holder of pecuniary rights with regard to the work of authorship, the term begins from the date of publication. Performer-related rights last for 50 years from the end of the year during which a performance was recorded. If a performance was not recorded, the term begins from the end of the year when it was performed. Phonogram producer-related rights last for 50 years from the end of the year during which a phonogram was broadcast and if a phonogram was not broadcast from the end of year during which it was recorded. Radio broadcasting organization-related rights last for 50 years from the end of the year of broadcasting. Foreign authors in Bosnia and Herzegovina enjoy the same rights with respect to copyright as domestic authors, provided that they are residents of Bosnia and Herzegovina, or if they do not have a residence in Bosnia and Herzegovina, provided that their works of authorship have been published in Bosnia and Herzegovina for the first time ever or, at least, if their works have been published for the first time in any other country, provided that their publication in Bosnia and Herzegovina was within 30 days from the date of their first ever publication. If any of the stated requirements is not fulfilled, foreign authors will still enjoy the same rights as domestic authors if such rights derive from international agreements or from the principle of reciprocity. In the event of a copyright or related right infringement, the holder of the infringed right may file an action through which he or she may particularly request the following: termination of the infringement, destruction or alteration of the infringing objects, destruction or alteration of the tools and equipment used to manufacture the infringing objects, reimbursement of pecuniary damages, publication of the court decision at the expense of the defendant. In addition, if the infringement was intentional or arose out of negligence, the plaintiff may request from the defendant compensation amounting to up to two times the contractual or usual licence fee he or she

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would have obtained if the work had been used lawfully, irrespective of whether the infringement has caused any pecuniary damages. Furthermore, the court is entitled to order fair money compensation to an author or a performer due to infringement of their moral rights, irrespective of whether pecuniary damages reimbursement has already been ordered or whether any pecuniary damages have resulted at all from the infringement. At the request of a holder of the right who credibly asserts that his or her copyright or related right has been infringed on or will be infringed on, the court may order a provisional measure (such as temporary seizure or removal of the objects from the market or when the means of infringement were created as a consequence of the infringement or if there is evidence of the infringement). The procedure initiated by request of the right holder must be acted upon immediately. At the request of a holder of the right who credibly asserts that his or her right would be infringed by the import or export of certain goods, the customs authority may order such goods to be retained; in that case, a holder of the right and a person entitled to exploit such goods should be notified about it without delay. If no objection is filed within 14 days from the date when the notification was received, the customs authority will order seizure of temporary retained goods. The Law on Copyright and Related Rights regulates responsibility for criminal offences (monetary fines or imprisonment up to five years) and petty offences (monetary fines).

Trademark In order to obtain a trademark for the territory of Bosnia and Herzegovina, an application should be filed with the Institute for Intellectual Property. An application should include the following: • Name and address/registered seat of the natural or legal person who has filed the application (the Applicant), including information about the representative if the application was filed by a representative; • The mark’s appearance, including information on whether the application relates to an individual or collective trademark, whether the mark is verbal or graphical, three-dimensional, whether it should be protected as a black–white or colour mark (if it should be protected as a colour mark, the relevant colours or colour combination should also be indicated); • List of the goods and/or services to which the mark relates, in accordance with the international classification of the goods and services established by the Nice Agreement; and • Information on the priority right if it was claimed. Proof of payment of the filing fee and procedural costs, as well as the power of attorney (if the application was filed by the representative), should

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be submitted together with the application. The application form should be signed and sealed by the Applicant or by his or her representative if the application was filed by the representative. After initiation of the trademark registration proceedings by filing an application, the Institute will examine whether an application contains all the above-stated information (formal examination) and, if so, it will examine whether the mark that is the subject matter of the application fulfils the requirements to be registered as a trademark. If all requirements are fulfilled, the Institute will issue the decision on trademark recognition for the territory of Bosnia and Herzegovina, provided that the applicant has paid the prescribed fees and the procedural costs. Otherwise, the Institute will reject the application. After entering the recognized trademark in the appropriate register, the Institute will issue a Certificate on Trademark provided that the prescribed fee has been paid. The trademark holder has the exclusive right to use the trademark in the market for marking all goods and/or services for which the trademark has been recognized. Additionally, he or she is also entitled to use the sign ‘R’ or any other sign in order to inform other participants in the market that the mark is a registered trademark. A trademark lasts for 10 years from the application filing date and may be renewed for an indefinite period of time. If a trademark ceases to be valid due to non-payment of the prescribed fee and the procedural costs, the trademark holder has the exclusive right to file a request for new registration of the same trademark in his or her name, within one year from the day when the trademark ceased to be valid. An application for international registration of the mark in proceedings before the WIPO can also be filed with the Institute, which will forward it to WIPO. The decision on trademark registration and/or an international registration of a trademark in Bosnia and Herzegovina may be annulled, in whole or for some goods and/or services, if it is determined that at the time of issuance of the decision, the requirements for trademark registration had not been met or if a trademark has, after the decision on trademark registration has been passed, become a generic term for the goods and/or services for which it was registered. The annulment is possible at any time during the term of protection, either ex officio or at the request of an interested party or the state prosecutor. The request for annulment should be accompanied by appropriate evidence. If the person requesting the annulment withdraws the request during the proceedings, the Institute may continue the proceedings ex officio or at the request of the trademark holder.

Patent In order to obtain a patent for the territory of Bosnia and Herzegovina, an application should be filed with the Institute for Intellectual Property. An application should include the following:

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• Request for grant of a patent (including particulars of the applicant, particulars of the inventor or a statement to the effect that the inventor does not wish to be mentioned in the application, and the title of the invention clearly reflecting its essence); • Description of the invention; • Patent claims; • Drawings referred to in the description of the invention and patent claims, if necessary; and • An abstract (setting out the essential content of the invention and which exclusively serves to provide technical information). Proof of payment of the filing fee and procedural costs, as well as the power of attorney (if the application was filed by a representative), should be submitted together with the application. The application form should be signed and sealed by the applicant or by his or her representative if the application was filed by the representative. A separate patent application should be filed for each individual invention. However, a single application may be filed for a number of inventions if the inventions are mutually linked so as to form a single general inventive concept. At the applicant’s request, the patent application may be altered to become an application for design registration. This alteration is possible throughout the proceedings, ie. until the Institute passes a decision on the application. The converted application retains the filing date of the patent application. The conditions for patent protection are novelty, inventive step and industrial applicability. Exceptions to patentability are the following inventions: • Inventions where the publication or the commercial use of which would be contrary to public order or morality; and • Inventions concerning methods for treatment by surgery or diagnostic methods or therapy practised directly on the human or animal body, except products or substances and compositions for use in any of these methods. In addition, the following creations are not considered inventions and, therefore, cannot be patented: • Discoveries, scientific theories and mathematical methods; • Aesthetic creations; • Schemes, rules and methods for performing mental acts, playing games or doing business; • Computer programs; and • Presentation of information defined by the content of the information. After the Institute receives the application, it will examine whether the application complies with all requirements. If while carrying out the

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examination of the application the Institute identifies deficiencies, the Institute will request the applicant to remedy them within 90 days; otherwise, the Institute will reject the application. After examination of the application, provided that there are no deficiencies, and if fees and procedural costs for publication of the application have been paid, the application will be published in the Official Journal upon the expiry of 18 months from the filing date of the application or from the claimed date of priority. At the request of the applicant, the patent application may be published earlier, but not before the expiry of 90 days from the filing date. After publication of the application, the Institute issues a decision by which it grants the patent provided that the applicant has paid the expenses for issuing Patent Certificate and Patent Specification. The granted patent will then be entered in the Register. Upon the expiry of the ninth year after application filing, the patent owner or the holder of the exclusive right over the patent is obliged to submit to the Institute evidence that the patented invention fulfils all the conditions for patent protection; otherwise, the patent will cease to be valid. On the basis of the submitted evidence, the Institute will issue a decision by which it determines that the conditions for patent protection are fulfilled (completely or partially; if these conditions are fulfilled partially, the Institute will accordingly limit the further term of patent claims) or a decision by which prior registration of the patent will be annulled. The patent holder, as well as the patent applicant, has the exclusive right to prevent any third party, without consent, from: • making, using, offering for sale, placing on the market any product made by means of the protected invention or from importing any product for such purposes; or • using, offering for sale, placing on the market or importing for such purposes a product directly obtained by the patented process. However, there are certain limitations to the exclusive right conferred by patent, ie. certain acts that a patent holder cannot forbid to third parties (eg. acts done with regard to private and non-commercial use of a patented invention). Furthermore, if a protected product is placed on the market in Bosnia and Herzegovina by the patent owner or with his or her consent, the person coming into possession of such product may use and dispose of it freely (exhaustion of patent owner rights). In addition, a patent has no effect against a person acting in good faith who has, before the date of priority, already started exploiting a protected invention in production in Bosnia and Herzegovina, or has made all necessary preparations to initiate such use (right of prior user); however, the person is entitled to continue exploiting the invention exclusively for production purposes, in his or her own plant or in the plant of another person for his or her own needs, and cannot assign the right to exploitation of the invention to another person, except together

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with the enterprise or part of the enterprise in which the preparation for use or the use of the invention has taken place. A patent, or a shortened term patent, is acquired by entering it in the Register. A patent lasts for 20 years from the application filing date, or a shortened term patent lasts 10 years from the application filing date, provided that the prescribed fees for maintaining the right are paid. A patent can be extended for up to five years upon the expiry of 20 years, but only in exceptional cases: if a state of war or similar extraordinary circumstances have been declared, prolongation lasts as long as such circumstances last; if the subject matter of a patent is a product or a process that requires, prior to initiation of its commercial use, certain legally regulated procedures for issuing an approval, prolongation lasts as long as such procedure lasts. The holder of a patent, or of a shortened term patent, may relinquish his or her right by filing a written statement with the Institute, in which case the right will cease to be valid on the first day after such statement was submitted. The decision on patent, or on a shortened term patent, registration may be annulled at any time during the term of protection if it is determined that, at the time of issuance of the decision, the requirements for patent registration have not been met. The annulment procedure may be initiated ex officio or at the request of an interested party or the state prosecutor. If the person requesting the annulment withdraws the request during the proceedings, the Institute may continue the proceedings ex officio. If the applicant or the patent holder supplements or enhances the invention that is the subject matter of the original application or of the basic patent, he or she may file an application for a patent of addition to cover the supplements or enhancements, within 18 months from the date when the basic patent application was filed. A patent of addition may not be obtained with regard to a shortened term patent. If the applicant relinquishes his or her basic patent right, the proceedings concerning the application for the patent of addition will be terminated. At the request of the basic patent holder, the court will determine that the patent of addition becomes the basic patent, provided that the decision on the basic patent registration was annulled or the basic patent ceased to be valid; this request may be filed within three months from the date when the decision on the basic patent registration was annulled, ie. from the date when the basic patent ceased to be valid. Although the Institute is a state authority competent to register patents, the applications of domestic natural persons and legal entities concerning the inventions of significant value to the defence or security of the country (secret inventions) should be submitted to the competent Internal Affairs Ministries (the Ministries); if the Ministries establish that the subject matter of a patent application filed with the Ministries is not a secret invention, the application will be forwarded to the Institute, which will continue the proceedings initiated by its filing. Secret inventions can be exploited exclusively by the Ministries, and the inventor of the patented

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secret invention is entitled to remuneration irrespective of how much of the patented secret invention is actually used with regard to defence or security of the country. A patent for secret invention shall not be published. A secret invention can be patented abroad but only with the authorization of the Ministries. An international patent application may also be filed with the Institute further to PCT (the PCT application). The PCT application may be filed with the Institute as a receiving office (if an applicant is a natural person who is a national of Bosnia and Herzegovina or a legal entity whose principal place of business is in Bosnia and Herzegovina) or as a designated or elected office (regarding PCT applications in which Bosnia and Herzegovina has been, further to PCT, designated or elected for the granting of a national patent). If the Institute is acting as a designated or elected office, the PCT application should be filed with the Institute within 34 months from the date of priority and should be published in the Official Journal upon the expiry of 18 months from the filing date of the application or from the claimed date of priority; at the request of the applicant, the PCT application may be published earlier, but not before the expiry of 90 days from the filing date.

Technical improvement Although the Law on Industrial Property does not include any provisions regarding technical improvements, the provisions of the Old Law regarding technical improvements are still valid. Namely, as prescribed by the Old Law, a technical improvement is considered to be every rationalization of the work accomplished by a change of common technical assets and procedures in all phases of the work process, by which certain improvements have been made, such as an improvement in product quality, savings in material and energy, a better employment of machinery and installations. Technical improvements cannot be patented but they can be protected by the decision on acceptance of the technical improvement issued by the company where the author of the technical improvement works (the author). The author is obliged to notify, in writing, the company where he or she works and where he or she has made the technical improvement, about the technical improvement. On the basis of such notification, the company is obliged to examine the technical improvement within three months and to notify the author, in writing, whether it accepts the technical improvement. If so, the company is obliged to start using the technical improvement within one year. If the company does not accept the improvement, the author is entitled to offer the technical improvement to other companies. The author is entitled to remuneration for use of the technical improvement for the period of up to five years from the day when its use started.

