Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Draft FOREIGN DIRECT INVESTMENT INCENTIVES STRATEGY OF MONTENEGRO Jun, 2006. 1 T A B LE OF CONTENTS I N T R O D U C T I O N ................................................................................................... 3 1. INTERNATIONAL MOVEMENT OF CAPITAL AND FOREIGN DIRECT INVESTMENTS ............................................................................................................... 4 1.1 Global trends in the movement of international capital................................................................ 4 1.2 International movement of capital – trends and projections for developing countries ............. 6 1.2.1 Countries of Southeast Europe and the Commonwealth of Independent States .................... 7 1.3 International movement of capital – position of Montenegro ..................................................... 9 2. COMPETITIVE POSITION OF MONTENEGRO AS A LOCATION FOR FOREIGN DIRECT INVESTMENTS ............................................................................................... 12 2.1 Montenegro – Basic information .................................................................................................. 12 2.2 Development goals of Montenegro .............................................................................................. 13 3. COMPARATIVE ANALYSIS OF MONTENEGRO AND WESTERN BALKANS REGION COUNTRIES ................................................................................................... 14 3.1 Standard risks of business operations (conventional risks) ..................................................... 15 3.1.1 The risk of general conditions of business operations – parametre – Index of Economic Freedom ........................................................................................................................................ 15 3.1.2 Country financial risk – Parametre - grade “Standard and Poors“ ....................................... 16 3.1.3 The risk of transparency of procedures and corruption – Parametre - Index of Transparency ...................................................................................................................................................... 19 3.1.4. The risk of intellectual property protection – Parametre – Intellectual Property Index ......... 20 3.2 The level of the achieved legislation reforms related to the creation of general business conditions ............................................................................................................................................. 20 3.2.1 Competitiveness of legal and economic framework of Montenegro – environment for foreign investments ................................................................................................................................... 21 3.2.2 Economic and institutional framework of Montenegro for encouraging foreign investments 25 3.3 The amount of operational costs of a foreign investor’s investment ........................................ 27 3.3.1 Education of labour – adapting to the new structure of economy and competitiveness in relation to SEE region ................................................................................................................... 27 3.3.2 Operational costs of energy, water and industrial land ......................................................... 28 4. SWOT ANALYSIS ..................................................................................................... 29 5. STRATEGY MEASURES FOR ENCOURAGING INVESTMENTS IN MONTENEGRO 2006-2010 ...................................................................................................................... 33 5.1 5.2 Montenegrin Investment Promotion Agency - MIPA ............................................................ 35 Promotion of Montenegro as an FDI location ....................................................................... 36 5.2.1 Target investor groups and target sectors ........................................................................ 36 5.2.2 Main activities to promote FDI .......................................................................................... 36 5.2.3 Promotional techniques .................................................................................................... 37 5.3. General strategic measures ......................................................................................................... 40 6. MONITORING AND EVALUATION ........................................................................... 44 BASIC PRINCIPLES ............................................................................................................................. 44 References: .................................................................................................................. 45 Abbreviations: .............................................................................................................. 47 APPENDIX- Sectoral Analysis ..................................................................................... 48 2 INTRODUCTION Foreign Direct Investments (FDI) represent one of the most important instruments through which a national economy can encourage production, know-how imports, increase in employment, infrastructure development, poverty reduction, etc. The benefits achieved through the increase in FDI's have created strong competition in the global market of free capital, all with the aim to attract as many and as diverse FDI's as possible. The general trend in the global FDI market is the erasure of geographic borders between developing countries and developed ones: in the past three years, developing countries have not only represented a growing FDI market, but have also been aimed at attracting capital intensive investments, as well as R&D investments.1 In that sense, FDI policy in the global market shows an upward trend of institutional liberalization in FDI protection, creation of institutions for encouraging and communicating with potential investors, as well as the trend of creating a legal basis through the strengthening of bilateral connections between the countries (BIT, DTT2). From the aspect of risks that cause FDI influx, in recent years, there has been an increase in the importance of the intellectual property protection risks, property and workers protection risks, as compared to the reduction in the importance of conventional risks, such as the financial risk, interest rate risk and political risk. Montenegro, as a small and very open economic system, has the potential to be flexible in fitting into the global FDI trends, and in that sense it primarily has to devote its attention to the improvement of the overall investment climate in the country, through the implementation of the key goals defined in the Economic Reforms Agenda 2005-07. In this strategic document attraction of foreign investments is marked as one of the primary goals, having in mind the positive effect they have on speeding up the production process and creation of new employment, through the opening of new enterprises, i.e. companies. However, besides the changes related to the liberalization of the FDI influx regime (protection of property rights, tax relieves, labor legislation...), the FDI attraction activity requires a simultaneous promotion of the introduced positive changes. For that reason, according to the FIAS3 recommendations, as well as according to the world trend in the development of business attraction instruments, it is necessary for Montenegro to focus on defining key measures of investment policy, targeting foreign investors through the implementation of fiscal, financial and institutional incentives, as well as on defining key promotional activities. The first step in the implementation of FDI policy in Montenegro, undertaken in March 2005, was to establish the Montenegrin Investment Promotion Agency – MIPA, which took over the role of promoter of investment projects, and which will be based on the implementation of the FDI Incentives Strategy of Montenegro. Finaly, the ultimative step toward afirmation of Montenegro as interesting investment ambient has been achieved on May, 12 th 2006. when citizents of Montenegro voted Montenegrian independency. Adopting Declaration on independency by the Parliamnet on 3 th of June 2006 Montenegro became the youngest European country which conducts independently its economic policy as well as process of creation of future economic growth. Gaining indpendency represents a positive signal toward investors , which now consider Momtenegro as a stable environment worth to invest. Source: UNCTAD,The World Investment Report 2005: R&D investments represent investments in research and development. The overall report for 2005 is based on internationalization and influx of R&D investments in the developing countries, which was mostly a priviledge of developed countries until this year. 2 BIT – Bilateral Investment Treaties, DTT – Double Taxation Treaties 3 FIAS – Foreign Investment Advisory Service 1 3 1. INTERNATIONAL MOVEMENT OF CAPITAL AND FOREIGN DIRECT INVESTMENTS Global trends in the movement of international capital If we look at the movement of foreign direct investments (FDI) in the world market in 2004, we can say that there has been a mild increase in FDI influx by 2% (648 billion USD) as compared to 2003. This insignificant increase was not sufficient to inhibit the downward trend that started as early as in 2001, when there was a serious drop in the global FDI market of 41% (from 1.4 billion USD to 818 billion USD), which continued in 2002 – 17% (679 billion USD) and 12% in 2003. Mild increase in FDI (in 2004) is reflected in a significant increase of these investments (Picture 1) in developing countries, as well as the countries of South East Europe (SEE), amounting to 40% (233 billion USD), and which actually neutralized the drop in FDI of 14% in the developed countries. As a result of this trend, we have a 36% participation of the developed countries in the overall FDI’s, which is the highest level since 1997.4 Although FDI is showing a downward trend in the global market since 2000, the upward trend at the global level is noted by the domestic investments, which confirms the fact that FDI do not necessarily have to follow the pace of domestic investments, despite the fact that both forms of investments have a similar reaction to the developments in national economy, starting from the economic growth pace, all the way to the structural changes in it. Today, FDI represent 8% of the domestic investments globally, whereas this percentage is a bit higher in the countries of Central and Eastern Europe, due to the privatization and EU accession processes. Picture 1: Overview of FDI movement by regions, 1990 – 2004 Source: UNCTAD, FD/ - TNC database (www.unctad.org/fdistatistics). The main causes of global drop in FDI in the period 2000-03, stated by UNCTAD are macroeconomic, microeconomic and institutional changes. At the macroeconomic level, most of the countries have experienced an insufficient economic growth, which caused more cautious investments by foreign investors. At the microeconomic level, most of the big companies have had a high 4 Source: UNCTAD, The World Investment Report 2005 4 debt/equity ratio5, which lead to disinvestments. Besides FDI, there was a negative trend in Mergers and acquisitions (M&As)6, as the most attractive form of investment, which have dropped from 370 billion USD in 2002, to only 297 billion USD in 2003 (a 20% drop). However, in 2004 there has been a significant increase in M&A of 28% (381 billion USD), that is, during the same year 5100 M&A agreements were signed, which represents a 12% increase. A significant increase in FDI in 2004 is characterized by the following indicators: a) Macroeconomic indicators: According to the IMF projections, global economic growth in 2004 was 5.1% (the biggest one since mid-80’s), which enabled many countries (Latin America, UK, USA) to attract a large number of FDI (Figure 1). Another positive macroeconomic trend, starting from 2001, is a significant drop in the country risk globally. Figure 1: Global GDP and FDI increase for the period 1980-2004 in % Source: UNCTAD, 2005 b) Microeconomic indicators: During 2004 there was an increase in the price of shares in all leading stock exchanges, as well as an increase in the scope of trade in stock (especially in NYSE7, where there was an approximate increase in stock trade of 60%, as compared to 2003). At the same time, there has been an increase in the price of oil and gas, which all caused an increase in FDI in the countries rich in these raw materials. Institutional indicators: Privatization process has been almost finished in most of the transition countries; thus, it only partially contributed to the FDI increase in 2004. However, during the year 2004 there has been a significant trend of FDI liberalization in the field of real estate, thus, the overall FDI in real estate were equal to 30 billion USD, which represents a triple value of real estate FDI realized in 2003. Table 3 As a consequence of favorable economic developments (especially a significant drop in interest rates. Increase in competitiveness of developing countries), 2004 is characterized by a significant increase in Greenfield investments (growth from 9300 Greenfield projects in 2003 to 9800 in 2004), especially in developing countries, thus, this type of investments has been recognized as the basic factor of FDI increase in the world market. China and India represent the most attractive locations for this form of investment in 2004, as well as in 2003. Debt/equity ratio represents a relative indicator of the relationship between liabilities (debt) and assets (ownership capital) of the company. 6 Merger – combining companies into one, and acquisition - takeover; 7 NYSE – New York Stock Exchange – the biggest world exchange of stock, options and financial derivatives 5 5 From the aspect of sector-based FDI distribution, in 2004 the upward trend continued in the service sector, so that the FDI level in this sector was 63%, out of which 1/3 related to financial services. If we take into consideration the distribution of corporate functions, in 2004, there was an important increase in corporate representative offices, as well as in management centers in the developing countries (over 350 representative offices and H&Q8 centers), which proves that the management units that used to be based in developed countries are slowly moving to the developing countries. A trend that follows is the increase in R&D investments in developing countries, so that in 2004 there were 429 R&D projects registered in developing countries, as compared to 316 of them that were realized in the preceding year. From the aspect of FDI structure, three most important elements are still: assets (ownership capital), intra-corporate crediting and reinvested profits. If we look at the developing countries, reinvested profit represents the fastest growing FDI element, so that in 2004 it participated with 42% in the overall FDI in developing countries, as compared to 15% in the developed countries. PROJECTIONS FOR THE PERIOD 2006-07. On the basis of IMF and UNCTAD indicators, further growth in FDI is expected in this period, which will be the highest in the developing countries. During 2006 it is predicted that the developing countries will experience further economic growth of 6%, i.e. it is expected that the overall economic growth will be 4,4%. If we take into account fall in the overall country risk index, as well as the further increase in stock prices at the international market, it is expected that the FDI will grow in the field of oil and gas industry, telecommunications, infrastructure, finance and tourism. Although the projections say that the service sector will still represent the most significant area of FDI attraction, UNCTAD projects that there will be an increase in FDI in the production sector, as well, primarily through the affirmation of free economic zones. In the period 2006 – 07 it is predicted that there will be an increase in the number of various economic policy measures for FDI attraction. Thus, according to the research made by KARNEY Group, 95% of the interviewed investment promotion agencies expect the adoption of new strategic documents, which will create financial, fiscal and institutional incentives, further liberalization of the system and implementation of the above-mentioned measures. As a consequence of the increase in regional competitiveness related to FDI attraction, these documents should primarily focus on targeting a specific type and profile of investments for a specific country. The most attractive investment locations remain: China, India, USA, Russia, Brazil and Mexico, while it is predicted that there will be a strong expansion of investments in the SEE region, as well as in the new EU member states. 1.2 International movement of capital – trends and projections for developing countries When we speak about movement of FDI in developing countries, unlike the general trend in the world, in 2004 there was a significant increase in FDI of 40%, fr4om 172 billion USD to 233 billion USD, which represents 37% of total FDI influx in the world, and represents the highest level since 1997. In this period, Africa experienced a significant increase of 20%, with the increase of 15 billion USD in 2003 to 18 billion USD in 2004. Asia-Pacific region also an FDI increase from 107 billion USD in 2003, to 148 billion USD in 2004. After a four-year reduction in FDI in the region of Latin America (in 2003 there was a marginal drop in FDI from 51 billion USD to 50 billion USD), in 2004 there was a significant FDI 8 H&Q – Head Quaters, corporate management centers 6 increase to the amount of 68 billion USD (44% increase). Finally, in this region, recognized by UNCTAD statistics as South East Europe and CIS, in 2004 FDI influx reached the level of 35 billion USD, as compared to 24 billion USD in 2003 (45,8% increase). 1.2.1 Countries of Southeast Europe and the Commonwealth of Independent States In the most recent UNCTAD World Report, due to the EU enlargement, there has been a change in the very structure of developing countries, as well as a change in the meaning of the term Central and Eastern Europe. Table 1: Re-classification of country groups in WIR05 OLD CLASSIFICATION New EU member states (classified as “developed countries” Former Central and Eastern Europe Albania Byelorussia Bosnia and Herzegovina Bulgaria Croatia Czech Republic Czech Republic Estonia Estonia Hungary Hungary Latvia Latvia Lithuania Lithuania Republic of Moldova Poland Poland Romania Russian Federation Serbia and Montenegro Slovakia Slovakia Slovenia Slovenia Macedonia Ukraine Central Asia (developing countries) Armenia Azerbaijan Georgia Kazakhstan Kyrgyzstan Tajikistan Turkmenistan NEW CLASSIFICATION Southeast Europe (SEE) and Commonwealth of Independent States (CIS) SEE CIS Albania Byelorussia Bosnia and Herzegovina Bulgaria Croatia Republic of Moldova Romania Russian Federation Serbia and Montenegro Macedonia Ukraine Armenia Azerbaijan Georgia Kazakhstan Kyrgyzstan Tajikistan Turkmenistan Source: UNCTAD, 2005 Out of 19 countries in the group of countries from Table 1, as many as 16 have achieved a higher level of FDI influx in 2004 as compared to 2003. In SEE region, the countries that especially stand out are Bulgaria and Romania, which have participated with 1/5 in total FDI for the whole group in 2004, which is more than 70% of FDI realized in the SEE region. As a consequence of this trend, Romania, with the realized influx of over 5 billion USD has taken the second position, according to the country groups ranked on the basis of realized FDI influx (UNCTAD WIR Analysis, 2005), while Serbia and Montenegro is placed into group 3. 