Document of The World Bank FOR OFFICIAL USE ONLY Report No. P 7530 BIH REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ONA rKurOSED BUSINESS ENVIRONMENT ADJUSTMENT CRF,DIT IN THE AMOUNT OF SDR 35.3 MILLION (US$44.0 MILLION EQUIVALENT) TO BOSNIA AND HERZEGOVINA April-24, 2002 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents'xiay not otherwise be disclosed without World Bank authorization. BOSNIIA AND [ERZEGOVIINA- BUSINESS ENVIRONMENT ADJUSTMENT CRIZDIT Currencv Equivalents (As of April 14, 2002) Currency Unit = Konvertible Marka (KM) I KM = US$0.44457 Weights and Measures Metric System Abbreviations and Acronyms BAC Business Environment Adjustment Credit JCT Joint Coordination Team BH Bosnia and Herzegovina KM Konvertible Marka CAFAO Customs and Financial Assistance Office NGO Non Government Organization CAS Cotntry Assistance Strategy OED Operations Evaluation Departmet DM Deutsche Mark OHR Office of the High Representative DFID Department for International Development PFSAC Public Finance Structural Adjustment Credit EBPAC Enterprise and Bank Privatization PRSP Poverty Reduction Strategy Paper Adjustment Credit EBRD European Bank for Reconstruction and QER Quality Enhancement Review Development EU/EC European Union/European Comnmission RS Republika Srpska Federation Federation of Bosnia and Herzegovina SBA Stand-by Arrangement FIAS Foreign Investment Advisory Service SEED South East Europe Enterprise Development Program SFRY Socialist Federal Republic of Yugoslavia GDP Gross Domestic Product IC Intemational Community SIDA Swedish International Development Agency IDA International Development Association SME Small and Medium Enterprises IFC International Finance Corporation SOSAC Social Sector Adjustment Credit IFI International Financial Institution TA Technical Assistance IJC Independent Judicial Commission US United States IMF International Monetary Fund USAID United States Agency for International Development l-PRSP Interim Poverty Reduction Strategy Paper FRY Federal Republic of Yugoslavia Government Fiscal Year January 1 - December 31 Vice President: Johannes F. Linn Country Director: Christiaan J. Poortman Sector Director: Paul J. Siegelbaumr Task Team Leader: Vicki Krecic Peterson FOR OFFICIAL USE ONLY Bosnia and Herzegovina Business Environment Adjustment Credit CREDIT SUMMARY Borrower: Bosnia and Herzegovina (Ministry of Treasury Institutions) with subsidiary credit agreements with the Federation of Bosnia and Herzegovina and Republika Srpska (the Entities) Amount: SDR 35.3 million (US$44.0 million equivalent) Terms: Standard IDA (35-years'matumyy,-iu years grace) Commitment Fee: Standard IDA Credit Objectives: The proposed Credit would support the Government's reform program to improve the investment climate and further development of a single economic space to promote domestic and foreign investment and private sector growth. Objectives of the reform program are to reduce those 'administrative and regulatory barriers that would have the most critical near-term impact on the three phases of business development: (i) improving business entry through streamlined and transparent countrywide approach to business registration and licensing and strengthened legal framework and capacity for attracting foreign investment; (ii) streamlining the environment for business operation by reducing companies' administrative and regulatory compliance costs through rationalization of inspections and regulations, strengthening of judicial and extra-judicial capacity to resolve commercial disputes; improving enforcement of secured transactions; and leveling the playing field for private sector participation in public procurement, and (iii) facilitating business exit through improved bankruptcy and liquidation systems. Underlying these objectives is the need to strengthen the consultative capacity between the public and private sectors to promote policies and legislation that are business-friendly. While the proposed Credit woulc. iavv; W61UIL%,,CU1L UllULL-MiU1j ,ssults in improving the business enabling environment and promoting increased private sector activity, sustained efforts to ensure the effective implementation of the reforms will be required to build up long-term investor confidence in Bosnia and Herzegovina. The key is to initiate critical changes that lead to strong momentum toward a self-sustaining process of improving the investment climate. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Credit Description: The Credit will be lent to the State of Bosnia and Herzegovina (the State), which will in turn on-lend in the amount of US$26.4 million equivalent to the Federation of Bosnia and Herzegovina (the Federation) and US$17.6 million equivalent to Republika Srpska (RS), on the same terms as the IDA Credit. The Entities will transfer US$4 million equivalent of the first tranche to the State budget through the normal transfer mechanism. The Credit will be disbursed in two tranches for budgetary and balance of payments support to Bosnia and Herzegovina. Releases of the tranches will be linked to policy conditionality as agreed upon during the negotiation of the Credit. Benefits: The main benefits of the proposed Credit include: (i) contributing to the building an investment climate attractive for new entrants and for increased productivity of existing private businesses to promote economic growth and absorb labor and other resources released by the privatization and downsizing of state-owned enterprises; (ii) strengthening the concept of a single economic space in BH through greater harmonization of administrative and regulatory frameworks, thereby moving the country closer to its goal of integrating more fully into the regional economy and the European Union; and (iii) a more dynamic private sector that will create much needed new jobs - this in turn will spur a shift away from informal sector activity toward formal sector activity and to the payment of taxes that will help fund vital social services and transfers, which are now often unavailable or only partially available to the poor. Risks: Main risks associated with the proposed Credit are: (i) complex and fragmented govemance arrangements in Bosnia and Herzegovina- Entities, Cantons, municipalities and cities-may prove challenging for implementation of reforms at lower levels of Government; (ii) momentum or Govemrnment commitment could be lost in the lead-up to and aftermath of fall 2002 elections; and (iii) rooted mindsets of the system of the former Socialist Federal Republic of Yugoslavia (SFRY) as well as in vested interests the current system may result in resistance to change and delays as many continue to view the private sector with suspicion and others stand to lose opportunities for rent-seeking. Schedule of Two tranche disbursements: first tranche of USD$19 million equivalent Disbursements: upon effectiveness (Board conditions now having been met); second tranche of USD$25 million equivalent to be released separately upon achievement of each Entity's specific actions associated with second tranche conditions, expected by December 2003. iv Poverty Category: Not Applicable Rate of Return: Not Applicable Project ID Number: P071001 Map BH map IBRD 28578R The BAC core preparation team comprised Vicki Krecic Peterson (ECSPF), Task Team Leader, Senada Havic (CFABB), Nermina Sljivo (ECCBA) and consultants Ian Newport, Boris Divjak, and Zlatko Hurtic. The starting point for preparation was the FIAS report "Commercial Legal Framework and Administrative Barriers to Investment," managed by Margo Thomas (PSAFI). The team wishes to thank the Japanese Government for its generous support of project preparation through a PHRD grant. v REPORT AND RECOMMENDATION OF THE PRESIDENT OF TIRE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED BUSINESS ENVIRONMENT ADJUSTMENT CREDIT TO BOSNIA AND HERZEGOVINA Table of Contenti Page PART I: THE ECONOMY 1 PART 11: THE BUSINESS ENVIRONMENT ADJUSTMENT PROGRAM 5 A. Core Issues 5 B. Business Entry 8 C. Business Operations 10 D. Business Exit 13 PART m: THE PROPOSED CREDIT 14 A. Rationale for Bank Involvement 14 B. Monitoring and Evaluation 14 C. Benefits and Risks 15 D. Coordination with the IMF 16 E. Board and Second Tranche Conditions 17 F. Implementation 19 G. Financial Arrangements 20 H. Poverty Implications 20 I. Environmental Impact 21 PART IV: RECOMMENDATION 21 ANNEXES: Annex 1 Key Economic Indicators 22 Annex 2 Timetable of Key Processing Events 24 Annex 3 Letter of Development Policy 25 Annex 4 Policy Reforms Program Matrix 33 Annex 5 Key Component Flows 37 Annex 6 Sampling Methodology 38 Annex 7 Status of Bank Group Operations in Bosnia and Herzegovina 45 Annex 7A Status of IFC Operations in Bosnia and Herzegovina 47 Annex 8 Country at a Glance 48 MAP BH map IBRD 28578R vi REPORT AND RECOMMEDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED BUSINESS ENVIRONMENT ADJUSTMENT CREDIT TO BOSNIA AND HERZEGOVINA 1. I submit for your approval the following Report and Recommendation on a proposed Business Environment Adjustment Credit (BAC) to Bosnia and Herzegovina (BH) in the amount of SDR 35.3 million (US$44 million equivalent) to support the Government's structural reform program. The Credit would be provided on standard IDA terms of 35 years maturity with 10 years grace period. 2. This Report should be read in conjunction with the Country Assistance Strategy (CAS) of the World Bank Group for Bosnia and Herzegovina, Report No. IDA/R2000-0060, dated May 18, 2000 and the CAS Progress Report No. 22863, dated September 24, 2001, which lays out a graduated assistance strategy aimed at helping BH to formulate and implement a comprehensive reform program that would accelerate the country's transition away from dependency on aid toward self-sustaining growth. I. THE ECONOMY 3. BH has been facing the dual challenge of recovering from war and transforming from a centrally planned to a market economy. The extent of the post-war economic revival in many respects has been impressive. Nearly all the pre-war infrastructure has been rebuilt and BH has managed to achieve this without compromising macroeconomic stability. Prudent fiscal management and a strict currency board arrangement have been the main pillars of the Govermnent's macroeconomic policy framework, supported largely by an IMF Stand by Arrangement. Successive BH governments have embarked on policy and structural reforms, ranging from trade and price liberalization to tax reforms, institution building, social sector and financial market reforms, as well as privatization. The implementation of these structural reforms, supported by substantial assistance from the International Community (IC), has initiated the transition from economic recovery to growth, though the process has been slower than anticipated. Table 1: Key Economic Indicators, 1990-2001 .________________ _ 1 1990 1998: 1999 T. 2000 '2e 001ne GDP (US$ rilion) 10,633 4,74 4,537 4,413 4,587 Real GDP growth 9.9 9.9 5.9 5.6 Per capita GDP in current US$ 2,429 1,042 1,135 1,103 1,146 Price Inflation (average, in %) 1 3 5.5 3 Trade Balance (US$ mnillion) 290 -1,959 -1,852 -1,617 1,442 Exports (US$ million) 1,990 697 649 732 857 ffnports (US$ rnillion) 1,700 2,656 2,502 2,348 2,299 FDI (US$ rnillion) I 100 90 150 130 FDI (% of GDP) 2.3 2.0 3.4 2.8 Current Account Balance (% of GDP) -23.0 -24.6 -21.8 -18.0 ource: Oficial data, World Bank and IMF estimates. 4. Recent Economic Developments. The prevailing macroeconomic situation is satisfactory. An IMF Stand by Arrangement (SBA) was successfully concluded in May 2001, and a letter of intent for a new IMF program was signed by the authorities on March 27, 2002. While annual economic growth averaged over 29 percent in real terms during the post-war period 1996 to 2000, the rate of growth declined from 10 percent in 1999 to 6 percent for 2000 and about 5.5 percent in 2001. This slowdown is largely explained by diminishing aid flows reflecting both the end of the post- war reconstruction period and the slower than anticipated pace of structural reform in BH. While measured GDP has more than doubled since the end of the war (i.e., US$4,587 in 2001 compared to US$1,867 in 1995), it still is only about half its pre-war (1990) level. In 2000, the slowdown was partly due to the economic effects of a severe drought that affected hydroelectricity generation and agricultural output, which revived in 2001 despite slowed growth overall. According to official statistics, unemployment has halved from its high of nearly 80 percent at the end of the war, although anecdotal information suggests that employment and production data are substantially understated, owing to strong incentives (i.e., high social contributions and taxes) for employers to under-report employment and wages. Real per capita consumption has increased significantly for most households. Inflation has fallen progressively, and is currently running at an annual rate of 3 percent, undoubtedly reflecting the stabilizing effect of the currency board. However, factors such as war destruction, external setbacks and a loss of momentum of the reform agenda during Government transition in 2000-01, have kept BH the second poorest country in Central and Eastern Europe/Southeast Europe (CEE/SEE) on a per capita basis. 5. BH's external accounts remain fragile. The steep growth in imports experienced in the early post-Dayton years, due to reconstruction efforts and the slow recovery of exports explain this fragility. Some decline in the rate of growth of imports is expected in the coming years as the reconstruction phase winds down. For example, sharp reduction in aid-financed imports contributed to a gradual decrease in the external current account deficit to 18 percent of GDP in 2001. The State continues its efforts to liberalize trade and open up regional markets to promote export-led growth in BH. BH is recognized as one of the more open economies in the region. Trade agreements have been concluded with Slovenia, Croatia, Federal Republic of Yugoslavia (FRY), and Forrner Yugoslav Republic of Macedonia; similar agreements are being negotiated with Albania, Bulgaria and Romania; the EU has granted trade concessions to SEE countries, including BH, as part of the Stability Pact, and the country has initiated the process for World Trade Organization accession. The export base has slowly expanded to 17 percent of GDP. However, the pace of structural reform needs to be accelerated to promote private sector-led domestic production and exports and ensure a smooth transition to a sustainable external position. 6. External Financing Needs and Debt-Servicing Capacity. Exceptional levels of external financial assistance have been crucial to sustaining BH's balance of payments. In addition to generous humnanitarian assistance, the international community made commitments of around US$5.2 billion--mainly grant funds--between 1996 and 1999, in order to meet the external financing requirement of US$5.1 billion outlined in the Priority Reconstruction Program. By yearend 2000, an estimated US$4.0 billion of external support had been disbursed. The highly concessional terms of donor assistance, as well as sizeable post-war reduction in the country's debt burden brought about by rescheduling and reduction of arrears, have helped ensure a relatively 2 comfortable external public debt servicing profile. The external public debt ratio, estimated at 56 percent of GDP, declined in 2001, owing to debt cancellation. External debt service, which is almost all on concessional terms, remains manageable, but is projected to rise in the next few years as BH's rescheduled debt, inherited from the former Socialist Federal Republic of Yugoslavia (SFRY) starts amortizing. 7. The key challenge facing BH in the near- to medium-term is the need to stimulate private sector activity and investment as a source of new growth, while ensuring fiscal sustainability and prioritized public spending in the face of declining aid flows. 