Why Foreign Investors Ignore Bosnia-Herzegovina

AIM Banja Luka, April 11, 2001

The recent arrival of a number of foreign delegations has created an impression that Republika Srpska is becoming a focus of interest for foreign investors. In only a couple of days, business delegations from Germany, Austria and Russia visited Banja Luka.

The Austrians delivered a memorandum on conditions for economic cooperation to the Bosnia-Herzegovina Council of Ministers. In it, they listed all Austrian companies willing to cooperate with the country. "For Austrian entrepreneurs, Bosnia is a stable country, but in order to upgrade economic cooperation and for our investments to start coming in, it is necessary for Bosnia to meet certain conditions," the chairman of the Austrian Chamber of Commerce and Industry, Christopher Leitl, said.

Austrian Ambassador to Bosnia Gerhardt Jandl stresses that Bosnia-Herzegovina has to become a functional state if it wishes to attract foreign capital. During a visit to Banjaluka, after his meeting with the speaker and the deputy speaker of the Republika Srpska Assembly, Dragan Kalinic and Sulejman Tihic, respectively, he pointed out that the chief obstacles when economic cooperation with the world is in question are different regulations in Bosnia's two entities and the unstable tax system.

The Austrian diplomat had good reasons to warn the local politicians of problems stemming from Bosnia's disfunctionality. Namely, a branch office of the Austrian Chamber of Commerce opened in Bosnia in 1998, and a year later, the Austrian Marketing Bureau in Banja Luka. Last year, Austria exported to Bosnia KM483 million in goods and imported KM70 million. Two years were a period long enough for the Austrians to learn what is wrong and issue the warning.

Frequent visits by European economic delegations are obviously aimed at informing local politicians that participation in the world market necessitates radical changes in legislation, especially in the field of taxation and customs duties. For economic experts the problem is much more complex than for diplomats and politicians. This could be heard at a recent gathering of economists in Sarajevo, where foreign investment in Bosnia and Herzegovina was discussed. A UN expert in foreign investment, Miroslav Jovanovic, recommended that the sectors to be opened to foreign investors be determined as soon as possible. "From my point of view, this sector is people -- educated and experienced workers, who are productive and whose labor, compared to Western Europe, is quite cheap," said Professor Jovanovic.

One of the key reasons for the lack of interest to invest in Bosnia-Herzegovina is the region's political instability. For the time being, Volkswagen and Coca-Cola were the only major companies willing to take the risk. There are indications, however, that they could withdraw, because of an unprofitable business environment.

We found an encouraging example in Kozarska Dubica. The INTEST holding company, formed through the merger of two well-known Italian textile companies, ITA and OLCESE SPA, is the first official investor in Republika Srpska. After buying a 30 percent stake in the state-owned Dubicanka textiles factory, INTEST became the majority owner.

During the past decade Dubicanka ran at only 10-15 percent of capacity. Before privatization, a number of its workers were laid off. Regardless of political and economic conditions and the consequences of the war, the Italian investors, according to deputy director Drazen Vidovic, embarked on the adventure of investing in Republika Srpska's textiles industry. "We are satisfied because in only several months we have gone from running at 10-15 percent of capacity to 57 percent," said Vidovic.

Currently, Dubicanka employs 400 workers, and in the past three months it opened 66 new jobs. There was no noticeable increase in salaries, but they are paid more regularly, as are dues to the state.

Expectations that privatization will be accompanied by a greater inflow of foreign capital turned out to be unrealistic. The director of Transparency International for Bosnia-Herzegovina, Boris Divjak, says that no major foreign investment should be expected to arrive through privatization because it was about a decade late. In that period, says Divjak, the entire business infrastructure was destroyed, dropping to a level where it was no longer of interest to foreign investors. "This is why today new investment is the only hope and support," he explains.

What is needed for new investment, however, is a proper business climate and a harmonized legal system. Unfortunately, foreign businesspeople find existing laws in Bosnia and Herzegovina unacceptable. The process of founding a company is excessively long. When it is finally completed, the owners face high fiscal obligations. According to the existing regulations, up to 80 percent of profits have to be set aside for various taxes and fees. "Without a radical reform of the fiscal system and simplification of the foreign investment procedure there will be no progress," Divjak warns.

According to a professor of the Banja Luka Faculty of Economics, Rajko Tomas, foreign investors prefer to do business in the countries which are politically stable. "It is a fact that this region is not only politically unstable, but is technologically backward as well. This requires greater investment, and foreign businesspeople are not ready for that at the moment," said Tomas. According to him, the basic condition for the inflow of foreign capital is the political and economic stabilization of the country, which should increase the safety of foreign capital.

There is an additional discouraging circumstance: according to a World Bank study, Bosnia and Herzegovina is high up on the list of the world's most corrupt countries. As a rule, foreign investors avoid such countries because a corrupt state apparatus does not offer guarantees to their capital. This could be the best answer to the question of why there are no foreign investors in Bosnia-Herzegovina.

Sanela Zivkovic

(AIM)