7 Table 2: Southeast Europe and Commonwealth of Independent States: distribution of FDI influx by amount, 2003-2004. Amount Over 5 billion $ $1 billion - $4,9 billion Less than $1 billion 2003 2004 Economy Economy Russian Federation Azerbaijan, Romania, Bulgaria, Kazakhstan, Croatia, Ukraine and Serbia and Montenegro Bosnia and Herzegovina, Georgia, Albania, Byelorussia, Armenia, Turkmenistan, Macedonia, Republic of Moldova, Uzbekistan, Kyrgyzstan and Tajikistan Russian Federation and Romania Azerbaijan, Kazakhstan, Bulgaria, Ukraine, Croatia Serbia and Montenegro, Georgia, Bosnia and Herzegovina, Albania, Tajikistan, Armenia, Byelorussia, Macedonia, Republic of Moldova, Turkmenistan, Uzbekistan, Kyrgyzstan Source: UNCTAD, WIR, 2005 Projections of the biggest Trans-National Corporations (TNC) related to FDI movement 9 According to the UNCTAD research applied to 335 biggest TNC’s, with the total property assessed to amount to 1.9 trillion USD, out of which 38% or 725 billion is invested outside the basic market10, the following conclusions were made: 1. when selecting the FDI location, China was mentioned as the most attractive destination (approx. 60% of the interviewed TNC’s marked this country as the best one for investments), the second place is taken by South America, while the third most attractive investment country is Poland. 2. Activities that will attract investments from the developed countries into developing ones will primarily be the activities in the field of production, distribution and sales channels and supporting services. 3. The most popular investment models in the period 2005 - 2006 are M&A, “Greenfield” and license issuance. Prospects for FDI attraction in individual regions: Region of developed countries – most of the interviewed TNC’s, approximately 50%, expect that the FDI in this region will remain the same in the period 2005–07, whereas they are almost unified in the opinion that there will be a drop in FDI’s in Western Europe, while there will be an increase in FDI’s in USA, Great Britain, Canada and Japan. Asia – Pacific Region –improved FDI influx in this region; more than 60% feel that China will be the leader in the most important FDI through M&A investments, while India will take the second place. Latin America Region – has the most uncertain prognosis, 43% of the TNC’s don’t expect FDI increase in this region, while 46% expect FDI increase in this region. Africa Region– as many as 67% of TNC’s expect that FDI in this region will remain the same, emphasizing the fact that this region is still not on the TNC strategic map of investments. Region of Central and Eastern Europe as a whole - the most interesting location for TNC investments for the period 2005-07, as many as 70% of TNC’s find this region profitable for investments. The first position is occupied by Poland, before Russia, third and fourth place are shared by Hungary and the Czech Republic, while the fifth one is occupied by Romania, with a very high percentage of “Greenfield” investments of 3.6%. Region of Southeast Europe separately - a very attractive region according to TNC projections; in 2003 FDI increase in this region was 60% (improvement in political stability, increase in education and efficiency of labor force and efforts to establish a common free trade agreement for the market with approximately 55 million inhabitants). Picture 2: Prospects of sector distribution of FDI, 2006 – 2009 9 UNCTAD's Worldwide survey – TNC trend forecast, 2004. The basic market represents the countries where TNC has a main office (Karney Analysis, 2005) 10 8 Mining and oil Agriculture and other Food and beverage Motor vehicles Publishing and media Other industries Electricity & electronics Production Machinery Metal Chemical Textile and clothing Rubber and plastic Non-metal products Civil works Retail sale and wholesale Transport Education and health Services Business services Computer services Banking and insurance Other services Hotels and restaurants Tourism Energy services Source: UNCTAD WIR 05 Primary sector According to the above-mentioned research, the most attractive sectors for investments in SEE region, within the service sector, are transportation, infrastructure, trade, IT sector, tourism and energy, while in the production sector, the most important investments are expected in the field of food and beverage production, as well as the production of automobile spare parts (Picture 2). In the primary sector a smaller FDI influx is expected. FDI increase in this region is connected with the pace of EU accession, competitive price of labor, gradual increase in productivity and increase in competitiveness of the investment environment in general, as compared to the other developing countries. 1.3 International movement of capital – position of Montenegro 11 Montenegro represents a country that follows the FDI movement trends, characteristic for the region of Southeast Europe. After a significant FDI influx in CEE countries, which due to the size of their market became top destinations for FDI (especially through the privatization process), the FDI wave that occurred after the privatization «expanded» to include the region of Southeast Europe. Characteristics of FDI in Montenegro in the previous period are highly compatible with the investments in the region, from the aspect of investment structure, as well as from the aspect of investors’ origin and type of investments. These are investments made mainly through the various forms of privatization, with small share of «Greenfield» investments, as well as a significant FDI influx in the sector of telecommunications (infrastructure) and the banking sector. In recent years, with the reduction of political risks and definition of clear framework for property rights, it can be noted that there has been an increase in FDI related to real estate purchase (according to the data from the Central Bank of According to the data from the Central Bank of Montenegro (CBCG) and the Agency for economic restructuring and foreign investments; 11 9 Montenegro only after 2003 there has been an increase in FDI in Montenegro, through real estate purchase). u RCG Graph 1 – FDI in Montenegro for the periodSDI 2001 – 2005 EUR 300,000,000 200,000,000 100,000,000 2001 2002 2003 2004 2005 SDI u RCG Source: CBCG, 2005 FDI influx in Montenegro in the given period took place within the framework of the adopted privatization plans, in which planned privatization of bigger companies represented most of the total FDI influx in Montenegro. Thus, for example, in 2002 the FDI influx was 73.85 mil € (where 75% of the influx was realized through the privatization of Jugopetrol). During 2004 there has been an FDI influx of 50.51 mil € (graph 1), through the privatization of Montenegro bank A.D.Podgorica (23.9 mil.€), sale of Hotel »Avala»- Hotel and tourist company »Budvanska Rivijera» (12.2 million €), Hotel «Panorama – HTP Miločer» (7.5 million €), etc. In 2005 there has been an influx in FDI amounting to 382,8 mil.€ , where 114,0 mil € was realized through the privatization of TELECOM, and 70,7 mil € through the privatization of Aluminum factory etc. Detailed overview of FDI influx in the period 1997-2005 by investors, type of investment and activity is given in Table 3. Table 3 The most important FDI in Montenegro 1997-2005 Company Telekom Crne Gore AD Podgorica Rudnici Boksita AD Podgorica (Boxite mine) Pro Monte Mill € Sector Buyer Country of origin Type of investment Amount Telecommunicatio ns Matav RT Hungary Privatization 114,0 Mining Salamon ent Russia Privatization 10,0 Telenor ASA Norway Telecommunicatio ns Oil industry Aluminum industry Tourism Banking Sector Finanacial Sector Acquisition /Greenfield Privatization Privatization Privatization Privatization Greenfield Privatization Jugopetrol AD Hellenic petroleum Greece KAP (Aluminum factory) Rusal Russia Hotel Maestral,Milocer HIT Nova Gorica Slovenia Podgorička Banka Socite Generale France HAAB Leasing HAAB Leasing Austrai HTPBudvanska rivijera, Great Tourism Bepler &Jacobson Hotel Avala Britain Hotel”Panorama” Tourism Springer&Sons Austria Privatization Valjaonica hladno valjanih Privatization Switzerlan traka (One plant within the Metal industry Technosteel d Steel mill) Source : Agency for restructuring and foreign investments of Montenegro 2005; 12 116 100,5 70,7 27,1 11,15 8,1 12,2 7,5 5,35 If we analyze investment structure by sectors (table 4), Montenegro is characterized by a very high percentage of investments into service sector (74.12 % in the past four years), which is compatible with the world trends in FDI. For comparison, investments in the service sector in the neighboring countries were, for example, only 14,6% in Bosnia and Herzegovina, and 34% in Serbia. 12 The amount includes calculated sales price with the system of investments signed in contracts; 10 Table 4: Distribution of FDI by sectors in Montenegro Investments into production Investments into activities service activities 2001 -401363 3.337,645 2002 3.449,936 69.095,359 2003 2.156,526 24.235,359 2004 2.273,576 37.671,487 2005 68,582,364 193.695,167 TOTAL 76,814,019 342,075,315 Source: Central Bank of Montenegro (CBCG), 2006 Investments into financial organizations 1.730,068 3.841,507 12.090,749 1.838,537 50.214,757 70,495,943 Real estate sale 5,315,350 10.868,089 70.333,388 67,617,972 Total 4.704,350 76.386,802 43.797,984 52.651,693 382.825,676 579,403,247 FDI structure by country of origin in Montenegro - according to the data from the Central Bank of Montenegro, over 45 countries have invested in Montenegro, and among them, the most important investors are Hungary, Great Britain, Austria, Slovenia (Table 5). Table 5 – Foreign Direct Investments in Montenegro by countries in the period 2001-2005 Country Hungary Great Britain Austria Slovenia Germany Switzerland Russian Federation Greece France Serbia USA Cyprus Latvia Italy Bosnia and Herzegovina Japan Estonia Ireland Other Value 150,071,429 72,360,220 69,432,693 53,954,529 39,215,283 29,942,760 14,940,312 15,244,172 12,008,111 10,294,198 6,900,738 7,352,138 6,787,817 5,837,941 4,621,753 4,151,790 4,074,427 3,807,286 22,400,000 % 27,0 13.0 12,5 9,7 7,1 5,4 2,7 2,7 2,2 1,9 1,2 1,3 1,2 1,1 1,0 1,0 1,0 0.8 0.5 Source: CBCG ,2006 An interesting data to mention is that countries of the region are intensively investing into Bosnia and Herzegovina (almost one third of investments comes from the SEE countries, which are themselves active FDI recipients, e.g. Croatia invests in Bosnia and Herzegovina at the level of 22%, and Serbia 10%). Also, many Middle East countries are investing in Bosnia and Herzegovina (Kuwait 19%, United Arab Emirates 11%).13 In Serbia the biggest investors are, with the exception of Russia, (privatization of Beopetrol) the developed countries: USA (Phillip Morris-cigarettes, US Steel–metal industry, Coca Cola), Belgium (Interbrew – brewery), Italy (banking sector), Great Britain (BAT-tobacco industry), Denmark (Calsberg – brewery), Austria (Henkel - cosmetics)14. Albania is characterized by high investments coming from two countries: Italy (48%) and Greece (34.2%). All these countries are characterized by a high number of small investors (e.g. in Bosnia and Herzegovina there are more than 75 countries as investors, in Albania – more than 15, in Serbia – approx. 20, etc). 13 14 Investor Guide,FIPA, 2004 SIEPA, 100 FAQ,2005 11 PROJECTIONS: Taking into consideration UNCTAD projections for SEE15, which related to Montenegro, as well, and having in mind the pace of privatization, goals set by the Economic Reforms Agenda 2005-07, as well as full implementation of this strategic document, it can be said that in the future period Montenegro should focus on attracting a greater scope of «Greenfield» investments, especially in the service sector (tourism and banking), whereas the pace of investments will depend on the implementation of a set of financial, fiscal and institutional measures, strong investment promotion, increase in productivity, stability of personal income, as well as the increase in»spillover«16 effect of the existing FDI in Montenegro. 2. COMPETITIVE POSITION OF MONTENEGRO AS A LOCATION FOR FOREIGN DIRECT INVESTMENTS 2.1 Montenegro – Basic information Montenegro is situated in the southeastern part of Europe (South-Western Balkan), it occupies the territory of 13,812 km² , coastal line is approximately 300 km long, and it has the population of 672.000. It is characterized by three regions: southern, central and northern one 17, with the total of 21 municipalities. Administrative center is Podgorica, which represents the biggest city (approximately 200.000 inhabitants). The historic capital of Montenegro is Cetinje. Table 6 Macro-economic indicators in Montenegro18 GDP in current prices (GDP)- (mil€) GDP per capita – current prices(€) Real GDP growth % Employed persons No of the unemployed Unemployment rate Average salary (in €) Budgetary expenditures (mil €) Budgetary revenues (mil €) Budgetary deficit (mil €) Budgetary deficit as a % of GDP Total deposits (mil €) Citizens' saving deposits (mil€) Deposits of private companies and entrepreneurs (mil €) Total loans (mil €) 2001 1,244.80 2,024.75 -0.20 141,112 79,960 31.5 176.00 148.00 5.62 n.a. 124.00 2002 1,301.50 2,109.11 1.70 140,100 76,293 30.45 193.00 255.02 229.87 25.15 n.a 205.50 22.21 65.34 124.66 2003 1,433.00 2,317.90 2.30 142,679 68,625 25.82 271.00 386.84 341.55 45.29 3.29% 211.01 45.07 81.55 200.63 2004 1,535.00 2,473.00 3.70 143,479 59,002 22.6 302.81 408.07 375.85 32.22 2.18% 273.78 80.68 71.86 284.08 200519 1644 2,638,00 4,1 145,923 49,886 18,9% 223.63 460,05 430,05 30,0 1,7% 487.0 173.0 121.82 377.3 As there is no analysis of this institution that incorporates Montenegro separately, but in all the reports it is analyzed through Serbia and Montenegro, this report and its projections (WIR, UNCTAD 2005), especially for SEE region, represent the best quality source for the positioning of Montenegro as an investment environment. 16 “Spillover” effect represents the positive effect of the existing FDI on the economy of a country, through the increase in capital intensiveness, level of technology, creation of clusters, increase in labor productivity and supporting services. 17 Southern region, that is, the coastal region of Montenegro is characterized by the jagged coastline with attractive beaches, and it is of the highest importance for the development of tourism. Most of the industrial facilities are located in the central part, but it also has the potential for the development of agriculture in the plains, as well as for hte development of cattle raising. The northern region is the area with high mountains, but also river valleys, and is suitable for the development of agriculture and tourism. 18 Economic Reforms Agenda of Montenegro, 2002-2007 19 Previous data from CBCG 15 12 Annual active interest rate Annual passive interest rate Export of goods and services (mil €) Import of goods and services (mil €) Trade balance (mil €) Balance of the current accounts (mil €) Net FDI (mil €) No of transactions in the capital market (growth rate) Turnover in the capital market (growth rate) Gray economy (%) (p) 12.40% 0.20% 385.00 776.00 -391.00 305.00 10.60 30.00 15.16% 0.50% 498.6 815.00 -334.00 176.00 87.00 374.72 27.96 30.00 14.07% 1.84% 461.90 709.60 -247.60 -101.98 38.72 395.79 202.2 20.00 13.50% 3.39% 622.70 913.70 -291.00 -142.97 50.00 168.95 -1.5 15.00 Investments (mil €) 225.62 182.90 213.62 111.08 748.96 1,063.83 -314.87 -140.71 374.7 13.00 382,8 Source: Economic Reforms Agenda of Montenegro 2005-2007 Characteristics of the macro-economic system – According to the macro-economic indicators, Montenegro has a stable growth in real GDP, with continuous reduction in the level of inflation, reduction in budgetary deficit and reduction in the level of unemployment. Economic growth is supported by the development of the financial sector (total deposits in 2004 have increased by 31.27%, table 6, while the loans approved to the private companies have increased by 46.26%). However, Montenegro, as well as all the countries in this region, has a high deficit in the balance of payments of approximately 7,3% of GDP (in the SEE region, on average, it is 9,32% of GDP). Having in mind the above-mentioned trends, FDI importance for Montenegro is even greater, as it represents one of the most efficient mechanisms to encourage growth and reduction in the deficit of the balance of payments. For the period 2006-07 it is projected that GDP will grow by 4,1%, that is, by 4,5%; then, the reduction in public expenditures of up to 40%, drop in the unemployment rate to 19,3%, and FDI influx at the level of 200 mil€ per year. 2.2 Development goals of Montenegro Within the Economic Reforms Agenda there is a set of goals for the period 2005-2007, which project GDP increase of 4,5%, as well as a reduction in the unemployment from 21,6% in 2005 to 19,3% in 2007. Strategy of export incentives in Montenegro projects a three-year goal of reducing foreign trade deficit by 20%. This projected GDP increase should be primarily supported by the FDI influx, as one of the most significant «instruments» for the achievement of sustainable GDP growth and increase in exports. Target investments from the aspect of development goals of Montenegro 1) EXPORT ORIENTED INVESTMENTS – according to the Strategy of export incentives in Montenegro, it is projected that the exports will increase by 20% in the next mid-term period. Partially, the increase in exports should be reflected through the increase in exports of the big production systems, and the second part through the development of small and medium size enterprises. In all this, special attention should be given to future investments in the field of agriculture, wood processing industry, metal processing industry, pharmaceutical industry and naval industry. Special emphasis should be given to the upcoming privatizations in the maritime and wood industry sectors, as their quality and the ability to find strategic investors will directly influence the competitiveness and sustainability of these industries in Montenegro. At the same time, within this type of investments it is necessary to secure partial export substitution; 13 2) LABOR INTENSIVE FDI – although in attracting this investments in Montenegro, we need to take into consideration transfer of technology and know-how, it is necessary to bear in mind the fact that from the aspect of the current structure of the unemployed, Montenegro is demonstrating a significant potential of quality labor force which is not in use; 3) FDI IN TOURISM – Economic Reforms Agenda recognizes the tourism sector as a priority, so the recommendation of this document to create the preconditions for investments in this sector is treated separately20. Also, within these investments special treatment should be given to the real estate purchase (land purchase) as a form of investment. 