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Industrial design In order to obtain an industrial design within the territory of Bosnia and Herzegovina, an application should be filed with the Institute for Intellectual Property. The application should contain the following: • A request for registration; • Particulars of the applicant; • Particulars of the author or annotation that he or she has waived the right to be cited; • Indication whether the application is made for one or multiple designs, and in case of a multiple design application, indication of the number of designs (under the Locarno Agreement, one application may include a request for registration of one or more, ie. up to 100, designs, provided that all of them relate to the products from the same class of the international classification established by the Locarno Agreement); • Actual and brief name of industrial design; • Two-dimensional representation of design/photography or graphic representation of the product to which the protection relates; and • Information identifying the representative if the applicant has appointed one. Proof of payment of the filing fee and procedural costs, as well as the power of attorney (if the application was filed by a representative), should be submitted together with the application. The application form should be signed and sealed by the applicant or by his or her representative if the application was filed by the representative. Industrial design will be protected if it is new. Industrial design is considered to be new if the identical form of the product or part of the product has not been made available to the public before the day when the application was filed, ie. before the priority date, if the priority was claimed. After the Institute receives the application, it will examine whether the application complies with all requirements. If on carrying out an examination of the application the Institute notes that there are deficiencies, the Institute will request the applicant to remedy them within 90 days; otherwise, the Institute will reject the application. After examination of the application, the Institute examines whether the product deserves to be recognized as an industrial design. Throughout the proceedings, the application may be altered to become a patent application. If all recognition requirements are met, the Institute will pass a decision on the industrial design recognition, provided that the applicant has paid the fee, the procedural costs for maintenance of the right and the costs of industrial design publication in the Official Journal and has submitted the proof of payments to the Institute. Industrial design confers to its holder the exclusive right to prevent any third party, without consent, to make, sell or import any products that appear like the design or are incorporated in a product that is a copy of the

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design or predominantly represents a copy of the design, provided that such actions have been carried out for commercial purposes. However, there are certain limitations to the exclusive right conferred by industrial design, ie. certain acts that the right holder cannot forbid to the third parties (eg. acts done privately and for non-commercial purposes, acts done for purpose of public notification or education, if these acts are in accordance with good business practice and do not cause any damage to the right holder). Industrial design is acquired on the basis of the decision on industrial design recognition and by entering it in the appropriate register. After registration, the Institute issues the Certificate on Design to the right holder. Industrial design lasts for 10 years from the application filing date, provided that the prescribed fees for maintaining the right are paid. Decision on industrial design recognition may be annulled at any time during the term of protection if it is determined that, at the time of issuance of the decision, the requirements for industrial design recognition have not been met. The annulment procedure may be initiated ex officio or at the request of an interested party or the state prosecutor. The request for annulment should be accompanied by the appropriate evidence. If the person requesting the annulment withdraws the request during the proceedings, the Institute may continue the proceedings ex officio or at the request of the industrial design holder.

Geographical indications In order to register a geographical indication for the territory of Bosnia and Herzegovina, an application should be filed with the Institute for Intellectual Property. An application may be filed by the associations of natural persons and legal entities, chambers, municipalities, local communities or state authorities. An application should particularly include the following: • • • •

Request for registration; Name and address/registered seat of the applicant; The geographical indication appearance; and The type of goods to which the geographical indication relates.

Proof of payment of the filing fee and procedural costs should be submitted together with the application. The application form should be signed and sealed by the applicant. In addition, the application should be accompanied by the rules containing particulars of the geographical indication regarding its appearance and its use (the Rules). After initiation of the proceedings by filing an application, the Institute examines whether an application complies with all requirements. If while carrying out an examination of the application the Institute notes that there are deficiencies, the Institute will request the applicant to remedy them within 90 days; otherwise, the Institute will reject the application. After examination of the application, provided that there are no deficiencies, and if fees and procedural costs have been paid, the Institute will pass a decision

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on geographical indication registration. Geographical indication will be entered in the Register and published in the Official Journal. No fees should be paid for maintenance of the geographical indication. Geographical indication is a collective right that may be used by all participants in the market that manufacture and place on the market the goods to which the indication relates, in accordance with the Rules. Use of geographical indication by unauthorized persons is forbidden if a translation of the geographical indication was used or if the geographical indication contains a marking like ‘type’, ‘style’, ‘imitation’ or ‘similar’, as well as if the goods do not originate from the territory to which the indication relates even if authentic origin of the goods was stated. Duration of geographical indication is not time limited. However, it will cease to be valid if it is, at the request of the competent state authorities, erased from the Registry.

Transfer of intellectual property rights Assignment Trademarks, patents and industrial designs can be assigned to third persons by a holder of the right or an applicant. In order to be legally binding, the assignment should be in writing. In addition, the assignment should be entered into the appropriate register of the Institute for Intellectual Property; otherwise, the assignment will not be legally binding towards third parties. The procedure for registration of the assignment should be initiated at the request of any of the assignment parties and published in the Official Journal. Collective trademarks and geographical indications cannot be assigned.

License The right to use a trademark, ie. the right to exploit a patent or an industrial design, can be licensed to third persons by a holder of the right or an applicant. In order to be legally binding, it should be in the form of a licensing agreement. The licensing agreement should be made in writing and should be entered into the appropriate register of the Institute. The procedure for registration of the licensing agreement should be initiated at the request of any of the agreement parties and published in the Official Journal. Collective trademarks and geographical indications cannot be licensed. Furthermore, the Court of Bosnia and Herzegovina may, at the request of an interested party, issue a compulsory licence, if the patent holder does not exploit the patented invention or exploits it insufficiently for fulfilling the needs of domestic market and if he or she refuses to enter into a licensing agreement or sets unreasonable conditions for such licensing. Request for the grant of a compulsory licence cannot be filed before the expiry of a period

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of four years from the filing date of the patent application or three years from the date of the grant of a patent, whichever of the two time limits expires later; however, if the exploitation of the protected invention is in public interest (public health, defence, environment protection) or of significant importance to a certain sector of the economy, a compulsory licence may be granted prior to the expiry of the specified time limit. A compulsory licence will not be granted if the patent owner provides legal reasons for non-use or for insufficient use of a protected invention. If a compulsory licence is granted, the patent owner will be entitled to remuneration in accordance with the economic value of the granted compulsory licence. The scope and duration of a compulsory licence shall be limited to the purpose for which it has been granted. A compulsory licence cannot be exclusive and it may be assigned only with the enterprise or part of the enterprise in which it is used. A compulsory licence will be granted for the supply of the domestic market.

Court protection of industrial property A holder of an industrial property right may file the following actions with the competent court: • Action for infringement of industrial property right (the Infringement Action); • Action for challenge of patent, industrial design or trademark (the Challenge Action); and • Action for recognition of authorship (the Authorship Recognition Action). In the event of an industrial property right infringement, the Infringement Action may be filed and the plaintiff may particularly request the following: cessation of the infringement, destruction of the infringing objects and infringing tools and equipment, reimbursement of pecuniary damages, publication of the court decision at the expense of the defendant. The Infringement Action may be filed by an applicant, the right holder, user of the geographical indication and a holder of the exclusive right relating to the infringed right within three years from the day when the plaintiff became aware of the infringement and the identity of the infringer, but not later than five years as of the day when the infringement was made. The proceedings on the Infringement Action shall be acted upon immediately. At the request of the plaintiff, the court may order a provisional measure by which an infringement of the right should be avoided. In addition, the court may decide to secure the appropriate evidence concerning probable infringement. The request for granting a provisional measure or for securing the evidence should be accompanied by evidence that the infringement is made or is about to be made. The request should be immediately acted on.

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The inventor, his or her heir or other legal descendant may file the Challenge Action with the competent court requesting the court to declare him or her as the patent holder, provided that the patent has been granted in the name of the person who is not the inventor, his or her heir or other legal descendant. The author of an industrial design, his or her heir or other legal descendant may file the Challenge Action with the competent court requesting the court to recall the industrial design, provided that the industrial design has been granted in the name of the person who is not the industrial design author, his or her heir or other legal descendant. A natural person or a legal entity that uses the mark, registered as a trademark in the name of another person regarding the same or similar goods and/or services, for marking his or her goods and/or services in the market may file the Challenge Action with the competent court requesting the court to declare him or her as the trademark holder, provided that he or she proves that the mark was generally known as the mark used for marking his or her goods and/or services before the defendant had even filed the trademark application, within five years from the date when the trademark was entered into the appropriate register. The inventor, ie. an author of industrial design, may file the Authorship Recognition Action with the competent court requesting the court to be stated in all documents regarding the patent, ie. the industrial design. In addition, he or she may request publication of the court decision at the expense of the defendant and remuneration of the moral damages he or she has suffered. This action may be filed throughout the whole period of the patent, ie. the industrial design duration. After death of the inventor, ie. the author, the action may be filed by his or her heirs.

Protection of industrial property in proceedings before customs authorities At the request of a holder of the industrial property right who credibly asserts that his or her right would be infringed by the import of certain goods, the customs authorities may order the following: an inspection of the goods by the right holder or his or her representative and seizure, removal from the market or the destruction of the goods. The customs authorities are obliged to notify without delay the importer of the goods and the person to whom the goods belong about the measures taken. However, if the right holder does not initiate the appropriate legal proceedings within seven days, the customs authorities will recall the measures taken.

Penalties The Law on Industrial Property regulates responsibility for criminal offences (monetary fines or imprisonment up to five years) and petty offences (monetary fines).

3.6

Bosnia and Herzegovina: Real Estate Legislation Karanovic & Nikolic and Branko Maric´ Law Office

Republic of Srpska Regulatory framework The legal framework governing the real estate sector includes numerous laws and other regulations of which the following represent the key legal sources: • Law on Basic Ownership Relations of 1980 as amended; • Law on Trade with Immovable Assets of 1978 as amended (this law and the above one are applicable as part of the legal system of the former Socialist Federal Republic of Yugoslavia); • Law on Construction Land of the Republic of Srpska of 2006; • Law on Agricultural Land of 2006; • Law on Urban Planning, cleaned text of 2002 as amended; • Law on Measurements and Land Cadastre of 2006; • Law on Land Registers of the Republic of Srpska of 2003 as amended; • Rules on Registers of Deposited Contracts on Sale of Residential Houses and Apartments of 2001 as amended; and • Rules on Registers of Deposited Contracts on Sale of Commercial Buildings, Commercial Premises and Garages of 2005.

Practice Ownership of immovable assets The most common and traditional forms of ownership in the Republic of Srpska are privately owned property and state-owned property. Under the Constitution of the Republic of Srpska every form of ownership enjoys equal treatment. The general rule is that the ownership title to real estate is obtained only after registration of the relevant agreement with competent land registers

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has been completed. The agreement must be executed in writing and verified by the competent court or notarized (when the Notary Act of 2004 as amended comes into force, expected by the end of 2007). In the Republic of Srpska, two registers of immovable assets exist: 1. The cadastral register is competent to register technical data in connection with lands and objects and is kept with the Republic Administration for Geodetic Affairs; and 2. The court land register is competent to register title, encumbrances and other rights pertaining to immovable property and is kept by the competent courts for the relevant area of the Republic. In addition, separate registers for apartments, business premises and garages exist, organized within the Republic Administration for Geodetic Affairs, for this purpose only competent to register rights pertaining to these economically divisible parts of buildings. The Law on Land Registers of the Republic of Srpska stipulates that these registers will be in effect until the establishment of adequate records for separate parts of the buildings within court land registers. Very often one sees certain areas covered only by cadastral registers and not by court land registers, and thus lack reliable information on the legal status of land and objects that is, as a rule, exclusively recorded in courts. On the other hand, the court land registers are establishing electronic databases and taking the data sources from cadastral registers. Until the completion of this process it will be difficult to obtain relevant data quickly and efficiently. However, the situation with regard to land registers throughout the Republic and with regard to their accuracy and uniformity is gradually improving. Encompassing all the court land registers in an electronic database will ultimately result in their being publicly available through the Internet; notwithstanding the fact that this project is still in its early stages, it encourages the professional community that the whole system is substantially improving over time. The tax charge on real estate transactions in the Republic of Srpska is favourable and amounts to 3 per cent of the price contained in the respective agreement. If this price is not established on an arms’ length basis, a correction of the price that would be used for tax calculation can be imposed by the tax authorities. The value-added tax (VAT) rate applicable on the first transfer of a newly-constructed immovable asset is 17 per cent.

Foreign ownership of immovable assets Foreign citizens and legal entities that perform commercial activities in the Republic of Srpska may, subject to reciprocity, hold ownership rights in commercial buildings, commercial premises, apartments and residential buildings, as well as on land on which such property rights may exist. In addition, a foreign natural person having a permanent residence in the

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Republic of Srpska may become the owner of an apartment or a residential building also subject to reciprocity. As an exception to this principle, foreign citizens and legal entities may not own immovable assets located in certain areas of the Republic of Srpska, if so provided by the law. Also, foreign citizens may not purchase agricultural land and the only manner in which to acquire ownership title on this type of property is by inheritance.

Construction land Roughly all land in the Republic of Srpska is classified in the following categories: • • • •

Construction land; Agricultural land; Forest land; and Other types of land (eg. areas under water, traffic, infrastructure).

Further, construction land is classified in two categories: urban construction land and other construction land. For the purpose of this analysis, we will focus on the special legal regime of urban construction land (hereinafter referred to as ‘Construction Land’), also accordingly applicable in the areas of ‘other construction land’. Construction Land is defined as land in a city or other urban area regulated by urban planning and intended for the construction of immovable objects. This land can be state owned, but can also be privately owned. The newly enacted Law on Construction Land in the Republic of Srpska, in effect as of 2006, provides for restitution of previously state-owned Construction Land to private ownership in the following cases: • When an object is built on Construction Land, the area under the object, as well as the surrounding area needed for regular use of the object, represents the ownership of the person/entity that holds the title on the object in question; • When Construction Land that does not serve its purpose according to the regulation plan was nationalized in the past by virtue of the resolution of the municipal authority or by-laws from 1958 and 1968. Previous ownership title will be re-established by issuing a new resolution of the municipal authority. The previously regulated ‘right to use’ state-owned Construction Land that does not serve its purpose according to the regulation plan or other urban planning act will, by virtue of the Law on Construction Land of the Republic of Srpska, become a ‘right to dispose’ of such land, recovered for the benefit of a previously entitled legal or natural person or its successor.

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The general rule regarding the Law on Construction Land of the Republic of Srpska provides that the previous owner that was registered as entitled to a ‘temporary right to use’ state-owned Construction Land that is not under a constructed object will become the owner of such land, but only when its right is not overruled by a stronger right previously obtained by a third party. State-owned Construction Land will be sold by the local authority through auction or given in exchange to legal and natural persons that are willing to invest and build permanent buildings. This category of land will be leased for the purpose of building temporary objects. Any investor willing to build on Construction Land must comply with the urban planning acts and other applicable legislation in areas such as environmental protection, the protection of cultural inheritance and other areas that may be connected with the construction in question (ie. obtain all necessary building permits from the local authority and, where applicable, permits of other state authorities). Also, the investor is obliged to pay a fee for the granted Construction Land according to the urban plan, as well as a fee for the development of the land lot in question. Finally, the fee for use of Construction Land is usually paid by the building owner, although when the object is leased the fee will be paid by the lessee if not contained in the rent sum.