8. Progress on Reforms. The prospect for entering a phase of self-sustained growth is contingent on the successful and accelerated implementation of economic and institutional reforms. In this respect, some important steps have already been taken. The proposed Credit will complement other ongoing Government activities that are assisted by donors to restructure the economy, including: * Accelerating privatization to eliminate the unfair competition of privileged state-owned firms. Several donors, including the Association through the Privatization Technical Assistance Credit, are assisting with international tenders of selected companies. The Association's Enterprise and Bank Privatization Adjustment Credit (EBPAC) supported the Government's initial phase of privatization. * Strengthening the banking sector to build capacity of financial intermediaries to support private sector growth. Bilateral donors and IFIs are providing technical assistance (TA) to strengthen the banking agencies, deposit insurance agencies and private banks. The Association has two operations that support the banking sector: EBPAC and the RS Private Sector Credit Program that provides a line of credit for commercial bank lending to private SMEs with companion TA for participating banks and the banking agency. * Lightening a burdensome tax regime to motivate companies to return from the informal to the formal sector. An International Advisory Group on Tax Reform coordinates donors' efforts to help the Government to rationalize and harmonize the tax system across BH. The IMF leads the reform. The Association's Public Finance Structural Adjustment Credit II also supports the Government's tax reform program. * Liberalizing trade, modernizing customs administration and strengthening competition policy to improve the competitive environment for the private sector. Customs and trade liberalization are supported as part of the EU Roadmap, associated with the Stabilization and Association (SAA) process, and Stability Pact. The IMIF supports harmonization of tariffs and customs revenues. The Association's Trade and Transport Facilitation in Southeast Europe project helps build border crossings. Competition policy is supported as part of the EU Roadmap and Stability Pact. 3 * Improving property rights and access to land create the foundation for an active land market and productive use of land. As a critical first step, a bilateral donor has worked with Entities to draft harmonized Laws on Land Registry and is committed to assisting the Entities to create new land registry books as a pre-requisite to building an automated countrywide land registry system. * Reducing corruption. Several measures under the proposed Credit will reduce rent-seeking opportunities, as will EC-supported modernization of customs administration. The Association recently conducted an Anti-Corruption Diagnostic that served as the foundation for the Government's draft Anti-Corruption Action Plan. Fighting corruption is also a key element of the Government's Interim-Poverty Reduction Strategy Paper. * Increasing the independence and capacity of the judiciary. In Spring 2001, an Independent Judicial Commission was established as an arm of the Office of the High Representative to lead reform of the judiciary. In February 2002, the Peace Implementation Council decided to implement sweeping reforms of the judicial system. Several donors support the work of the IJC in implementing its mandate. 9. As well, many of the basic political and economic institutions required for the country's effective functioning have been established, including the establishment of the central bank, State and Entity treasuries, and issuance of the national currency. Significant progress has been achieved in removing barriers to the movements of goods and people within the country, and a common, countrywide customs tariff regime and trade policy were introduced. 10. Reform of the public finance system has begun, with a focus on strengthening accountability and control over management of public resources. Both Entities have made significant progress in reforming and harmonizing tax policies and in establishing intra-Entity revenue and expenditure mechanisms and in introducing external audit functions. The legal and institutional frameworks for privatization and restitution have been adopted. Although with considerable delay due to difficulties of achieving consensus on privatization methodology and institutional framework among constituent groups, privatization of small-scale enterprises is well advanced, public offering of shares nearly completed, and the privatization of large enterprises is underway. 11. Key elements of the legal and regulatory frameworks for the banking sector have been introduced and supervisory capacity has been strengthened, with several banks now under control of the banking agencies. In 2001, BH became the first country in the region to close its payments bureaus inherited from the system of the former Socialist Federal Republic of Yugoslavia and transfer clearing functions to commercial banks. Banking reform has taken a dramatic, positive turn in recent months, with 80 percent of assets now in private banks, and more than 60 percent in foreign-owned banks, including international banks and regional investors. Dramatic increase in citizen savings from KM650 million at end-September 2001 to more than KM1.3 billion at end- December 2001 has been spurred by the arrival of foreign international banks, introduction of deposit insurance, and the need for currency conversion at commercial banks as the Euro replaced the DM, which previously had been used interchangeably with the local currency. With increased 4 liquidity and competition, banks are beginning to increase lending to retail and business customers and interest rates are dropping (e.g., from low 20s to about 13 percent, and some banks offering rates as low as 10 percent). Still, bankable projects are few in this high-risk environment where lenders' rights are not easily enforced. II. THE BUSINESS ENVIRONMENT ADJUSTMENT PROGRAM A. Core Issues 12. Despite these positive developments in market-based economic reforms, a substantial reform agenda lies ahead and further economic development depends on the acceleration of reforms. In support of this process, State and Entity governments in 2000 started drafting their first countrywide economic strategy since Dayton entitled Economic Development Strategy: A Global Framework for Bosnia and Herzegovina. The framework was prepared with the support of local academics and in consultation with a wide range of stakeholders from government, productive sectors, civil society and the donor community, and was approved by Parliament in June 2001. The strategy's main focus is on private sector growth to reduce unemployment and poverty, while restructuring the social safety net to protect the poorest in a cost-effective way. The strategy recognizes that the sustainability and efficiency of the economy and strengthened competitiveness is predicated on attracting long-term investors, and that attracting such investors requires a predictable and coherent policy environment countrywide. The strategy, combined with a full PRSP preparation and participation plan and a more detailed poverty profile, formed the basis of an Interim Poverty Reduction Strategy Paper (I-PRSP). The I-PRSP was submitted to the Bank and JIMF in December 2001 for information, not linked to any Bank or IMF operation. The I-PRSP specifically envisions acceleration of privatization, strengthening of the financial sector, and establishment of an enabling environment for domestic and foreign investment, and further recognizes that a key element of a good enabling environment for business is establishment of a single economic space in BH. The I-PRSP is expected to be followed in 2002 by a full PRSP, currently under active preparation (see Paragraph 13 below). 13. An inter-Government Coordination Board for Economic Transition and European Integration (Coordination Board), comprised of State and Entity Prime Ministers and key members of their cabinets, was established in late 2001 to strengthen ownership of economic reforms and to move toward more cohesive and concerted policy action at the State and Entity levels. Among its primary responsibilities, the Coordination Board oversees implementation of the I-PRSP, preparation of the PRSP and anti-corruption action plan, and implementation of business environment reforms, which is an integral component of the PRSP. A special task force to facilitate the economic transition and improve the trade and investment climate has been set up under the PRSP preparation process. Under the leadership of this task force, an action plan to eliminate barriers to investment was developed and is the foundation for actions supported by the BAC. The plan was accepted by the Coordination Board in January 2002 and subsequently adopted by both Entity Governments and the State Council of Ministers. 14. The progress and impetus of structural reforms has to be maintained to create an environrment conducive to private sector activity. The low share of the private sector in the economy reflects 5 slow progress in privatization and the still weak investment climate. FDI inflows have remained fairly low, albeit with some encouraging signs of increased interest from neighboring countries, such as Croatia, FRY, and Slovenia, and a resurgence of traditional ties with Italy, Germany and Austria. Bosnia and Herzegovina, with FDI at an estimated 2.8 percent of GDP in 2001, is a poor performer in comparison to other countries of similar per capita income. 15. Several studies agree that overly complex and costly government structures and regulations, coupled with a lack of transparency, unpredictability and high costs have led many prospective investors to consider the risk of doing business in BH as too high'. A 1999 Wall Street Journal survey of leading economists ranked BH's investment climate 19th among 27 countries; l8th for business ethics; 21st for integration into the world economy; and 21St for rule of law. BH's own assessmene ranked the country lowest among 59 countries on most measures of competitiveness, such as openness, government, finance, infrastructure, technology, management, labor and civil institutions. The study ranks BH at the bottom on nearly 80 percent of the 184 indicators measured. 16. Committed to reducing regulatory and administrative barriers in order to attract private domestic and foreign investment, the authorities commissioned a Foreign Investment Advisory Services (FIAS) study, "Bosnia and Herzegovina: Commercial Legal Framework and Administrative Barriers to Investment." Despite previous attempts at reducing obstacles to business entry, operations and exit, the 2001 report confirmed that an unfriendly and complex business environment continues to impede investment (see Box 1). The World Bank and European Commission's Bosnia and Herzegovina: Review of the Priority Reconstruction Program and Looking Ahead Toward Sustainable Economic Development, May 1999; The Wall Street Joumal's Central European Economic Review, November 1999; The World Bank Group's World Business Environment Survey, Spring 2000; Foreign Investment Advisory Service (FIAS) report Bosnia and Herzegovina: Commercial Legal Framework and Administrative Barriers to Investment, March 2001; Intemational Crisis Group's (ICG) report Why No One Will Invest in Bosnia and Herzegovina, 1999; ICG's draft report Still Not Open /or Business: Bosnia's Precarious Economy, July 2001. 2Bosnia and Herzegovina Competitive Report, May 2001, a study by a team of local economic experts on the basis of the methodology of the World Economic Forum for 1999, was the first of its kind since the country proclaimed independence from the former Socialist Federal Republic of Yugoslavia in 1992. 6 Box 1: Administrative Barriers to Investment - FIAS Report Highlights * Absence of a seamless, transparent and predictable legal and regulatory framework is a major impediment to setting up and operating businesses in BH's relatively small market * Lack of consistent and transparent business and administrative regulations and procedures opens the door to abuse of power at various levels of government - compounded by the absence of effective and independent appeals mechanisms, significantly raises the cost of doing business * Lack of effective, efficient and adequately resourced judicial systems negatively affects the cost of doing business * The study goes on to detail business barriers in the commercial legal and institutional framework, business registration, land titling, employment generation and business operation. Some notable findings: = The lack of effective laws, regulations and mechanisms for securing and enforcing collateral severely restricts access to much needed working capital from banks =' Courts are weak, deficient and, in many instances, subject to political direction and corruption causing long delays in the resolution of commercial disputes => The 14-step business registration process is overloaded with unnecessary but mandatory approvals resulting in a process that can take months to complete and is yet another reason for the perpetuation of the gray economy => Once registered, businesses faces a multitude of inspections from numerous inspectorates with unclear and often overlapping mandates, leading to excessive administrative costs for compliance 17. Based on the report's findings, the authorities have adopted a countrywide action plan to implement recommendations to address impediments to private investment in BH. The plan constitutes a key element in the country's Poverty Reduction Strategy Paper (PRSP) process and is the foundation for the Government's business environment reform program to be supported by the proposed Business Environment Adjustment Credit (BAC). 18. This reform program complements a number of ongoing Government programs (noted in Paragraph 8) to help accelerate the transition to a self-sustaining economy. The Credit, itself, supporting the business environment reform program focuses on administrative and regulatory reforms that would have the most critical, near-term impact on the three phases of business development: * Inproving business entry through a streamlined and transparent countrywide approach to business registration and licensing and strengthened legal framework and capacity for attracting foreign investment; * Streamlining the environment for business operations by reducing companies' administrative and regulatory compliance costs through rationalization of inspections and regulations, strengthening of judicial and extra-judicial capacity to resolve commercial disputes; improving the system for secured transactions; and leveling the playing field for private sector participation in public procurement, and * Facilitating business exit through improved bankruptcy and liquidation system. 19. Underlying these objectives is the need to strengthen the consultative capacity between the public and private sectors to ensure that policies and legislation are business-friendly. 7 20. It will be the relatively small regulatory and administrative improvements, such as rationalizing costly inspections that will be immediately helpful to business development. Such improvements are vital not only to expedite the whole investment process but also to denote a change of direction and pro-business attitude in the Government and bureaucracy. Unless some immediate impact is felt at the ground level, many well-intentioned legal reforms that have already been undertaken will not be fully appreciated by the investor community. In the absence of significant reforrms, the common problems, perceptions and anecdotes of existing investors will continue to be some of the most potent deterrents to incoming investors. B. Business Entry 21. Current Situation. Investors view the process for establishing and registering a Average Company Registration (Days) business as one of the top barriers to investment in BH. Each of the 14-15 formal steps can take Poland I 2 L days or weeks. Furthermore, the process is not Li0iuania = = = clear and is loaded with sequential approvals Hungary ___ _ and unnecessary or redundant steps resulting in U"in a time-consuming, costly process from the LaWia preparatory phase until the business can legally US/L=K begin operations. During this time, valuable Aua resources are idle, business plans become 0 10 20 4 I 50 60 70 obsolete, business partners and contacts turn away -- opportunities are lost. 22. Efficiency of the business registration process in BH falls behind most transition countries in the region3. A baseline survey of administrative and regulatory costs of doing business conducted as part of preparation of the BAC in 2002 showed that the process for registering a business in BH in 2000-2001 took an average of 64 days (i.e., 80 days in the Federation; 31 days in RS), but ranged from one to 730 days. Although certain courts have taken steps to streamline the procedures connected with the registration of a company and to make the process more transparent, this type of piecemeal reform is insufficient and courts remain the main bottleneck in the process. 