4) INVESTMENTS IN THE FINANCIAL SECTOR – although restructuring of the financial system is mostly finalized (less than 10% of the total banking capital is owned by the state), it is expected that the adoption of the new law on banks will result in a significant increase in «Greenfield» investments in the financial sector, mostly through the opening of representative offices of the banks that already operate in the region. In 2005, Montenegro received grade BB+ from the renowned consulting institution S&P, which involves a reduction in the financial risk of investments in Montenegro. However, in our system we still have high interest rates, whereas the big difference between the active and passive interest rate is explained by the underdeveloped sector of financial intermediaries (insurance companies, leasing companies, microcredit associations, funds, etc). This opens room for the entry of foreign investors through various forms of financial intermediaries. On the basis of the implementation of the program contained in the Economic Reforms Agenda, in the future period Montenegro should gradually realize the change in the structure of FDI inflow. Namely, in that period it is planned to privatize a significant number of bigger companies in the Montenegrin economy, such as the Electricity system of Montenegro (EPCG), Railway company of Montenegro, Shipyard in Bijela, Plantations company, Port of Bar... Depending on the pace of execution of this privatization plan, at the same time Montenegro should look for the possibilities for a greater influx of «Greenfield» investments, which means that in the period 2006-08 it is necessary to continuously work on providing favorable investment conditions, as well as on the promotion of investments according to the target groups of investors. 3. COMPARATIVE ANALYSIS OF MONTENEGRO AND WESTERN BALKANS REGION COUNTRIES According to the UNCTAD experts’ researches for the year 2005, the region of South-Eastern Europe (SEE) is one of the most competitive locations for attracting Foreign Direct Investments (FDI), primarily due to the significant changes in the investment policies of these countries which are bringing to the creation of favourable business climate. In that sense, this analysis is based on the comparison of Montenegrin investment environment to the investment environment of the region of South-Eastern Europe, on the basis of three basic elements which impact the decisions of potential investors: Standard (general) risks of business operations of foreign investors (political risk, financial risk, level of transparency of procedures and administrative system), Prema preporukama OECD-a, ukoliko je određeni sektor prepoznat kao prioritetan, neophodno je kreirati sektorski dokument, kojim bi se detaljnije tretirali usovi investiranja u isti. 20 14 The level of the achieved legal reforms for creation of general conditions for business operations of domestic and foreign investors, together with the level of the achieved fiscal, regulatory and financial incentives for attracting Foreign Direct Investments, and The level of basic operational costs of business operations (labour costs, energy and land costs) 3.1 Standard risks of business operations (conventional risks) The standard risks of business operations are the most significant risks that the investors take into account when deciding about investing. They are the first indicators of the investment quality of a country and they refer above all to the political, macroeconomic and financial stability. It is characteristic that lately their significance has slowly started declining as the total political stability is strengthening. 3.1.1 The risk of general conditions of business operations – parametre – Index of Economic Freedom One of the best indicators which includes the conventional risks is the Index of Economic Freedom21, which is the weighted value of the most important macro-economic indicators (the level of trade, fiscal burden, level of government intervention, quality of monetary policy etc. – see the Table 7). According to the data of the Heritage Foundation from 2005, Albania, Macedonia and Bulgaria are the countries that belong to the group of partly free economies (the index is lower than 3). On the other side, Croatia, Romania and Bosnia and Herzegovina are described as partly unfree economies. All the countries of South-Eastern Europe got the lowest scores for protection of property rights, level of development of legal infrastructure and the level of grey economy. On the other side, almost all the countries got quite good scores in the field of monetary policy, fiscal policy and the level of achieved Foreign Direct Investments. Table 7 Index of general economic freedom 2005 2005 grade Trade Fiscal burden Government intervention Monetary policy FDI Banking Wages and prices Property rights Regulation Informal market Albania 2.93 4.0 2.8 2.5 1.0 2.0 3.0 2.0 4.0 4.0 4.0 BiH 3.16 3.0 2.6 2.5 1.0 4.0 2.0 3.0 5.0 5.0 3.5 Croatia 3.00 4.0 3.0 2.5 1.0 3.0 2.0 3.0 4.0 4.0 3.5 Macedonia 2.95 4.0 2.0 3.5 1.0 3.0 2.0 2.0 4.0 4.0 4.0 Bulgaria 2.74 2.0 2.4 2.5 2.0 3.0 2.0 2.0 4.0 4.0 3.5 Country Index of Economic Freedoms (IEF) includes the scores (1- the highest, 5 - the lowest) for the ten categorise which at the same time excellent indicators for investors. These ten categories are: trade policy, fiscal burden, government intervention in economy, monetary policy, capital flow and FDI, banking and finance, wages and prices, property rights, institutional framework (regulation), grey economy (informal market). According to the level of these indicators and by weighting them with their relative influence to the economic freedoms we get final scores which divide countries into five categories: Free (02), Mostly free (2-2.99), Mostly unfree (3-4), Repressed (4 – 5). For more details see: www.heritige.org/research/features/index/countries.cfm 21 15 Romania 3.58 3.0 3.3 2.5 5.0 4.0 3.0 3.0 4.0 4.0 Source: Index of Economic Freedom 2005, www.heritige.org/research/features/index/countries.cfm Fraser Institute experts think that „individuals“ have economic freedom: a) if ownership is obtained without using any force, fraud or theft, protected from physical injuries that other individuals may inflict and b) if such ownership can be used freely, exchanged freely and given freely to the others as long as the activities of the owner do not violate identical rights of other individuals“. 22 The basic elements of economic freedom are protection of private ownership, personal choice and freedom of contract. In the annual publications of the Heritage Foundation and the Fraser Institute Montenegro was observed in the context of Serbia and Montenegro, and thus it was not even graded within the Index of Economic Freedom for 2006 done by Heritage Foundation. However, if Montenegro could have been observed separated from Serbia its position would have been much more favourable. That is confirmed by the Annual Report on Economic Freedoms of the Fraser Institute for 2005 23, which analyses Montenegro separated from Serbia and gives Montenegro the score 6,0. This score puts Montenegro into the first 86 countries in the world (out of the 127 included into this research), i.e. immediately below the Republic of Croatia. Fraser Institute Criteria and scores for Montenegro Size of public administration Legal structure Stable currency International trade Regulations 5,82 3,38 9,23 6,64 4,82 3.1.2 Country financial risk – Parametre - grade “Standard and Poors“ According to the Karney’s researches conducted on the sample of 500 largest TNCs, the second important general investment risk is the financial risk of a country. Representative indices of financial risks, calculated for almost all the countries in the region, including Montenegro, are the „Standards and Poor’s“, „Moody’s“ and „FITCH-IBCA“. These indices determine the general credit ability of a country to provide for certain investment environment. They also grade the factors as: economic status of a country, transparency in the capital flow, flow of foreign and domestic investments, level of foreign state reserves, and the ability of the country to remain stable in the conditions of political changes. Table 8 gives scores for financial risk for the countries in the region of South-Easter Europe. Table 8 Financial risks of Central and Eastern European countries Country BiH Bulgaria Croatia Romania Serbia Montenegro Standard and Poor’s BB-(positive) BBB (stable) BB+ (positive) BB BB(positive) Moody’s B3 (positive) Ba1(positive ) Baa3 (stable) Ba1 (positive) n.a n.a FITCH-IBCA BBB- (positive) BBB- (positive) BBB- (stable) n.a. n.a Compare. http://www.fraserinstitute.com On the basis of Fraser Institute criteria, CEED (Center for Development and Strategis Research) from Podgorica did evaluation which was accepted by Fraser Institute and published in the Annual Report for 2005. 22 23 16 4.0 Czech Republic A- (stable) Estonia A (stable) Lithuania A- (positive) Latvia A- (stable) Moldova Slovakia A- (positive) Ukraine BB- (stable) Source: Credit Suisse Group24 A1 (stable) A1 (stable) A3 (positive) A2 (stable) Caa1 (stable) A2 (positive) B1 (stable A- (stable) A (positive A- (positive) A- (positive) B- (stable) A- (stable) BB- (stable) In November 2005 Montenegro got the grade of S&P BB positive for long term credit ability. This means that Montenegro is ready to respond to all its financial liabilities in the short term (while for the long term there is the possibility of not covering the financial liabilities of Montenegro, due to the change of financial environment). If we observe the position of Montenegro in the region, on the basis of the three indices of financial risk, we can state that Montenegro has more favourable rating than Serbia and B&H and that it has the same score as Macedonia. On the world list of S&P indices, Montenegro is in the group of countries like Panama, Morocco, Columbia and Jordan. Economic indicators taken into account in the process of the rating, which brought to the increase, are: increase in credit facilities in the last four years (2001-2005), while for the year 2006 the increase was estimated to the level of 25%, which is the highest in the region. Estimate of macro-economic trends and potentials for attracting FDI in Montenegro “Standard&Poor’s”25 for the period 2005-2007 When discussing the justification for giving the score BB positive, Standard & Poors made comparison to similar countries which were given the same or approximately the same score and which are in the region of South Eastern Europe. The comparison was made in all significant elements which are included into the system of determining the S&P score. In case of political situation, Montenegro was characterized as being more stable than Serbia, Ukraine and Columbia, and less stable, or with shorter history of democratic processes than Macedonia, Brazil, Turkey and Costa Rica General economic data indicate that Montenegro has one of the best grades for GDP development, with prospects of improvement, having in mind the envisaged increase of 4-5% (figure 2). It is also estimated that Montenegrin economy is still facing challenges of restructuring state companies, development, modernization and improvement of banking sector, as well as development of infrastructure, particularly in the field of transportation and energy. Figure 2. S&P 24 25 Trends of Montenegrin GDP and GDPs of compared countries for the period 2005-2007, estimates of For more information on financial rating of countries see www.entry.credit-suisse.ch Standard&Poor*s , Research Republic of Montenegro , March 2005 17 As for the prospects of Montenegro for attracting FDI, according to the estimates of this reputable institution, they will depend on foreign investors perception of the conditions for investing in this country. Due to its strategic position, natural potentials, lowest profit tax rate of 9%, and highly qualified labour, Montenegro has the possibility to increase the inflow of FDI in the future period. However, just like in Serbia, compared to other countries in the region, Montenegro has high labour costs, as well as tax burden. Compared to the selected countries, S&P envisages the further increase in the FDI inflow for the period 2006 – 2007 for about 4 – 5%, primarily through privatization of large systems and new investments in tourism. 18 Figure 3. Trends of net FDI in Montenegro and compared countries with the grade BB, for the period 2006-2007 3.1.3 The risk of transparency of procedures and corruption – Parametre - Index of Transparency The risk of corruption (transparency) is one of the most important risks identified by TNC as key risks for the region of South Eastern Europe. It refers to Montenegro as well. This risk, which is ranked as second, together with the financial risk, is characteristic for the countries of south Eastern Europe as the countries of post-transition region. Index of transparency26, is used as a quantitative form of expressing the capacity of transparency, and the list of South-Eastern European countries included by this index is presented in the Table 9. Table 9 Index of transparency of SEE countries TI - Corruption Perception Index (CPI) 2004 Country 2004 CPI Score* Confidence Range** Survey used *** Albania 2,5 2.0 - 3.0 4 Bosnia i Herzegovina 3,1 2.7 - 3.5 7 Bulgaria 4,1 3.7 - 4.6 10 Croatia 3,5 3.3 - 3.8 9 Hungary 4,8 4.6 - 5.0 12 Macedonia 2,7 2.3 - 3.2 7 Romania 2,9 2.5 - 3.4 12 Serbia and Montenegro 2,7 2.3 - 3.0 7 Clarifications: *The method of scoring - Corruption Perception Index (CPI) refers to the level of corruption perceived by business people and domestic analysts and it ranges from 10 (the lowest corruption level) to 0 (the highest corruption level) ** Confidence Range provides for the range of possible results of CPI scoring. It shows how the results of a country vary, depending on the preciseness of measuring. Nominally, the results vary for 5%. However, if only some of the sources are available, the impartial estimate of the average coverage is lower than the nominal value of 90%. *** Survey used refers to the number of researches used for estimating a country. 18 researches and expert estimates were used, and it takes at least 3 to have a country become a part of CPI. Source: ITX Report 2004, www.transparency.org 26 For more details see www.transparency.org 19 On the basis of the Table 9 we can conclude that Montenegro and Serbia are scored as the countries with low transparency level, with the score 2,7 27. According to this index, Montenegro has the same position as Macedonia and it is in front of Albania (2.5) and behind B&H (3.1) and Bulgaria (4.1). According to the world table of indices Serbia and Montenegro are in the same rank with Lebanon, Algeria and Nicaragua. It is characteristic that all the countries of the South Eastern Europe region have extremely low level of transparency scores. Having in mind the importance of the corruption risk that the foreign investors mention as the reason for not investing into the region of transition countries, this strategy treats this issue separately, with the view of increasing the transparency of procedures and decreasing corruption. All of this is aimed at creating an image of Montenegro as a small and efficient system. 3.1.4. The risk of intellectual property protection – Parametre – Intellectual Property Index The risk of intellectual property protection does not belong to the conventional risks, but in the last few years investor perceive this risk as increasingly important. The reason for that is the increasing trend of investing into development and research and opening of a large number of management centres in developing countries. SEE countries are no exception in this field. Creation of the legal framework for protection of intellectual property rights in Montenegro can be considered the first important step. A special emphasis should be put on the full implementation of the framework. Montenegro currently has one of the lowest scores in the region. Only Bosnia and Herzegovina and Albania are lower. Table 10 Intellectual Property Index 2005 Country Albania Bosnia i Herzegovina Croatia Macedonija Serbia and Montenegro Czech Republic Hungary Slovak Republic Index n.a. 2.1 2.9 2.5 2.3 3.9 4.2 3.8 Source: World Economic Forum, Global Competitiveness Report,2005; 3.2 The level of the achieved legislation reforms related to the creation of general business conditions Comparative analysis of legislation reforms and administrative incentive measures of Montenegro and other SEE countries was based on the most important information – important from the aspect of the interests of a foreign investor. Region of South-Eastern Europe, generally speaking, is competitive from the aspect of fiscal incentives that the emphasis was put on, particularly in terms of small capacity for development of financial incentive measures. This region, for example, has the most competitive profit tax in Europe. Taking this criterion into account, Montenegro is the most competitive country in Europe, with the lowest profit tax rate of 9% (Table 11). 