Restitution The Law on Restitution of Confiscated Property and Indemnification was enacted in 2000, but was proclaimed void by a special decision of the High Representative for Bosnia and Herzegovina and a new law has not been enacted yet to systematically regulate the issue of denationalization of seized property. However, the Law on Construction Land of the Republic of Srpska contains provisions that have the practical effect of restituting the ownership of the Construction Land to previous owners, where this restitution is applicable and possible to execute (eg. the land has not already been used for construction of objects; please refer to previous paragraph). It is important to note that the Framework Law of 1998 on Privatization of Companies and Banks in Bosnia and Herzegovina as amended explicitly instructs the parliaments of the Republic of Srpska and the Federation of Bosnia and Herzegovina that natural restitution not be allowed under laws passed under their jurisdiction in relation to land, objects and other assets of companies and banks undergoing privatization, as well as in relation to the said companies and banks as a whole. Also, the authorities of the entities of Bosnia and Herzegovina will have to ensure that just indemnification according to the law is guaranteed to potential applicants for restitution.

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Federation of Bosnia and Herzegovina The Law on Construction Land in the Federation of Bosnia and Herzegovina was enacted in 2003 with almost the same text as the Law on Construction Land of the Republic of Srpska. The situation is the same with regard to the Law on Land Registers of the Federation of Bosnia and Herzegovina of 2003 as amended; it is almost identical to its counterpart in the Republic of Srpska. Eventually, modernization of the court land registers will be coordinated at a centralized level and is simultaneously pending in both entities. As in its counterpart, the effort to combine all the court registers in an electronic database is making progress – for example, many of the cadastral plots can be seen on the website of the municipal court in Sarajevo. However, since this initiative is still in its early stage, data about the ownership as well as some other related rights (ie. mortgages) are still not available. The Law on Basic Ownership Relations of 1998 as amended is based on the text that was applied throughout the former state of the Socialist Federal Republic of Yugoslavia, but in the Federation of Bosnia and Herzegovina, different solutions existed in certain cases, eg. The acquisitive prescription period for movable objects when the possession is only bona fide for six years (in the Republic of Srpska, this period is 10 years) and so on. Other regulations in effect in the Federation of Bosnia and Herzegovina relevant to real estate issues are based on similar legal principles but one must refer to the original texts in order to ensure a thorough understanding of the regulations since nuances can often trigger the risk of non-compliance with the law. For example the tax charge on real estate transactions is slightly higher – 5 per cent – even though other tax regulations are almost identical. The law in which can be seen the most considerable variation would be the Law on Public Notaries (Notary Act), which came into force in May 2007. According to this law, the competence of preparation and verification of all the agreements in relation to real estate dealings has strictly been transferred from the courts to the Public Notary.

Brcko District In Brcko District, most of the regulations are different and we have not come across the situation as with the two entities where similar texts passed the parliamentary procedure, as is the case with the Law on Land Registers. An example is the Law on Register of Land and Rights Pertaining to Land of 2001 as amended, which regulates both the cadastral register and the court land register; however, the situation is the same as in the other parts of the country and relevant data on the legal status of immovable assets will be exclusively found in the Basic Court of Brcko District, which is also

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competent to record ownership on the basis of deposited contracts on purchase of economically divisible parts of buildings. A further example is that the Law on Ownership and Other Rights Pertaining to Objects of 2001 as amended explicitly regulates the so-called right to build; a right corresponding to the one that was defined in the Republic of Srpska’s legislation until 2006 as the right to use Construction Land for the purpose of construction of objects thereon. It is advisable to refer to the original texts of these and other acts that regulate real estate issues in Brcko District in order to avoid the risk of non-compliance with the law.

3.7

Bosnia and Herzegovina: Taxation Manal Bec´irbegovic´, KPMG

“Tax complexity is a kind of tax in itself” Max Baucus, US Senator, Finance Committee Chairman, US Senate (2001) Bosnia and Herzegovina is divided up into three tax jurisdictions: • Federation of Bosnia and Herzegovina (FBiH), which itself consists of 10 cantons; • Republic of Srpska (RS); and • Brcko District (BD), which is a self-governing unit. Each of these entities has its own tax administration that is responsible for tax collection. There is no central tax administration except for Indirect Tax Administration, which is responsible for value-added tax (VAT) and customs revenue.

Corporate taxation The revenue from Corporate Tax is low in Bosnia and Herzegovina (1.4 per cent of total tax revenue earned by the government). The tax rates are not harmonized between the three entities; the corporate tax rate in the FBiH is a unified 30 per cent flat rate, while both the RS and the BD enjoy a unified 10 per cent flat rate. Also in the FBiH, tax holidays are available for certain activities, but these tax breaks are not available in the RS or the BD. The Corporate Profit Tax (CPT) Laws in the FBiH, the RS and BD are in the process of harmonization. The RS has already adopted and implemented a new CPT Law which imposes a unified 10 per cent flat rate. Similar changes are expected in the FBiH CPT regulations which are expected to be implemented as of 1 January 2008, or from a later date, depending on the ratification of the proposed new draft CPT Law by the FBiH responsible governmental bodies. In the FBiH, a resident legal entity (registered by the court on the territory of the FBiH) is subject to CPT on income earned in the FBiH and abroad. A

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non-resident legal entity is subject to CPT only on income realized in the FBiH. In order to promote inward investment, the government of the FBiH is granting an annual profit tax exemption for newly established companies with local shares in the first year, 70 per cent exempt in the second year and 30 per cent exempt in the third year. For new companies with at least 20 per cent foreign investment, the tax exemption is equal to the percentage of foreign investment in the companies, including companies with 100 per cent foreign investment. This tax exemption applies for five years from the date of the foreign investment. There is no tax exemption in the RS or in the BD. Investment capital is not subject to taxation in Bosnia and Herzegovina.

Federation of Bosnia and Herzegovina A company is resident for the purposes of the Corporate Tax Law if it has a home office, headquarters or main place of business registered in the Court

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Register in the territory of the FBiH. A non-resident company is one which does not meet this condition. There are many benefits available for: • newly-established companies, due to the above-mentioned tax holiday; • reinvestment of taxable profit; • investment of foreign capital in a resident company/establishment of a local company by a foreign investor; • free trade zones; 100 per cent tax holiday. Tax losses may be carried forward for five years subsequent to the year in which the original loss was incurred. In addition, the tax return is due 30 days after the deadline for submitting the annual accounts, which is 28 February, and advance payments of tax are due monthly and are payable by the eighth day of the following month. In the FBiH, financial penalties for tax violations are not recognized as deductible. Any interest paid out is only deductible up to the open-market interest rate that applies, and any interest in surplus of this is then treated as a dividend payment. There are also no capital gains/losses provisions in the CPT Law, so any capital gains/losses from the sale of a company’s fixed assets are taxed as part of the company’s ordinary business income. Tax consolidation in the FBiH is possible for a group of companies, provided that every member of the group is a tax resident of the FBiH, and once approved, consolidated taxation is available for a minimum of five years. As stated above, a new corporate tax is likely to be introduced in the FBiH in 2008, in which, according to the draft law, the main changes include a decrease in the corporate income tax rate and withholding tax rate, introduction of the permanent establishment and reduction or elimination of tax holidays, deductions and incentives.

Republic of Srpska A legal entity that is registered in the Court Register in the territory of the RS is resident for the purposes of the Corporate Tax Law. A non-resident, for the purposes of the Corporate Tax Law, is a legal entity that is founded and has home office management and control in another territory, district or state (including the FBiH or the BD). There are no benefits available for the reinvestment of taxable profit in the RS, but tax losses can be carried forward for five years. A foreign legal person carrying out an economic activity through a permanent establishment in the RS must pay corporate tax on the tax base that is attributable to the permanent establishment. Tax consolidation is possible for a group of companies provided that the parent company directly or indirectly owns at least 80 per cent of shares of a company included in a group. Withholding tax at the rate of 10 per cent is

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levied on certain payments abroad, including payments for management services, interest payments and author compensation. Any differences between transaction prices and market prices increases the taxable base. Unlike the FBiH, capital gains/losses are included in the tax base.

Brcko District In the BD, the Corporate Tax Law allows the entity to compensate profits with losses over a five-year period. Foreign investors can open bank accounts in all jurisdictions (the FBiH, the RS and the BD) and transfer abroad, without any restrictions, the funds acquired from their profits. They have the same rights as citizens of Bosnia and Herzegovina to invest and reinvest their profits in any economic sector.

Value-added tax Bosnia and Herzegovina introduced VAT from 1 January 2006. The standard VAT rate is 17 per cent and is administered by a centralized indirect tax authority. It applies to most transactions, but there are some exemptions with a zero rate applying to the export of goods and certain services. The VAT exemptions (no input VAT recovery) include the following: • • • • • • •

financial services; education; betting and gambling; rental of residential property for a period longer than 60 days; dealing in shares; investment fund management; tax stamps;

• • • • • •

insurance and reinsurance services; healthcare; certain supplies of immovable property; services of public radio and television bodies, other than those of a commercial nature; current postage stamps; administrative and court stamps.

Services are taxable in Bosnia and Herzegovina if they are deemed to be supplied in Bosnia and Herzegovina. The place of supply rules are similar to those which apply in the EU. The self-charge mechanism applies. The registration threshold is taxable supplies of 50,000 convertible marks (BAM; currently approximately equal to €25,500) or more in the previous period. A non-resident entity who does not have a seat or a permanent business unit, or a permanent residence in Bosnia and Herzegovina, and who performs VATable supplies of goods or services, is obliged to register for VAT purposes and to appoint a tax representative where the appointed tax representative has joint and several liability to the tax authorities in Bosnia and Herzegovina.

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VAT grouping is available to entities, 100 per cent directly or indirectly owned. Upon the taxpayer’s request, any refund due shall be paid no later than 60 days (30 days for exporters) after the expiry of the deadline for submission of the VAT return. Any tax credit which has not been used after a period of six months will be refunded by the Indirect Taxation Authority.

Customs duty • Customs duty rates range from 0 per cent to 15 per cent. • Administrative charge: 1 per cent of the customs value of the goods imported into Bosnia and Herzegovina is charged on imported goods. • Import approvals mainly relate to the quality of goods imported such as food, fuel and similar. • Exemptions apply to contributions made in kind into the registered capital of a domestic company; however, prior approval must be obtained from the Ministry of Finance.

Excise duties Excise duties are levied on any legal or physical entity which trades in excisable products. A taxpayer is liable for excise duty at: • The issuing of an invoice or the delivery of the excisable products, whichever is the earlier. Payment must be made within five days of the end of the week in which the invoice was issued or the excisable products were delivered. • The time of customs clearance of the excisable products and the delivery of the excisable products to a ‘free customs area’ or duty-free warehouse. Payment must be made simultaneously with customs duty and other import duties. • The time the excisable products are taken for a taxpayer’s own consumption. Payment must be made immediately.

Personal income tax The personal income tax (PIT) system is characterized by the number and level of tax rates, the thresholds (eg. the amount of taxable income to which the highest individual tax rate applies), and the rules of exemptions and rebates. The tax period is the calendar year. The BD was the first of the three jurisdictions to pass a comprehensive modern individual tax law, which took effect in 2004. Individuals who are resident in the BD are subject to tax on their worldwide income; non-

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residents are taxed only on income earned in the BD. A flat rate of 10 per cent applies. In FBiH, PIT is regulated at the cantonal level; therefore applicable PIT rates vary between cantons, but as an illustration, the tax rate in Sarajevo Canton is 15 per cent. Non-residents will be taxed on income earned on the territory of the FBiH and residents on their worldwide income. Income will be treated as the sum of all receipts rather then each receipt being treated separately. Non-taxable income includes, but is not limited to: • • • •

Dividend income and shares in profit; Pensions derived from pension schemes abroad; Gifts and bequests; Child inheritance. Exempt income includes but is not limited to:

• Certain insurance payments; • Income derived from the trade of securities; • Certain types of interest income. Tax free allowances include but are not limited to: • Severance paid in accordance with the relevant regulations; • Meal allowances; • Reimbursement of business trip expenses. In the RS, PIT is regulated at the level of the RS, where a new PIT law was introduced on 1 January 2007. The progressive rates are 10 per cent and 15 per cent. Tax free allowances include, but are not limited to: • Retirement compensation; • Daily allowances for business trips within the country and abroad, up to specified amounts; • Allowance for public transportation, in the amount equal to a monthly ticket price.

Wage tax The PIT Law in the RS and in the BD regulates the taxation of income earned by physical persons, including wages. The Wage tax (WT) in the FBiH is regulated at the level of the FBiH and it is paid monthly by the employer, together with social security contributions. • The WT rate on regular employment income is 5 per cent; • The WT rate on additional income is between 30 per cent and 69 per cent.

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Tax-free allowances include, but are not limited to: • Separate living allowance – up to 50 per cent of an average monthly net salary in the FBiH; • Annual leave allowance – up to 70 per cent of the employee’s average monthly net salary; • Reimbursement of expenses for accommodation and other business trip expenses, up to the amount of actual expenses; • Reimbursement of travel expenses to/from work; • Meal allowances at work – up to 2 per cent of the average monthly net salary in the FBiH; • Daily allowances for business trips within Bosnia and Herzegovina – up to 10 per cent of the average monthly net salary in the FBiH (in addition to actual travel and accommodation costs); • Allowances for field work – up to a maximum of 70 per cent of daily allowances; • Daily allowances for business trips abroad – up to specified amounts (country dependent).

3.8

Bosnia and Herzegovina: Accounting and Auditing Manal Bec´irbegovic´, KPMG

Following four long years of conflict, the Dayton Peace Accord established Bosnia and Herzegovina with a central government in December 1995. However, this central government is divided into three parts. There are two administrative divisions – the Federation of Bosnia and Herzegovina (FBiH) and the Republic of Srpska (RS) – and one internationally supervised district – the Brcko District. The FBiH and the RS each have their own different laws, rules, regulations and institutions, including different Ministries of Finance. The FBiH and the RS each have their own separate accounting and auditing regulations with no consistency in requirements between them and no legal framework whatsoever. As a result, many problems arise, especially for foreign investors. All accounting standards, accreditation of accountants and licensing of auditors fall under two separate establishments, and enterprises operating in both the FBiH and the RS can feel as though they are dealing with two entirely separate countries.