23. The entire system needs to be re-examined and overhauled. An inter-Entity working group has completed an assessment and adopted an action plan to streamline business registration on the basis of FIAS' recommendations. Their efforts are supported by donor-funded technical assistance to help re-engineer the process and to build the countrywide registry. The Entities' have committed to common procedures for registration and a single database. 24. Historically ineffective and overly influenced by political structures, the Foreign Investment Promotion Agency (FIPA) has made significant progress over the past year in re-asserting its Source: FIAS data. 8 mission, sharpening its vision and initiating investment promotion activities. In order to function as an effective investment promotion agency representing the interests of the entire country, the Government has undertaken efforts to increase the capacity and professionalism of the FIPA through amending the decree on the foundation of FIPA and its statute to abolish the ethnically based system for the rotation of General Managers; to formalize a Steering Board comprised of a majority of private sector representatives, and to establish a financing base to carry out its activities. 25. In fulfilling its mandate as the State investment promotion agency, FIPA will need to expand its operations and collaborate closely with State, Entity, Canton and local governments to provide investors with the best information about investment opportunities and to promote further investment across BH. This will enhance the credibility of FIPA, while enabling it to leverage its limited resources through local partners and representative offices within both Entities for greater impact. 26. The State Law on Policy of Foreign Direct Investment, drafted with assistance from FIAS and adopted by the State Parliament in 1998, obligates the Entities to adopt imnplementing legislation aligned with the Policy law. The Entities together have drafted and each has adopted such legislation harmonized with the State law. 27. Reform Agenda. The Government will reduce barriers to business entry by: * Creating common streamlined business registration and licensing procedures and a single registry countrywide. Changes will include introducing a single business registration form and eliminating superfluous forms, contact points and approvals; simplifying and increasing the transparency of the process; reducing the number of events that require re-registration; enforcing the "deemed approved" system, as allowed in existing laws, when a Governmental body does not meet a required deadline; and using private sector professionals and lower level court personnel to assist judges in the administrative tasks of business registration. Both Entities will reduce the number of steps to register a business from the current 14-15 for foreign firms, for example, to 7 or less. The FIAS Report on the Administrative Barriers to Investment and the Government's action plan lays out a robust proposal for improving the registration of business in BH, including elimination of separate approvals for foreign investment. * Harmonizing Entitv-level laws, such as the company laws that define the allowed forms of company registration and the Laws on Entry into the Court Register that define registration requirements; strengthening the capacity of the courts, especially clerks whose administrative role will increase as the judicial role in registration is reduced; and rationalizing the requirements and process for permits and licensing. In order to assess impact of the reforms, the Entities will carry out independent surveys to measure progress against key results indicators, such as reduction in the average elapsed time to register a business from 80 to 30 days or less in the Federation and from 31 to 23 days or less in the RS. 9 C. Business Operations 28. Current Situation. In addition to the obstacles investors face to successfully begin operations, they are then faced with complying with a large number of regulations that are often inconsistent and outdated, with very considerable reporting requirements, and with inspections by numerous inspectorates with unclear and often overlapping mandates. This provides a fertile ground for rent-seeking behavior by Entity- and local-level inspectors and is noted by virtually all businesses as a top complaint and cost of doing business in BH. Anecdotally, domestic investors estimated that as much as 20 percent of administrative time is spent on compliance issues; one foreign investor reported that the ratio of administrative costs to production costs was an alarming 1:1. The 2002 baseline survey of administrative and regulatory costs of doing business showed that during 2001 the four inspectorates with mandates across all businesses (i.e., Market, Labor, Financial Police and Revenue (Tax) Administration) together spent an average of 28 on-site inspector days per business inspected in the RS and 18 days in the Federation. The authorities have initiated actions to reduce the burden on business by: eliminating the overlap between Financial Police and Revenue Administration; setting up cross-inspectorate working groups to resolve issues of overlapping inspectorates and obsolete regulations, and setting targets to reduce the on-site inspector days for the four mentioned inspectorates from 28 to 15 days or less per year in the RS and from 18 to 12 days or less in the Federation. The European Commission, recognizing that a difficult regulatory environment can discourage business activity, has recommended that the EU Member States review their regulatory environments with a view toward streamlining4. 29. Limited access to working and investment capital from banks is, in part, a reflection of a weak system of secured transactions on movables: a commercial legal framework that does not grant non-possessory proprietary security; weak enforcement mechanisms, and lack of a central registry, all contributing to the possibility of duplicate pledges of collateral without proper establishment of priority of lien and, therefore, difficulty in enforcing creditors' rights. Both Entities have adopted laws on Pledges on Movables, drafted with international assistance, and a bilateral donor is assisting in the design and implementation of a countrywide registry. 30. Resolution of commercial disputes through the courts is slow. The courts are known to be weak, deficient and, in many instances, subject to political direction and corruption.5 Enforcement of laws, contracts and court decisions is exceptionally poor and reflect the inadequacies of the whole legal system. Both Entities recently introduced new laws (the Law on Judicial and Prosecutorial Service (Federation), the Law on Prosecutors (RS) and the Law on Courts and Court Services (RS)) that are designed to de-politicize the judiciary. These laws also establish independent judicial commissions to conduct a review of the judiciary and prosecutors-an effort overseen by the Office of the High Representative's (OHR) Independent Judicial Commission (UJC), which oversees all judicial reform activities for BH. Judicial reform is being accelerated under a February 2002 decision by the Steering Board of the Peace Implementation Council to 'European Commission Recommendation on Improving and Simplifying the Business Environmentfor Business Start-Ups, article 11, C(97) 1161 (April 22, 1997). Intemational Crisis Group reports. Denied Justice: Individuals Lost in a Legal Maze, February 2000; Rule of Law in Public Administration: Confusion and Discrimination in a Post-Communist Bureaucracy, December 1999; and Rule Over Law: Obstacles to the Development of an Independent Judiciary in Bosnia and Herzegovina, July 1999; and World Bank's Anti-Corruption Diagnostic, March 2001. 10 remove all judges and prosecutors and replace them by the end of 2003 on the basis of qualifications and merit, rather than political appointment. 31. Weak and disparate public procurement legislation and practice limits the opportunity for private sector participation in public tenders, impedes competition and creates rent-seeking opportunities. While the RS recently enacted a Law on Public Procurement, both the law and its implementation need to be strengthened to eliminate abuses (e.g., reducing procurements in small- value lots to avoid open bidding; short bidding periods to favor preferred bidders; excessive public official discretion to award contracts; inadequate advertising requirements that limit competition). In the Federation, the enforceability of public procurement rules is severely weakened by the facts that rules are mandated by decree rather than law and that there is little awareness of the decree. No public procurement legislation exists at the State level. The Government recognizes that harmonized procurement legislation is important to promoting competition and strengthening of a single economic space in BH, and it is included in the Government's draft anti-corruption action plan that is in the process of public consultation. A Bank-led Country Procurement Assessment Report is nearing finalization. 32. Regular consultation between the public and private sector in the formnulation of laws, regulations and policies affecting business, essential to creating an effective business environment, is lacking in BH. Discussions between Government and the private sector occur irregularly and infrequently. Furthermore, meetings often have been one-on-one with Government officials and managers and/or owners of the largest and most influential firms, which commonly are the loss- making state-owned enterprises. This has resulted in the perception that mostly "connected" persons have a voice with Government and that this voice rarely and poorly represents the interests of the broader business community. The authorities have established a forum for formal consultation with stakeholders as a part of the PRSP process. This is a first step toward regular consultations on business environment issues. 33. Mandatory membership in Chambers of Commerce and laws that prevent businesses from forming alternative associations effectively create a Government-sanctioned monopoly for the Chambers and crowd out viable alternatives that may better serve the needs and represent the views of the emerging private sector. Although some Chambers have begun to restructure their operations to better serve the needs of the private sector, most new private businesses express dissatisfaction with what is effectively a "tax," as they perceive little value from the Chambers in return. As a result, many private businesses do not interact with the Chambers and see them as relics of the past. 34. In response, some private business owners in both Entities have established organizations under laws allowing creation of citizens' associations; others have affiliated with the Chambers in order to associate as businesses rather than individuals. Private business associations that have been established, however, are struggling. Fees derived from membership and services are limited by a small membership base and make it difficult to compete with the monolithic, monopolistic Chambers. Although still developing their capacity for effective public-private sector dialogue, these new private business associations are now beginning to lobby the Government on behalf of 11 their constituents. As a first step, the RS recently adopted legislation that sets the stage for elimination of mandatory membership by establishing a new basis for fee generation and retaining the mandatory structure as an interim measure only. The Federation is drafting legislation to eliminate mandatory fees in 2002. This will provide incentive for the Chambers to reform into service-oriented organizations that will compete with private associations for their membership. The State has adopted legislation to allow individuals and businesses to associate across the country. 35. Reform Agenda. The Government will reduce impediments to business operations by: * Preparing an inventory of legal and extra-legal inspectorates at all levels of government as a first step toward minimizing redundancies that are costly to both government and businesses. The activities of the inspectorates will be coordinated, eliminating duplication and overlap, and initiatives for joint training and information sharing will be implemented; the mandate of each inspectorate, authority of inspectors and the process for appealing inspectors' decisions will be clarified and publicized; rational, planned inspection schedules with appropriate notification to the business will be initiated; standard inspection forms and guidelines for, and review of, penalties imposed by inspectors will be established; a Code of Conduct for inspectors will be developed; time limits for different inspection activities and performance standards for inspectors will be set, against which performance will be monitored; and regulations will be reviewed and rationalized and those that are deemed outdated or unnecessary will be repealed. In order to assess impact of the reforms, independent surveys will be conducted periodically to measure progress against key results indicators, such as reduction in the average amount of time inspectors spend on-site per inspected business per year in aggregate for Market, Labor, Financial Police and Revenue (Tax) Administration inspectorates (i.e., from 28 to 15 days or less in the RS and from 18 days to 12 days or less in the Federation). * Improving access to capital by protecting creditors' collateral rights in secured transactions through creation of a countrywide registry of pledges on movables and increasing capacity of judges, clerks, lawyers and banks to implement the new system. * Improving enforcement and commercial dispute resolution by supporting the further development of alternative dispute resolution mechanisms and utilizing progressive courts to formally pilot specialized commercial sections of the court with jurisdiction over business registration, collateral registration and enforcement of secured transactions, and bankruptcy and liquidation proceedings. Such specialization would be combined with selection, qualification and training programs for commercial judges and expert associates. * Adopting and implementing strong, harmonized public procurement legislation at State and Entity levels to promote a fair, transparent and competitive environment for private sector growth. 12 * Strengthening capacity for regular consultations between the Government and the business communitv to promote business-friendly reforms. * Ending the mandatory membership fees for businesses to join the Chambers of Commerce and encouraging them to compete on a commercial basis with other business associations. D. Business Exit 36. Current Situation. A well-functioning system of bankruptcy and liquidation is an essential element of a market economy. Bankruptcy serves many important functions: it relieves debtors of the burden of debts; it frees up non- or under-performing assets to be channeled into more efficient uses; it encourages entrepreneurial activity by facilitating risk-taking behavior and it promotes lending by preventing debtors from delaying and squandering resources and allowing creditors to recover some portion of debts owed. As a transition economy, the bankruptcy and liquidation system is extremely important for BH. It will facilitate exit of numerous loss-making state-owned enterprises that will not find buyers in the privatization process and which must make way for new, private businesses. 37. In 1998, the Federation adopted a modem bankruptcy law, while former SFRY bankruptcy legislation is still in effect in the RS. An inter-Entity working group, comprised of local and international experts, is finalizing its draft of this important legislation to ensure that it is coordinated with other core business legislation (i.e., the Law on Enterprises and the Law on Entry into the Court Register) and is in line with relevant EU directives. 