27 The scores are in the range of 1(the least secure) -10 (the most secure) 20 Table 11 Comparative presentation of profit tax of some Eastern European countries Czech Republic Hungary Slovakia Albania Bosnia and Herzegovina Croatia Macedonia Serbia Montenegro Estonia 26% 16% 19% 23% 20% 20% 15% 10% 9% 0% Source: PricewaterhouseCoopers Corporate tax guide, 2005 Average number of days needed for opening a business The procedure of registration of a company in Montenegro is significantly simplified. The procedure of registration takes 4 days, the initial capital for LLC amounts to 1 Euro, costs of foundation amount to 10 Euros and the number of documents required for registration is as small as 4. Having in mind only the procedure of registration, we can say that Montenegro has become the leading country in the region. However, the problems are still the existing administrative barriers on the level of local administration (various permits, local fees). Picture3: Time and costs required for registration of a business in the region 80 Bosnia and Herzegovina Serbia 70 Albania Number of days to register a company 60 50 40 30 Macedonia Croatia Romania Moldova Bulgaria 20 Montenegro 10 0 0 2 4 6 8 10 12 14 16 18 Source: OECD, Enterprise Performance Policy Assessment Report, 2003 3.2.1 Competitiveness of legal and economic framework of Montenegro – environment for foreign investments Business environment in Montenegro has significantly improved during the last couple of years. A number of laws were adopted28. They are in compliance with EU standards and they have created a 28) The main law and other regulations that regulate privatization and foreign investments: Foreign Investment Law, Privatization Law, Law on Free Zones, Business Organizations Law. Law on insolvency of business organizations, Law on Central Bank of Montenegro, Law on Banks, Law on Restitution, Law on Foreign Trade, Customs Law, set of laws regulating the tax policy, Budget Law, Law on Public Procurement, Law on participation of the private sector in performing public services, Law on e-commerce and e-signature, Law on Preventing Money Laundering, Law on Mortgage and Fiduciary, Law 21 good institutional framework for implementation of economic policy defined in the Agenda of economic reforms. However, although Montenegro has made significant steps towards the improvement of legislation which is up to the world standard and towards the creation of the necessary institutions for attracting investments, we have to emphasize that FIAS experts have emphasized that the key problem for investing in Montenegro is the so called implementation gap, which is the slowness or lack of compliance with and application of the norms. This is characteristic for all transition countries. Legal framework of Montenegro for encouraging foreign investments – For the purposes of performing business activities in the Republic of Montenegro foreign investors can invest into other forms of organization for performing activities or services. They can establish companies and make other investments in compliance with the Foreign Investment Law (and other laws), the basic characteristics of which are: Who is treated as a foreign investor - a legal entity with its headquarters abroad, a foreign physical entity and Montenegrin citizen with its habitual place of residence i.e. temporary place of residence abroad if it is longer than a year (according the Law on capital and current transaktions this Period is 6 month), a company which was established by a foreign entity in the Republic and the company with more than 25% of foreign capital share. What can be an investment of a foreign investor – money, services, property rights and securities, which is also the condition for a domestic investor. Things, services and rights from the above paragraph must be expressed in money. Rights of a foreign investor are guaranteed by the law. Rights of a foreign investor – on the basis of the investment, a foreign investor has the following rights: 1) to manage, i.e. to participate in managing the company; 2) to transfer the rights and obligations from the contract on investment or contract, i.e. decision on establishment to other foreign or domestic persons; 3) to return certain invested things, pursuant to the contract on investment or contract, i.e. decision on establishment; 4) to return the investment, i.e. the rest of the funds invested into the company in case of termination of the contract, or expiry of the contract on investment or contract, i.e. decision on establishment or in case of cessation of operation of the company; 5) to the share in net-assets and the return of the share, i.e. assets after the termination of operation of the company if he invested funds in establishing the company; 6) other rights provided for in the Foreign Investment Law and other laws; 7) to have share of profit and to freely transfer and re-invest the profit, including the exchange of currency; 8) foreign investor has the right of protection of inventions, trade marks (brands), models and samples and copyrights, in compliance with the law; 9) for performing its activities a foreign investor can employ domestic and foreign physical persons and hire physical and legal entities in compliance with the law (employees of a foreign investor have the rights and obligations determined by the law, collective agreement, ILO conventions and other international standards. Mutual rights and obligations of employees and foreign investors are stipulated in the employment contract, pursuant to the enactments referred to in the paragraph above. In case that the employment contract establishes lesser rights or less favourable conditions of work than the on Employment, Law or labour of foreigners, Law on Securities, Law on Investment Funds, set of regulations in the field of intellectual property rights protection etc. 22 rights and conditions established by the law, provisions of the law and collective agreement shall apply). The position of a domestic and a foreign investor in terms of regulating legallabour relations are put on an equal level. If the legal relations are established with a foreign person, the provisions of the Law on conditions for establishing a labour relations with a foreign person shall apply. If the foreign person is the owner of a company or has a majority share in managing the company and if he employs Montenegrin citizens, he has the same obligations as a domestic employer. Obligations of a foreign investor – a foreign investor keeps business records, accountancy and documentation in accordance with international accountancy principles and standards and in performing its activities he is obliged to behave in compliance with environment protection legislation. Foreign investors are obliged to insure their investments pursuant to the insurance regulations. Treatment of a foreign investor compared to the treatment of a domestic investor – In the Republic of Montenegro a foreign investor can establish a company and invest in it in the manner and under the conditions which are the same as for domestic persons. This means that a foreign investor is given a national treatment, i.e. the same regulations applied for domestic investors apply to foreign investors – not any „other“ regulations which might deprive him of any rights or limit such rights. Fields in which a foreign investor can invest his funds – Joint stock company (shareholder’s company, limited liability company, limited partnership and unlimited solidary liability company); Private company and private business; Contractual company; Bank and other financial organization; Cooperative; Organization for insurance and other forms of cooperation and joint business operation stipulated by the law. Business organization law introduces lower fees for registration of business organizations and simplified registration procedures. Other changes in this Law refer to more precise definition of the rights of shareholders and protection of minority shareholders. Rules that refer to the duties and obligations of the founders are more flexible and also more precisely defined. Table 12 Business statistics in Montenegro (2005) BUSINESS STATISTICS – registration Shareholders’ companies 363 LLC 9.347 Partnership 640 Independent business activity 12.458 Companies with foreign capital ownership share 252 Other 1.114 Total: 24.174 TAXES VAT 17% i 7% Profit tax rate 9% Profit up to 100.000 € 15% Profit higher than 100.000 € 15% to 100.000 € i 20% to the amount higher than 100.000 € Up to 785 € 0% 785 – 2.615 € 0%+15% to the amount higher than 785 2.615 – 4.577 € 274 Eur +19% to the income higher than 2.615 € More than 4.577 € 647+23% to the income higher than 4.577 € MINIMUM WAGE Minimum wage 50Eur Average wage (Eur tax and contribution excluded) * 223,63 23 Report by Chief Economist of the Central Bank of Montenegro, November 2005 Law on pledge brought to the creation of on-line register of pledges. In October 2003 the value of the pledged property amounted to over 3 million Euro. Law on insolvency which came into effect on July 1st 2003, offers a SE set of rules which are aimed at solving the situations in case of a breakdown of a company in a regular, envisageable and fair way. This Law gives the possibility for an efficient completion of activities and reorganization of business. The Law helps creditors to return their claims in a faster manner and it helps the owners of businesses to change their orientation to some other activities, as well as to include the property of a company into the economic process as fast as possible. Law on fiduciary transfer of property rights allows companies and physical entities to offer various property in exchange for credit. Creditors will be in a position to secure credit through movable property and through centralized registration and lower costs they will be able to provide for their position. This kind of security will encourage creditors to give more credits. The Law is intended to encourage „borrowing“ as an instrument for encouraging businesses. Accountancy Law has introduced International accountancy standards (IAS). This internationally recognized system of accounts will allow tax authorities to determine what amount of tax is due. Potential investors will have a valid basis for researching financial statements of companies and companies will be able to update data in order to „monitor“ financial situation. Law on capital and current transactions allows free flow of capital, regulates procedures of transfer and repatriation of capital, in compliance with the best EU practice and most developed countries in the world. Foreign Trade Law is completely in line with the requests and principles of World Trade Organization (WTO) and European Union. This Law provides for monitoring of the goods and capital flows, open market economy and increasing liberalization in the trade of goods and services. It also provides for the equality of all the participants in foreign trade. Every person, depending on his/her legal and business capacity has the possibility to take part in foreign trade. Customs Law is in compliance with the requirements of World Trade Organization and European Union and it has been applied since April 2003. The Law simplifies customs procedures i.e. export-import procedures and introduces documentation for the goods which is identical to the documentation used in EU. The Law has fully overtaken the provisions of WTO Agreement on customs evaluation and rules on origins of goods Law on free zones defines free zones and free storages as parts of state teritorry htat have exterritorial character from the aspect of customs. From the aspect of customs such zones are for domestic markets treated as abroad. From every other aspect, such zones are a part of the state territory. Free zones give the participants in international business the possibility of more flexible, more efficient and more profitable business operation. Therefore many free zones in the world have developed industrial production and business of refinement of goods. The advantage for users of free zones and storages is the fact that they are relieved from customs and taxes when producing goods for export. In such a way they are increasing their competitiveness in third markets. In process of priparation is the Draft Law on National State as well as the first Montenegrin Law on Proprety Rights, which will cover this area in accordance with international standards on protection of investor's proprety rights as necessary condition for investors to purchase and become owners of realstates in Montenegro in form of legal persons as well as companies. 24 3.2.2 Economic and institutional framework of Montenegro for encouraging foreign investments In the period starting from 2001 (which is considered a year of factual beginning of the transition process) Montenegro has made a significant number of institutional reforms that are developing at an accelerated pace. They should be followed and supported by the changes happening in Montenegrin economy, starting with the process of privatization, restructuring of companies, establishment of capital market, strengthening of banking sector and foreign investment inflow. Fiscal reform – started in 2001. In the subsequent three years a large number of laws were adopted. They were aimed at contributing to more transparent and more efficient collection of budget revenues (Budget Law, Public Procurement Law, VAT Law, Physical Person’s Income Tax Law, Corporate Income Tax Law, Excise Law, Law on Tax Administration. Property Tax Law, Law on Administrative Fees, Law on Local Government Financing). Treasury of the Republic of Montenegro was founded. Its foundation and application of Public Procurement Law increased the level of transparency and efficiency in state expenditures control, and reduced discretionary authorities and possibilities for corruption in public administration. More efficient filling of the budget has been achieved. The additional improvement in terms of managing public expenditures is connected to introduction of the concept of mid-term framework for budget spending, which was for the first time presented in the Budget Law for 2003. Reforms in financial sector – In the period 2000-05 a set of new basic laws was adopted within the reform of financial sector in Montenegro: Law on Central Bank, Law on Banks (the new is planned for 2006), Foreign Investment Law, Law on Securities, Law on Bankruptcy and Liquidation of Banks, Law on Securing Claims, Law on Deposit Insurance, Law on Regulating Liabilities and Claims on the Basis of Foreign Debt and Foreign Currency Savings of Citizens, Law on Capital and Current Transactions, Law on Leasing etc. A whole set of bylaws was adopted as well. They made it possible to implement these laws in practice. All the adopted laws and bylaws are in compliance with EU and internationally recognized standards. Pursuant to the adopted laws the following institutions were established: Central Bank of Montenegro, Commission of Securities of Montenegro, Central Depositary Agency, 6 Privatization Investment Funds, 4 brokers’ and 1 dealer firms and 2 micro-financing organizations (2 more obtained a licence for starting) Banking sector – The reforms conducted in banking sector give visible results. 10 banks work in Montenegro today and majority of them has either whole or majority foreign capital. After the privatization of Podgoricka Bank at the end of 2005 state capital disappeared fully from the banking sector. Table 13 Ownership structure of the banking system Bank 1 CKB 2 3 4 5 6 7 Montenegrobanka Podgorička banka Hipotekarna banka Euromarket banka Atlasmont banka Opportunity banka Key shareholders DEG (22,1%),FMO(22,1%),Telekom Crne Gore(11,8%) Nova Ljubljanska banka(91,5%) Societte General (64%) State(4%),state companies(15,6%) SEEF(48%),DEG(21,5%),EBRD(19,7%) State (19,2%), state companies (6,2%) Opportunity international(75%), Driehaus 25 TOTAL ASSETS (MIL €) MARKET SHARE (%) 106 27.9 65.4 23,4 44.9 29.5 25.8 21.6 17.2 6.1 11.8 7.8 6.8 5.7 8 Komercijalna banka 9 Niksićka banka 10 Pljevaljska banka Source: CBCG , 2004 (13,63%), Rabobank group (1,5%) n.a State (16,5%), state companies (54,5%) Atlas Group (27.2%) 14.6 10.4 9.9 3.8 2.7 2.6 Efficiency and profitability of the banking system of Montenegro – challenges for foreign investors Banking sector in Montenegro is still underdeveloped. Thus, for example, the level of financial intermediation (which at the end of 2001 amounted to 35% of GDP, after restructuring of the banking system done by CBM, through the activities of writing off the foreign debt and frozen assets, and through liquidation of certain banks and solving the problem of old debt), fell to only 25.4% by the end of 2003. After the restructuring of the banking system was finished, there was a slight increase in financial intermediation to the level of 30.2% of GDP in 2004, which is still far from the average in EUR. 29 Table 14 Structure of the quality of investments of funds in the banking system of Montenegro 2001 2002 Number of banks 10 10 Number of branches 21 57 Number of employees in banks 751 951 ROAA (return on average assets) rate of return to the total invested -0.7 4 capital ROAE (return on average equity) rate of return to the total invested -4.4 15.7 equity Total income from interests(%) 4.1 4 Unused funds(%) 14.8 11.9 2003 10 92 1,237 2004 10 n.a n.a 1.5 -0.3 6.3 -1,2 5.8 7.4 6,1 8,0 Private sector deposits(in % of GDP) 8.5 6.6 9.5 10.7 Credits in private sector (u % of GDP) 5.3 7.4 11.8 16.2 76.3 72.8 70.4 57.4 35 27.9 25.4 30.1 Concentration coefficient(C5-total assets, in %) 85.8 79.8 77.8 77.3 Concentration coefficient (C5-credits, in %) 90.5 75.9 76.5 76 Concentration coefficient (C5-deposits, in %) 93.5 86.3 84.9 82 Concentration coefficient (C5-capital, in %) 85.7 69.2 70.8 69 43 16 31.1 25.3 22.6 33.1 25.8 37.9 Short-term credits to private sector (% of total credits to private sector) Financial mediation (total assets/GDP, in %) Market share of state owned banks (capital, in %) Market share of banks owned by foreign entities (capital, in %) Source: CBMN,2005 At the end of 2004 the level of deposits was as low as 18% of GDP. On the other side there was a significant level of regaining confidence of citizens into the banking sector, which resulted in the increase of the level of private sector deposits, which the end of 2004. was 10,7% of Montenegrin GDP. Since the EU average is 75% it is obviously a low figure. The level of financial intermediation is an indicator for identifying the level of banking activities according to which the level of development of financial system is determined. In 2004 the level of financial intermediation in EU amounted to 200% of GDP. 29 26 In this period there was also a significant increase in credit activities (in the period 2001 – 2004 credit potential increased to 65%), which by the end of 2004 amounted to 16,2% of GDP. It is still far below the EU average (the level of credits given to the private sector amounts to about 100% of GDP in EU). This expansion of credit activities was caused by significant investment demand and significant domestic demand for consumers’ goods. In the sector of banking the most positive changes have been achieved in a short period of time, and they are result, primarily of successful privatization, strengthening CBMN capacities and passing the set of laws which are in line with international standards, establishment of the Guarantee Fund for deposit insurance, and the gradual return of citizens’ confidence into the financial system. Analysing the number of banks needed for Montenegrin market, we can say that the number of banks is sufficient, so that in the following period, similar to the situation in Estonia, we can expect merging of some banks, i.e. further increase of concentration of banks. The low level of financial intermediation and the high level of liquidity indicate that in the future we should expect the increase of credit activities. When it comes to other financial institutions, a significant space has been created for opening financial intermediaries and micro-credit institutions. For such institutions there is a competitive condition for equity (census), high investment and consumers’ demand and good institutional framework for protection from business risks. Other forms of financial institutions, like investment funds, joint funds, trust etc. will follow the development of the banking system in the future mid-term period, supplementing the range of financial services in Montenegro. Capital market – Operation of institutions of the market of securities has so far shown that legislation and institutions are established in line with the needs of the market. Apart from Montenegroberza „Nova Berza“ (New Stock Exchange) has been established with private capital. Four brokers’ firms and one dealers’ firm have licences for work. Trading in shares, old foreign currency bonds and privatization funds’ units is going on smoothly and freely. The project of networking of SEE Stock Exchanges was implemented (BTS trading system). An independent web portal www.sem-on.net was established, where it is possible in parallel and in real time to follow developments on 7 Stock Exchanges: NEX Exchange from Podgorica, Ljubljana, Sarajevo, Banja Luka, Varazdin, Skopje and Belgrade. 3.3 The amount of operational costs of a foreign investor’s investment The third group of indicators, characteristic for the last stage of making the decision on investing is the amount of operational costs – labour, land and external elements. 