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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
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45
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

















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