38. Reform Agenda. The Government will facilitate business exit by: * Modernizing bkrupitc and liquidation laws and procedures so they are consistent with EU standards; reducing high up-front fees needed to initiate bankruptcy proceedings; and initiating the creation of a better system through which capable trustees, liquidators and specialized judges are trained, certified and engaged to implement modem exit procedures for enterprises. 13 III. THE PROPOSED CREDIT A. Rationale for Bank Involvement 39. The Business Environment Adjustment Credit (BAC) is proposed as the next in a series of adjustment operations that IDA has extended to Bosnia and Herzegovina following the Dayton Accord. Previously approved adjustment operations include the Enterprise and Bank Privatization Adjustment Credit (EBPAC), Public Finance Structural Adjustment Credits I and 1I (PFSAC), and a Social Sector Adjustment Credit (SOSAC). A second Social Sector Adjustment Credit (SOSAC II) is under preparation. An IMF Stand-by Arrangement (SBA) was successfully concluded in May 2001; a letter of intent for a new Stand-by Arrangement was signed by the BH authorities on March 27, 2002. 40. The proposed Credit is an integral part of the Government's Interim Poverty Reduction Strategy Paper submitted to the Bank and the IMF in December 2001, to be followed by a full PRSP in 2002. The I-PRSP envisions acceleration of privatization, strengthening of the financial sector, and establishment of an enabling environment for domestic and foreign investment. The I- PRSP further recognizes that a key element of a good enabling environment for business is strengthening of a single economic space in BH, following the EU example. The BAC also is consistent with the Country Assistance Strategy (CAS) dated May 18, 2000 and the CAS Progress Report, dated September 24, 2001, which lays out a graduated assistance strategy aimed at helping BH to formulate and implement a comprehensive reform program that would accelerate the country's transition away from dependency on aid toward self-sustaining growth. B. Monitoring and Evaluation 41. Recognizing that previous experience in BH has shown that changes to laws and regulations alone are not always effective in achieving results on the ground, the Credit incorporates performance-based results indicators as second tranche conditions. These performance-based actions will help ensure that key reforms are effectively implemented and result in tangible improvements in the business environment. In particular, the authorities have agreed to specific results to decrease the amount of time and number of steps to register a business and to reduce the compliance burden on businesses as measured by the on-site inspector time spent by those inspectorates common to all businesses. An independent system for monitoring results and determining compliance for tranche release has been established. 42. A baseline survey of administrative and regulatory costs of doing business in BH was conducted by a local NGO, and overseen by the Association and FIAS, among 302 randomly selected majority private companies representative of the country's economic activity. The survey instrument, sample size and methodology for the baseline survey were established in cooperation with FIAS to allow comparison with other countries that have undertaken similar surveys. The resulting baseline indicators set the starting point for each Entity. Every six months throughout the 14 term of the reform program, an abbreviated survey to assess progress against the baseline indicators will be carried out according to specific methodology described in Annex 6. The method for calculating results of the surveys and determining compliance with the conditions are also detailed in the annex. 43. The surveys will be carried out under the auspices of the Ministry of Foreign Trade and Economic Relations, in conjunction with FIAS and the Association. Each of the Entities, the State and the Association may appoint a monitor to observe that the sample selection and survey process are being carried out according to agreed terms to ensure independence and reliable results. The names of the firms, however, will remain anonymous to the monitors in order to maintain integrity of the sample. 44. In addition to the semi-annual surveys, a full survey will be carried out with donor assistance every 18 months for at least three years and results widely publicized to increase transparency and accountability for the reform program and to encourage continued progress of BH's efforts to improve the business environment. 45. In addition to results of the surveys, regular monitoring of the program will be carried out by a field-based Task Team Leader (TTL) supported by periodic supervision missions. The TTL will coordinate closely with other donors, particularly those providing critical technical assistance necessary for the implementation of the reform program. The Government's implementation and monitoring arrangements are further described in Section F, "Implementation," Paragraphs 55-58. C. Benefits and Risks 46. The main benefits of the proposed Credit include: (i) contributing to the building an investment climate attractive for new entrants and for increased productivity of existing private businesses to promote economic growth and absorb labor and other resources released by the privatization and downsizing of the state-owned enterprises; (ii) strengthening the concept of a single economic space through greater harmonization of administrative and regulatory frameworks, thereby moving the country closer to its goal of integrating more fully into the regional economy and the European Union; and (iii) building a more dynamic private sector that will create much needed new jobs-this in turn will spur a shift away from informal sector activity toward formal sector activity and to the payment of taxes resulting in more funds for vital social services and transfers, which are now often unavailable or only partially available to the poor 47. Main risks associated with the proposed Credit are: (i) complex and fragmented govemance arrangements in Bosnia and Herzegovina-Entities, Cantons, municipalities and cities-may prove challenging for implementation of reforms at lower levels of Government; (ii) momentum or commitment could be lost in the lead-up to and aftermath of fall 2002 elections; and (iii) rooted mindsets of the system of the former Socialist Federal Republic of Yugoslavia as well as in vested interests the current system may result in resistance to change and delays as many continue to view the private sector with suspicion and others stand to lose opportunities for rent-seeking. 15 48. In order to mitigate the risk of complex and fragmented governance arrangements in Bosnia and Herzegovina, the task team consulted with local governments, NGOs and donors to seek alternatives to minimize this risk. For registration of businesses and pledges, the risk is minimal as the Cantonal and regional courts, where this activity takes place, are involved in the design of the new system and will receive equipment and training to facilitate implementation of the registries. Most local level administrative functions, such as certain inspections and registration of sole proprietorships, are delegated by the Entities or, in the Federation, by the Cantons. While this limits the risk by giving some accountability to the Entities, it does not eliminate it. As part of the monitoring arrangements, surveys will be conducted periodically to measure administrative and regulatory costs of doing business. As previously noted (see Paragraphs 42-44), progress will be measured against selected baseline indicators that will be linked to release of the second tranche. This is expected to help motivate the Entities to impact change at sub-Entity levels. In addition, the task team has identified a number of donor-funded local economic development (LED) programs that are expected to form the basis of a partnership to coordinate reforms under the BAC at the local level. In particular, implementation of the BAC is closely coordinated with IFC's Southeast Europe Enterprise Development (SEED), which is working with selected municipalities to design LED. 49. While current State and Entity Governments together have demonstrated commitment to and ownership of reforms, this is a relatively recent development; previous Governments, especially in the RS, have been resistant to collaborate toward the strengthening of a single economic space. The recently established Coordination Board for Economic Transition and European Integration to move the Government's reform agenda forward on a cohesive and accelerated basis is expected to transcend the elections and provide continued support for the reform program. This will help mitigate, but cannot eliminate, the risk that momentum or commitment could be lost in the lead-up to and aftermath offall 2002 elections. It will be important that key actions aimed at strengthening the single economic space establish strong momentum before the fall elections. 50. The Govermments' anti-corruption programs, supported by the Bank, and many of the laws, regulations and structures subject to the BAC reform program, will significantly reduce opportunities for rent-seeking behavior and will help mitigate the risk that vested interests the current system may result in resistance to change and delays. Changing mindsets will be a long- term process, which poses a risk that cannot be fully eliminated. D. Coordination with the IMF 51. There has been close coordination with the IMF to assure the BAC supports and complements the IMF program. As well, the IMF participated in Government workshops sponsored by FIAS to solicit feedback on the recommendations on which the BAC is based. Consultations on the new IMF Stand by Arrangement have emphasized the need to remove structural barriers to SME growth and employment as an important factor contributing to poverty reduction. 16 E. Board and Second Tranche Conditions 52. The overall program to be supported by the proposed Credit is outlined in the Letter of Development Policy (Annex 3) and the Policy Reform Matrix (Annex 4). (i) Board Conditions 53. Conditions of Board presentation demonstrate Government actions taken to date to improve the business environment, including the adoption of a single time-bound action plan for implementation of business environment reforms by State (Bosnia and Herzegovina) and Entity (Federation and Republika Srpska) Governments. * State Council of Ministers adopted amendments to the Decision on Foundation of Foreign Investment Promotion Agency, satisfactory to the Association, and allocated funding for its operations. * Entities adopted Foreign Investment Laws, satisfactory to the Association and fully harmonized with the State Law on Policy of Foreign Direct Investment. * State and Entities established a formal mechanism, satisfactory to the Association, for regular consultation with the private sector to consider their views in the formulation of policies and legislation affecting business. * Entities formally adopted the concept of common procedures and single database for each of business registration and registration of pledges on movables (i.e., collateral registry). * Entities adopted Laws on Registered Pledges on Movables, satisfactory to the Association. * Entities conducted an independent baseline survey of administrative and regulatory costs of business. * State and Entities drafted an anti-corruption action plan, incorporating public procurement, and initiated the public consultation process. * Entities eliminated the overlapping authorities of the Financial Police and the Revenue (Tax) Administration. * State adopted the Law on Associations and Foundations of BH, satisfactory to the Association, allowing associations to cooperate across BH. * Entities established a working group to draft new harmonized bankruptcy laws. The working group has already produced a draft that is in the process of being finalized. 17 (ii) Second Tranche Conditions 54. Second tranche conditions continue the process of reform not only through: (a) prescriptive legal and regulatory reform measures to be taken by both Entities, requiring harmonized actions to promote strengthening of a single economic space; but also by: (b) performance-based actions, which ensure that reforms are effectively implemented and result in tangible improvements in the business environment, as measured by selected results indicators. While the substance of the results indicators is the same for both Entities, the targets established take into account the different starting points in each Entity and, consequently distinct sets of achievable goals. As the onus is on each Entity to achieve these goals, disbursement of the second tranche will be made independently to each Entity upon fulfillment of its second tranche conditions. * FIPA representative offices are staffed and operating in both Entities. * Pilot of the business registry system embodying common procedures, common forms, and single database has been tested in selected courts across both Entities, and a plan for full implementation, satisfactory to the Association, has been adopted. * Entities reduce the average number of days to register a business from 80 to 30 days or less in the Federation and from 31 to 23 days or less in the RS, as measured by independent surveys on a semi-annual basis. * Entities reduce the number of steps required to register an enterprise to 7 or less. * Pilot of the collateral registry system embodying common procedures, common forms, single database and trained participants (judges, clerks, banks) has been tested in selected courts across both Entities, and a plan for full implementation, satisfactory to the Association, has been adopted. * Entities have established a business inspection system, satisfactory to the Association, that provides for: the review and rationalization of the mandates of inspectorates operating at Entity and sub-Entity levels; clarification and publication of the mandates of the inspectorates and the inspectors; rational, planned inspection schedules, standard forms and guidelines; amendments to legislation as necessary to implement rationalization of the inspectorates, and regulatory assessment with the goal of appealing obsolete or unnecessary regulations. * The average number of aggregate on-site inspector days per inspected business per annum for the Market, Labor, Financial Police and Revenue Administration combined will be reduced from 28 days to 15 days or less in the RS and from 18 days to 12 days or less in the Federation. * Entities adopt amendments to the Laws on Chambers of Commerce, satisfactory to the Association, to eliminate mandatory membership. 18 * Entities adopt strengthened and harmonized Laws on Bankruptcy and Liquidation, satisfactory to the Association. F. Implementation 55. As previously noted, the Council of Ministers and Entity Governments have adopted a countrywide action plan to implement recommendations of the FIAS study on Commercial Legal Frarnework and Administrative Barriers to Investment. A working group, or secretariat, comprised of State and Entity technical experts across relevant ministries were appointed by Entity Prime Ministers and the State Minister of Foreign Trade and Economic Relations (MFTER) to draft the time-bound action plan based on the FIAS study and in consultation with the private sector, and will continue to act as the technical monitoring group for implementation of the reforms. The plan also notes parties responsible for the actions. The action plan will be the Government's key instrument for monitoring progress against the business environment reforms. 