The Federation of Bosnia and Herzegovina Business activities in the FBiH are primarily regulated by the Law on Business Companies which is partly based on Company Law Directives set out under European Union (EU) law. This Law on Business Companies recognizes just four types of companies: general partnerships, limited partnerships, joint stock and limited liability. Under the current Law on Business Companies, a company’s main board of directors is liable for the accuracy of the company’s financial statements. However, previous legislation in force before independence from Yugoslavia is considered more reliable, as it was the company’s chief accountant who was liable for the accuracy of the financial statements. In practice, company directors do not consistently review the financial statements and/or the critical accounting policies and practices applied by the company. They are mainly focused on their ‘bottom line’ instead of the importance of disclosing

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transparent and reliable financial information. This means that the information accumulated and the figures obtained may not be wholly trustworthy when used in company research and by those who are looking to invest or expand in these regions. The Institute of Accountants and Auditors (IAA) controls the accounting and auditing in the FBiH. But, the IAA is not driven by a requirement to ensure the public interest is the most important goal behind policymaking. The Accounting Law requires that the person responsible for preparing the financial statements is an ‘independent accountant’ licensed by the IAA. No accountant or auditor can provide any accounting or auditing services without being trained, certified and licensed by the IAA. Under this regime, no one can prepare financial statements, perform any type of audit or provide accounting, management or organizational or advisory services without having an IAA certification and IAA licence, which must be renewed every year.

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Financial statements are not publicly available even though the Accounting Law requires enterprises to file financial statements with the Bureau for Payment Transactions (ZPP). Unfortunately, the ZPP was dissolved in 2000, and there is now no requirement to make financial statements publicly available, with the exception of listed companies.

Republic of Srpska Business activities in the RS are generally regulated by the Law on Enterprises, which is partly based on EU Company Law Directives. The Law on Enterprises recognizes two main types of companies: private and public (ie. government-owned businesses) and the types of business include joint stock and limited partnerships. Under the Law on Enterprises, the accuracy of a company’s financial statements is the responsibility of the board of directors, similar to their counterparts in the FBiH. Insurance companies are not required to comply with specific accounting, auditing and financial reporting requirements. This is because the Accounting Department within the Ministry of Finance has not yet laid down accounting regulations concerning financial statements of companies providing insurance services. Therefore, until the Accounting Department of the Ministry of Finance actually enforces certain laws, insurance companies do not produce any information – not only for the government, but also for any potential or actual investor or other interested party. Financial statements are not publicly available as in the FBiH. The RS does not have a unified access portal that would give stakeholders access to (audited) financial statements. In reality, financial statements are still very difficult to obtain, but as this falls short of the requirement of the First EU Company Law Directive, the Ministry of Finance of the RS has ensured that financial reports prepared from 2004 onwards are publicly available.

Cross-border enterprises Enterprises registered in both the FBiH and the RS must maintain two sets of accounting records and are subject to different accounting and financial reporting requirements. This, obviously, has a significant impact on the cost of doing business in Bosnia and Herzegovina and impedes foreign investment and private sector growth. An auditor licensed in the FBiH is not authorized to conduct a statutory audit in the RS unless also licensed in the RS and vice versa. An auditor must therefore be licensed in both the FBiH and the RS to carry out crossentity work in Bosnia and Herzegovina. Auditors licensed in both the FBiH and the RS are extremely difficult to find. The accounting and audit profession in Bosnia and Herzegovina is still undeveloped, which results in unproductive use of scarce resources. The

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profession is divided between the two entities, and in addition, the profession is further fragmented in the FBiH by the co-existence of more than one professional organization.

PART 4

Profiles of Dynamic Companies

4.1

Bosnia and Herzegovina: Raiffeisen Bank dd Bosna i Hercegovina Overview and corporate background Raiffeisen Bank dd Bosna i Hercegovina (RBBH) is a member of the RZB Group and a subsidiary of Raiffeisen International Bank-Holding AG. The bank has been operating in Bosnia and Herzegovina since November 1992, when it was founded as Market Banka dd Sarajevo, with the dominant participation of private capital (over 90 per cent). RBBH is a joint stock company. The majority shareholder is Raiffeisen International Bank-Holding, Vienna, Austria (hereinafter RI), with 96.99 per cent of the shares. Its quality of business has established RBBH as a very successful and profitable bank. Between 1996 and 2000, the bank was one of the leading partners in international financial institutions (World Bank, IFC, KFW, Soros, EBRD) for implementation of credit lines. The British finance magazine Central European awarded Market Banka for being the ‘best banking institution in Bosnia and Herzegovina in 1999’. ¨ sterreich AG, Vienna, purOn 21 July 2000, Raiffeisen Zentralbank O chased Market Banka. It has since been successfully integrated into the Raiffeisen network and today it operates under the name of Raiffeisen Bank dd Bosna i Hercegovina. In May 2001, RZB became the majority owner of Hrvatska Posˇtanska Bank, which was renamed Raiffeisen Bank HPB. Since 1 January 2003, when the project of integrating Raiffeisen Bank HPB with Raiffeisen Bank was successfully implemented, the bank has been operating under the common name of Raiffeisen Bank dd Bosna i Hercegovina. Implementation of the project strengthened the position of the bank in the market and increased the balance sheet volume to over 1 billion Bosnian convertible marks (BAM), also significantly extending the branch network. The Raiffeisen Group in Bosnia and Herzegovina consists of Raiffeisen Brokers and Raiffeisen Leasing.

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Products and services Some of the mainstream commercial activities conducted by the bank include the following: • Receipt of all types of money deposits and other assets from corporate and retail customers • Domestic and international lending and borrowing, other lending transactions and financial leasing • Granting all types of money guarantees • Participation, purchase and sale of money and capital market instruments for its own or someone else’s account • Domestic and international payment transactions and money transfers • Purchase and sale of foreign currencies (foreign exchange) • Issuing and managing payment facilities, including credit cards, travellers’ and bankers’ cheques • Financial management services • Purchase and sale of securities • Maintaining giro and current accounts of corporate and retail customers • Storing and managing securities and other valuables • Safe deposit facilities for corporate and retail customers • Agent activities in banking and other financial transactions • Establishing and managing joint investment funds • Establishing and participating in establishing other banks and financial organizations • Other banking and financial transactions in accordance with the law Furthermore, the bank is authorized to undertake all the activities and measures that are necessary or that directly or indirectly bring benefits to the bank’s business and implementation of its business goals.

Business development issues RBBH operates 90 branches throughout Bosnia and Herzegovina and employs around 1,532 individuals (virtually all of whom are local staff). For its corporate customers, the bank offers a rich variety of lending products and depository operations. In addition, the bank offers the following services for retail customers: • • • • •

Account servicing Money transfer (domestic and international operations) Cash transactions Foreign exchange operations Cheques

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• • • •

Savings deposits Western Union services Tax refunds – VAT tax refund service Other services For corporate customers, the bank offers the following products:

• • • • • • • • •

Letters of credit Guarantees Remittances Conversion fees Domestic and international payments Correspondent banking Internet banking Business cards Other products

Furthermore, the bank offers a wide range of card products, including Visa, MasterCard and Diners cards, and in its network it currently has 111 ATMs installed throughout Bosnia and Herzegovina. It plans to increase the number of ATMs to 116 by the end of 2007. Raiffeisen Bank is presently the most recognizable brand in the country and maintains a strong position among commercial banks, offering topquality banking services and products through its countrywide branch network. The management team is in control of all modern banking challenges and is strongly committed to strengthening and improving the local banking system. Investment in new technologies, experienced and trained staff who are constantly improving their skills, an emphasis on an individual approach to the customer and the introduction of new, up-to-date products and services are the main factors underpinning the competitiveness of Raiffeisen Bank in the Bosnia and Herzegovina market. Evidence of the bank’s successful business is the many international and local awards with which the bank has been acclaimed. Some of these include Global Finance’s ‘The Best Bank in Bosnia and Herzegovina’ award, The Banker’s ‘Bank of the Year’ award, Euromoney’s ‘Best Bank in B&H’ award and awards by Finance Central Europe, Central European, EBRD and by the local magazines The Banks and Prizma.

Market share and competition The main competitors of RBBH are HVB Central Profit Bank dd, UniCredit Zagrebacka Banka dd and Hypo Group Alpe Adria dd. As of 30 June 2007, the market share of RBBH, calculated on the basis of total assets, was 20.24 per cent, while the market share of HVB Central Profit Bank dd was 7.67

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per cent, of UniCredit Zagrebacka Banka dd 11.33 per cent and of Hypo Group Alpe Adria dd 10.57 per cent. The market share of RBBH in total loans was 21.15 per cent, while the market share of HVB Central Profit Bank dd was 6.58 per cent, of UniCredit Zagrebacka Banka dd 11.40 per cent and of Hypo Group Alpe Adria dd 14.44 per cent. Raiffeisen Bank’s market share in total deposits was 23.23 per cent, of HVB Central Profit Bank dd 7.75 per cent, of UniCredit Zagrebacka Banka dd 11.76 per cent and of Hypo Group Alpe Adria dd 11.92 per cent. The bank applies International Accounting Standards. The bank’s investment plan is an integral part of its planning procedure, ie the plan (budget) of the bank, which consists of the following: • Investments in real estate • Investments in equipment • Investments in the capital of other legal entities

Human resource management and development The bank emphasizes the technical development of its human resources. Training in the bank is continuous and based on an annual training plan. It uses two main methods of implementing training programmes: in-house (trainers from the bank) and external (trainers from consultancy agencies). Also, in terms of content, two main types of education are available: professional and soft skills. The training of board members is under the authorization of Raiffeisen International, and the bank’s own human resources department covers the education and training of the rest of management and all other employees.

A strategic vision for the future RBBH follows its vision – to be a leading bank in all target segments throughout the country. As a commercial bank, the bank wants to retain all leading positions in the medium-term future and to become an institution for providing financial services with extremely well developed electronic distribution channels. In addition to the fact that the bank aims to maintain long-term connections with its customers, its aim is to likewise strengthen the Bosnia and Herzegovina economy, as well as its connection with the economy in the region and in Europe. However, the bank’s vision is, to some extent, limited by the investment climate in Bosnia and Herzegovina. In spite of all problems, which by definition are those faced by a country in transition, in general the

Bosnia and Herzegovina: Raiffeisen Bank dd Bosna i Hercegovina 173

environment for conducting the bank’s business is quite positive. The best evidence for this is the significant number of banks mostly owned by EU banks. Raiffeisen Bank dd BiH Danijela Ozme br. 3 71 000 Sarajevo Bosna i Hercegovina Tel.: +387 33 26 80 80 Email: [email protected] Website: http://www.raiffeisenbank.ba

4.2

Bosnia and Herzegovina: The UniCredit Group The UniCredit Group currently operates three subsidiaries in Bosnia and Herzegovina – HVB Central Profit Banka, Nova Banjalucka Banka and UniCredit Zagrebacka Banka. The three banks have combined total assets of about 2 billion euros and are the number one in the country with a market share of 25 per cent. Together, the banks operate a countrywide network of 170 branches and serve over 1 million retail and corporate customers. There is a plan to integrate HVB Central Profit Banka and UniCredit Zagrebacka Banka to form the new UniCredit Bank in Bosnia and Herzegovina in early 2008. These banks are proud to be part of the biggest banking group in the Eurozone – the UniCredit Group – and offer the advantages of understanding national and international markets and the expertise that the group possesses. The merger of UniCredit and HVB into one of the most prestigious and influential European financial institutions was achieved in 2005. This dynamic financial services group is the leader in the wealthiest regions of mainland Europe (Northern Italy, Bavaria and Austria), and is the undisputed number one in the strongest growth area in Europe: Central and Eastern Europe (CEE). Through the merger with Capitalia, effective as of 1 October 2007, UniCredit has significantly strengthened its presence in Italy, which is one of its core markets alongside Germany, Austria and CEE. By implementing the standards and expertise of other UniCredit Group members, the three banks have enriched their classical banking products (loans, deposits, payments), providing high-quality and prompt service. In addition to a wide variety of existing products, our advisors throughout the network of branches are prepared to offer innovative products (including basic treasury products) tailored to suit individual needs. UniCredit Group’s services for corporates include the following:

Account processing • Transaction account for cash flows and payment transactions • Account statements – Types and periods of statements delivery chosen by the client

176 Profiles of Dynamic Companies

• MT 940 – Sending the account statement for the bank’s client to another bank, and for the specific client of that bank, via SWIFT MT 940 messages

Cash transactions • Cash deposits • Cash withdrawal

Payment services • Internal payment transactions • Domestic cumulative payments • International payment transactions

Deposit of the founding capital/privatization Issuing receipts for deposits of founding capital in the bank and services of depositing privatization capital (additional investments).

E-banking The Internet, as a world phenomenon, is making its way into companies and households in Bosnia and Herzegovina. We are bringing to you, via this modern communication channel, a fast and efficient method of utilizing banking services. Through e-banking you can access up-to-date information about your account balance, and make payments or other banking operations from any place with Internet access. By using e-banking you can also save some of the expenses, when compared with traditional forms of banking services.

Card payment Your decision to join the world’s largest VISA International payments system with members of the UniCredit Group deserves congratulations. By using your card, you will soon discover all the advantages of modern, simple and efficient transactions. When travelling you will not have to worry about carrying large sums of money; your card will enhance your safety and spending capacity, which will improve the organization of your trip and reduce your costs. You may pay your foreign expenditure in convertible marks (BAM) and receive the statements specifying the costs once a month.

Bosnia and Herzegovina: The UniCredit Group 177

Services of the International Markets Division The bank’s Treasury is a part of the UniCredit Group Treasury, the UniCredit Group’s ‘gateway’ to the global financial market. By connecting with international financial centres and branches in CEE, our Treasury transfers its know-how around the world.

Deposits • On-sight deposits – Deposits on the transaction account of the company, in BAM or any other convertible currency. For deposits to the transaction account, the interest is calculated on a monthly basis. • Term deposits – Term deposits for a fixed period on a deposit account.

Financing The UniCredit Group offers short-term and long-term financing services to its clients.

Documentary business Outline loan for guarantee/credit issuing – This is a universal financial arrangement that entails multiple guarantee/credit issuing during the period that is covered with an outline loan agreement.

Guarantees Banking guarantees issued as security for domestic and international transactions, with the following types of guarantees: • • • • • • • •

Payment guarantee Advance guarantee Bidding guarantee Guarantee for quality job execution Quality guarantee Guarantee for the return of retained amount Customs guarantee Confirmed ‘nostro’ guarantees towards abroad: for all the above-mentioned guarantees except for customs guarantees.