3.3.1 Education of labour – adapting to the new structure of economy and competitiveness in relation to SEE region In comparison to the countries in the region Montenegro has highly educated labour, which was by foreign experts described as an important strategic advantage (depending on the proper adaptation of the current school system to the future needs of the economic structure of Montenegro, this advantage can be recognized by foreign investors as a part of image of Montenegro). However, Montenegro still has a high level of unemployment ((2003 - 21.4%, 2004.-23.7%, 2005. – 19,7%). The current structure of unemployment from the aspect of education level indicates that the largest number of unemployed persons are the persons with secondary school education (about 27 65%). Even if we take into account the fact that this group is the most numerous in the total education structure, this data still indicates that there is no demand for certain groups of secondary school educated staff, or that it is not in line with the current market demand. Other countries in the region have similar situation - the group with secondary education level is the most critical group. The level of unemployment of highly educated labour is 8%. The second characteristic that special attention should be paid to is the price competitiveness of labour in Montenegro. Observing the total operational costs of business operation in the region (Table 15), Montenegro has relatively expensive labour in comparison to the countries in the region (average minimum wage in the Republic is 1.5 EUR/h, while in Albania it is 0.6EUR/h). However, the labour market in Montenegro is competitive from the aspect of the level of education. Another incentive for attracting FDI is the fact that the high level of unemployment will for a long time keep the costs of labour on a competitive level. Table 15 Operational costs of operation in SEE 30 € Country Albania B&H Bulgaria Moldova Romania Montenegro Serbia Gross income 163 267(B) i 193(RS)31 149 80 179 290 238 Source: Report for Southeastern Europe , OECD, 2005; 3.3.2 Operational costs of energy, water and industrial land In comparison to the countries in the region Montenegro has the lowest average electricity and water costs (Table 16). However it can be expected that in the future period these prices, like for example the prices of electricity, will grow as these systems get privatized. Montenegro still does not have competitive price of industrial land in the context of the region. This is primarily due to the fact that the legal framework for free purchase of property by foreign investors has only recently been completed. Table 16 Average costs of electricity, gas and water in the countries of SEE Country Albania Croatia Macedonia B&H Serbia and Montenegro Electricity price 0.1 0.1 0.08 0.12 0.07 Gas price /l 0.01 0.38 0.26 0.28 0.22 Water price / l 0.19 3.06 0.49 1.79 0.53 Industrial land price m2/€ na 215 60 52 177 Source: World Bank, MIGA, 2005 Final comparison of operational costs that are important in investor’s selection of location brings Montenegro to the place behind Macedonia and Albania only on the basis of the price competitiveness. If the Index of operational costs is observed, Montenegro is on the same level with B&H. 30 31 Research have been made only in certain wage groups (among cetain sectors) B – Bosnia, RS – Republic of Srpska 28 Table 17 Index of operational costs for SEE countries Albania Bosnia and Herzegovina Croatia Macedonia Serbia/Montenegro Checz Republic Hungary Slovak Republic Source: PricewaterhouseCoopers Corporate operational cost index guide, 2005 35 63 101 51 53 85 100 59 4. SWOT ANALYSIS We started SWOT analysis of the attractiveness of investing in Montenegro from specific characteristics of Montenegrin macro-economic environment for investments; its position in the SEE region and broader context; the analysis of the estimate or investment risk and the level of the achieved economic and legal reforms. In making the SWOT analysis we started from the most important types of risks recognized as key causes of not investing into the SEE region, which were also recognized in the FIAS study of investment potentials of Montenegro. Strategy of encouraging investments in Montenegro is based on TWO BASIC GOALS: reducing the risk of business operations, which is the first step which has to be provided for CREATING GENERAL FAVOURABLE ENVIRONMENT FOR INVESTMENT, through reduction in the business operations risk (General measures/ General Strategy)32, detailed list of fiscal, regulatory and financial MEASURES FOR TARGET SECTORS AND REGIONS, AS WELL AS FOR INDIVIDUAL TYPES OF INVESTMENT, i. e. Investors (Target measures/ Targeting Strategy). According to OECD33 experts, GENERAL CONDITIONS FOR ATTRACTING FDI to the SEE countries are: Securing safe, flexible and non-discriminatory legal framework, with simplification of administrative procedures for establishment and operation of companies; Creating a stable macro-economic environment, with clearly defined investment policy for entering foreign markets and Available resources, with developed infrastructure and human potential. Foreign investors34 have also recognized LIMITATIONS of potential investment in the SEE region and they put them to the following positions: Poor infrastructure (road infrastructure above all), The basic conclusion of the OECD for SEE is that foreign investors most frequently invest into a country when they already have an attitude about the level of risk in that country; 32 33 34 Source: Checklist for Foreign Direct Investment Incentive Policies, OECD 2003 Source: Investment Confidence Index Report, Karney, 2005 29 Corruption – lack of transparency of institutions and procedures, insufficiently protected property rights of investors, Gradual increase of labour costs, Insufficient macro-economic stability, Insufficient market of production inputs, and inefficient market of accompanying services, Inflexible labour market and uncompetitive structure of employees Insufficient legislation for competitive private sector market Political instability Insufficient domestic demand (purchase power) Insufficient use of free zones Completion of privatization process To that end OECD experts have defined the following recommendations as the most efficient method for creation of the general positive environment for attracting FDI: Strengthening transparency of public sector through creation of legal framework and through developing appropriate institutions for implementation and control, in the aim of reduction of implementation gap (which refers to the transparency of procedures and public sector institutions), with a particular emphasis on judiciary, customs services and services for obtaining licences for business operation (these institutions are the ones that are recognized as having the highest level of non-transparency in the SEE countries, and according to FIAS study they have been marked as the most serious barriers for attracting FDI to Montenegro). Providing institutional legal framework for business operations of foreign investors under the same conditions for domestic companies, Development of a high quality legal and implementation framework in the aim of protection of property rights of foreign investors, as well as provision of free capital flow (transfer and repatriation of profit), Providing conditions for „sound“ competition in private sector, Reducing bariers for encouraging international trade and free access to new markets, Reducing fiscal barriers that are an obstacle to FDI inflow. 30 SWOT Analysis of Investment potential of Montenegro 2005 STRENGTHS (S) WEAKNESSES ( W) 1. Political stability 2. Relative macro-economic stability 3. Competitive financial risk in the region (S&P - BB positive) 4. Final stage of the privatization process 5. Euro – currency (lowered exchange rate risk) 6. High level of achieved economic reforms and newly established institutions for creating attractive business environment 7. Restructured and privatized banking system 8. Accelerated development of capital market 9. Developed telecommunication infrastructure (regional aspect) 10.Highly educated labour (benchmark – world market) 11.Free access to the markets of EU, FTA zone and Russia 12. Liberalized system of customs tariffs 13.Responsible fiscal policy 14. Significant level of already introduced incentive fiscal, regulatory and financial measures, competitive in the region: The lowest number of days for registration a firm in the region Protection of property rights, including intellectual property and system of securing claims (mortgage and fiduciary); National treatment – foreign investors have the same rights and obligations as domestic ones, with the possibility to be shareholders in a company with no limitations, as well as buyers of property (with the reciprocity right); Free transfer of re-invested profit and payments abroad; Taxation as for domestic legal entities with tax relieves and facilities; Privatization, purchase of property and shares of companies (investing in all kinds of projects, individual or joint establishment of companies and banks, joint ventures, concessions, BOT arrangements, Joint Venture, M&A, contractual modalities, leasing, franchising etc.); The lowest rate of profit tax in Europe in the amount of 9% Exemption from customs taxation for the investments in goods (which are imported as an investment of a foreign investor); Exemption from profit tax (in the period of 3 years) for establishing a legal entity in underdeveloped municipalities (production activities); Tax relieves (profit tax) for investing into fixed assets (re-investment) – 25% of the investment; Avoiding double taxation In free zones users and operators are fully and without time limitations exempt from paying corporate profit tax. 31 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. Market size Location still not sufficiently recognizable for attracting FDI Limited natural resources Inflexible labour market Insufficiently developed infrastructure Relatively expensive labour (benchmark SEE region) Complicated burearocratic procedures for establishing companies Implementation gap – insufficiently efficient application of basic laws which refer to foreign investors, particularly in the field of protection of property rights (intellectual property especially) Administrative barriers (time consuming processes of obtaining construction permits, procedures of change of land use, not defined industrial land offer) Underdeveloped capital market (intermediaries) Limited domestic consumption Complicated procedure of issuance of zoning and construction permits Underdeveloped sector technological basis Underdeveloped know-how (particularly management skills) Not leveled regional development policy OPPORTUNITIES (O) 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. THREATS(T) Strengthening macro-economic stability; Sustainable GDP growth; Commitment of the Government of Montenegro to the programme of sustainable economic development, responsible fiscal policy and creation of favourable environment for business operation of foreign investors; Accelerated development of financial markets; Accelerated development and strengthening of institutions for attracting FDI; Alignment of legislation in the field of labour relations with EU standards; Indebtness with international financial institutions for building capital infrastructure (road, maritime and air transportation; Establishing free zones; Creating liberalized fiscal system for attracting FDI; Implementation of the law for regulating the new types of risks (laws in the field of intellectual property protection, Law on protection of competition); Strengthening banking sector and financial intermediaries Reforms of education in line with the needs of development sectors in Montenegro; Adapting the structure of employees to the needs of foreign investors. 1. 2. 3. 4. 5. 6. 7. 8. 9. 35 Privatization of major companies and selection of high-quality strategic investors, with a special emphasis on the energy system; *Increase of fiscal incentive measures * of the countries in SEE region35; Implementation gap; Further non-transparency and inefficiency of administrative system Slow legislation reforms in the field of labour; Low level of sector diversification of FDI (concentration of FDI in a small number of sectors, for example now these are greenfiled investments mostly in tourism); Low level of reinvesting and potential outflow of foreign capital (post-investment influence – particularly the level of local taxes, tax changes, change in the price of inputs, trade union influence...etc. Further concentration of ownership in the banking system; Further inefficiency of labour market (slow re-training, additional education programmes, compliance of education programmes with the needs of the investors). According to the report of WIR – UNCTAD 2005, the territory of SEE has become one of the most competitive regions for attracting FDI, primarily through important reforms of the fiscal and institutional system. Since these countries cannot provide financial incentive measures for the investors, there is a „fiscal war“ in the region. It is reflected through drastic reductions in profit tax (for example Albania from 25 to 23%, Bulgaria from 19,5 to 15%, Romania from 25 to 16%, Serbia from 18 to 10%, Montenegro from 15 to 9%) 32 5. STRATEGY MEASURES FOR ENCOURAGING INVESTMENTS IN MONTENEGRO 2006-2010 The measures to encourage investments stemmed from the SWOT analysis of the quality of the investment environment and attractiveness of Montenegro for new investments, and the goals envisaged by the Montenegrin Economic Reforms Agenda 2005-2007. With this in mind, new types of investors and investments have been defined that Montenegro should be targeting in the period 20062010. Strategy Measures to encourage FDI in Montenegro divided into three groups: 1. GENERAL STRATEGIC MEASURES – a group of measures which should provide for creation of an environment more conducive to business, and in the medium-term result in reducing the general business risk in Montenegro (Table 20); 2. FOCUSED STRATEGIC MEASURES – a set of regulatory and fiscal incentives that should result in further alignment of the investment policy of Montenegro to the policy of the region, and its positioning in the SEE region (Table 21); 3. PROMOTIONAL STRATEGIC MEASURES – which are supposed in medium term to build the image of Montenegro as an investment destination, primarily through the implementation of general and focused measures, and by presenting and promoting positive examples of investments in this country (Table 22); The Strategy time frame is divided into two parts: 1. Period 2006 – 2007 - intensify the efforts to implement general strategic measures. Over this period the intensive privatisation process is to continue, thus opening up possibilities to work in parallel on creating the conditions for greenfield investments; this period also involves intensive promotional activities. 2. Period 2007 – 2010 – implement focused measures and the promotion programme for Montenegro as an investment destination. Target groups for the Strategy implementation: 1. Prospective investors (“Pre-investment Phase – Go Fish“); 2. Investors in the decision-making process (“Decision making phase“); 3. Investors in post-investment phase (“Reinvestment not reallocation“) - with the aim of creating a business climate conducive to profit reinvestment, as well as the provision of additional capital investments of current investors.36 Recently the SEE region has seen an intensive reduction of fiscal encumbrances and provision of fiscal incentives for foreign investments /so-called Thropy competition/, leading, among other things, to the creation of a market in which low costs enable capital reallocation. The competition is very harsh and Montenegro is an active participant. Hence, additional incentives are needed to encourage investors already present in Montenegro. Strategic investors – active stakeholders need to be involved in macroeconomic policy-making and creation of an environment conducive to investments in the country, by passing own experiences to the Government. It is necessary to define fiscal and regulatory measures conducive to retention of capital, i.e. reinvestment of profits in Montenegro. 36 33 Target investment forms, which would be of most interest for Montenegro, are conditioned by the investor demand and general conditions for business operation Montenegro may offer. In their decision-making, the investors take into account 4 types of demand: 1. 2. 3. 