56. The high-level cross-Governmental Coordination Board for Economic Transition and European Integration, that is providing leadership to the country's economic reform agenda, will have overall responsibility for ensuring progress under the BAC. More specific responsibility for implementation matters has been delegated to MFTER in coordination with the Entity Prime Ministers. Each Entity and the State has appointed a "champion" in the Prime Minister's cabinet (in METER at the State level) to oversee implementation of the business environment reforms at the Entity level, and serve as the Association's primary counterpart for the BAC. The BAC task team has worked effectively with each "champion". A bilateral donor has committed financial and technical assistance to State and Entities to assure access to local and international experts as needed to move the agenda forward, and to fund activities of FIAS in supporting the Government's implementation of surveys and self-assessment tools to monitor progress against results and to help build capacity for public-private sector dialogue. 57. As noted earlier (Paragraphs 41-44), baseline surveys to assess administrative and regulatory costs of doing business in BH, in each Entity and in a cross-section of municipalities, have been completed. Bilateral funding is available to conduct the full survey twice in a three-year period and targeted surveys to measure progress against agreed indicators every six months during that time, after which point the Government is expected to continue the surveys with its own resources. Methodology for the surveys is included in Annex 6. Results will be widely publicized both to increase transparency and accountability and to encourage continued progress under the reform program. 58. Another important factor for successful implementation of the reform program is availability of technical assistance. Bilateral technical assistance has been arranged for implementation of most of the reform areas supported by the BAC. Those that are not yet committed, such as support for rationalizing inspections and regulations, are under discussion with interested donors and the task 19 team is confident that grant funding will be secured for all remaining areas. A "map" of administrative responsibilities in the Government and technical assistance in place is included in Annex 5. G. Financial Arrangements 59. The Credit would be disbursed in two tranches, with the second tranche disbursed separately to the Entities. In terms of financial monitoring, the Bank will complement its increased emphasis on borrower public financial management in its analytic work and lending program with stronger reporting and auditing arrangements over the disbursements of adjustment credit proceeds. These controls are not intended to restrict or prescribe the uses to which adjustment credit proceeds funds may be applied by the Borrower. They are rather intended to provide assurance that Bank funds have arrived at their intended destination, have been used in the first instance for their intended purpose of providing balance of payments and fiscal support, and will be subject to the Borrower processes for managing public resources which are known to and can be reviewed by both the Bank and the IMEF. 60. Fiduciary arrangements have been agreed with authorities at the State (Borrower) and Entity levels. Disbursement would be made in SDR's and sold to the Central Bank in exchange for KMs. The KMs will be deposited into a dedicated Deposit Account of the State at the Central Bank of BH. The entire amount of all disbursements would be transferred from the State Deposit Account to the budgetary accounts of the Entities in the Central Bank and then transferred to budgetary accounts of the Entities in commercial banks. The Entities have agreed that they will transfer $4 million equivalent of the first tranche to the State budget through the normal transfer mechanism. Tranche release would be contingent upon satisfactory review by IDA of the implementation of the adjustment program as a whole and the fulfillment of specific actions required for each tranche. Proceeds of the Credit will be used for approved uses, such as foreign debt service. The Borrower will comply with standard reporting requirements of adjustment credits. The Association will exercise its right to receive audit reports on the Deposit Account after each disbursement. 61. In recognition that studies continue to indicate weak financial accountability and controls, the upcoming PRSP will include measures to strengthen accountability. The country recognizes that corruption is a critical impediment and has drafted an anti-corruption action plan for which public comments are being sought. The anti-corruption action plan, together with many of the measures carried out under the BAC and related reforms, will further help reduce the corruption in BH and improve accountability. H. Poverty Implications 62. The reform program supported by the proposed Credit is an integral component of the Government's Interim Poverty Reduction Strategy Paper (see Paragraphs 12-13). Strong private sector growth, a key objective of the BAC, is seen as the principal vehicle for poverty reduction through employment creation in an environment of high unemployment. 20 I. Environmental Impact 63. The proposed Credit will have no direct impact on the environment. For the purposes of Operational Directive 4.01, it has been rated Category C, and therefore does not require an environmental assessment. IV. RECOMMENDATION 64. I am satisfied that the proposed Credit complies with the Articles of Agreement of the Association and I recommend that the Executive Directors approve the Credit. James D. Wolfensohn President by Shengman Zhang Washington D.C. April 24, 2002 21 ANNEX 1: KEY ECONOMIC INDICATORS TABLE 1 Bosnia and Herzegovina - Key Economic Indicators Actual Estimate Projected Indicator 1996 1997 1998 1999 2000 2001 2002 2003 2004 National accounts (as % of GDP) Gross domestic product' 100 100 100 100 100 100 100 100 100 Agriculture 20.5 16.9 15.3 13.8 12.4 .. Industry 25.7 25.3 26.7 25.2 26.3 .. Services 53.8 57.8 58.0 61.0 61.3 .. Total Consumption 117.2 104.2 100.9 113.0 110.1 106.7 102.9 100.6 97.9 Gross domestic fixed investment 34.6 35.6 32.2 20.6 20.7 20.5 20.6 19.7 19.5 Government investment .. .. .. 17.6 15.9 14.0 12.0 1 1.8 11.0 Private investment .. .. .. 3.0 4.8 6.5 8.6 7.9 8.5 Exports (GNFS)b 24.0 28.4 30.2 26.5 27.1 26.6 26.5 26.6 27.2 Imports (GNFS) 83.1 73.9 6S.1 60.1 57.9 53.3 49.9 46.9 44.6 Gross domestic savings -17.2 -4.2 -0.9 -13.0 -10.1 -6.7 -2.9 -.6 2.1 Gross national savings' 14.6 11.2 18.0 -0.8 0.1 2.3 5.2 6.6 7.8 Memorandum items Grossdomesticproduct 2741 3527 4169 4540 4394 4808 5232 5749 6303 (USS mrillion at current prices) GNPPpcrcapita(USS, AtlasmethOa) .. 1010 1140 1200 1310 1310 1330 1450 1600 Real annual growth rates (%. calculated from 19.. prices) Gross domestic product at market prices 79.2 36.6 10.2 10.0 5.9 6.0 6.0 6.0 6.0 Gross Domestic [ncome .. .. .. .. .. .. Real annual per capita growth rates (%, calculated from 19.. prices) Gross domestic product at market prices 73.1 32.3 6.8 6.8 4.8 5.0 5.0 5.1 7.5 Total consumption 56.1 17.7 3.5 6.8 3.5 1.4 1.2 2.5 4.3 Private consumption .. .. .. .. .. .. Balance of Payments (USS millions) Exports(GNFS) 658 1002 1260 1201 1192 1278 1386 1532 1712 Merchandise FOB 336 575 697 649 732 834 968 1123 1303 Imports (GNFS)b 2278 2606 2840 2728 2543 2588 2612 2696 2813 Merchandise FOB 1882 2333 2656 2502 2348 2346 2378 2457 2561 Resourccbalance -1620 *1604 -1580 -1527 -1351 -1310 -1227 -1164 -1101 Netcurrenttransfers 1094 772 461 284 217 172 169 176 178 Current account balance -748 -1060 -789 -971 -909 -875 -804 -750 -738 Net private foreign direct investment 0 0 100 90 150 200 200 200 250 Long-term loans (net) 514 19 251 -55 227 236 199 83 101 Official .. .. .. .. 247 203 181 143 90 Private .. .. .. .. -19 33 IS -60 11 Othercapital(net.u nl.enoms&ounissions) 477 1132 499 1198 575 498 452 516 408 Change in reserVesd -243 -91 -61 -262 -43 -60 -47 -48 -21 Memorandum items Resource balance (% of GDP) -59.1 -45.5 -37.9 -33.6 -30.7 -30.5 -26.9 -23.2 -20.0 Real annual growth rates ( .. prices) Merchandise exports (FOB) .. .. .. .. .. .. Primary .. .. .. .. .. Manufactures .. .. .. .. .. Merchandise imports (CIF) .. .. .. .. .. .. Continued 22 TABLE 2 Bosnia and Herzegovina - Key Economic Indicators (Continued) Actual Etsimale Pro"acted hInicator 1996 1997 199S IM99 2000 2001 2002 2003 2004 PubUc ftinance (as % of CDP at market prices) Currentr te 37.2 28.2 30.5 31.7 31.0 31.6 30. 30.2 29.8 Curren expenditurcs 41.0 26.9 31.0 32.6 32.2 31.4 30.0 28.6 27.4 Cunt account splus (+) or deficit(.) -3.9 1.3 40.5 -0.9 -1.2 0.2 0.6 1.6 2.4 Capital cxpenditure 0.6 18.2 16.2 16.5 14.7 14.0 12.0 I 1.8 11.6 Foreign financing 0.0 16.9 16.S 17A 16.1 13.8 ll.4 10.2 9.2 Meontary Indicators M2IGDP 18.8 19.3 21.1 26.0 27.3 28.2 29.2 30.1 31.1 GrowthofM2( ) 96.2 52.0 31.3 39.9 16.1 14.2 12.3 13.4 13.2 Privacesectorcreditgrmwthl 191.6 119A 102.3 -229.6 198.6 312.1 77.2 103.2 10.5 total cedit growth (%) Price Indees( - -100) Merchandise export price ine .. .. _ . .. . . . Merchandise import price index .. .. _ .. .. Mac di tmnm of trade index .. .. .. .. .. Real exchag rate (USSILCU)t. . _ . . . . . Real interm ates Cauusmrprke Index (%change) 7.7 13.6 1.0 3.2 5A 5.0 3.6 3.6 3.3 GDP dator (% change) -14.0 8.5 S8 3.1 4.6 5.3 2.7 3.7 3.7 a. GDP at b. IGNFS, denotes goods and non1ctor services." c. nCludes net unrequited tnfas excilding official capital grants. d. Includes use of lMF resourcs *. Consolidated cetal govenmict. t. LCUI drenotes loal currency units." An increase in USS1LCU denote appreciation. 23 ANNEX 2 TIMETABLE OF KEY PROCESSING EVENTS 1. Preparation mission: March 5, 2001 2. Pre-appraisal mission: September 10, 2001 3. Appraisal mission: February 25, 2002 4. Negotiations: April 03, 2002 5. Planned Board presentation: May 21, 2002 6. Planned date of effectiveness: August 19, 2002 7. Expected program completion: December 31, 2003 24 ANNEX 3: LETTER OF DEVELOPMENT POLICY Business Environment Adjustment Credit to Bosnia and Herzegovina April 9, 2002 Mr. James D. Wolfensohn President World Bank 1818 H Street, NW Washington, DC 20433 LETTER OF DEVELOPMENT POLICY Dear Mr. Wolfensohn: As you are aware, Bosnia and Herzegovina (BH) has experienced strong economic recovery since the signing of the Dayton Peace Agreement in December 1995. Much of this recovery-reflected in average GDP growth of 29 percent in real terms during 1996-2000--came from large inflows of concessional funds from the Priority Reconstruction and Recovery Program (PRRP), which was successful in helping the country to rebuild its basic infrastructure and to restart economic activity. Macroeconomic stabilization is now by and large intact. We successfully concluded an IMF Stand by Arrangement (SBA) in May 2001, and a letter of intent for a new SBA was signed on March 27, 2002. Unemployment has halved from its high of nearly 80 percent at the end of the war. Real per capita consumption has increased significantly for most households. Inflation has fallen progressively, and is currently running at an annual rate of 5 percent. The strong economic recovery has allowed post-war output to more than double, from US$1,867 million in 1995 to US$4,372 million in 2000. However, we are aware that the prospect for entering a phase of self-sustained growth will require successful and accelerated implementation of economic and institutional reforms. In this respect, we have taken some important steps that contribute to improving the investment climate for private sector growth. Reforms are ongoing in areas of: * Accelerating privatization to eliminate the unfair competition of privileged state-owned firms and to free up resources for use by the private sector * Strengthening the banking sector to build capacity of financial intermediaries to support private sector growth * Lightening a burdensome tax regime to motivate companies to return from the informal to the formal sector 25 * Liberalizing trade, modernizing customs administration and strengthening competition policy to improve the competitive environment for the private sector * Improving property rights and access to land create the foundation for an active land market and productive use of land * Fighting corruption and increasing the independence and capacity of the judiciary. Among the most successful economic achievements over the past few years has been the establishment of the Central Bank, introduction and widespread acceptance of the Konvertible Marka (KM) and, just last year, elimination of the old Yugoslav-era payment bureaus and transfer of clearing functions to commercial banks. BH was the first in the region to achieve this difficult task, and both banks and businesses are the beneficiaries. Dramatic improvements in the banking sector have occurred in recent months, with 80 percent of banking sector assets now controlled by privately owned banks and more than 60 percent now in foreign-owned banks. The conversion of the Deutsche Mark to the Euro fueled an "explosion" in consumer deposits, which doubled to KM 1.3 billion during the quarter ended December 31, 2001. The introduction of deposit insurance, soon to be moved to the state level, has boosted confidence in the banking sector and participating banks are the largest beneficiaries of these deposits. As BH continues in the transition from recovery and reconstruction to economic growth and sustainability, it has become clear to us that we still have a difficult road ahead. Already, external debt service requirements are growing at a faster pace than public revenues, at the same time that concessional aid flows are diminishing. Despite our best efforts to attract foreign investment, which we view as essential to fill the gap and to bring much needed technology and management expertise, we continue to lag behind our neighbors. In 2000, foreign investment was only 3.4 percent of GDP. We wanted to know why BH is not an attractive location for investment and what we could do about it. We commissioned the Foreign Investment Advisory Service (FIAS) to follow its previous work with the Foreign Investment Promotion Agency (FIPA) and help in drafting our FDI laws by carrying out a study of the Commercial Legal Framework and Administrative Barriers to Investment in BH. The FIAS study confirmed much of what has been clear to businesses here--that despite improvements, investors continue to face a difficult business environment with: 26 * Absence of a seamless, transparent and predictable legal and regulatory framework that proves to be a major impediment to setting up and operating a business. * Inconsistent and unclear business and administrative regulations and procedures opens the door to abuse of power at various levels of government-which is compounded by the absence of effective and independent appeals mechanisms-significantly raises the cost of doing business. * The lack of effective laws, regulations and mechanisms for securing and enforcing collateral severely restricts availability of much needed working and investment capital from banks. * Courts are weak, deficient, and, in many instances, subject to political direction and corruption causing long delays in the resolution of commercial disputes. * The 14-step business registration process is overloaded with unnecessary but mandatory approvals resulting in a sequential process that can take months to complete and is yet another reason for perpetuation of the gray economy. * Once registered, businesses face a multitude of inspections from numerous inspectorates with unclear and often overlapping mandates, leading to excessive administrative costs for compliance. With the assistance of FIAS, we consulted with the private sector, NGOs and other stakeholders to help us prioritize actions that would have significant impact over the next two years for improving the business environment and attracting private investment-both foreign and domestic. This process became an important part of our deliberations and preparation for the Interim Poverty Reduction Strategy Paper, which envisions growth of the private sector as one of the key contributing factors to the alleviation of poverty in BH. Business Environment Reforms On the basis of these efforts, we have entered into a new reform program to improve the business environment. Objectives of the reform program are to reduce those administrative and regulatory barriers that would have the most critical near-term impact on the three phases of business development: * Improving business entry through streamlined and transparent countrywide approach to business registration and licensing and strengthened legal framework and capacity for attracting foreign investment * Streamlining the environment for business operation by reducing companies' administrative and regulatory compliance costs through rationalization of inspections and regulations, strengthening of judicial and extra-judicial capacity to resolve commercial disputes; improving enforcement of secured transactions; and leveling the playing field for private sector participation in public procurement * Facilitating business exit through improved bankruptcy and liquidation systems. Underlying these objectives is the need to strengthen the consultative capacity between the public and private sectors to promote policies and legislation that are business- friendly. 