178 Profiles of Dynamic Companies

Cross-border credits The UniCredit Group has the most comprehensive network in Europe. This enables the group to offer a special product to its multipresent corporate customers: the Cross Border Plus Credit. This is a customized solution for start-up companies as well as for medium- and large-sized companies, to arrange the financing of their subsidiaries in the CEE countries as well as in Italy, Austria and Germany. The Cross Border Plus Credit is unbureaucratic and fast to access: every UniCredit Group customer can address his or her relationship manager at the parent company level for such a credit. Based on the overall business relationship and the parent’s creditworthiness, the parent’s bank extends first-class references to the UniCredit Group bank wherever credit is needed. In the country where the subsidiary is domiciled, the local relationship manager then takes care of the quick local credit process, ensuring a swift disbursement of the facility. The customer can choose from different loan arrangements, for example a working capital facility/overdraft, investment loans and guarantees. Furthermore, the credits are available in an amount of up to 10 million euros (or counter value in local currency) and up to a tenor of five years. With the Cross Border Plus Credit, the customers’ needs are perfectly met.

The largest banking network in Europe Ranking among the top financial groups in Europe, the UniCredit Group has a presence in 23 countries, with over 40 million clients, 9,000 branches and approximately 170,000 employees.

Reasons for choosing members of the UniCredit Group in Bosnia and Herzegovina as your business bank • International and domestic know-how are present in one banking group • The UniCredit Group is a leading financial group in Europe, and therefore we are an integral part of an international group for financial services offered • Global presence in the main financial centres worldwide • A reputation and position that will assure you safety and trust • Professional managers for client relations in Bosnia and Herzegovina and abroad with high capability to solve problems and provide you with highquality service • A widespread network in Europe, including commercial banks, branches, investment banks, insurance and leasing companies

Bosnia and Herzegovina: The UniCredit Group 179

• Modern and innovative banking products, which provide fast and efficient service Your contact is at HVB Central Profit Banka Zelenih beretki 24 71000 Sarajevo Tel.: +387 33 562-834 Email: [email protected] Nova Banjalucka Banka Marije Bursacc´ 7 78000 Banja Luka Tel.: +387 51 243 231 Email: [email protected] UniCredit Zagrebacka Banka Kardinala Stepinca bb 88000 Mostar Tel.: +387 36 312112 Email: [email protected]

4.3

Bosnia and Herzegovina: Kosig Dunav Insurance1 Establishment, property relations and management Kosig Dunav Osiguranje AD Banja Luka is a joint stock insurance company with no state ownership. The head office of the company is in Banja Luka, Republic of Srpska. It was established in 1991, and in 1993, the branch office of Dunav Osiguranje in Belgrade (Serbia) was merged with the company in Banja Luka. To date, there have been three share issues. The founders’ shareholdings are in the possession of the following 25 prominent shareholders from the Republic of Srpska: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 1

Nova Banka, Bijeljina Premium, Trn, Banja Luka Banjalucka Pivara, Banja Luka Nova Banjalucka Banka, Banja Luka PIK, ‘Mladen Stojanovic’, Nova Topola Veleprehrana, Banja Luka Mljekarska Industrija, Banja Luka Poljoprivredni Institut, Banja Luka Cajavec – Elektromehanika, Banja Luka Vocar Promet, Banja Luka TTD Sana, Sanski Most Dunav, Beograd Zitoprodukt, Banja Luka Hypo Alpe-Adria-Bank, Banja Luka Krajinalijek, Banja Luka Kozaraprevoz, Novi Grad Kristal, Banja Luka Veletrgovina, Gradiska Vitaminka, Banja Luka Vikom, Gradiska Prima-trade, Nova Topola Fruktona, Banja Luka

Translated by Dreno Zeljkovic, an English-language translator at Radnicki University in Banja Luka.

182 Profiles of Dynamic Companies

23. Suma Sana, Sanski Most 24. Rafinerija Nafte, Brod 25. Zavod Za Izgradnju, Banja Luka The founding structure comprises shares possessed by 9 manufacturing companies, 6 trading companies, 3 banks, 1 brewery, 1 oil refinery, 1 institute, 4 other financial institutions and 92 individual shareholders. The majority of shareholders have been privatized so that many of them are companies with prevalently private capital. The largest shareholder is Nova Banka, Bijeljina, with 30.7 per cent of shares and Dunav Osiguranje, Belgrade, with 28.8 per cent of shares. The company is managed by a board of directors consisting of 7 member shareholders and a shareholders’ assembly of 25 members. The company has a contract with the Dunav Insurance Company from Belgrade to engage in long-term business cooperation in the field of insurance, reinsurance, application of new technologies, development of information systems and other businesses.

Scope of activity, organization and management Kosig Dunav Osiguranje is registered to perform the following activities: • • • • • • • •

Life insurance Property insurance Personal insurance Obligatory and comprehensive insurance of motor vehicles Contract works insurance Insurance of goods in transport Professional liability insurance Other types of insurance

The provision of life insurance products has not yet commenced, but final preparations are under way for it to start, while other sorts of obligatory and non-obligatory insurance are being offered. Kosig Dunav Osiguranje AD Banja Luka covers the entire area of the Republic of Srpska, and has 8 branch offices – Banja Luka, Gradiska, Bijeljina, Brod, Trebinje, Mrkonjic Grad, Projedor and Foca – and offices in 26 other locations. The company does not have a presence in the territory of the Federation of Bosnia and Herzegovina. However, Kosig Dunav Osiguranje AD Banja Luka is currently working on creating conditions for entering the insurance industry in the Federation of Bosnia and Herzegovina. Kosig Dunav Osiguranje AD Banja Luka employs 172 people, of which 25 have completed university degree education and 23 have completed further

Bosnia and Herzegovina: Kosig Dunav Insurance1 183

education. The management of the company comprises experienced, hardworking and creative university-educated managers with backgrounds in machine engineering, economy and law, with 10–20 years of experience in the insurance industry and in other business activities. In addition, Kosig Dunav Osiguranje prides itself on its comprehensive use of technology in all phases of its work. We have just completed a feasibility study for a new information system with more powerful hardware, software solutions and a better communications network to maintain our performance at a high level.

The scope of insurance activities Kosig Dunav Osiguranje enjoys a good reputation in the insurance market and boasts of 2,400 company clients, of which 600 have property insurance, 1,600 collective accident insurance and 200 comprehensive company insurance. We have provided more than 44,000 insurance policies, with 38,000 policies covering automobile liability insurance and 6,000 policies covering other types of insurance. Among others our biggest insured parties include the following: • • • • • • • • • • • • • • • • • • • • • • • •

Rafinerija nafte, Brod Srpske Poste, Banja Luka Banjalucka Pivara, Banja Luka Petrol Srpske, Banja Luka Glas Srpski, Banja Luka Integral Inzenjering, Laktasi Krajina Petrol, Banja Luka Niskogradnja, Laktasi Vitaminka, Banja Luka Fruktona, Banja Luka Vodovod, Banja Luka Centar komerc banka, Banja Luka Nova banjalucka banka, Banja Luka BRC Banja Vrucica, Teslic Rudnik Ljubija, Prijedor Ind keksa ‘Mira’, Prijedor Ribnjak Sanicani, Prijedor Industrija alata, Trebinje HE na Trebisnjici, Trebinje Rudnik i TE, Gacko DIPO Podgradci, Gradiska Metal, Gradiska Zitopromet, Bijeljina Pavlovic International Banka, Bijeljina

184 Profiles of Dynamic Companies

• Hypo Alpe-Adria-Banka, Banja Luka • Elektrokrajina, Banja Luka Our clients come from different fields – industry, trade, banking, government agencies, health, education and others – and, by size, are large, medium and small companies, independent shops, institutes and individual insurance parties. In cases of insuring against risk above one’s own cover, the methodology for which is determined by a certified actuary, the company covers the extra risk through reinsurance. Our reinsurance is provided through Dunav Reosiguranje Belgrade, which in turn coordinates reinsurance with wellknown reinsurance companies – Swiss Re, Lloyd’s, Munich Re, Scor and others. Since the company was established, it has enjoyed steady and continual growth in the size of its business, and in the last two years has achieved the following results:

1. Invoiced premiums 2. Total income 3. Profits 4. Business property 5. Reserve profits 6. Number of workers 7. Number of concluded policies

Currency* BAM BAM BAM BAM BAM BAM BAM

2004 13,885,600 16,532,000 940,295 20,328,574 4,695,771 166 42,298

2005 16,798,300 18,214,000 994,473 23,008,652 5,542,039 172 44,047

Index 121 110 106 113 118 104 104

BAM – convertible marks

The company consistently applies professionalism in practice, respecting economic principles, the interests of its insurers and shareholders and existing laws. By doing this it achieves the following: • Protection of the founding capital, ie the shareholder • Maintenance of reserves at required and necessary levels • Maintenance of permanent liquidity and the ability to fulfill financial obligations The structure of the insurance premium is such that the majority is represented by auto insurance (60.1 per cent), property insurance (25.2 per cent), comprehensive insurance (6.2 per cent), collective insurance of workers (5.9 per cent) and other insurance (2.6 per cent).

Efficiency in settling compensation claims Kosig Dunav Osiguranje received 2,758 damage claims in 2005, which is 269, or 9 per cent, less than the number received in 2004. According to structure, the majority of damage claims are related to the following:

Bosnia and Herzegovina: Kosig Dunav Insurance1 185

Collective insurance of workers Motor Property Comprehensive Other insurance

1,042 1,006 257 244 209

From the total number of registered damages, 2,200 have been settled so far and each received approved compensation amounting to 4,330,595 convertible marks (BAM). Kosig Dunav Osiguranje AD Banja Luka ensures that it efficiently and rightfully settles the damage claims of its insurance parties.

Business results and market position Kosig Dunav Osiguranje enjoys a favourable reputation in the Republic of Srpska insurance market, as well as in other markets due to its dynamic development and professionalism. Kosig Dunav Osiguranje AD Banja Luka has been proclaimed by the magazine Finance Central Europe from London as the best insurance company in the Republic of Srpska in 2005. At the same time, according to business indicators it has a significant place in Bosnia and Herzegovina and in southeastern Europe.

Bosnia and Herzegovina Southeastern Europe

By strength of capital 6th place 30th place

By total premiums 6th place 35th place

Kosig Dunav Osiguranje AD Banja Luka is also well known outside the borders of the Republic of Srpska and Bosnia and Herzegovina. Due to our successful business operations, the Business Initiative Directions from Madrid awarded us with an International gold star for quality in 2001 and in 2005 the same award in the platinum category.

Future outlook Based on its performance to date and its solid position in the market, Kosig Dunav Insurance Osiguranje AD Banja Luka plans to do the following: • Expand its portfolio • Introduce new types of insurance • Expand business activity to the territory of the Federation of Bosnia and Herzegovina

186 Profiles of Dynamic Companies

• Further develop our life insurance products, in accordance with the Law on Insurance Companies • Strengthen the financial potential and the guarantee fund of the company The company will also develop its immediate business in cooperation with the Dunav Insurance Company, Belgrade, a mutual cooperation that has yielded positive results. Our orientation will be grounded in professionalism, integrity, efficiency and trust, the foundation of the successful relationship we have with our customers. We believe:

Your insured item is worth more with us Kosig Dunav Insurance, Banja Luka 78000 Banja Luka, Veselina Maslesˇe 28 Tel: +387 51 211 390, 212 822, 212 818, 211 696 Fax: +387 51 211 686 Email: [email protected] Website: www.kosigdunav.com

4.4

Bosnia and Herzegovina: Krajina Kopaonik Insurance Company Krajina Kopaonik Insurance Company, Banja Luka, a joint stock company, is one of the most respected insurance companies in the Republic of Srpska. The company offers various types of non-life insurance products for the protection of property and persons enabling efficient insurance coverage across the whole territory of Republic of Srpska (49 per cent of Bosnia and Herzegovina). The Krajina Kopaonik headquarters is located in Banja Luka, the largest town in the Republic of Srpska and the second largest in Bosnia and Herzegovina, and leads the development and coordinating functions of the company. Its network of branches across the Republic of Srpska provides simple and quick access to all services. The medium-sized company has 56 full-time employees and its insurance products are sold through a network of 150 independent sales agents and insurance brokers. Krajina Kopaonik Insurance Company was founded in 1991, by Kopaonik Insurance Belgrade and Medical Electronics Banja Luka, each holding 50per cent ownership. At that time, Krajina Kopaonik worked for and on behalf of Kopaonik Insurance Company from Belgrade. In 1993, Krajina Kopaonik Insurance began operating as an insurance joint stock company. Recently, the insurance sector in Bosnia and Herzegovina and surrounding countries has experienced structural changes resulting from mergers, takeovers, company sales or other types of ownership change. Krajina Kopaonik has also experienced changes in its ownership structure. In October 2007, Slovenian Triglav Insurance Company (Ljubljana) bought a majority share package of Krajina Kopaonik and now holds 95 per cent of the ownership of Krajina Kopaonik Insurance. By joining the Triglav Group, Krajina Kopaonik is demonstrating its support for reforms in the insurance industry of Bosnia and Herzegovina and increasing its potential for further development of the insurance industry in South Eastern Europe.

188 Profiles of Dynamic Companies

The insurance market in Bosnia and Herzegovina Bosnia and Herzegovina’s two entities, Republic of Srpska and the Federation of Bosnia and Herzegovina, each possess their own government and judicial system. In the Federation of Bosnia and Herzegovina, the governmental organization is further split into cantons which in turn have their own separate governments, laws and judicial systems. The insurance sector is regulated by its own specific laws concerning insurance of property and life insurance. Even though the laws and legal practice are almost identical in both entities, the rules are not applied and it is nevertheless very difficult to do business across the different entities. The insurance market in Bosnia and Herzegovina is largely unregulated, making it very difficult to do business. Reform in the insurance sector will improve regulation and enforcement. Insurance companies in the region offer only a limited variety of insurance products (eg voluntary, supplementary and medical insurance) because of restrictions in place by regulators. Furthermore, a section of the insurance market has yet to be reformed and specific registration is required for life insurance products. Between January and June 2007, Krajina Kopaonik Insurance Company, operating only in the territory of Republic of Srpska, has achieved a 7.3 per cent market share among comparable insurance companies operating on the insurance market of Republic of Srpska. The recapitalization of Krajina Kopaonik is expected by the end of 2007, as well as the introduction of new products, bringing the company closer to its goal of a 10-per cent market share. The company is striving to create and develop modern, successful and competitive insurance company, aimed at the further advancement of insurance business in the Republic of Srpska and Bosnia and Herzegovina as a whole. To this end, Krajina Kopaonik continually trains its staff and invests in developing young personnel and works toward offering and selling new insurance products (life insurance and other voluntary insurances). HEAD OFFICE Kralja Petra I Karadjordjevica 103 78000 Banja Luka, Republic of Srpska, BiH Tel./Fax: +387 51 215 262 Email: [email protected] INSURANCE DEPARTMENT Jevrejska 16 / II 78000 Banja Luka, Republic of Srpska, BiH

Bosnia and Herzegovina: Krajina Kopaonik Insurance Company 189

Tel.: +387 51 226 361 Fax: +387 51 226 360 Email: [email protected] Website: http://www.krajinakopaonik.com/

4.5

Bosnia and Herzegovina: Eurohaus “Eurohaus, the Most Successful Brokerage House in 2005”1 “Eurohaus” doo Sarajevo Brokerage House was registered on 2 November 2001. Its founders are: 1. 2. 3. 4. 5. 6. 7.