4. input resource seekers, market seekers, reducing cost seekers client followers. The given target investment forms are of primary importance in decision-making and Montenegro may not have direct impact on majority of them. At the same time, however, the business climate in a country is of extreme importance for investors. It means that macroeconomic stability, ownership structure and protection of property rights after the privatisation process, the presence of other competitors, the level of know how, technology etc. are all significant elements in the decision-making process, but only after the region has been well-positioned for investments.37 Investment policy development goals - What do investors expect38 1. Developed practice of investment protection – in that sense, the recommendation is to sign BIT, DTT39, as well as have full implementation of laws on investor protection (especially those concerning protection of property rights), 2. Foreign investors primarily respond to general measures aimed towards improved conditions for business operation, compared to specific programmes relating to incentive packages specified for certain sectors or regions, 3. Fiscal regulatory measures are a key group of measures having impact on the investment process. General policy of Montenegro as a small market is to create a liberal fiscal system, and all the changes in this sector need to be well-coordinated and lead to the same direction – further reduction of taxes having impact on investment decisions – profit tax, depreciation rate, etc., 4. Creating clear and precisely defined employee-employer relations, and provide protection of employee rights and employer rights in that effect, 5. Competition policy – establishing market competition, as well as the reduction of costs for setting up business and closing it down, 6. Access to regional markets through bilateral and multilateral free trade agreements, 7. Human resources development – increase productivity trough enhancement of specialised knowledge (operational management, strategic management, consulting, etc), 8. Successful privatisation stories – an indicator of institutional capacity to provide for adequate investment protection, 9. FDI targeting – designing incentives for the most prospective sectors, or regions, 10. Appropriate development of service industry, in line with the level of FDI (consulting agencies, real estate agencies, forwarding, marketing agencies, etc), 11. Provision of post-investment services in order to retain reinvested profit and expand business activities of investors. FDI Theory: The Investment Development Path, by Haico Ebbers 2004 Source: EFFECTIVENESS of FDI Policy Measures, UNCTAD Secretariat Trade and FDI Development Board, 2004 39 Bilateral Investment Treaty and Double Taxation Treaty; 37 38 34 Being a small market, Montenegro is not the first choice of horizontal TNC or locally-oriented TNC; thus, we may say that targeted investors for Montenegro are found in the VERTICAL TNC40, i.e. export-oriented investors. What is characteristic for these investors (vertical TNC) is that they are less susceptible to political risk and macroeconomic stability, due to their business mobility (which is not characteristic for horizontal TNC). On the other hand, this type of investors is motivated by low labour costs (especially highly educated labour), appropriate infrastructure, nonexistence of trade barriers, stable currency and additional investment incentives. What differs Montenegro from the countries in the region is an extremely high level of FDI in service sector (73 %41, being more than the world average of 62%42 in 2005), and its growth trend is expected even in future (HAAB, Reiffeisen Bank, tourism). It could, therefore, be argued that Montenegro has the potential to become one of the service centres for the SEE region for various services (“knowledge intensive industries”), such as telecommunication services, consulting, service management, educational centres, research and development, transport services – especially tranzit sevice, establishing distributive centers in free zone's area for the purpose of reagional markets, etc. 5.1 Montenegrin Investment Promotion Agency - MIPA In late 2004 Montenegrin Government passed a Decision to establish the Montenegrin Investment Promotion Agency – MIPA, which started operating in March 2005. The decision envisaged that the scope of activity of the Montenegrin Investment Promotion Agency primarily referred to the coordination and implementation of the Strategy for Encouraging Direct Foreign Investments (records and promotion), but also the development of specific strategies, or programmes for particular sectors and countries (sources of investment), conducting activities aimed at improving the image of Montenegro as a location attractive for investments, establishing contacts and provision of professional services to foreign investors, presentation of characteristic sectors and specific advantages Montenegro has to offer to investors (in printed and electronic form), conducting promotional activities in the target markets, establishing public and private partnerships aiming for as broad promotion of Montenegro as possible, development of databases on target companies, as well as the system for locating and identifying potential sources of investments, partnership cooperation with municipalities, free zones and other public organisations of Montenegro to promote attractive locations and real estate which meet the investor requirements in a competitive manner, provision of feedback information, analysis and recommendations to the Government with the aim of enhancing the investment environment, stimulating initiatives for the development of the “investment product” (like encouraging greater supply of “greenfield” options and technological parks in order to attain better competitiveness of Montenegro as a destination attractive for investments, development), implementing strategies for the use of internet and information technologies as marketing and research tools, as well as the records of agreements, decisions and other enactments from the scope of competences of the Agency. The Montenegrin Investment Promotion Agency has its Director and its Executive Board, whose chair is, by his mandate the Prime Minister, and members the representatives of the public and private sector. Horizontal TNC – total production process organised at one location, characteristic of large markets (China, India, Russia); Vertical TNC – production process organised at the regional level (e.g. automotive industry in the SEE region). 41 Source: CBM, Payment balance account 2001 – 2005 42 Source: WIR 2005, UNCTAD 40 35 This decision also envisages the duty of the Agency to submit to its Executive Board the annual Work Programme, the Progress Report, the Financial Plan and Final Balance of Accounts, which are to be approved by the Government. 5.2 Promotion of Montenegro as an FDI location Countries wishing to attract foreign investors have to establish a clear promotion concept aiming to create the image well suited to the demands and the needs of foreign investors. It particularly holds true for the countries like Montenegro, not having a large domestic market, one of major location advantages for foreign investors, and at the same time being in the region where, due to ever increasing openness of the countries, the competition is growing harsher. In order for the set goals to be attained it is necessary to develop the appropriate Programme for promotion of Montenegro to attract FDI, with the action plan for the implementation of the planned activities, in line with this Strategy, which is to define the need, advantages and opportunities of Montenegro for attracting FDI, in terms with the needs and demands of prospective investors. This makes it a target-oriented programme for encouraging foreign direct investments, having clearly set promotion goals, a systematic approach to the FDI promotion activities, including all the available human resources and adequate financial resources. 5.2.1 Target investor groups and target sectors On the basis of the SWOT analysis given in this Strategy, as well as the comparative analysis of Montenegro and the region, we may position target groups of foreign investors and target sectors that we should focus on in the future programme of promotional activities: Medium and large-sized companies (firms) from the neighbouring and nearby developed countries, which have the need to expand their production; Multinational companies not yet present in the region; Multinational companies already positioned in the neighbouring countries. To this target group Montenegro may offer competitive location for logistic and distribution centres, as well as internationally payable services; Companies or firms which are main foreign trade partners of Montenegro, i.e. enterprises already having successful cooperation with Montenegrin enterprises, and Companies that, by taking over or by some other form of strategic linking, would enable the companies in Montenegro to “survive” and develop further, i.e. enable the preservation of the existing jobs. Judging from prior experience, and seen from the FDI perspective, the sectors of most interest are those in which Montenegro already has long-lasting tradition and own knowledge, and which are moreover internationally competitive: manufacturing sector (car industry, food and beverage industry,...), maritime sector, tourism sector, energy sector and telecommunications sector. 5.2.2 Main activities to promote FDI FDI promotion concept is based on three main activities: 36 Promotion of advantages of Montenegro as a location for foreign direct investments (Image Building). In the process of image building it is necessary first to identify perceptions of prospective investors and on the basis of that set the promotion goals. The main promotional messages, serving to attain goals, have to take into account the specific/sectoral competitive advantages of the country. The selection of the appropriate promotion depends on the target public. The advertising activity needs to be aligned with other activities related to attracting foreign investors. Due to limited financial resources and relatively indirect impact, the activities on promotion of Montenegro as a foreign direct investment location must to a great extent be related to target groups/sectors that are to define future promotion programme. Provision of foreign direct investment by direct promotion (Investment Generation). Although the main generator of new investments lies in how accorded the location features are with the investors’ wishes, still the final decision may to a certain extent be influenced by the active role of the Investment Promotion Agency. Winning over foreign investments by direct promotion is the best way for establishing links with new prospective investors, since direct approach is adapted to the very investorf. Service for Investors. Service to foreign investors may be divided into three groups: Preinvestment services – provision of information, support to investor visits and establishing connections with other institutions, Services during investment (providing assistance in acquiring various approvals and consents of competent authorities, provisions of adequate infrastructure sites and assistance with initial problems, inevitable in each new investment), and Post-investment services (including maintaining business connections with current investors, promotion and assistance with new investments, and assistance in establishing the supply chain between domestic companies and foreign investors). 5.2.3 Promotional techniques To promote Montenegro as an attractive destination for direct foreign investments the promotional techniques to be developed in detail in the promotion programme of Montenegro for attracting FDI will be used: Positioning Communicating the message – examples: Politically and economically, Montenegro is a stable partner – open for cooperation Montenegro is a country of rich tradition and culture, future modern partner in the world. Plan of actions and tactical implementation of set goals Selection and evaluation of information, concentration of vital information, its presentation during events and publication economy and industry 37 policy tourism international cooperation Information and communication with target groups for certain Events establishing contacts with - prospective investors - cooperation partners - business people and politicians with decision-making powers significant information on the economic structure, development trends and investment and cooperation opportunities presentation of achievements and production programmes image building arranging presentations in partner countries PR – support to the campaign Ongoing work with the media / Ongoing reporting on economic cooperation achievements / Cooperation / Investment programmes monthly events with the media – press conferences, events for journalists, talks with the press, “shadow” talks establishing contacts with the media initiating specialised shows – TV and radio broadcasts, features in well-known magazines study visits of journalists covering economy CD and Internet presentations, spots and promotional films Info material for presentations, fairs, business contacts Info brochures / investment environment in Montenegro Catalogues / by sectors and by fields Investor Atlas / an up-to-date version of a general catalogue Photographs for Press kits Texts for journalists / paid publicity Event Promotion Montenegro – Selection of an important event in Montenegro, e.g. conclusion of a cooperation agreement, an important economic event, etc Austria, Germany, Russia/ or … a European country – some special event covered by TV Presentation at international, fairs, exchanges, conferences, symposiums with media coverage (establishing contacts, development and distribution of promotional materials) 38 Establishment of info centres within future diplomatic missions for prospective investors, cooperation with the Diaspora (by, for instance using free telephone calls) Sponsorships – provision of sponsor support for the development of promotional materials, e.g. from Siemens, the banks, etc Newsletter - info briefing with information and news for investors (by web presentations and e-mails) 39 5.3. General strategic measures Table 18 Measure 1. Analysis of the current Labour Law and proposal of the new draft 2. Implementation of the Law on Protection of Competition 3. Analysis of administrative barriers in investment 4. Analysis of investment flows, development of investor data base 5. CBM capacity building to follow FDI through payment balance account, by type of investment (FDI in ownership, re-invested profit, intra-corporation credits) 6. Bilateral investment agreements (BIT and DTT) Implementing and evaluating agency Ministry of Labour and Social Welfare Implementation timeframe Ministry of Economy I quarter 2006 MIPA, Ministry of Finance, Ministry of Economy, Ministry for Environmental Protection and Physical Planning III quarter 2006 III quarter 2006 Evaluation indicators Alignment of protection of employment relations with international standards Alignment with EU standards Annual Prevention and control of unlawful forms of formal and informal association of market entities, free pricing policy Alignment with EU standards Annual Determining specific administrative problems in investment process Establishing good databases on FDI, their types, sectors, number of investment transactions, etc.43 Number of procedures for setting up a business, number of effective days for acquiring the approvals needed, etc Quality of investment basis, sectoral distribution of FDI, no. of investors, reinvestment level, etc MIPA III quarter 2006 CBM Ministry of Finance III quarter 2006 Establishing good databases on FDI, their types, sectors, number of investment transactions, etc.44 Quality of annual CBM reports on FDI flows Ongoing activity Establishing better investment links with countries of importance for the investors45 Number of signed BIT and DTT (new and extended) MIEREI Evaluation timeframe Goal Half a year Annual Half a year Annual Except for monitoring FDI through payment balance account, it is necessary to have further research on the number and type of investments, having in mind that not all investments may be determined by the payment balance account of the CBM, Recommendation: WIIW 2005, Seminar on FDI policy in the SEE 44 UNCTAD Recommendation, WIR 2004 is for FDI to be followed by the type of investment to analyse the “age and quality” of FDI 45 Currently the BIT agreement signing with USA is in progress 43 40 Measure 7.Pension system reform 8. Within developments of general and detailed urban plans for Montenegro, develop a database on prospective locations – industrial sites in Montenegro 9. Implementation of a set of laws to protect intellectual property Implementing and evaluating agency Ministry of Labour and Social Welfare Ministry for Environmental Protection and Physical Planning in cooperation with local communities, Real Estate Directorate Ministry of Culture and Media Ministry of Economy 10. Full implementation of FTA and linking MIPA with regional IPAs MIEREI and MIPA 11.Design of new curricula, trainings, attracting foreign educational centres to Montenegro Ministry of Science and Education, University of Montenegro, line ministries, Directorate for the development of SMEs 12. Establishment and putting into operation of “one stop shops” for foreign investors MIPA Implementation timeframe 2006- 2008 III quarter 2006 Ongoing activity Goal Evaluation indicators Creation of a liberal, privately-oriented pension system Alignment with EU standards No of locations of industrial sites, no of investors using the industrial sites Creation of a free market of an industrial country and free pricing policy46 Protection of intellectual property rights and reducing business operation risks Ongoing activity Project inclusion in the SEE region, Extension of the market for Montenegro Ongoing activity (2006-2010) Human resources development 47 I quarter 2006 Quality presentation of investment environment and investment projects in Montenegro to foreign investors Alignment with EU standards No. of joint investment projects, no. of joint presentations, level of foreign trade with the region No. of higher education institutions, no. of Sector specific and Firm specific trainings No. of services of the One Stop Shop Evaluation timeframe Annual Annual Annual Annual Annual Annual For Greenfield, first provide the field (site) Having available low-paid, unqualified labour is not an advantage any more having in mind that the countries in the region (and worldwide) have the same advantage plus additional advantages like the size of the market. 46 47 41 5. 2. FOCUSED STRATEGIC MEASURES Table 19 Measure 1. Competitiveness of tax encumbrances on wages (analysis) and passing a new law on wage taxes 2. More efficient financial system for the needs of foreign investors 3. Analysis of switching from progressive profit tax base to the uniform, lower tax rate 49 4. Further uniform reduction of the tax base of profit tax 5. Analysis of possibilities to reduce tax encumbrances for investors at the local level Implementing and evaluating agency Implementation timeframe Goal Evaluation indicators Evaluation timeframe Ministry of finance III Quarter 2006.g. Price increase of competitiveness of labour costs in Montenegro48, possibilities to reduce tax encumbrances on wages Accrued tax revenues Annual Ministry of finance CBM II quarter 2006 Alignment with EU standards Equal access to financial resources Annual Ministry of finance III quarter 2006 Ministry of finance III quarter 2006 Ministry of finance III quarter 2006 Fast entry of banks into the Montenegrin market through reduced census for initial capital, possibilities for further reductions of mandatory reserves. Creation of a more liberal fiscal system Accrued tax revenues as income tax Annual Creation of a more liberal fiscal system Accrued tax revenues as profit tax Creation of a more liberal fiscal system for current foreign investors Accrued tax as local taxes Annual Annual In the region, Montenegro has the least competitive labour prices, both in absolute terms and in relation to work productivity. According to an USAID research, 2004 the tax encumbrances – taking into account all the social benefits (pension and health care, as well as unemployment benefits, including taxes and surcharges introduced in terms with the General Collective Agreement, the Law on Communal Taxes and Charges, and other laws) it was estimated that it accounted for 52% of labour costs, the non-wage labour costs being estimated to 35%. In the region tax encumbrances with all contributions amount to 34.5% in Estonia, 26% in Russia, 35.8% in Serbia, etc. When it comes to productivity, for the past 4 years Montenegro has achieved the increase in productivity of 18.2%, while the increase in the labour costs for the same period was 103%, which had a negative impact on the relative regional competitiveness of the labour price of Montenegro. Source: European Tax Surveys 2005, USAID 49 Countries in the region have already established the uniform profit tax rate, which is lower than the current upper limit of the profit tax rate in Montenegro of 23%. Thus in Serbia this tax rate is 14 %( to wages) and 20% to other incomes, in Romania 16%. Considering that the tax rate of 23% is payable for revenues exceeding €4,577.00, foreign investors are directly impacted by this; the recommendation is to establish a lower uniform profit tax rate. 48 42 Measure 7. Tourism Development strategy for Montenegro 8. Provision of post-investment services and cooperation of MIPA with current investors 9. Strenghening of the statistic processing and dissamination of FDI dta through adopting in ternational stadndards for following FDI flows in