27 While the proposed credit would have significant short-term results in improving the business environment and increasing the momentum, we expect that full impact of reforms of administrative and regulatory barriers to investment will be longer term. The key is to initiate critical changes that lead to strong momentum toward a self-sustaining process of improving the investment climate. We expect that the emerging private sector will find its voice and be maj or players in pushing priority reforms in the future, as we work in partnership with them to improve the investment climate. Business Entry When compared with other countries in Central and Eastern Europe as well as in the European Union, efficiency of the business registration process in BH ranks at the bottom. Although certain courts have taken steps to streamline the processes connected with the registration of a company and to make the process more transparent, we know that this type of piecemeal reform is insufficient. Therefore, we intend to creating common streamlined business registration and licensing procedures and a single registry countrywide. Changes would include introducing a single business registration form and eliminating superfluous forms, contact points and approvals; simplifying and increasing the transparency of the process; reducing the number of events that require re-registration; enforcing the "deemed approved" system, as allowed in existing laws, when a Governmental body does not meet a required deadline; and using private sector professionals and lower level court personnel to assist judges in the administrative tasks of business registration. The business registration process could be re-engineered by summer 2002 and new system designed and ready for pilot testing by yearend 2002. Certain laws, such as Laws on Entry into the Court Register and Company laws, would require change to support the new system. The company laws regulate all aspects of corporate formation in BH. The FIAS study indicates that it is essential that these laws incorporate the best practices of business organization and corporate governance and that they be mutually consistent in order to create a consistent and harmonized regime for business in BH. It is our intention, therefore, to modernize and harnonize the company laws of both Entities and to bring them in line with EU standards. We expect to see results of an improved process even sooner and will use independent surveys to measure the reduction of time for registering a business. A baseline survey has been conducted against which we set measurable, verifiable indicators. The full survey will be conducted every 18 months; targeted surveys to measure progress against the indicators will be carried out every six months. Results of the surveys will be publicized. Simplifying the business registration process will be an important element in attracting foreign investors. More important, however, will be assurance that their rights are protected and that they are treated equally with domestic investors. Therefore, both Entities have harmonized new Foreign Investment Laws with the State Law on Foreign Investment Policy and are committed to implementing these laws. In order to promote and facilitate foreign investment 28 across BH, the Foreign Investment Promotion Agency (FIPA) will be strengthened. Changes to its founding decree and statute that will help to de-politicize the organization and assure that the new Steering Board has majority of representatives from private domestic and foreign investors. The State will allocate adequate funding to ensure that FIPA can operate efficiently across BH with representative offices staffed and operating in both Entities. FIPA will build its capacity to represent local investment opportunities by creating strong links with progressive local governments. The agency will increase visibility of BH by carrying out a public relations campaign, including promotion of the Government's action plan to improve the business environment for the benefit of private investors. We believe that the more transparent we make our plans and achievements, the more attractive an environment we will be for new investors. Business Operations The FIAS study reports that once investors have surmounted the administrative maze to successfully begin operations, they are then faced with complying with a multitude of regulations that are often inconsistent and outdated, with massive reporting requirements, and with inspections by numerous inspectorates with unclear and often overlapping mandates. This was noted by virtually all businesses as a top complaint and cost of doing business in BH. Bosnia and Herzegovina is not alone. The European Commission, recognizing that a difficult regulatory environment can discourage business activity, has recommended that the EU Member States review their regulatory environments with a view toward streamlining. We believe that this is one area where we can make significant near-term changes that will dramatically reduce the costs of doing business. We will start with an inventory of legal-- and extra-legal--inspectorates at all levels of government as a first step toward minimizing redundancies. The activities of the inspectorates will be coordinated, eliminating duplication and overlap, and initiatives for joint training and information sharing will be implemented; the mandate of each inspectorate, authority of inspectors and the process for appealing inspectors' decisions will be clarified and publicized; rational, planned inspection schedules with appropriate notification to the business will be initiated; standard inspection forms and guidelines for, and review of, penalties imposed by inspectors will be established; a Code of Conduct for all Government employees will be developed; time limits for different inspection activities and performance standards for inspectors will be set, against which performance will be monitored; and regulations will be reviewed and rationalized and those that are deemed outdated or unnecessary will be repealed. Because businesses report that inspections and regulations are among the top constraints to doing business in BH, and because we think we can make dramatic improvements in a short horizon, we will measure progress against the average number of inspector days spent on site in business premises by those inspectorates that have mandates across all businesses: Market, Labor, Financial Police and Revenue (Tax) Administration. And we will minimize the impact on 29 business operations by setting targets for the average time spent on-site by these four inspectorates during a year. Another area that severely limits the availability of financing to grow a business is the weak system of securing and enforcing creditors' rights in collateral. We intend to improving access to capital by protecting creditors' rights in secured transactions through adoption of a satisfactory Law on Pledges on Movables and Shares in the Federation; creating a central registry of pledges on movables, and increasing capacity of judges, clerks, lawyers and banks to implement the new system. It is expected that the new system could be ready for to be pilot tested in spring 2003. In order to improving enforcement and commercial dispute resolution we will support development of altemative dispute resolution mechanisms and use progressive courts to pilot specialized commercial sections of the court with jurisdiction over business registration, collateral registration and enforcement of secured transactions, and bankruptcy and liquidation proceedings. Such specialization would be combined with selection, qualification and training programs for commercial judges and expert associates. Weak and disparate public procurement legislation and practice limits the opportunity for private sector participation in public tenders, impedes competition and creates rent-seeking opportunities. While the RS recently enacted a Law on Public Procurement, both the law and its implementation need to be strengthened to eliminate potential for abuse (e.g., reducing procurements in small-value lots to avoid open bidding; short bidding periods to favor preferred bidders; excessive public official discretion to award contracts; inadequate advertising requirements that limit competition). In the Federation, the enforceability of public procurement rules is severely weak because they are enacted by decree rather than law and that there is little awareness of the decree. No public procurement legislation exists at the State level. We recognize that harmonized procurement legislation at all levels of public institutions is important to promoting competition and strengthening of a single economic space in BH. Therefore, we intend to adopt strong, harmonized public procurement legislation at all levels of government for all public institutions. This is a vital part of our anti-corruption program and an important element of the EU Roadmap. We are aware that regular consultation between the public and private sector in the formulation of laws, regulations and policies affecting business, are essential to creating an effective business environment. Until now, we have relied heavily on the Chambers of Commerce as the focal point of our consultations, but the private sector has clearly stated that it is not adequately represented by the Chambers and wants to have a choice of representation. Therefore, both Entities will pass legislation to eliminate the mandatory membership fees for the Chamber and Government at State and Entity levels will institute a formal mechanism for regular consultation with the private sector. In order to assure that our consultations are successful and 30 sustainable for the long-term, we will launch a series of workshops with the dual aim of educating and advocating change to the business environment. Business Exit A well-functioning system of bankruptcy and liquidation is an essential element of a market economy. Bankruptcy serves many important functions: it relieves debtors of the burden of debts; it frees up non- or under-performing assets to be channeled into more efficient uses; it encourages entrepreneurial activity by facilitating risk-taking behavior and it promotes lending by preventing debtors from delaying and squandering resources and allowing creditors to recover some portion of debts owed. As a transition economy, the bankruptcy and liquidation system is extremely important for BH. It will facilitate exit of numerous loss-making state-owned enterprises that will not find buyers in the privatization process and which must make way for new, private businesses. In 1998, the Federation adopted a modem bankruptcy law, drafted with international assistance. Former Yugoslav bankruptcy legislation is still in effect in the RS. We plan to build upon lessons learned from years of transition in the region that indicate that it is equally important to balance encouragement of new business activity with the discipline to remove old, loss-making state-owned companies. It is also important that private businesses have clear possibility of exit that allows productive parts of the business to survive. Therefore, we plan to modernize bankruptcy and liquidation laws and procedures so they are consistent with EU standards; reduce high up-front fees needed to initiate bankruptcy proceedings; and initiate the creation of a better system through which capable trustees, liquidators and specialized judges are trained, certified and engaged to implement modem exit procedures for enterprises. New bankruptcy legislation could be in place by fall 2002. Lastly, we have established a high-level cross-Governmental Coordination Board for Economic Transition and European Integration to lead to the country's overall economic reform agenda, including the business environment reform program. More specific responsibility for implementation of the reform rests with the State Minister of Foreign Trade and Economic Relations (MIFTER) in coordination with the Entity Prime Ministers. Each Entity has appointed a "champion" in the Prime Minister's cabinet to oversee implementation of the business environment reforms at the Entity level. A bilateral donor has committed financial and technical assistance to State and Entities to assure that we have access to local and intemational experts as needed to move the agenda forward. The donor also has committed to fund activities of FIAS to support our monitoring activities related to implementation of surveys and self-assessment tools and to help us build capacity for public-private sector dialogue. As noted before, we plan to publicize the results of the surveys to promote transparency, accountability and further progress of the reforms. 31 We hope that the above elaboration of our program for business environment reform has clearly expressed our commitment. As noted earlier, improvement of the business environment is an integral part of our Interim Poverty Reduction Strategy Paper, which envisions growth of the private sector as one of the key contributing factors to the alleviation of poverty in BH. The proposed BAC agenda will firmly launch the reform program and build momentum that can be sustained by a stronger private sector in the medium term. The continued contribution of the World Bank and the rest of the International Community is an essential part of this challenging task. ,,-, ,2S" 5> t_,*, |Minister v , - ~: > ',9im4s,6Tiegn Trade and Economic Relations ; '""'. .;r ...' 8,Sriand Herzegovula DCR 'JOO ~ ~ ~ ~~~~~~~1 Alija Behi Mid M la F002fiono3 32 AINI 'NIA 4 ,~~~ ~~~ flA T £^L ERAIO ITAN HE Ifl PS K Ennwortn. enrlh3 p~%*Y tditJ~flI1 ND O..-* .~~Ibi .-DE TTIO RANCH K ~~~~~~~~~~~~~~~~~~~~~ - ~~~~~~~~~~~~~~~~~~~SLare and Ennti (Ge,ernnmenL axe ru lI .-\ c,r,rumtid to the promotio, c,l i rirgn 1^ |. direct r.%e.rm-.cnt -.d to proiecung rhc i*- ->P ; Enuties h3ve adopted Fdigre inieit n rdto protcctang the I:, Invsr em- L n enU , L atsfictotr to rnte rqabk*h buDmnsses u. BH Fhe Entit Association and fuIl hrrnonxzed Srrer.gthen FDI Leg-al rrimework wdii uimplement Ere Sute he S-on ^;. ,y, ~~~~~~~~~~~~wnh rne Smie Liv ,:,r P.: lc-, oi mn ohvOc * 'Ira fl~ ~ ~ ~~~~~~~~~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~F:rcp r~f 'J. <,! FDi treaTrdlned regEsirauunr process is e§tablished, Enuti Foreign Inietnent Lius i lU eliminrate any exr-a teps for foreign imesaton, which currendt i-ste to ______________________________ _r 1lregister with Entity mnu rcmes . ,. I Thle CouncT e oo f Minsters (StateJ ir commnicped tc a de-polncized Fl PA ind en:.ureadequate mgtU interue FdI ing 1cand tor b Ld .i. Lin -: brenFP andlocalState Concl oi uziers has _. and Jnvur% pubh~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~efctrr capenpugtion Lncpremse iarnes ofa BaHn od ord the re-nnent;bins t-1 $ adopted amnendmencs i, the lnc*nmer re program f . j;8, | Increase ropenoonir cap-3ry oi dh.e Decsion on Foundir.