Sˇunje Aziz, prof. dr. Kurtc´ehajic´ Suad, Dr. Gadzˇic´ Dragan B.Sc. ecc. Blekic´ Zijad, economist Hrbat Mesud B.Sc. ecc. Blatnik Jurij ´ osibegovic´ Fadil, ecc. C

Eurohaus Brokerage House obtained its permit to perform brokerage operations of securities transactions from the Securities Commission of the Federation of Bosnia and Herzegovina (FBiH), No. 04-19-155/03, dated 17 April 2003, and permits to operate as a stockbroker, No. 04-19-793/05, dated 12 January 2006. Eurohaus Sarajevo Brokerage House was one of the first brokerage houses in FBiH. Since its foundation, we have always been among five most successful brokerage houses in the FBiH. The brokerage house offers the following services: • Receipt of orders for purchase or sale of securities; • Execution of orders at the stock market or any other regulated market on behalf of the Brokerage House and for the benefit of the Customer; • Maintenance of accounts of dematerialized securities; • Operations of issue of securities; • Operations regarding acquisition of companies; • Operations regarding introduction of securities into public trade; • Operations regarding securities ownership transfer; • Technical organization of issuance of all types of securities; • Operations regarding representation of customers at meetings of stock corporations; 1

As acknowledged by the Sarajevo Stock Exchange dd Sarajevo.

192 Profiles of Dynamic Companies

• Operations regarding preparations of founding assemblies; • Provision of information on conditions on the market to customers.

Vision One of our main goals is to become Bosnia and Herzegovina’s leading financial service provider participating in global financial markets. We want to offer the maximum choice of investment options to our customers, while always respecting the principle of placement diversification and risk dispersion. A further goal of Eurohaus Sarajevo Brokerage House is to actively assist society through its various activities.

Strategy The strategy of Eurohaus Sarajevo Brokerage House is to provide services to its customers in a new flexible way in order to satisfy high-level financial service needs based, first of all, on competence. The company intends to follow international development trends, reducing the time needed for implementation of new projects, continually improving its products and services. The prescribed strategy will be realized in the following ways: • The continual training of its employees; • Investments in equipment and software tools for support of financial services; • Education of the public in the field of financial markets; • Provision of personal service, permanent availability, flexibility and reliable information to customers; • The development of business cooperation with other players in neighbouring financial markets; • Active participation in creating and suggesting new activities aimed at developing Bosnia and Herzegovina’s financial markets and its connection with global financial markets.

Presence in Bosnia – network of branch offices Eurohaus has 11 branch offices in Bosnia, ranging from regional and industrial centres of Bosnia to smaller communities with strong financial backgrounds and traditions. The network is to be further expanded both within national borders and abroad.

Bosnia and Herzegovina: Eurohaus 193

Expansion and presence in regional stock markets Since our goal is to become the leading Bosnia and Herzegovina financial services provider and participant in global financial markets, we have successfully managed to expand our services to regional stock markets such as the Banja Luka stock exchange and Montenegro.

References Eurohaus Brokerage House has undertaken several significant projects, among which: • • •

•

• •

Tender made by Wienerberger, Austria for IGM d.d. Visoko; Tender made by VF Sarajevo for Progres d.d. Lukavac company; Tender made by Intesa Holding International S.A. Luxembourg for ABS Bank d.d. Sarajevo; Tender made by Nova Ljubljanska banka d.d. Ljubljana for Tuzlanska banka d.d. Tuzla; Brokerage in purchase/sale of 83 per cent of Tuzlanska banka d.d. Tuzla Tender made by Steiermarkische Bank und Sparkassen AG for ABS Bank dd Sarajevo

194 Profiles of Dynamic Companies

Awards • Bronze Plaque at the First International Conference of the Sarajevo Stock Exchange, on the fifth anniversary of operations of the Sarajevo Stock Exchange, for the total amount of turnover of more than 311.7 million convertible marks (BAM) made on the Sarajevo Stock Exchange. • Bronze Plaque at the First International Conference of the Sarajevo Stock Exchange, on the fifth anniversary of operations of the Sarajevo Stock Market, for the total number of more than 55,779 transactions made on the Sarajevo Stock Exchange.

Active assistance to the society In cooperation with the University of Sarajevo, School of Economics and Business, we have an ongoing programme stimulating its best students with financial assets to invest in SASE with the aim of providing practical knowledge to its students.

The staff The Eurohaus Sarajevo Brokerage House recognizes its personnel as one of the key elements in its operations. Choice and selection of personnel is a task performed by top management, and the process is given special attention. As a part of its strategy, the Eurohaus Sarajevo Brokerage House undertakes continuous education of employees, such as specialized studies, post-graduate studies, education through seminars in Bosnia and Herzegovina and abroad. Presently, 32 employees work for Eurohaus Sarajevo Brokerage House:

Master of Business Administration University qualifications Two-year post-secondary school qualifications Secondary school qualifications

1 employee 8 employees 2 employees 21 employees

Eurohaus Sarajevo Brokerage House employees have passed professional examinations:

Investment advisors Brokers

4 employees 6 employees

Bosnia and Herzegovina: Eurohaus 195

The hardware Eurohaus Sarajevo Brokerage House follows technological development trends and has adapted to such trends by continuously improving its hardware. All branch offices are equipped with the most modern computer– telecommunication equipment, adequate software solutions as well as telecommunication lines enabling Eurohaus Sarajevo Brokerage House to function as one unit through its VPN connection. We will be glad to inform you more about our company and details about its business.

Eurohaus d.o.o. Sarajevo Brokerage House Azize Sacirbegovic 16 71000 Sarajevo Bosnia and Herzegovina Tel: +387 33 720 900 Fax: +387 33 710 610 Email: [email protected] Website: www.eurohaus.ba

4.6

Bosnia and Herzegovina: BOBAR Group Scope of activities The BOBAR Group has been present in the business world since 1989. It is an entity which, by scope and the variety of business interests in these times of transition, represents a leading business conglomerate in Bosnia and Herzegovina and retains a distinguished position in the region of South East Europe. Drawing upon a contemporary business organizational model, BOBAR Group has become a synonym for permanence, sound business principles and success. This formula for success also includes continuous workforce development and intelligent investments. Alongside dedicated work practices, discipline and knowledge, the BOBAR Group motto sums up its business philosophy ‘A person who knows exactly what they want to do, will do it!’ Over the last 18 years, a great deal has been accomplished and it has been said that ‘Gavrilo Bobar is one of the most successful entrepreneurs in Bosnia and Herzegovina and he has a habit of fulfilling his goals.’ (John Muir, EuroInvest, London, 2000) The BOBAR Group encompasses 24 companies in Bosnia and Herzegovina, Montenegro and Serbia and has company headquarters in FYR Macedonia, Germany, the United States and United Kingdom and operates 35 different types of businesses and employs 1,500 people. The core businesses comprise insurance, banking, engineering, trading, tourism, oil trading, car vehicle inspection, international transportation, agribusiness, graphic design, mass media, etc. These activities are performed in business centres and branches in over 70 cities. BOBAR Insurance is the top insurance company in Bosnia and Herzegovina, and BOBAR Bank is the biggest holder of deposit accounts. The BOBAR Group’s next steps are aimed toward the world market with the help of our strategic partners.

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Recognition • BOBAR Osiguranje (BOBAR Insurance) and BOBAR Bank were awarded the Certificate of System Quality ISO 9001:2000/N ISO 9001:2000; • BOBAR Bank was awarded the “GOLDEN BAM” (the gold convertible mark), the award from Banks in BIH magazine. BOBAR Bank was awarded for the fastest growth of deposits; • The BOBAR logo won the Gold medal for creativity and the Grand Prix at the 54th World Exhibition of Innovation, Research and New Technologies “Brussels Eureka”. • In June 2007, the BOBAR Group gained international recognition from BID (Business Initiative Directions) and was awarded the International Star for Quality in Moscow for its quality management practices.

Community commitment The BOBAR Group is one of the very first companies in Bosnia and Herzegovina to support various cultural, sport and youth activities. The company supports significant events including various charitable, cultural and sports events which are important not only to the local community but to the country as well. The BOBAR Group helps youth in several ways, with scholarships as only one mode of supporting the young people in their wish to succeed. • Over the last 18 years, around 40–60 students received scholarships; • Free summer holidays are organized for elementary school pupils; • Supply elementary and high schools with computers, furniture and other equipment; • BOBAR Group managers are among the founders of Forum 2000; • BOBAR Radio broadcasts daily radio programmes aimed at youth; • BOBAR support events such as the awards for the sportsman of the year, awards for Miss BiH and other cultural events. The BOBAR Group places special emphasis on its support for sporting initiatives, including support for the Radnik Football Club in Bijeljina and the women’s basketball club ‘Radnik-Bobar’. The success and growth of the BOBAR Group’s business would not be possible without the personal commitment of Mr. Gavrilo Bato Bobar, the President of the BOBAR Group. He was the driving force of the company from its beginnings; he has invested his personality and authority, knowledge, energy and family name into the company. He created a core of young professionals – the future of the company – and continually invests in workforce development. Gavrilo Bobar also personally supports numerous sporting, cultural and educational events, and he was awarded ‘Manager of the Year 2001’. He is

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the Chairman of the Association of Industrialists of Bosnia and Herzegovina, Vice President of the Board of Green Card Bureau of Bosnia and Herzegovina and the President of the Insurance Bureau of Republic of Srpska. For Mr. Bobar, business is a way of life. John Muir, editor of EuroInvest, a Euromoney publication, who interviewed Mr. Bobar in the Fall of 2002, wrote the following: ‘I left the President’s office on that sunny September afternoon with a distinct feeling that if anybody in Bosnia and Herzegovina has the energy and vision to recognize the right moment and use the opportunity for this young country, that has to be Mr. Gavrilo Bobar.’

Bobar Group Ul. Filipa Visnjica 211 76300 Bijeljina Republika Srpska Bosna i Hercegovina Tel.: +387 (0) 55 232 100 (Main Reception) Tel.:+ 387 (0) 55 232 101 (Office of the President) Fax: + 387 (0) 55 210 898 Main Email: offi[email protected] Corporate Governance: [email protected] Office of the President: [email protected]; [email protected] Website: www.bobar.com

4.7

Bosnia and Herzegovina: City of Banja Luka Banja Luka is the biggest town in the Republic of Srpska and the second biggest in Bosnia and Herzegovina. It is the town in which the headquarters of all the state institutions are situated. Situated on both banks of the Vrbas River, it occupies more than 15,000 hectares and is inhabited by about 250,000 people. Banja Luka is distinguished by its wide boulevards, parks and tree-lined streets. The fortress of Kastel built by the Romans, a walk called “gospodska ulica” with its old buildings, and other cultural sites gives the town its unique appeal.

The current name of the town was originally mentioned in the written records from 1494. Ever since the Paleolithic era, this area had been inhabited by various tribes, such as the Illyrian tribe of Maezaei, in the preRoman period, and Slavic tribes after the fall of the Roman Empire during the 6th and 7th century A.D. The International Centre for the Culture of Peace, named “The Little Ambassadors of Peace”, was opened in Banja Luka in 2003. Banja Luka is an open and hospitable town that welcomes visitors with open arms and a pure heart. The population includes people of many faiths, of which those of the Orthodox, Roman Catholic and Islamic are the most numerous. Representatives of numerous national minorities such as

202 Profiles of Dynamic Companies

Slovenians, Jews, Romanies, Czechs, Ukrainians, Slovaks, Hungarians, Macedonians, Germans, Poles and Italians also live in Banja Luka. Considerable attention is paid to international cooperation. In the last five years, Banja Luka signed protocols on cooperation with Belgrade (Serbia), Moscow (Russia), Patras (Greece), Lviv (Ukraine) and Kaiserslautern (Germany). Signing the protocol on cooperation with the town of Kranj (Slovenia) is being worked on too, and resuming regional and worldwide cooperation with other cities and towns with which cooperation protocols signed by Banja Luka 20 years ago are also under way. Banja Luka joined the Citizen’s Pact for South Eastern Europe, which aims to develop regional cooperation to promote the principles of stability, peace and democracy. Banja Luka is also a member of BALCINET, the network of the major Balkan cities. Banja Luka has solid road connections with Sarajevo, Zagreb and Belgrade (which is mostly connected by motorway). Many world and European centres are within reach by air, with an airport situated a few kilometres to the north of the town. Banja Luka is also an important railway hub.

Prior to 1992, Banja Luka had a thriving economy and a well-developed industrial infrastructure – good power resources, large capacity in steel production and strong processing industries. However, as a consequence of the four-year war in the region, the economy went through a long period of stagnation. There was little investment in new technology, existing industrial plant became obsolete and traditional foreign trade relations, important customers and markets were lost. But now, in this new era of renewal and rapid economic growth, Banja Luka offers a young, dynamic and forward-looking business environment, in which foreign investors and business partners are welcome to participate.