Montenegro( BOP5,SIMSDI,SURVEY) Implementing and evaluating agency Implementation timeframe Ministry of Tourism III 2006 Ongoing activity MIPA CBCG,MIPA Ongoing activity Goal Evaluation indicators Sectoral approach to creating conditions conducive to investments in tourism which is to represent the main generator of “greenfield” investments Attracting current investors to re-invest, creating a positive environment for new investors Quality of obtained data (FDI data based on types, country of origin and trends) Number of “Greenfield” investments in tourism Number of new investors, share of re-invested profit in total FDI Number of investors , accurate evidence on various types of investments (Reinvested earnings, equity capital, loan, greenfield vs privatization) Evaluation timeframe Annual Annual Annual 5.3. PROMOTIONAL STRATEGIC MEASURES Table 20 Measure 1. Development of annual Action Plan – promotion programme of Montenegro for attracting FDI Implementing and evaluating agency MIPA Implementation timeframe II 2006 Goal Evaluation indicators Building image of Montenegro as an investment destination 43 Number of new investors, quality and diversity of promotional materials, participation to international investment conferences Evaluation timeframe Annual 6. MONITORING AND EVALUATION Monitoring and evaluation activities are a basis for monitoring the Strategy implementation, they affect the attainment of main goals set by the Strategy and evaluate how effective the proposed measures are, leaving the possibility for on time response of the Strategy implementers to enhance the quality of the proposed measures. BASIC PRINCIPLES The basic principles on which the monitoring tools development, establishment of monitoring institutions and Strategy implementation are based are as follows: Strategy implementation is a process – a large number of measures envisaged by the Strategy has a long-term impact, both in the process of its implementation and in its effects. In that sense there is a risk of appropriate assessment of the impact of certain measures in relation to the projected goal, as well as the inability for good insight into projected effects. Comprehensive and ongoing commitment to the Strategy implementation – Montenegrin Government in its Economic Reforms Agenda 2005 – 2007 set attracting FDI as one of the priorities in achieving economic growth and development. Through its proactive approach, this Strategy provides for maximum participation of all the institutions in implementing the policy for encouraging FDI in Montenegro. In the monitoring and evaluation process it is necessary to have the participation of all institutions and close cooperation of all Strategy implementers – The Strategy is a document primarily directed towards foreign direct investors as a target group. It means that through the institutional monitoring system over the Strategy implementation as well as the evaluation process it is necessary to provide for the participation of investors themselves, through the intended Council of Investors, that is to play an active role in investment policy-making, primarily by giving proposals and suggestions for removing the barriers for the implementation of certain measures, how to improve their effectiveness and proposing the new ones. The same is expected from other Strategy implementers. Strategy implementers, the institutions enlisted in the tables presenting measures, are at the same time the main agents in monitoring and evaluation processes, respecting the envisaged time frames for evaluation reports to the Government. Also, an important actor in the Strategy implementation and creation of the future investment policy should by all means be the Council of Investors, whose initiation and full cooperation is to be provided by MIPA. Realistic expectations – the basic goal of Strategy development is to increase the FDI inflow to Montenegro. In that sense, the actual inflow of foreign investments may be affected by this strategic document only to a certain extent. Certain factors, also very important in the investment process (size of the market, i.e. conditions for regional approach to investments, purchasing power of the population, risk level in the region, etc), may not be influenced over directly, i.e. some may be influenced over but only in the long run (like the purchasing power). However, by creating a good business environment, guarantees and protection of property rights as well as by the implementation of special, primarily fiscal, incentives provided for in the document, Montenegro has the potential to be recognised in the SEE region as a specific and attractive investment location. 44 References: Foreign Direct Investment And Restructuring In The Automotive Industry In Central And East Europe, Centre For The Study Of Economic And Social Change In Europe, Slavo Radošević and Andrew Rozeik Renewable Energies in Europe, Market Development Prospects and International Corporate Investment Strategies, Michel Lemagnen, May 2005 FDI Confidence index, The Global business policy council, October 2004, Volume 7 Development and Privatisation Strategy for EPCG and Coal Mine Pljevlja, IPA Energy Consulting, IDOM, Carl Bro, Planet Erns and Young Checklist for Foreign Direct Investment Incentive Policies, OECD The New Dynamic of Central and East Europe, Opportunities and Challenges, OESA Executive Breakfast Briefing, June 24, 2004 Foreign Direct Investment in South East Europe in 2003-2004, Gábor Hunya, June 2004 Marketing a Country, Promotion as a Tool for Attracting Foreign Investment, Revised Edition, Louis T. Wells, Jr. and Alvin G. Wint Economic Reform Agenda for Montenegro 2002-2007 Analiza Investicionog Ambijenta U Crnoj Gori (Analysis of the Investment Environment in Montenegro), Ministry for International Economic Relations and European Integration, November 2004 The Memorandum on Foreign Trade Regime of the Republic of Montenegro, December 2004 Montenegro - Investment Challenge, Government of Republic of Montenegro, March 2004 Foreign Direct Investment in South-eastern Europe, Robert W. McGee Barry University Hrvatska: Administrativne Prepreke Stranim Ulaganjima (Croatia: Administrative Barriers to Foreign Investments), FIAS, January 2001 World Investment Report 2004, The Shift Towards Services, United Nations Conference on Trade and Development WORLD TRADE REPORT, Exploring the linkage between the domestic policy environment and international trade, World Trade Organization Program for Restructuring of Companies and Supporting of Institution Development, Government of the Republic of Montenegro, June 2003 Plan privatizacije za 2005 (Privatization Plan 2005), Privatisation Council Diversifying Agricultural Products and Exports in Africa, The role of Public Agricultural Research, David Bigman Foreign Trade Annual Report 2004, USAID, ACIT, ISB April 2005 Development Strategy of the Republic Of Croatia, Maritime Strategy Advice on Taxation and Tax Incentives for Foreign Direct Investment, Joel Bergsman may 1999 Are the geese flying?’, Comparing the industrial restructuring role of FDI in South-East Asian and Central European countries, by Gábor Hunya Gaining and Losing Competitive Advantage, by Christian Bellak Research paper series, Foreign Direct Investment and Intra-Industry Spillovers: A Review of the Literature, By H. Görg and D. Greenaway G-24 Discussion Paper Series, Should Countries Promote Foreign Direct Investment? by Gordon H. Hanson, February 2001 Foreign Direct Investment in South East Europe in 2003-2004, Gábor Hunya National Measures Providing Exceptions to National Treatment in South East European Countries, Regional Overview, Status of Information as at: July 2003 45 South East Europe as Foreign Direct Investment Location, Slavica Penev, Economics Institute Belgrade, Matija Rojec, University of Ljubljana Prospects for Multilateral Investment Rules Post-Cancún: An Attempt to Put Things in Perspective, Dr. Manfred Schekulin, Austrian Federal Ministry for Economic Affairs and Labour Effectiveness of Foreign Direct Investment Policy Measures, UNCTAD WIIW Database on 2005 Foreign Direct Investment in Central, East and Southeast Europe, Opportunities for Acquisition and Outsourcing, may 2005 Foreign Direct Investment and the Catching-up Process in New EU Member States: Is There a Flying Geese Pattern?, Jože P. Damijan and Matija Rojec WIIW research reports, October 2004 Prospects for FDI Flows, Transnational Corporation Strategies and Promotion Policies: 2004–2007 Global Investment Prospects Assessment (GIPA) Research Note 1: Results of a survey of location experts Banking in Serbia and Montenegro, Bank Austria Creditanstalt Banking FDI in Latin America: An Economic Coup, Sukanya Bose FDI for Agriculture 1988 – 2003 and Orientations to 2010, Tran Nam Binh Manager ISG Secretariat Information On the need to adopt the Action Plan for the Removal of Administrative Barriers to Foreign Direct Investment (FDI), Government of Serbia Agricultural Situation and Prospects in the Central European Countries, European Commission Directorate General for Agriculture (DG VI) Working document, may 1998. A Strategy for Attracting Foreign Direct Investment, Penelope Hawkins And Keith Lockwood Ekonomska Politika Crne Gore za 2005. Godinu, Vlada Republike Crne Gore, Sekretarijat za razvoj, 2004. Demekas, Dimitri G, Balazs Horvarth, Elina Ribakova and Yi Wu “Foreign Direct investment in Southeastern Europe: How (and How Much) Can Policies Help?”, IMF Working Paper 110, 2005. Zoltan, Adam “FDI: good or bad?” South-East Europe Review, Vol. 3, No. 3, 2000 Bevan, Alan and A., Estrin, Saul, 2000. The Determinants of Foreign Investment in Transition Economies, CEPR Discussion Paper 2638. Centre for Economic Policy Research Holland, Dawn and Nigel Pain, 1998, “The Diffusion of Innovations in Central and Eastern Europe: A Study of the Determinants and Impact of Foreign Direct Investment.” National Institute of Economic and Social Research, Discussion Paper No 137 (London) Campos, Nauro F. and Yuko Kinoshita, 2003, “Why Does FDI Go Where it Goes? New Evidence from the Transition Economies” IMF Working Paper 228 OECD, 2003, “The Survey on the Role of the Taxation in Foreign Direct Investment in South East Europe” Buch, Claudia M., Robert M. Kokta and Daniel Piazolo, 2003, “Foreign Direct investment in Europe: Is there redirection from South to the East?” Journal of Comparative Economics, Vol. 31, No.1. OECD, 2003, “Progress in Policy Reform in South East Europe Monitoring Instruments, SEE Compact for Reform, Investment, Integrity and Growth, 3rd edition, March 2003 Garibaldi, Pietro, Nada Mora, Ratna Sahay and Jeromin Zettelmeyer, What Moves Capital to transitional Economies?, IMF Working Paper No 64, 2002 Kusic, Sinisa and Vladimir Cvijanovic, “The Importance of Foreign Direct Investments for Stimulating Economic Growth in Croatia”, Osteeuropa-Wirtschaft, I/2003 46 Abbreviations: BOT – Build, operate, transfer BIT – Bilateral Investment Treaty CARDS - Community Assistance for Reconstruction, Development and Stabilisation CBM – Central bank of Montenegro CEE – Central and Eastern Europe DTT – Double Taxation Treaty FDI – Foreign Direct Investments FIAS - Foreign Investment Advisory Service IAS – International Accounting Standards IMF – International Monetary Fund JICA – Japan International Cooperation Agency SEE – South-eastern Europe MIEREI – Ministry for International Economic Relations and European Integration MIPA – Montenegrin Investment Promotion Agency NYSE – New York Stock Exchange OECD - Organisation for Economic Co-operation and Development VAT – Value Added Tax FDI – Foreign direct investments SIEPA – Serbian Investment and Export Promotion Agency WTO – World Trade Organization UNCTAD - United Nations Conference on Trade and Development USAID – United States Agency for International Development WTO – World Trade Organization 47 APPENDIX- Sectoral Analysis Sectoral potential of Montenegro to attract SDI50 Sectoral analysis only indirectly determines the potential of certain sectors, while the level of achieved FDI in a country depends on the successful creation of an environment conducive to investments and the proper targeting of investor groups. In that sense we highlight the sectors which, by their natural potentials, quality of labour or currently achieved level of FDI have been selected as attractive for investments. The selection has been based on the list of most attractive sectors for investments in the countries of SEE region (see p. 9 of this document, Source: UNCTAD, WIR). Maritime industry Current status – Until the sanctions, maritime industry was one of the main generators of capital in Montenegro, primarily through the operation of three large complexes: the Port of Bar, the Port of Kotor and the Adriatic Ship Repair Bijela, and two shipping companies Jugooceanija Kotor and Prekookenaska plovidba Bar. As of 2003 the Port of Kotor has been looking for a strategic partner through direct sale of 58.39% of its shares. Currently there is a tender open for the development of the nautical tourism centre - Marina Kotor, joint venture type of investment estimated to some €8.5 million. The Privatisation Plan for 2005 envisaged the development of a Strategy for the development and privatisation of the Ship Repair Bijela and the Port of Bar. Within the Company Restructuring Programme from 2003, the programme for restructuring large companies, in case of the Port of Bar the emphasis was given to the development of the legislative framework (The Law on Ports and the Law on Free Zones), definition of market prospects of the Port of Bar, division of the organisational structure and establishment of profit centres, settlement of outstanding debts, social programme and downsizing. On the other hand, in case of the Adriatic Ship Repair Bijela, the emphasis was given to increasing productivity of the company, to improving business planning and the control system, downsizing and foreign currency risk. In 2003, sponsored by the EAR, an agreement was signed with the company WM Global Partners Limited to draft the Revitalisation Strategy for the maritime industry that is to focus on establishment of smaller size shipping companies. Reasons for investments: Favourable geographical location and growth trend in the Mediterranean maritime industry. Montenegro has a strategic location with access to main Mediterranean maritime centres, having great possibilities for connections with the whole world (direct link to greatest maritime centres in the Mediterranean: Bertoia - Algiers, Izmir - Turkey, Alexandria - Egypt, Casablanca - Morocco, Banjas - Syria, Haifa - Israel, etc.). We should particularly bear in mind the fact that the Mediterranean is one of the most significant “strategic points” (on maritime routes), i.e. it is one of the “mother lines”, whose strategic position is located at the contact of three channels: Bosporus, Sues and Gibraltar. In order to reduce the freight rates, the Mediterranean is increasingly becoming part of the Orient-American line, developing the port services, at Algeciras (southernmost point of Spain), as well as the port Gioia Tauro in Calabria. This trend is to continue in future, so that the Mediterranean countries, especially the Adriatic region, should 50 Source: Ministry for Maritim,e industry and transport 48 strive to strengthen port activities and services for the needs of the Southeast and Central Europe, currently mostly relying on the ports of Rotterdam, Antwerp and Marseille. Figure 4: Most significant maritime lines and strategic points Source: Faculty of Maritime Studies Montreal, Australia Human resources and tradition Montenegro has a long-lasting maritime tradition, with the Faculty of Maritime Studies located in Kotor (since 1959, 4550 students have graduated from this Faculty, 776 navigation department, 1108 marine engineering department, 6539 maritime management department), and as of 1993 the postgraduate studies have been in operation at this faculty. Labour costs in maritime industry in Montenegro are the lowest in the region. At the same time, highly skilled personnel is frequently employed at the markets of the developed maritime countries of Malta, Italy and Greece with which Montenegro has traditionally good business relations. Quality assurance system: The Port of Bar and the Port of Kotor hold the international certificates ISO 9001 and ISO 9002, required for operation at the international market. Investment challenges: Considering the initial costs of investments into maritime industry, it should be borne in mind that it is highly susceptible to political risk, to property relations and the development of other forms of infrastructure. Therefore, it is necessary to develop the long-term Strategy for the development of maritime industry of Montenegro, since this document would project measures and give answers to the following challenges: maritime policy-making, overcoming the problems of technological and technical underdevelopment of the existing equipment, monitoring trends of the world maritime industry, Europe in particular, development of a consistent legal framework in the field, design of special programmes for the development of particular systems within the maritime industry, compatibility with the reforms of inland traffic, etc. Possibilities for attracting FDI in future will primarily depend on the privatisation of the Port of Bar, since ports are the vital sub-system of the maritime industry, which accelerates the flow of goods, leads to increased openness of an economy and generation of new services within ports, and generates new jobs. With present trends (setting up fewer larger ports, with concentrated and diverse services) in mind, by provision of modern infrastructure connections and increasing the value added in them, the Port of Bar, in a foreseeable future, has the possibility to develop into one of the most significant port centres in the region (restructuring, privatisation of the Railroad, fully operational Free Zone). 