- of Fl PA, IFIPA represer.EaDC ,iffice 1: mufed FIPA represenutive ,ffice L *tafTed FhIPA bud peusoe 3n d: .reach priogme to un 1 |FregnIveamn Pomon gn sf3ctory to the . nand ir0nS m dhe Fedenomon ind operating Lr. Republilu '~rpu ma n-cipalloe, and Canton;i FederSitona Xl,0 t'FI PA5) allocared adeq3te ar.dirng ro unc re iz e FD I av% arenuss Etid re btn dd -'. .,; ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~LmLn.kp,g beme en FIPAt and lc:Hx3 ; i ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~gznvenmer, FlPA vwdl carr n, i pbrocis campugn to boncrth E itire n ll . ) e Pilot of the .:.inei RegHHrn serve BH ired e the reiG inrient'. bustot btl5 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~enm-tortmenr reform progmrin .gtuii Pilot ot tl-e Eltaines Registry dome budndfome ind ccdv prxesr ic.r S l>, tsur.eSs ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~reigzarLnUon v6di be ,iyruficanuiv 9 m~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~rphfied ior all c.ompartt-. TFhe State t;ti ,~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~nd Enoite/si gree Lhat 3 SUr. UrJILned " -. systt'n, en'bodyrne common r., t^ v ll .wW5v~ ~~~~~~~~~~~~~~~~~~~~~~~~~Po cu> if Ehe BusLnez: Repi un Pilot .M d.e BLines: Rei.L;" dmse ic and I m ortrteig Lner. tosnrreli '.4 ,-stw;ihoenroacmr n vmebozdving c,mrr.:,n ;epirnte proces:wncrbeulshc Entities have fomiulv adopted the procedures. comm.or. iomrnim and ad cm: sente proeswlr be eibrshed StresTnitne and esubltsh er-aetparent corrcp oihairmonLzrd pr--cedurt; ungle J :itatve hr been tested i pioLedureh.. commor. -teen, and i ior foreign tnverce:s and InV ebera step;. counrn-vwde approach to bwiLnes 3nd single ditabue for tuines, .elected cc,urr in the Federation, inledatbs be re-red i for tnrer vestorr will be eLimi ate regi.traeaon registi-ation and pLin tot full implernerrarion has s~~eleccted courts in Republiks ~mpU. Entities % ll adopt ha-rmniuzed L; i n i ;.:regpsLnnon reppLsonoon ind pLLr. io-.r full implementatio h-i a. lr 0 1urpscu.- i Eu-Ll h U>u e;E,a-Jl ;L.. been adopted by the Federjation ar-Jd pLan to: full imrple-nenution h-ias Enus inTC- the Coun Rkegister. satisfactory been idopred by Repubirka Srp-.skna to the X-sctnuon and fuliv suppo:lrting the re-rdimned busuines registrboun .i. t pr,cess Nec essary suppornting lgtplspO-n and bsl ar s wall be adopted without delay tW cnn:rc qu.ick tnplemernatt.n Entities I all * )Jd.:.pt h ±rnonized Lu,! Jr I ' '. Enterprie .x iact.:rr t: the BOSNIA AND HERZEGOVINA: Business Environment Adjustment Credit 33 Proposed Prog-ram of Policy Reforms Page 1 of 4 ANNEX 4 X P-OCRAS&M : | TRANCHE; ! ; ;SECONDC LETTER OFIEVELOPMENT -TRANCRE" :~~~~~RLEPUBLIKA SRPSKA A. A~~~~~~~~~~~~~~~~~~~~~~~~(or) FEDERATION TRANCI-rE T&~~H *POLIY Entities have conducted an The Federation reduces: (a) the Republika Srpska reduces: (a) the independent baseline survey of average number of days required to average number of days required to i Ensure effectiveness of the business administrative and regulatory costs comp ete e registration process complete the registration process Results wiDl be monitored every six registration system of business. an tee numses to commence for enterprises to commence months through an independent survey ' registration system ~~~~~~~~~~~~~~~oper-ations from 80 days to 30 days; operations from 31 to 23; and (b) and findings will be publicized. and (b) the number of steps the number of seeps required to required to register an enterprise to register an enterprise to 7 or less. 7 or less. Entities wiDl ensure that a streamlined and effective pledge registry is implemented with training for judges, clerks and banks. Necessary supporting legislation and by-laws will be adopted without delay. In parallel with Entities have adopted the Law on establishing the pledge and business Registered Pledges on Movables, Pilot of the Pledge Registry system Pilot of the Pledge Registry system registries, the Entities will initiate a pilot satisfactory to the Association, embodying com on procedures, embodying com on procedures, program to estabish speciazed sections ebdi c.common forms, single database and common fos, single database andon of comeral matters Oudge,cleks, on resluctergionaof commrtsa mhatterfocs, g-,i cmpredtor accesstollate al by protecang have formaDy adopted the tcrained participants (Judges, clerks, traimned participants (judges, clerks, including contract disputes, creditors' Improve access to capital by protecting ontep harmallyedoptedute banks) has been tested in selected banks) has been tested in selected rights, bankruptcy and liquidation, concepi of harmnonized procedurescorsiReuM Spkaana and sngledataase fr reistrtion courts in the Federation and a plan cut nRpbiaSpk n including training for judges, clerks and fand sngle database fog regnstvateon for full implementation has been plan for ful implementation has lud crating a ces,fcan t of pledges on movables. adopted by the Federation. been adopted by Republika Srpska. lrsgan creatig A cerication program for judges. As well, authorities will encourage businesses to use Altemate Dispute Resolution as an optional settlement method, in order to speed up the process and reduce the burden on the courts, thus freeing them to handle more complex miatters. State and Entity Govemments wiD adopt tr"W ....,State and Entities have drafted an and implement strong harmonized public .tw, ~~~~~~~~~anti-corruption action plan procurement legislation for all public . Level dhe playing field for pnvate incororatng public procurement institutions. This is a vital part of the X sector parecipat in public tenders and initiated the public and Govemment's anti-corruption campaign Level pathcplationg il o rvtn consutiationth pro hcs and is crucial to a fair, transparent and setrpriiaini ufc edr oslainpoes competitive environment for private sector development. It is also a condition _____ ______________________________of________________dhe_________ __________E U________________R oadm ap._____________________ ofo theh E UU R ooa m ap BOSNIA AND HERZEGOVINA: Business Environment Adjustment Credit 34 Proposed Program of Policy Reforms Paze 2 of 4 ANNEX 4 |iLtiinaLia burden on bwsneb ciLued b) The Fedlertion etatbh,he..3 Republik.; 'TtC etaEhshe, ' st%i eUn2 dipchn h - . . ~~~~~~~~~~~~~~~~~~~~~~~~bwine... rLp-ecu,)n iymtenr, buimcs; Ln z -; .msc:lv em..n dupecuon; ;Lhcm u-hne ecorrunirted rc*. Lseirnhrung - r- _ secepsble :; the .\SI cYIIOn. to acceprabl to tphe AbLc.Cteo on. ') I he npe r: prcth runcn.;r sl ol be Enti.ies have eluT.iaated iLn%ertion re',e-a ir.d rind lne the snsen.rv. remheei snod ra;onahze the raonahzed, ipector. trained, a Code of .Ennncs ha%e elirywriateci ri-Lnard.ite o1 inspecronrea operanng rmnd,te, -,I ripectorite- .-periatm1 Cridupc adoped businest overlipping 3uLhonues Fninacil it Enun nred :ub-Enurv leve;. at Eniurv and ub- Enntn level. h ,.d bee] - Reduce regulriore complnce burden Police end Re-ence Tat clantied and publiczed the clnhe.d ind pobiiczed the goEnesr,eOr sail on bu;ne AdmntiLrnu,un mandaute ol Lhe inspectorates end mandites or the inspectcrirte, nd -stult a iti pn' are bueu se to i-.pecton.. ii'irinuted rnional. inspectors. enztiuitr! rational. pno.-ntizc al-itch regulstroca tems plane impection scheduler, prE cl anned hdtepee-ctn costl Cherl burdcn.ome reguldtions fomts and pudelis. nd £e- ndironri ind oderLe and Well 4 anged or elined !uLndird fooTL, ~~~nd gwdehnes. ind i-~~he Entities aidi uork uaith C artot-s * ~~~~~~~~~~~~~~~~~~~~~~~~~iiopled3 nect-siin smendmenu to i. dopud.: nece, irv irnendurnenn to iFdrhon and ntluesbz toI url e-Le xa,nz law;. ind bV l1u . . 13US ind bv bc;Fden.n imuncpl ;zrve and rsrionilizc requirements tor perrmits licensing iendoher reiruJidnns. uenece-;san reg.itions %di be repealed Ennties hi%e c ,nJucted an. The Federeumn reduce. the sert-gec Republik SrpsLa reduces ti-e independent bLaeirine neN ot number ft or-sate Ln:pecror dayv a -erage number .:1 *nste irnpectOr Results ' ad be monsied ere six Entsite effecnsenes; of iLnpecuon adn-aruunte and reist.:r elr.c:sr-. per inspected bu;ine.s per annut-, dies per inspecied brssne;: Pei Re-nih t. LLI e indepede, eunlC5 s91 iystems of>1 bu iness treinrn 1tl dI t d i; r 1 t e 3annumr fr.rc 2h dv; 1 ,.. I" div: i i r n ftndirjg wil11 be pubocut.I Market, Lab-ir, Fna-ncsi Police ind ulirket Libor. Fin-ncial P.-sice end Resenuc \Ndmirusrtaions Re%enue \dmanuisr3tioni BOSNIA AND HERZEGOVINA: Business Environment Adjustment Credit Proposed Program of Policy Reforms Page 3 of 4 35 ANNEX 4 - -- . . |' . r . .-.E 9 - -I *-C . -. :-;;~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~- 7.E0 . ._ _ f.-. R. S 4 j; *. ~~~~~~Stair and Entites h.a.Ce¶taCbLahed a State ard Entities are c.:mrmined t;. ni J.- t-)rrru mechain,m. saoalicr:,n .;tc 'tv ipro;vingri-c egi9lau'c Irarnenark tc ti ?tzfj .tAs:cianor. fo:r regular c:.rvulraur-,s laciliLite the iSCCaticn. n ' pc-t Fx3e 0; ° it h pm are sector to- conaider thenr businesie: and merribership mn the .,t J4 .; ie-u in the tc.miuluion ci policies md C:hambEers CF.Dmmerce LOM be NTde " '-i , . lepalir ion afI'e;tnng busmn-as Fedtr3o ad-rped3 arrendnreinr ReubWtka Srsk 3d e t oluntars Stair and Entnnes v.ill [2 i j2 tnance the co:nrultanse role the La*.n; 3nk,.. 3mnV et u- telawl actively consl'I with pm are secorl irs arm ita O pneaie sector in tomxnTuiri *:2 (C.:nrec tuic- :he (CF.ben ol I ;.mec anar d tni ranapaenri A^ if t: seek the RI jJ, public policies and conmmercial State has idopited th,e U-A o n A , i ~iu. eliminat rerandatn:r-s sasfactu.rs' to tht s cl3c ~urC. s * ial atbusiness pnor to efflecting malor ri. si.. liws' *\ssociem3onl and Fo:undtionsn .t BH. - merabrsiup elimiunate nr3ndaton membership theirg in:.pleresr Ta1 fura-ici buildeun Xt4t-it. sautacr.:-rv lathe %.sacicsiaicn alloirng c hngesE d *ntities ireI rIialetmnIdE '4 ' usoetoro to. coorperate actresa BH cchn"Pirtante capacar't of both pubic and x: ti''ate omdw e d ualLam ofu ucin andheld It 4 f2~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~avcatLin chng- t he busijc- O nesse lCg ba,in modemn banjupinad liquidanton on a ffecung b-sLn- hmt unrngof amarketrec:nomy In I'- t3 transition nwvnchen Laie -o:iv ned co .:mpaiesrr !. . - Entitues hat e es tabitsh rd aaoika . hr.g Th' F ederani-lr. aJ. *pLusruer*re ned Rubpeik hendmnEi id-e:-c i rs pled are undeLgng InvState zu r a rn d Ennn tIe :i - -t * hinanrm,ue and ,trennr.er . gt -up to daitre3 hni*:rned La orbukep and ti.nuth:ed Li * :.n B43rinnpi- tha ai- ndr 1bl ru d,r-c [uer n.s . . "lzJr t mnka-nupicy arid liquidrinn bankruptc, 1la-a tistaicr*r r*,. thc \:- :o:au-r ar.iL s cCn.;at1cin su e stablish a c Itreera ' tirm--.ni.ed pubfic policies aLnd C0MMe`IClAI Lhe L,- .-. t- himb,, .:,I' imendmenu I.m. Lhe I-aws ' aveliLn on.innin %.-ihhpn%tate mect-ut. more State haz )J-)pted die La-, on Conuncme. 'ALlSf3Ctl)r LhC orgaudg Isd-er and r Itrsepe A. p A r-net-r * r* tiar a { 1|ur, ird ccmn) Aht kes plmeera *dc F_ !.~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~ ~~~~~~~~~~~~~~~~~~~~~~~e . cie. :pt-i m.i Is unre. Irutmared BOSNIA AND HERZEGOVINA: Business Environment Adjustment Credit Proposed ProCpram of Policy Reforms Page 4 of 4 36 ANNEX 5 BOSNIA AND HERZEGOVINA: BUSINESS ENVIRONMENT ADJUSTMENT CREDIT (BAC) Key Component Flows with Responsibility/Technical Assistance Mapping ., . B USI N ESS i ADMINI STRATIVE! ' | - I NUIMPLEMENTING MONITORIN ENVIRONMtENT- , LEGAL/REGULATORV I RESPONSmIUf'r( J TECHNICAL TASlS I AUTHORIn' INDICATORS . G (TA) (7AJ Strengthen FDI Legal Adoption of Entity FoIeig,n i Franmeork and Increase Investment Laws fully . opeational capacity of the harmonized with State FDI law Entity Padiaments (FlA,S .. BA, Foreign Investment Adoption of amended derision EC) R BH, promote inward invesment, increase Entity Goverments I Promotion Agency on foundation of FIPA, allocates State: COM - MFIER awareness within and outside BH. (FLAS/EC) (FIPA) fundinag fConkd i Develop and test common procedures Entities/regional/ , Adoption of harmonized Laws Enity Industry Ministries and single database for business canronal courts Z~~~~~ t ~ ~ ~ ~ ~ Aonptsion andhaParliamentsw registration (DFID) Reduction in nuosber of days to on Enterptses and Paiatnt Entities/regional/ required to complete the State and Sbamlime and establish (G7Z) Strengthen capacity of Commercial cantonal courts registraion process for enterprses Entities: t' cn;' transparent countrywide sections in courts (gJC/DFI D/BilakmrlDonori to commence operations (BH METER and WAi aroah bue Adopton of to 5 average is 64 days) as measured by Entity - tegi Tra i rit aLawts o o onized independent survey of private Sec/SrIa)a amendents tL Entry Entities/regional/ b into Coutt Register to (GT/DrD . M t and buinsss and in of of s ( strelAmlined, ol EntityJustice Ministriesand Train judges, decksandayca acourtsarequiredstclerksreit lawyer aak bu sinens/rt h, ps ;nsuns sni~~~~~~~~~~~Prhrrn'Ptsf onDFD relobis rnd Lto i'rireLSrergithe...sp fCmerca rmoal coustines Z ;.;llater.l nprs bh~ueam e,(-v,J conywd (DFDIBlakis u.o;nrr.j5 approachI Entities/regional/ Deselop nd F esi Alcomon procedures cantonal courts and ingle dactabse for Registry of pledges (EBRD/USAID) c,n moo-able': ic. ral ri I Sa- Tran judLe': clerks, laTwye, bake Entities/regional! I mprc-e accets .c.cpirl Adoption of tUwn Regisered EniPrimn atnlcut -b, pacrecocng creditrsrs Pledge': on Mcacambles and Entiq Padaacr.okComeriaML(ICaruhtonl courts coltrlrghsSae Cwk4iu'Entities/regional! *O- La th.e playing field (ol , Ecourag a-er Altemnate Dispute cantonal tours CL ~ ~ ~ ~ ~~~~~~~~~~~~~~~~~IState Treat .l,n, u:tur mi' fi rm pen-ate sertcl \Adopronl ':tnrengrhenel I Prlauer.1 p>n-.lhsh ran o and tasparen of tState/Enties/Cantons taarmtrnnued La-as on Pabhc Emits Fnncpc-errioss at aulevlso . | parnoip:iaon m public PrILmrn end P,dk:rrcnu gofemeri (EC) I,S. wnder. a P,un,i 1 ' i | Federation: Govemment, Reduction in the average number F; x . ! Pederation C_.n.emrr,mnt Can:.nslseun:pector kRS:rGovernmerot ofn-ste inspector days per State and * Reduce regutv*~n lUnunalanng ci tswur.g a:sr.,rn: t--nicipritn Rkancn du,'e in: pectorare function RS oenetinspected business per~ annum for IEntities: Reouce regulbmrn Rkri,nn nng ;.l c%.:nury L prrr.n nr.unll Market, Labor, Financial Police MFTER and uc:rnphince burden on uregtli' framelork and repal ,S tF!iti R>n:niuc ieq.lwment forpemits, Federation: Government, and Revenue (rar) Administration Entity cmbu:pane nnrdnegulco! irm reulsrk an repeal S i.eme Ratnric edalementsfor prt cantons, municipalities as measured by independent survey Secretariats I t lRe'egadohe euain-~S: Government, of private businesses (BH average j(FLAS/SIDA) municipalities 21 days _____________________ _____________________________ (DFID/Bilalenol Donors) i 1dy) in l-. e pmiEr seci-:i m u tl..n:r.;iarendmer.t: ...... lna. i . ulsi puateb ri:i in AJ.:pn f h *r. c-t,er .-.i C.:-mdnre i Ennn IS: ernrr,tr:l . ir*.i F.-.rmaiŽ. J ec h nism for consuitation State COM and Entity I )err.au 4 pLic ic.:,''at rsn-,bJr -.i ro, ire Eis .treet -d Lrhc pri-are :ector and regular IGovernments . ,c.-lbe . and] ct ,Lom ierl I. elcrrin-ie mid: it . r, ,Prlirr -'l' i r : ai , n-going. jFLAS, SEED, GZ, SIDA),i I - m rnem be rship ,________________________________ __________nt G c m t rg n -Establish a comprehensie approach to ' Entity Govrrnrntr, rrgional an * ~, bankruptcy and liquidation, starting with and cantonal courts Ill_ l iirrr,-.r ,ze nd -pn.-.n :A irnFi:.-I n J Enimn 1t.,.kr-, Inc. -,. laws and beginning to build capaciy of fC7) Z v Irer.irthc, binkr.ptc, l-rn--c.ni;edL-a .r,tl.rkr.p'cs PF ideni: judges, lawyers and trustees. 'J1 i.13 a;rrp * .I i 5.Z.anc-r, Entities and regional/ M 1l: Strengthen capacity of Commercial i castonal courts sections in courts I i7JCTZ) 37 ANNEX 6 Bosnia and Herzegovina: Survey of Administrative and Regulatory Costs of Business SAMPLE METHODOLOGY A survey was conducted of 300 majority private firms throughout Bosnia and Herzegovina (BH) in order to assess the situation at the start of the Business Environment Adjustment Credit and to establish baseline indicators against which to set targets and measure results of the Government's efforts to streamline the process for registering a business and rationalizing inspections by Market, Labor, Financial Police and Revenue (Tax) Administration inspectors. The survey instrument, sample size and methodology were established in cooperation with FIAS to allow comparison with other countries in which FIAS has conducted the surveys. Abbreviated surveys to assess progress against the indicators established for tranche release under the BAC will be carried out every six months and the full survey will be conducted twice more at 18 month intervals to provide feedback to the Government and to the public regarding progress against the reform program. The methodology for the baseline survey and additional factors for future surveys follow. Baseline Survey The baseline survey sample followed three principle criteria: (1) sectoral composition representative of BH's distribution of enterprises between Manufacturing/Mining, Services and Commerce (including wholesale and retail trade) as indicated by relative contribution to GDP, (2) representative distribution of small, medium and large firms, subject to a minimum of 15 percent small and 30 percent large firms; and (3) multiple BH cities representative of the diversity of possible conditions for business operation. Sub-samples of 200 foreign and domestic firms in the Federation and 100 in Republika Srpska (RS) were selected. In each Entity, a panel of municipalities representing over 90 percent of total economic activity is contained within the sample. Eight sectors were included: (1) agriculture, hunting, forestry and fishing; (2) manufacturing and mining; (3) construction; (4) wholesale and retail trade; (5) catering trade; (6) transport, storage and communication; (7) financial intermediation; and (8) other services. Note that some sectors were merged for practical considerations, although some data presented below are disaggregated. Also, the manufacturing sector was overweighted by 10 percent to provide better insight into its further development as BH seeks to increase productive capacity and decrease the overall proportion of trade. The sample included 55 percent small, 15 percent medium and 30 percent large majority private enterprises, in accordance with EU definition of size (i.e., 0-9 employees=small; 10-50 employees=medium; greater than 50 employees=large). 