Bosnia and Herzegovina: City of Banja Luka 203

Mayor and City Administration Address: Trg Srpskih vladara 1, 78000 Banja Luka Tel.: +387 51 244 444 Fax: +387 51 212 526 Email: [email protected]

Information Centre Address: Trg Srpskih vladara 1, 78000 Banja Luka Tel.: +387 51 244 463 Email: [email protected] Website: www.banjaluka.rs.ba

4.8

Bosnia and Herzegovina: Hypo Alpe-Adria-Bank Hypo Alpe-Adria-Bank d.d. has been active in the Bosnia and Herzegovina market since 2001, when it started its business operations by taking over first Auro Bank d.d. Mostar and then Kristal Bank a.d. Banja Luka, in which manner it significantly strengthened its overall position throughout Bosnia and Herzegovina. Today, Hypo Group Alpe-Adria-Bank operates in Bosnia and Herzegovina through more than 80 business units and boasts the most widely extended network of branches within the Hypo Group Alpe Adria. We operate in Bosnia and Herzegovina through Hypo Alpe-Adria-Bank d.d. Mostar and Hypo Alpe-Adria-Bank a.d. Banja Luka, both of which are considered significant business partners, not only because of the financial services they provide to natural and legal entities, but also because they are indeed one of the driving forces of Bosnia and Herzegovina’s economy. We value highly the trust of our clients and can proudly say that the success of Hypo Group Alpe-Adria-Bank is shared by all. Through our joint efforts, we have reached our high set of targets, and we achieved the leading position in the field of capital, deposits and loan portfolio in the Bosnia and Herzegovina market. Hypo Group Alpe Adria is an international finance group with more than 350 banking and leasing locations in 12 countries (Austria, Italy, Slovenia, Croatia, Bosnia and Herzegovina, Serbia, Montenegro, Liechtenstein, Germany, Hungary, Bulgaria and Macedonia) and a history stretching back over more than 110 years. The principal company of Hypo Group Alpe Adria is Hypo Alpe-Adria-Bank International AG, which has its registered office in Klagenfurt (Austria). The owners are Ka¨rntner Landesholding (44.91 per cent), the Grawe Group (41.45 per cent), Berlin & Co. (9.09 per cent) and Hypo Alpe-Adria Mitarbeiter Privatstiftung (4.55 per cent). The Hypo Group Alpe Adria network currently has over 6000 staff serving approximately 1 million customers. Hypo Alpe-Adria-Leasing Holding AG is a subsidiary of Hypo Alpe-AdriaBank International AG. The first leasing company was formed in 1990 in Austria; further subsidiaries followed in Slovenia, Croatia, Bosnia and Herzegovina, Serbia, Germany, Italy, Hungary, Montenegro, Bulgaria and Macedonia. The Hypo Alpe-Adria-Leasing Group currently has more than 600 staff at over 60 locations, serving more than 57,000 customers.

206 Profiles of Dynamic Companies

We provide secure and safe services, favourable terms and attractive products to entrepreneurs, depositors, private persons, institutions and investors. With the takeover of the Auro Bank d.d., the services and knowhow of Hypo Group Alpe Adria as an international financial group are available to you – as a client, business partner or potential future client. Our mission and strategy is to secure funds for private and public investments, which will strengthen Bosnia and Herzegovina’s economy. Our starting point is based on the premise that our clients’ advantages actually represent our own advantages. Hypo Alpe-Adria-Bank d.d. guarantees, first of all, the absolute safety of saving deposits, quality sources of funds, a wide variety of services through the branch network in Bosnia and Herzegovina, as well as safe, fast and high quality service within the whole group. Currently, we have more than 80 outlets all over Bosnia and Herzegovina, the network of which represents a healthy basis for further development in compliance with the philosophy and aims of Hypo Group Alpe Adria. Our employees can rely upon the international banking know-how of the entire group, and our clients have access to attractive products. Safety, tradition and taking care of individual market needs dominate our business activities. That is the basis for our presence in “our Alps-Adriatic region”, to which Bosnia and Herzegovina belongs. Partnership and clients’ benefits belong to our principles too, and it is particularly in this sphere that we will expand our activities in Bosnia and Herzegovina. We offer a wide variety of loan activities to entrepreneurs, as well as internal payment, professional consulting and project support. We also offer different types of loans to private individuals, as well as new products for the Bosnia and Herzegovina market, favourable loan terms and many other advantages. Hypo Group Alpe Adria’s presence on the international market allows us access to funds for economic, institutional and private investments, while still guaranteeing fast and complete service and safety to depositors. Hypo Alpe-Adria-Bank Kneza Branimira 3 88000 Mostar Bosnia & Herzegovina Tel.: +387 36 444 200 Fax: +387 36 444 235 Email: [email protected] Aleja Svetog Save bb 78000 Banja Luka Bosnia & Herzegovina Tel.: +387 51 336 500 Fax: +387 51 336 518 Email: [email protected] Website: www.hypo-alpe-adria.ba

APPENDICES

Bosnia and Herzegovina: Contributor Contact List Branko Maric Law Office Mehmeda Spahe 2 6 71 000 Sarajevo Bosnia & Herzegovina Tel: +387 33 716 030 Fax: +387 33 716 036 Email: [email protected] A member of the SEE Legal Group Website: www.seelegal.org Foreign Investment Promotion Agency of Bosnia and Herzegovina Branilaca Sarajeva 21/III 71000 Sarajevo Bosnia and Herzegovina Tel.: ++ 387 33 278 - 080 Fax: ++ 387 33 278 - 081 Email: fipa@fipa.gov.ba Website: www.fipa.gov.ba Institute for European Studies, Belgrade Slobodan G. Markovich, Kraljice Natalije 21, 11 000 Belgrade, Serbia Tel.: +381-11-2686-344 Fax: +381-11-2686-471 Email: [email protected] Website: http://www.ies.org.yu/ Karanovic & Nikolic Advokati Gunduliceva 4 78000 Banja Luka Bosnia and Herzegovina Tel: +387 51 303 100 Email: [email protected]

210 APPENDICES

Lepenicka 7 Belgrade, Serbia & Montenegro Tel: +381 11 3094 238 Fax: +381 11 3094 223 Office: +381 11 3094 200 Email: [email protected] Website: www.karanovic-nikolic.co.yu A member of the SEE Legal Group Website: www.seelegal.org KPMG Fra And-ela Zvizdovic´a 1 71000 Sarajevo BiH Tel.: +387 33 29 65 73 Fax: +387 33 22 10 49 Email: [email protected] Website: www.kpmg.ba Raiffeisen Bank dd BiH Kneza Domagoja b.b. Mostar Bosna i Hercegovina Tel.: +387 36 398 398 Fax: +398 36 398 367 Email: [email protected] Website: www.raiffeisenbank.ba Sarajevo School of Economics and Business Anesa Vilic´, Referent in Center for teaching development, Trg Oslobod-enja – Alija Izetbegovic´ 1 Sarajevo Bosnia and Herzegovina Tel.: +387 61 715 175 Fax: +387 33 447 560 Email: [email protected] Website: www.efsa.unsa.ba Tourism Association of the Federation of Bosnia and Herzegovina Branilaca Sarajeva 21/2 71 000 Sarajevo Bosnia and Herzegowina Tel.: + 387 33 252 926 Fax: + 387 33 252 901 Email: [email protected] Website: www.tourism.ba

Bosnia and Herzegovina: Contributor Contact List 211

UniCredit Group Hohenstaufengasse 6, A-1010 Wien, Austria Tel.:+43 (0) 50505 41957 Fax: +43 (0) 50505 41050 Email: [email protected] Email: [email protected] Website: http://ceeeconomicresearch.ba-ca.com Debora Revoltella Chief Economist for the CEE region Tel.: +39 02 4762 4053 Email: [email protected]

Bosnia and Herzegovina: List of Advertisers Bobar Group Ul. Filipa Visnjica 211 76300 Bijeljina Republika Srpska Bosna i Hercegovina Tel.: +387 (0) 55 232 100 (Main Reception) Tel.: + 387 (0) 55 232 101 (Office of the President) Fax: + 387 (0) 55 210 898 Main e-mail: offi[email protected] Corporate Governance: [email protected] Office of the President: [email protected]; [email protected] Website: www.bobar.com City of Banja Luka Mayor Address: Trg Srpskih vladara 1, 78000 Banja Luka Tel.: + 38 7 51 244 444 Fax: + 38 7 51 212 526 Email: [email protected] City Administration Address: Trg Srpskih vladara 1, 78000 Banja Luka Tel.: + 38 7 51 244 444 Fax: + 38 7 51 212 526 Email: [email protected] Information Centre Address: Trg Srpskih vladara 1, 78000 Banja Luka Tel.: + 38 7 51 244 463 Email: [email protected] Website: www.banjaluka.rs.ba Eurohaus d.o.o. Sarajevo Brokerage House Azize Sacirbegovic 16 71000 Sarajevo Bosnia and Herzegowina

214 APPENDICES

Tel: +387 33 720 900 Fax: +387 33 710 610 Email: [email protected] Website: www.eurohaus.ba Hypo Alpe-Adria-Bank Kneza Branimira 3 88000 Mostar Bosnia & Herzegovina Tel. + 387 36 444 200 Fax. + 387 36 444 235 Email: [email protected] Aleja Svetog Save bb 78000 Banjaluka Bosnia & Herzegovina Tel. + 387 51 336 500 Fax. + 387 51 336 518 Email: [email protected] Website: www.hypo-alpe-adria.ba Kosig Dunav Osiguranje Banja Luka 78000 Banja Luka, Veselina Maslesˇe 28 Tel.: +387 51 211 390, 212 822, 212 818, 211 696 Fax: +387 51 / 211-686 Email: [email protected] Website: www.kosigdunav.com Krajina Kopaonik Insurance HEAD OFFICE Kralja Petra I Karadjordjevica 103 78000 Banja Luka, RS, BiH Tel./Fax: + 387 51 215 262 Email: [email protected] INSURANCE DEPARTMENT Jevrejska 16 / II 78000 Banja Luka, RS, BiH Tel.: + 387 51 226 361 Fax: + 387 51 226 360 Email: [email protected] Website: http://www.krajinakopaonik.com/ Raiffeisen Bank dd BiH Danijela Ozme br. 3 71 000 Sarajevo

Bosnia and Herzegovina: List of Advertisers 215

Bosna i Hercegovina Tel.: +387 33 26 80 80 Email: [email protected] Website: http://www.raiffeisenbank.ba UniCredit Group HVB Central Profit Banka Zelenih beretki 24 71000 Sarajevo Tel.: +387 33 562-834 Email: [email protected] Nova Banjalucka Banka Marije Bursacc´ 7 78000 Banja Luka Tel.: +387 51 243 231 Email: [email protected] UniCredit Zagrebacka banka Kardinala Stepinca b.b 88000 Mostar Tel.: +387 36 312112 Email: [email protected]

Index A accounting procedures/requirements, 163–6 administrative divisions, 9–11, 23, 89 agriculture, 18, 47–51 ban on foreign land ownership, 151 support for, 26 airlines, 91 Albania, 17, 18, 27 Alexander, King of Yugoslavia, 4 Aluminij Mostar, 63–5 aluminium, 61, 63, 80 Andric, Ivo, 13–14 arbitration, 125, 129–30, 132 arms trade/sector, 92 Ashdown, Paddy, 12 assignment of intellectual property, 146 ATMs, 36–7, 171 auditing/audit board, 104, 163–6 Austria, 41 Austria-Hungary, 73 occupation/annexation of B-H, 4 automotive industry, 79–85 B BALCINET, 202 banks in B-H, xi, xvii–xviii, 25–38, 169– 73, 175–9, 197–8, 205–6 assets of, 36 capital adequacy rate, 31–2 concentration in sector, 35 conservatism of, 36 in foreign ownership, xi, 30, 35, 41 mergers and acquisitions, 35 number of, 35 regulatory structure, 30–3, 37, 92 see also Central Bank of B-H Banja Luka, 10, 34, 201–3 Stock Exchange, 97 banovinas, 4

bauxite, 61 Basel Capital Accord, 31 Basel II, 37 Baucus, Max, 155 Bec´irbegovic´, Manal, xvii B/H/S, 13 Bijedic, Dzemal, 6 Bijeljina, 10 Bildt, Carl, 12 bioenergy, 59, 68, 70 Bobar, Gavrilo, 197–9 BOBAR Group, 197–9 Bologna Declaration, 83 Bosanski Brod, 68 Bosnia civil war in, 8 economy under communism, 6 independence in 1992, 7–8 as part of Yugoslavia, 4–5 republic of, 5 Bosnia and Herzegovina location, xi, 39, 71, 84 three banovinas as part of Yugoslavia, 4 Bosnia and Herzegovina, Federation of, 9–10, 19, 81 accounting and auditing in, 163–5 legislation and regulation in, 98–110, 118–24, 130–2, 153 taxation in, 156–7 Bosniak member of Presidency, 11 population presence in B-H entities, 10 view of B-H history, 3 branch offices, 98, 110 Branko Maric Law Office, xv, 209 Brcˇko, District of, 10–11, 89–90 legal differences in, 110–11, 124, 133, 153–4

218 Index broadcasting, public, 23 brokerage services, 191–5 budget of B-H, 20–1 Bulgaria, 18 business forms of entity, 91–111 unincorporated, 91–2, 98, 99–101, 110 see also company by-laws, company, 106 C cadastral register, 150 cantons in B-H, 9–10 capital increase/decrease in registered, 102, 107–8 minimum required for joint stock companies, 96, 102, 111 minimum required for limited liability companies, 95, 106 cards, debit and credit, 36–7, 171, 176 casualties, war, 8–9 caves, 74–5 Central Bank of Bosnia and Herzegovina, xi, 19, 22, 28–30 Central European Free Trade Agreement (CEFTA), xi, 27, 41 certification see standards chambers of commerce, 129 chetnik movement, 5 climate, 47, 71 coal, 62, 67–8 coastline, 71 collective agreements, 113–14, 116, 120, 123 community commitment, enterprise, 198–9 Communist Party, 5, 7 company joint stock, 92–3, 95–7, 101–5, 108 limited liability, 92–5, 104, 105–10, 111 non-resident, 156 structures and incorporation, xii, 91– 111 termination of, 98–9, 105, 108 compensation schemes, 21 Congress of Berlin, 4 constitution, 25, 89–90, 125, 127

of communist Yugoslavia, 7 efforts to adopt new, 16 of 1921, 4 Constitutional Courts, 11, 127 construction land, 151–2, 153, 154 Contact Group, 12 contracts of employment, 114–23 international, 95 to establish joint stock company, 101–2 to establish limited liability company, 105–6 conventions, international, 11, 75, 127, 136 copyright, 137–8 council of employees, 123 Council of Ministers, 11 court system, 10, 11, 125–7, 130–1, 133 hearings, 128 credit cards, 36–7, 171, 176 cross-border, 178 debt capital market, 27 growth, 18, 22, 36 rating of B-H, 27 crime, fight against organized, xii Croatia, 4, 13, 18, 27, 41 Banovina of, 5 independence in 1991, 7 (Nazi-created) State of, 5 Croats, 3–6 casualties in civil war, 9 member of Presidency, 11 numbers decreasing in 1980s, 7 view of history of B-H, 3–4 cultural heritage, 73–4 of Bjelasˇnica, 75 currency of B-H, xi, 19–20, 23, 27 central bank control of, 29 currency board, xi, 19, 27, 28–9, 41 current account, deficit on, 21, 41 customs, 10, 41 duty, 159 procedures, 41 and intellectual property, 148 D Dayton Peace Accord, 8–9, 12, 16, 17, 23, 89