49 Telecommunications Sector 51 Current status – Telecommunications are a sector that has seen the largest development so far. In 2003 alone the revenues from telecommunications services amounted to EUR 162.7mn, 52.4% of which was the revenues from fixed telephony, 46.1% revenues from mobile telephony and 1.5% revenues from Internet services (total revenues increase of 77%). Currently there are two mobile telephony operators at the Montenegrin market – ProMonte, the property of Telenor AS Norway and Monet, with Matav, Hungary as a majority share-holder. As early as 1995 Telenor entered the Montenegrin market of mobile telephony (as a part of the Greek consortium ETL), in 2004 performing the acquisition by purchasing 55.9% of ownership (for EUR 64.8mn), so that the total value of the ProMonte company reached EUR 116mn. Telekom Crne Gore is the leading operator in the field of telecommunications, which has been operating as a separate company from 1998. Today its operation includes the maintenance and exploitation of telecommunication systems, development of telecommunication technologies and servicing provided to fixed and mobile telephony customers. On the tender sale in late 2005 Matav became the majority owner of Telekom Crne Gore, with the investment of EUR 1.154mn. Telekom is the exclusive provider of fixed telephony services in Montenegro. The number of connection lines in late 2003 was 188,012, or 28 customers per 100 inhabitants, which is the highest level in the region per capita, but slightly lower than in the new EU member states. Figure 5: Penetration of fixed telephony of Montenegro compared to the new EU member states Source: Montenegrin Telecommunications Agency, 2003: The state of telecommunications market in Montenegro Following global trends, Telekom Crne Gore has performed a considerable digitalisation of the system and portable telephone network, so that the digitalisation level is close to the one found in EU countries. At the same time, the subscription rates for fixed telephony are among the lowest in the region (EUR 2.8 for natural persons, or EUR 4.48 for legal entities, while the regional average is 14.7%) Internet Crne Gore started operating in 1997, owned by Telekom Crne Gore. According to the 2005 data, there are currently 52 000 dial up customers of this internet provider (Mont Skay was given the licence as early as in 2002, nevertheless, according to the 2003 data, it had as few as 583 users). According to the surveys, there are over 100,000 internet users, which is by far the highest share of 51 Source: Ministry of Economy and Agency for telecomunication 50 Internet users in the region and is at the level of European standards (per capita). One of the indicators of the quality of services provided by Internet CG is the fact that its server hosts over 800 web presentations, mostly from the commercial sector. Investment challenges: Montenegro has the potential for investments in the telecommunications sector, especially in the provision of internet services, which is to continue with its rapid growth, together with the increase in educational structure of the population of Montenegro, as well as by setting up new companies. Having in mind the highly qualified young labour (currently at faculty or graduate students) in the telecommunications sector, within the Faculty of Electrical Engineering in Podgorica, it gives rise for the opportunity to establish the regional software incubator (through a business alliance or joint venture). According to the Karney52 research, which says that the SEE region will be characterised primarily by inflow of FDI through organised chains of stores and supply markets, as well as production centres, a share of FDI, mostly directed towards developed countries in the form of R&D investments for the sector of telecommunications and electronics, will also go to the Eastern European market, which is already characteristic of Moldova and Estonia, which are gaining the status of new software powers in the field of electronics. Automotive industry (industry of auto parts) According to the research of the Karney group on the attractiveness of certain sectors for attracting FDI in the SEE region, within production sectors the industry of car parts - OEM (Original Equipment Manufacturer) is by far the most attractive sector, far ahead of the food industry and high technology industry. As a reason for such a high ranking, the exceptionally low level of material costs of production (labour costs and production inputs) is stated, so that leading manufacturers in the industry in the SEE region have lower production costs, up to 33% lower, compared to the ones achieved in the western countries53. The competitiveness of this market is well illustrated by the fact that in 2004 as many as 37% investment projects at the global level went to CEE countries, in the automotive industry sector (Czech Republic ranks firsts, with 18% of the total projects)54. Analyzing the potential of SEE countries, the automotive industry investors are increasingly more turning towards Bulgaria and Romania. Thus Renault bought the Romanian Dacia and invested further EUR 220mn in the reconstruction of the company. Automotive industry, according to CEE research55, lead to the increase of new employment, especially in the supply and production sector of car parts (as a labour-intensive sector), and as an additional effect it leads to the extension of the production base of car parts in a certain market. Source: FDI performance index Report 2005, Karney Group The new Dynamics of Eastern Europe, Opportunities and Challenges, 2004, web site: www.oesa.org 54 The AG company invested the most, with 7 projects, Robert Bosch 5, Toyota, Faurecia, Magna Intl and Visteon 4, each, etc. From the revenues accrued in this industry in the CEE countries, automotive industry “found” an excellent location for reducing the production costs (outsourcing), covering the region of not more than 200 km (Poland, Slovakia, Hungary and Czech Republic). The three biggest investments are into the factory of spare parts and Peugeot assembly line of 840 million dollars (Trnava, Slovakia), Hyundai - Kia Motors, Zlina, putting Slovakia among largest car manufacturers (850,000 a year). 55 Source: CEE, Car Electronic Equipment: The New Dynamic of Central and East Europe Opportunities and Challenges, 2004 52 53 51 In order to be able to think of prospective companies that would be interested in the Montenegrin market, we provide an overview of the leaders of automotive industry in Eastern Europe, as well as the participation of the leading countries in this sector. Figure : Market share of the leading automotive industry companies in the Eastern Europe Region Figure : Share of leading automotive industry manufacturers in certain markets Source: Automotive World Automotive Quarterly Review, 2003 Currently in Montenegro there is one company from automotive industry, Daido Metal LTD from Nagoya, Japan, the world leader in manufacturing bearings for cars, ships, lorries and industrial machines. It is curious that this company, which mostly invested in the regions of India, Korea, Indonesia, has only three companies in Europe: Daido Industrial Bearings Europe Limited, England, Daido Metal Europe GMBH, Germany and Daido Metal Ltd, Montenegro. In that sense, Montenegro should focus on attracting FDI in the sector of car parts industry, that will mostly depend on the privatisation of the “Zastava” factory in Serbia which is to become the new car 52 assembly centre (OEM centre), which would enable Montenegro fast integration into car manufacturing process, through manufacturing supply parts. With the improvements of infrastructure, railway in the first place, the same opportunity opens for the markets of Romania and Hungary, together with the privatisation of the Port of Bar, and particularly with opening new free zones, which are an additional stimulus for attracting FDI in this industry due to their special business operation conditions. Agriculture: food and beverages industry and tobacco industry 56 Trends in the region – Judging by the investment trends in agriculture for the countries of the Central and Eastern Europe, according to forecasts of 100 largest TNC, the primary sector (agriculture and mining) shall be less interesting for investments. Only 38% expressed positively on further growth of FDI in agriculture (50% of them said that from 2005-2007 they expect an increase of FDI in this sector). On the other hand, almost 70% of the interviewed, or 90% expect for the Eastern Europe region that there will be an increase in investments in food industry, beverages industry and tobacco industry. Since R&D investments for the given period are mostly directed towards developed countries, it is forecasted that SEE countries will be attractive mostly as production zones, logistics zones and supply markets. The confirmation for this may be found in the statistics of achieved FDI in agriculture and food industry in the region. Figure 7: Forecasts for FDI in primary and secondary sectors 56 Source: Ministry of Agriculture and Fishery 53 Source: UNCTAD WIR 05 If we consider the investment structure in the region we may notice that the level of FDI in agriculture is small, while being much more significant in food processing industry, beverages industry and tobacco industry. For instance, in Croatia EUR 13.9mn was invested in agriculture, while EUR 243mn was invested in food industry, compared to 6.1 billion of total investments achieved in 2003. In Bulgaria FDI in agriculture amounted only to EUR 12.4mn, compared to 6.4 billion of total investments in 2003. Also, in Macedonia out of EUR 979mn FDI in 2004 just EUR 4.39 million was invested in agriculture, while in food and beverages industry EUR 79.7 million was invested. The only significant investments in agriculture were seen in Serbia where they accounted for 9% of total FDI in 2003. By way of conclusion we may say that food and beverages industry, as well as tobacco industry, make an important sector for attracting FDI. Investment challenges: Analysing the potentials of Montenegro compared to the trends in the region, we may note that in future we may expect considerable FDI inflow in this sector, primarily through privatisation of share holding company Plantaze and the Duvanski kombinat (Tobacco Company). By the privatisation of Niksic Brewery, in the beverages production sector, the significant FDI came through the Belgian Interbrew, while a good example of greenfield investment in this sector is the company DonZe ice creams. 54 Montenegro should focus on enhancing and increasing basic production activity that is to be effectuated, to a great extent, through domestic investments and credit arrangements. Target investor groups in this sector should be sought in processing industry, primarily in soft drinks industry, dairy industry, processing industry, insisting on know how and technology transfer as basic types of investments, placing special emphasis on full implementation and utilisation of the free zones projects (as centres for product processing, under special business operation conditions), as well as having supply chains for processing industry for the needs of tourism establishments57. Since Montenegro has limited natural resources in the area of agriculture, and is currently at the stage of recovering the primary production bases, in future considerable inflow of FDI in this sector may be expected. Tourism58 According to the Kerney research, in SEE countries in the coming two years the tourism sector will be less attractive for foreign investments than, say, banking services, construction industry or transport. However, bearing in mind the advantages of this sector in Montenegro (as envisaged by the Economic Reforms Agenda of Montenegro 2005-2007), as well as a number of project already initiated, coordinated and planned by the Ministry of Tourism, in the coming period further increase of FDI inflow may be expected through the privatisation of the remaining hotel and tourism establishments and attracting capital investors. Current status and implementation of strategic documents – available resources of Montenegro are still not adequate to meet the demands of large tour operators, although according to the World Tourism Organisation this sector is expected to grow, with greatest growth rate in the Mediterranean, with forecasts of 4 million overnight stays in 2008. Tourism development, which influences the FDI inflow in this sector, is based on the activities envisaged by the strategic development documents and plans: 1. Tourism Master Plan59 for Montenegro, with the concept of developing sub-regions, targeting and profiling potential locations for investments in Montenegro at the same time targets the investor profile; 2. Spatial planning and development in the coastal region60, as well as clarification of the process for obtaining purchase and development approvals in the coastal region (reducing administrative barriers and increasing the effectiveness of protection of property rights); Supply chain means diverse forms of product distribution, usually relating to wholesale establishments. Source: Ministry of Tourism 59 Master Plan relies on the implementation of the regional development concepts for Boka Kotorska, giving general approach to the development of Boka Kotorska as a basis for the development of up-scale tourism, development concept for Ulcinj region – Velika plaza as an up-scale market destination, development concept for mountain tourism, as well as the development concept for Bjelasica and Komovi (Austrian-Montenegrin project). The general section of the Master Plan is based on the implementation of projects for categorisation of hotel facilities and establishing international standards, as well as branding of tourism product of Montenegro “Wild Beauty” and the new marketing campaign. 60 Actions related to spatial planning are based on the development of land management within the coastal municipalities, which is in the period 2006-2010 to become the hot market for real estate. To provide an efficient system of procedures and protection of property rights of foreign investors the most significant activities planned for the period 2005-2007 are: Development and adoption of the National Spatial Plan planned for 2006, Development and adoption of spatial plans for the coastal region planned for 2005 57 58 55 3. Infrastructure rehabilitation and development programme through loans61; 4. Setting additional conditions and incentives for attracting FDI in tourism sector Privatisation achievements and forecasts of level of investments in tourism Unlike other countries in the region, Montenegro has the largest share of FDI in tourism sector 28%. This sector has achieved the largest number of individual investment projects and the largest number of Greenfield investments. Table: Major privatisation projects in the tourism sector: Bellevue - Iberostar Hotel Montenegro Hotel Mediteran Hotel Tara Hotel Splendid Hotel (2006) Panorama Hotel (2006) Rivijera Hotel (2005) As Hotel (2007) 4. July Hotel (2006) 500 beds 350 beds 475 beds 475 beds 700 beds 500 beds 252 beds 500 beds 200 beds Source: Ministry of Tourism, 2005 Privatisation investment projects to be implemented in future are: tender sale of three hotels and restaurants of HTP Boka, Herceg Novi (Hotels Tamaris, Plaza and Igalo), direct sale of two hotels of UTIP Crna Gora (Hotels Ljubovic and Zlatica, tender announced in June 2005), as well as potentially most significant investment through leasing of Sveti Stefan and Kraljicina plaza hotels, HP Milocer. In terms with the Master Plan and regional development concepts, in order to design and establish up-scale tourism resorts, projections of investment activities per municipalities have been done including the forecasts of investments into construction facilities, real estate and infrastructure investments, amounting to some EUR 6.8 billion (Source: Ministry of Tourism, Investment Opportunities in Tourism Sector in Montenegro, 2005). These documents recognised, as destinations attractive for Greenfield investments, the regions of Ulcinj, Skadar Lake, Petrovac and Boka Kotorska: Ada Bojana, Velika Plaza, Valdanos, Buljarica, Lucice, Jaz, Sveti Marko, etc. Prospects for future investment policy development – recommendations for Montenegro In Montenegro, from 2005 – 2010, the most significant inflow of greenfield FDI will be seen in the tourism sector (EUR 6.8 bn, estimates of the Ministry of Tourism, IOTSM, 2005). According to the recommendations of OECD Checklist for FDI Policies62, apart from the strategy to encourage FDI, aimed at creating the general environment conducive to foreign investments in a country, in case when Establishment of the Geographic Information System (GIS) for the coastal region by municipalities planned for 2005-2006. The activities in the medium-term are: consolidation and updating of the Cadastre system for the period 2006-2008; providing support to local Secretariats for Urban Planning on the development of detailed urban plans for the coastal region 2006- 2008, and provision of legal and institutional infrastructure for protection of investments and property rights of foreign investors. 61 A draft Strategy of transport development have been in the phase of the public discussion , planned for adoption Jun 2006. 62 OECD Checklist for FDI Policies, 2004. 56 considerable opportunities for greenfield investments into a sector or region are recognised, it is recommended to develop the so-called Targeted Strategy. This strategy should focus on the development of special fiscal, regulatory or financial incentives, in line with the type, extent and structure of investments, which are desired for a certain region or sector. In that sense, since tourism has been recognised as the strategic sector (Economic Reforms Agenda, 2005-2007), apart from the activities covered by the Master Plan and other significant programme documents, it imposes the need to have the strategic approach in planning and stimulating FDI investment policy in the tourism sector, i.e. development of the Montenegrin Tourism Development Strategy. Energy sector 63 This is one of the sectors of most interest for foreign investors, for the period 2005-2009, when full liberalisation of the energy system of Europe is envisaged. Speaking of FDI in energy sector in Montenegro, for the given period a significant FDI inflow is expected, primarily through privatisation. In that sense, EAR has supported the development of the privatisation strategy for the energy system of Montenegro, which should in the long-term provide for greenfield investments and re-investments in this sector, which due to the length of the privatisation process of such a complex system, may not be expected prior to 2010. Montenegrin energy system – current status and prospects Montenegrin energy system is a small system with some 200,000 consumers and the demand of some 3800 GhW, 50% of it being the consumption of the Aluminium Plant, 5% railway and steel plant, while the remaining 35% is the household consumption. About 33% of consumption is serviced by energy imports from regional systems. Energy sector is controlled by the state-owned share-holding company Elektroprivreda Crne Gore – EPCG (Electric Power Supply of Montenegro), having full monopoly over the generation, transmission, distribution and sale of electric power. The system itself consists of two large hydro-power plants, one thermal-power plant and a system of small mini hydro-power plants. Current financial situation of EPCG is rather complex, due to inefficiency (i.e. non-productivity of the system), low tariffs, low level of collections and large losses. Thus in 2004, they made a loss of EUR 28mn primarily due to electric power imports, while, due to low tariffs and low level of collection, the generation revenues are not adequate to cover for operational costs, which does not leave any room for domestic capital investments in the sector. The Energy Law as well as the established Regulatory Agency provide a legislative and institutional framework for the coming privatisation. In that sense, in the coming period we should monitor changes that will take place with opening the supply market of the energy system, starting with the implementation of the Athens Treaty directed towards the creation of the free supply market of the Southeast Europe; it is planned for 2010 to have fully open supply market of Europe. It will result in full competitiveness of this system in Europe, which implies that Montenegro by this date should complete the privatisation process of its energy sector. 63 Source: Ministry of Economy 57 58