Index 219 defence, xii, 11 reform of system, xii, 11, 20 democracy score, 16 Deposit Insurance Agency of B-H, 33–4 discrimination, legislation to prevent, 118 dispute resolution, 125–33 with international elements, 129 documentation for company registration, 94–5, 97, 109 post-registration for companies, 109– 10 Dodik, Milorad, 15, 16 E economic conditions in B-H, xi, 17–24, 39 reforms needed, 25–6 selected indicators, 23, 40 elections in B-H, 7, 15 in Yugoslavia, 7 electrical supply system, 26 Embassy of B-H (London), xiii employment regulations, 113–24 for foreigners, 118, 123–4 energy sector, 42, 67–70 mineral fuels, 62, 67–8 regulation, 70 renewable sources, 68–70 enforcement procedures, 128 entities as administrative division of BH, 9–10 entrepreneurs, 91–2 environment, natural, 59 and ecotourism, 75 protection of, 59–60 euro, the, xi, 19–20, 27 Eurohaus, 191–5 European Bank for Reconstruction and Development (EBRD), 55, 69, 77 Sector Study on Sustainable Forestry and Forest Industry Business in B-H, 57 European Court of/Convention on Human Rights, 11, 127 European Partnership, xi European Union autonomous trade measures, xi

EU–B-H Consultative Task Force, 25 candidate for membership, xi, 15, 23, 25 financial assistance from, 23 role in Western Balkans, xi–xii, 43 special representative in Bosnia, 23, 25 standards, need to comply with, 43 trade with, 42–3 visa facilitation agreement, xii excise duties, 159 exports, xii, 18, 21–2, 42 of automotive parts, 84 need to foster, 26 structure of, 43 of wood and furniture, 53, 54 see also trade, foreign

F financial services, xix, 17, 28–38 see also banks, insurance First World War, 4 fiscal policy, 20–1 fish farming, 48 food organic, 48–9 processing, 47–51 production and consumption statistics, 49 standards/certification, 43, 49 foreign direct investment, 18, 19, 22–3, 27, 39, 91 in the automotive sector, 79–80, 84–5 examples in wood sector, 58 investing nations, 41 in joint ventures, 68 levels of, 27, 40 liberalization of, 27, 41 in metal processing, 63–5 and privatization, 22, 64–5, 80 in the steel industry, 64 in the wood sector, 56–7 and work permits, 118 see also investment foreign exchange reserves, 22, 27, 29 Foreign Investment Promotion Agency (FIPA), xv, 81, 83, 209 forestry, 53–60 forest, virgin, 75

220 Index

H Habsburg Empire, 4 Herceg-Bosna, 8 Herzegovina as republic within Yugoslavia, 5 history of B-H, 3–9 hotels, 76–7 House of Peoples, 11 House of Representatives, 11 party membership, 15–16 Hrvatska demokratska zajednica (HDZ), 7 hydroelectric power, 67, 68–9 Hypo Alpe-Adria-Bank, 205–6

independence of B-H, 8 of Croatia and Slovenia, 7 industrial designs, protection for, 144–5 industrial production, 17–19, 21 age of plant and machinery, 81–2 foreign investment in, 41 growth in, 26 inflation rate, xi, xii, 19–20, 26 Institute of Accountants and Auditors, 164 Institute for Accreditation of B-H (BATA), 43 Institute for European Studies, xvi, 209 Institute for Intellectual Property, 136, 138–45 insurance, 165 bank deposit, 33–4 companies, 181–6, 187–9, 197 intellectual property, 135–48 infringement proceedings, 147–8 transfer of rights, 146–7 Inter-Entity Boundary Line, 10 International Court of Justice, 14 International Criminal Tribunal for the Former Yugoslavia, xii, 14 International Energy Agency (IEA), 67 International Federation of Organic Agriculture Movements (IFOAM), 49 International Monetary Fund (IMF), 20–1 investment in B-H fund for stimulating, xii joint ventures, 68 in plant and equipment, 82 promotion of foreign, xv in tourism, 76–7 see also foreign direct investment iron ore, 61 Izetbegovic, Alija, 7–8, 15

I imports, 18, 21–2, 42 approval procedures, 159 import cover, 19–20 of plant and equipment, xiii structure of, 44 see also trade, foreign

J Japan International Cooperation Agency, 83 JNA see Yugoslav People’s Army judiciary, 11 reform of, xii see also courts, legislation

Forestry Stewardship Council (FSC), 55–6 free trade zones, 157 Freedom House, 16 fruit production, 48, 50 furniture industry, 54–5, 58–9 G Gardo´, Sa´ndor, xix gas sector, 68 GDP, xi, xii, 17, 23, 40 of Bosnia, 6 growth rates, 17, 22, 26, 40 per capita for various states, 18 genocide, 14 geographical indications, registration of, 145–6 geography of B-H, 47, 71, 75 geothermal energy, 69 government of B-H, 11–17, 23, 25, 70 difficulties after October 2006 elections, 25 functions of central government, 90 see also administrative divisions, legislation

Index 221 K Karadzic, Radovan, 7–8, 14, 15 Karanovic & Nikolic, xvi–xvii, 209–10 Komsic, Zeljko, 16 Konjic, 72 Kosig Dunav Insurance, 181–6 Kosovo, 6, 27 Kozaricˇ, Kemal, 19 KPMG, xvii, 210 KRAV Certification Institution, 49 Krajina Kopaonik Insurance Co., 187–9 L Labour Law, 113–24 Lajcˇak, Miroslav, 12, 23 land register, 149–50, 153 languages, official, 12–13 lawyers/law practices, xv, xvi–xvii League of Communists of Yugoslavia, 7 legal assistance, 95 legal firms, xv legal framework/system for foreign investors, xi, 27 introduction to, 89–90 legal proceedings, 124–33 concerning intellectual property, 147–8 legislation, 89–166 on banking, 30, 34, 37 on business structures, 91–111, 163– 6 on defence system, xii on employment, 113–24 on environmental protection, 59–60 on foreign direct investment, 41, 91 on foreign trade, 40–1 on insurance, 188 on intellectual property, 135–48 local discrepancies in, 90 on public notaries, 153 on real estate, 149–54 on restitution and indemnification, 152 on vehicle imports, 84 licensing of intellectual property, 146–7 living standards, xiii M Macedonia, 17, 18, 42 management, board of, 96, 104, 107

market research, 110 marketing, 110 Markovic, Ante, 7 Markovic, Emma, xv Markovic, Slobodan G., xvi maternity leave, 121 media public broadcasting reform, 23 restrictions on foreign ownership, 92 mediation, 129, 131–2 Med-ugorje, 74 mergers, 105, 108 metal-processing industry, 19, 61–5, 81 Mid-term Development Strategy, 26 Milosevic, Slobodan, 8 minerals, industrial, 62 mining, 61–2 of coal, 62, 67 Ministry of Foreign Trade and Economic Relations (MoFTER), 70, 91–2, 110 Mittal Steel, 63–5 Mladic, Ratko, 14 mobbing, 118 Moldova, 27 monetary policy, 29, 90 Montenegro, 18, 27 Moody’s Investor Services, 27 Mostar, 9, 61, 74 Muir, John, 199 municipalities (as administrative unit), 9, 89 Muslims, 3–6 biggest national group, 6 causalities in civil war, 8–9 massacred in Srebrenica, 8 as separate nationality in 1971 census, 5

N names of companies, 94, 97 National Assembly, 11 national(ist) movements, 4, 7 parties, 7 national parks, 75 NATO, xii bombing by, 8 hoped-for membership, xii

222 Index Partnership for Peace programme, xii, 15 presence in B-H (1996), 8 Riga summit, 15 Neum, 71–2 Nicholl, Peter, 19 notice, periods of, 116–17 O Office of the High Representative, 9, 12, 16, 23, 25, 152 oil consumption of, 68 and gas routes, 39 petroleum, 27 refining, 68 Ottoman Empire, 3, 73 overtime work, 115–16, 120 P partnerships, as business entity, 92, 99– 101 patents, 139–43 international, 143 Paul, Prince Regent of Yugoslavia, 5 payments system, 30, 36–7 Pech, Serbian Patriarchate of, 3–4 Pehar, Zˇeljko, xviii Pension Disability Insurance Fund, 109 pensions, reforms of, 37 Petritsch, Wolfgang, 12 petroleum see oil pharmaceuticals, 48 plant and machinery, age of, 81–2 police force, 10, 15, 23, 25 political parties, 7, 15–16 (see also individual parties by name) political situation, 15–16 population in 1931, 4–5 in 1948, 6 of B-H today, 9–10 Pozderac, Hamdija, 6 presidency of B-H, 7, 11, 16 privatization, xii, 18, 22 automotive industry, 80–2, 84 of construction land, 151–2 and FDI opportunities, 56 incomplete in Srpska, 81

of the metal processing industry, 64– 5 oil refinery, 68 of telecommunications, 42 probation, employee, 119–20 procurers, 109 profits for partnerships, 101 reinvestment of taxable, 157 Public Notary, 153 public sector level of spending, 18, 20–1 Pudschedl, Walter, xix Q quality management, 56 R Radmanovic, Nebojsa, 16 Raiffeissen Bank dd BiH, xvii–xviii, 169–73, 210 Ramsar International Convention, 75 raw materials exports of, 42 imports of, 82 real estate, 149–54 foreign ownership of, 150–1 referendum on independence, 8 religion, 3–4, 5, 13–14 and tourism, 74 repatriation of profits, 27, 91 reports, company, 96, 103–4, 165 representative office, 91, 110 research and development (R&D), xii, 83 Research and Documentation Centre, 8 reserves see banks, foreign currency resistance movement in Bosnia (1940s), 5 restitution of confiscated property, 152 retail automotive, 84 loans and deposits, 36 sales, 18 Revoltella, Debora, 211 risk credit risk management, 32, 37 foreign exchange, 33 measurement, 37–8 rivers and hydro power, 69 Romania, 18 Russia, 39

Index 223 S sanctions, economic, 8 Sarajevo, 9–10, 76, 89 Andric’s letter from, 13–14 Olympics in, 6, 72 population of, 6 School of Economics and Business, xviii–xix, 210 Schwarz-Schilling, Christian, 12, 23 Sephardic Jews, 5, 13, 74 Serbia, 13, 18, 27 Serbs, 3–6 casualties in civil war, 9 in Croatia, 7 member of Presidency, 11 numbers decreasing in 1980s, 7 propaganda in 19th century, 4 in Republic of Srpska, 10 view of Bosnian history, 3 services sector, 17 severance payments, 117–18, 122–3 shareholders meetings, 102–3, 107 shares in joint stock companies, 96–7, 101–2 in limited liability companies, 93, 105, pre-emptive right to purchase, 97 Silajdzic, Haris, 15, 16 single economic area, need for, 39–40 skiing, 72, 77 Slav people, 3 Slovenia, 4, 41 independence of, 7 social security contributions, 121, 160 solar energy, 69 spas, 73 sport, 198 Srebrenica, 8, 14, 80 Srpska, Republic of, 8–9, 10, 13 accounting and auditing in,165 economic situation, 19 incomplete privatization in, 81 legislation and regulation in, 91–7, 113–18, 125–30, 149–52 taxation in, 157–8 Srpska demokratska stranka (SDS), 7, 15 Stabilization and Association Agreement (SAA), 15, 23, 25–6, 84

standards, international and certification, 82 food, 43, 49 forestry management, 55–6 statistics, shortcomings of, 18 steel industry, 63–5 stockbrokers, 191–5 Stranka demokratske akcije (SDA), 7, 15, 16 Stranka nezavisnih socijaldemokrata (SNSD), 15 Stranka za BIK (SBIH), 15 supervisory board, 96, 103–4, 107 Supreme Court, 10, 130–1 sustainable development, 55

T taxation, 20, 155–61 company registration for, 110 corporate, 155–8 for foreign investors, 27, 156 income tax, 159–60 of real estate transactions, 150, 153 reform of, xii, 26 tax allowances, 161 VAT see value-added tax wage tax, 160–1 technical improvements, legislation on, 143 telecommunications, 26 termination of employment, 116–17, 121–2 Tito, Josep Broz, 5–6 topography, 47 Tourism Association of the Federation of B and H, xix–xx, 210 tourism, xix–xx, 71–7 statistics, 76 tourist associations, 76 trade, foreign, 39–44 partners in, 42 policy on, 40–1 see also exports, imports trade agreements, xi, 27, 41, 85 with the EU, xi, 41, 85 trade balance, xii–xiii, 21–2, 27, 41–4 trade unions, 123 trademark registration, 138–9

224 Index training, technical for automotive industry, 83 transport, 202 tribunals, arbitral, 125, 129–30 Tudjman, Franjo, 8 Turkey, 42 free trade agreement with, xi, 41 Tuzla, 9–10 U unemployment, xiii, 22, 39 UniCredit Group, xix, 35, 175–9, 211 United Nations Council for Human Rights, xii Regional Cooperation Council, xii Security Council, 14 United States Agency for International Development (USAID), 55, 56 universities/business schools, xviii, 83 urbanization, 6 Ustashi, 5 V vacations, legal provisions for, 115, 121 value added tax, xii, 18, 20, 21, 26, 40, 41, 150, 155, 158–9 exemptions, 158 Vienna Institute for International Economic Studies, 65 Vilic´, Anesa, xviii–xix Vjetrenica, 74–5 Volkswagen, 79–80 W wages, 18, 57, 116, 120 public sector, 20–1 wars causalties in, 8–9

civil in Bosnia, 8 crimes, 8, 14 First World, 4 for Yugoslav Succession, 3 waste management, 60 water protection, 60 welfare, social, 26 Westendorp, Carlos, 12 wind power, potential for, 69 wine making, 48, 74 Winter Olympics, 6, 72 wood processing, 53–60 certification of, 56 development opportunities, 57–8 work and residence permits, 109, 118, 124 working hours, 115, 120 World Bank, 55 World Intellectual Property Organization (WIPO), 136 World Trade Organization (WTO), xii, 26, 40 credit rating, xii World Tourism Organization, 76 Y Yugoslav People’s Army (JNA), 7–8 Yugoslavia B-H in, 4–6 constitution, 7 decentralization of, 5 foreign policy of, 6 People’s Federal Republic of, 5 wars for succession, 7–9 Z Zastava, 82, 84 Zenica, 61