38 Table 1: Baseline Survey Sample Distribution Si S2 S3 S5 S6 S7 S9 S4 hun .fict. Manufactur+Min Construction Wholesale and Catering trade Transport in . Other services hunt. for, fish, retail trade intermediat. S M L S M L S M L S M L S M L S M L S M L S M L BanjaLuka I 1 1 12 3 3 3 12 1 1 11 2 1 3 2 1 041 Priedor 1 3 1 1 1 3 1 1 1 2 1 __ _ Pmjavor I 1 2 1 3 Bijelina 113 11 2 1 1 4 1 1 1 DoboG I 1 2 2 1 4 11 1 Trebinj I I X 2 - S 8' S2 29rli, 53 7 ~ 42 Si 5i ' 56 8 7 6. S8 'i Bihac I I 2 I I 3 I I 1 113- TuzS a 1 5 2 2 I 1 6 1 2 2 1 2 2 128 rcnia1 12 2I - - 1 t Zenica 2 6 3 21 4 2 1 2 2 1 I Zavidovici 11 2 2 1 2 Bugojno 2 1 3 I Mostar 4 1 1 1 6 112 1 1 1 2 Sarajevo 1 1 9 6 10 123 14 4 6 1 4 221 2 6 52 13 SI ~~~S2 317- 4 S7 S6j0 S7 S 1 The sample was derived through simulation of the following criteria. Distribution between Entities. The ratio of firms selected within the two Entities is 2:1 (Federation, 200 : Republika Srpska, 100). This ratio is consistent with similar surveys conducted throughout BH and was derived on the basis of the following statistics from the RS and Federation statistics institutes: Table 2: BH Statistical Information _ __________________ _ |RS Federation Ratio Population (2000) 1.4 million 2.8 million 1: 1.9 GDP (KM in 2000) 2.6 billion 6.7 billion 1: 2.6 Per Capita GDP 1,793 KM 2,392 KM 1 1.3 Employees (06/2001) 221,326 406,185 1: 1.8 Distribution by Sector. The Entities' statistics institutes do not track contribution of private firms to GDP, the preferred criterion. Therefore, the sample considered the distribution of GDP by sector; distribution of private and majority private companies per sector; and number of employees in private and majority private firns per sector. Proposed sample distribution among the 300 subjects according to these criteria is detailed in the following three tables and aggregated in Table 6. 39 Table 3: GDP Distribution by Sector GDP structure Firms in Sample Sector _____________________________________________RS Federation RS Federation 1. Agriculture, hunting and forestry 24.0 8.8 24 18 2. Fishing 0.1 0.0 0 0 3. Mining 1.3 2.8 l 6 4. Manufacturing 10.4 _ _ 13.6 L 10 27 5. Electricity gas and water supply 9.5 7.4 9 15 6. Construction 6.7 5.6 7 11 7. Wholesale and retail trade, repair of motor vehicles, 7.6 10.6 8 21 7.motorcycles and personal and household goods 8. Catering trade 2.7 2.1 3 4 9. Transport, storage and communication 8.6 11.0 9 22 10. Financial intermediation 3.6 4.6 4_9 11. Real estate, renting and business activities 1.7 2.7 2 5 12. Public administration, defense compulsory social securityI.I 15.7 11 31 13. Education 5.5 6.7 6 13 14. Health and social welfare 5.4 5.9 5 12 15. Other community, social and personal service activities 1.9 2.4 _ _ 2 5 TOTAL 100% 100% I 100 200 Table 4: Sector Distribution by Share of Private or Majority Private Companies Sector Share of Private or Majority Private Firms in Sample Companies* RS Federation RS Federation I - Agriculture, hunting and forestry 2.9 1.7 3 3 2. Fishing 0.1 0.1 0 0 3. Mining 0.7 0.4 1 I 4. Manufacturing 19.1 14.4 19 29 5. Electricity gas and water supply 0.0 0.0 0 0 6. Construction 7.1 9.4 7 19 7. Wholesale and retail trade, repair of motor vehicles, 53.4 54.1 53 108 motorcycles and personal and household goods 8. Catering trade 1.5 2.7 2 5 9. Transport, storage and communication 7.6 8.4 8 17 10. Financial intermediation 0.5 0.3 I I 11. Real estate, renting and business activities 5.5 6.6 6 13 12. Public administration, defense compulsory social security 0.0 0.0 0 0 13. Education 0.2 0.5 0 14. Health and social welfare 0.2 0.1 0 0 15. Other conmmunity, social and personal service activities 1.1 1.2 1 2 TOTAL 100% 100% 100 200 *Note: In the absence of reliable data for proportion of GDP attributable to private sector, the distribution assumes 40 percent, except electricity, gas and water supply and public administration, defense and compulsory social security, which are all state controlled. This is in line with World Bank estimates. 40 Table 5: Sector Distribution by Share of Employment in Private Firms* Sector Employee Distribution Firms in Sample RS Federation RS Federation 1. Agriculture, hunting and forestry 0.4 2.4 0 5 2. Fishing 0.2 0.0 0 0 3. Mining 2.9 4.1 3 8 4. Manufacturing 17.1 25.3 17 51 5. Electricity gas and water supply 0.2 3.8 0 8 6. Construction 5.1 6.1 5 12 7. Wholesale and retail trade, repair of motor vehicles, 46.4 11.9 46 24 motorcycles and personal and household goods 8. Catering trade 12.7 3.6 13 7 9. Transport, storage and communication 6.5 7.4 6 15 10. Financial internediation 4.1 1.9 4 4 11. Real estate, renting and business activities 2.2 2.7 2 5 12. Public administration, defense compulsory social security 0.0 14.5 0 29 13. Education 0.0 7.5 0 15 14. Health and social welfare 1.8 6.3 2 13 15. Other community, social and personal service activities 0.4 2.3 0 5 TOTAL 100% 100% 100 200 *Note: In the absence of reliable data for proportion of GDP attributable to private sector, the distribution assumes 40 percent, except electricity, gas and water supply and public administration, defense and compulsory social security, which are all state controlled. This is in line with World Bank estimates. Table 6: Final Sector Distribution in Sample Firms in Sample Sector RS Federation Si Agriculture, hunting. forestry and fishing 8 8 S2 Manufacturing+mnining 29 (19) 62 (42) S3 Construction 7 17 S4 Wholesale and retail trade 32 (42) 53 (73) S5 Catering trade 5 7 S6 Transport, storage and conmunication 8 20 S7 Financial intermediation 6 14 S8 Other services 5 19 TOTAL 100 200 Note: Figures in parentheses represent the sample distribution before overweighting the manufacturing sector by 10 percent as agreed between the World Bank, FIAS and the survey firm Distribution by Size. Statistics for size of frms are not available from the statistics institutes. Therefore, an estimate of the distribution by size of firm is extrapolated from a year 2000 survey of nearly 8,000 private enterprises in the Republika Srpska, which showed distribution of 83 percent small, 10 percent medium and 7 percent large. It is fair to assume that similar distribution exists in the Federation due to status of business conditions, privatization and economy. 41 However, these numbers should be adjusted to accommodate the known practice of firms to understate employment to avoid taxes and social contributions. Thus a more realistic distribution by size of private companies within the country is 70/20/10. In accordance with FLAS' request, the final sample, therefore, overweights large companies (i.e., 30 percent vs. 10 percent) and underweights small companies (i.e., 55 percent vs. 70 percent). Table 7: Final Distribution by Size Firt size Sahnple structure (%) RS Federation 1i. r nall 55.0 55 110 2. Medium 15.0 1 5 30 3. Large 30.0 30 60 TOTAL 100.0 100 200 Distribution by Foreign Capital. Of 13,027 enterpn'ses in the RS, 80 percent are domestic, 2.9 percent foreign and 2.3 percent mixed foreign and domestic ownership. Assurning similar distribution of the Federation, the S percent of the firrns in the sample have foreign capital (i.e., 5 companies in the RS; 10 in the Federation). Distribution by Location. Due to lack of information regarding level of development of regions/cantons and municipalities, sample distribution by location was determined on the basis of population. Table 8: RS Regional Distribution (2000) Region % of Population 1. Banja Luka 44.4 2. Bijeljina 22.2 3. Doboj 17.2 4. Srpsko Sarajevo 8.8 5. Trebinje 7.4 TOTAL 100% Table 9: RS Distribution by Municipality in Final Sample Municipality Population % of Total Population Structure in sarnple Number of firms 1. Banja Luka 220,466 15.0 37.9 38 2. Prijedor 95,502 6.5 16.4 16 3. Pmjavor 48,889 3.3 8.4 8 4. Bijeljina 107,040 7.3 18.4 18 5. Doboj 78,537 5.3 13.5 14 6. Trebinje 30,673 2.1 5.3 6 TOTAL 581,107 39.5% 100% 100 Three regions cover 83.3 percent of the population. In addition to these three regions, Trebinje is included in the sample to provide broader territorial coverage. Six municipalities from within these regions are included in the sample (see Table 9). 42 Table 10: Federation Cantonal Distr ibution (2000) Canton % of Population 1. Unsko-Sanski 13.2 2. Posavski 1.9 3. Tuzlanski 21.9 4. Zenicko-Dobojski 17.1 5. Bosansko-Podrinjski 1.5 6. Srednjebosanski 10.4 7. Hercegovacko-Neretvanski 9.4 8. Zapadno Hrecegovacki 3.5 9. Sarajevo 17.3 10. Hercegbosanski 3.6 TOTAL 100% Eight municipalities from among the six cantons that represent 89.4 percent of the Federation's population (i.e., Una-Sana, Tuzla, Zenica-Doboj, Central Bosnia, and Herzegovina-Neretva cantons) were selected for the sample as noted in Table 11. Table 11: Federation Distribution by Municipality in Final Sample Municipality Population % of Total Structure in sample Number of firms ~~~~~~~~~~Population 1. Bihac 60,113 2.6 6.3 13 2. Tuzla 135,510 5.9 14.2 28 3. Gracanica 52,902 2.3 5.5 11 4. Zenica 127,972 5.5 13.4 27 5. Zavidovici 37,942 1.6 4.0 8 6. Bugojno 37,107 1.6 3.9 8 7. Mostar 104,997 4.6 11.0 22 8. Sarajevo 400,219 17.3 41.8 83 TOTAL 1,135,120 49.2% 100% 200 Semi-Annual Monitoring Surveys Monitoring surveys will be carried out semi-annually to measure progress against results indicators for release of the second tranche. At a minimum, the following questions from the baseline survey will be included in the surveys: A. How long did the most recent registration/re-registration process last (from the moment you started the process through the moment you got all the necessary documents)? B. Did you register or re-register your business in [Court Register, Statistics, Revenue Administration, Municipality, Health and Pension Fund, Customs Administration, Trademark Registration, Other]? How many calendar days did it take (for each)? 43 C. How many times during the last 6 months was your business inspected by [Market, Labor, Financial Police, Revenue Administration] and how many inspectors visited your business? How many days did the [Market, Labor, Financial Police, Revenue Administration] inspection last? Sample Frame Business Registration (QA/QB). All companies that have completed the registration process in the following municipalities (those from the baseline sample frame) during the six-month reporting period will be included in the survey: Banja Luka, Prijedor, Prnjavor, Bijelina, Doboj, Trebinje, Bihac, Tuzla, Gracanica, Zenica, Zavidovici, Bugojno, Mostar and Sarajevo. Inspections (QC). The sample frame methodology used in the baseline survey will be applied to randomly select the stratified sample to monitor progress against the inspections indicator. While the panel will be used when the full survey is conducted again, the sample for monitoring surveys will be fresh each time. The number of companies in the monitoring survey will be based on data reliability and cost considerations, but will not be less than 100 companies in the Federation and 50 companies in the RS. Calculation of Results The geometric, rather than arithmetic, mean will be used to compute the average length of the registration process and number of days of inspections. The aggregate number of days of inspections will be the result of multiplying the number of inspections times the number of days the inspection lasted times the number of inspectors for Market, Labor, Financial Police and Revenue Administration during the six-month reporting period. Determining Compliance with BAC Conditions Only Question A will be used to assess status against the second tranche condition related to the length of the registration process. Question B will provide the Entities detailed data regarding which steps remain problems. Question C will be used to assess status against the second tranche condition related to inspections. In determining compliance with the BAC conditions for the number of days to register/re-register a business and number of days of inspections, the condition will be deemed to be met if the target value lies within a 95 percent confidence interval for the estimated mean value. Survey Monitors Each of the Entities, the State and the Association may appoint a monitor to observe that the sample selection and survey process is being carried out according to agreed terms to assure independence and reliable results. The names of the firms, however, will remain anonymous to the monitors in order to maintain integrity of the sample. 44 ANNEX 7: STATUS OF BANK GROUP OPERATIONS IN BOSNIA AND HERZEGOVINA STATUS OF BANK GROUP OPERATIONS IN BOSNIA AND HERZEGOVINA STATEMENT OF BANK LOANS (As of March 31, 2002) US$ Million (Less Cancellations Fiscal Loan No. Year Borrower Project Loan Undisbursed Loan/Credits/ Grants 4038-BOS 1996 Bosnia and Herzegovina Consolidation Loan A 28.6 0.0 4039-BOS 1996 Bosnia and Herzegovina Consolidation Loan B 284.9 0.0 4040-BOS 1996 Bosnia and Herzegovina Consolidation Loan C 307.1 0.0 Total 620.6 0.0 __________ __ _ Of whicb: Repaid 24.9 Total Now Held by the Bank 595.7 0.0 TFBHc/ (UnderUDisburs TF-024030 1996 Bosnia and Herzegovina Emergency Recovery Credit 45.0 0.0 TF-024031 1996 Bosnia and Herzegovina Emergency Farm Reconstruction 20.0 0.0 TF-024032 1996 Bosnia and Herzegovina Emergency Water Supply 20.0 0.0 TF-024033 1996 Bosnia and Herzegovina Emergency Transport 35.0 0.0 TF-024034 1996 Bosnia and Herzegovina Emergency District Heating 20.0 0.0 TF-024035 1996 Bosnia and Herzegovina Emergency War Victms Rehabilitation 5.0 0.0 TF-024040 1996 Bosnia and Herzegovina Emergency Education Reconstruction 5.0 0.0 Total 150.0 0.0 ll2A 2897-BOS 1996 Bosnia and Herzegovina Emergency Education Reconstruction 5.0 0.0 2896-BOS 1996 Bosnia and Herzegovina Emergency War Victims Rehabilitation 5.0 0.0 2902-BOS 1997 Bosnia and Herzegovina Emergency Housing Repair 15.0 0.0 2903-BOS 1997 Bosnia and Herzegovina Emergency Power Reconstruction 35.6 0.0 2904-BOS 1997 Bosnia and Herzegovina Emergency Public Works and Employment 10.0 0.0 2905-BOS 1997 Bosnia and Herzegovina EmnergencyLandmines Cearance 7.5 0.0 2906-BOS 1997 Bosnia and Herzegovina Emergency Demobilization and Reintegration 7.5 0.0 2914-BOS 1997 Bosnia and Herzegovina Transition Assistance Credit 90.0 0.0 NOOI-BOS 1997 Bosnia and Herzegovina Emergency Industry Re-Start Guarantee 10.0 0.0 N002-BOS 1997 Bosnia and Herzegovina Emergency Microenterprise/Local Initiatives 7.0 0.0 N003-BOS 1997 Bosnia and Herzegovina Essential Hospital Services 15.0 0.0 N032-BOS 1998 Bosnia and Herzegovina Transport Reconstuction II 39.0 0.0 N035-BOS 1998 Bosnia and Herzegovina Education Reconstruction II 11.0 0.0 3028-BOS 1998 Bosnia and Herzegovina Reconstuction Assistance Project 17.0 0.0 3029-BOS 1998 Bosnia and Herzegovina EmergencyNatural Gas 10.0 0.0 3070-BOS 1998 Bosnia and Herzegovina EEmergencyPilot Credit (RS) 5.0 0.0 3071-BOS 1998 Bosnia and Herzegovina Power II 25.0 0.0 45 NC40-BOS 1998 Bosnia and Herzegovina Forestry 7.0 1.2 3090-BOS 1998 Bosnia and Herzegovina Public Finance I (Strucal Adjustment) 63.0 0.0 3191-BOS 1999 Bosnia and Herzegovina Local Development 15.0 12.3 3202-BOS 1999 Bosnia and Herzegovina Basic Health 10.0 6.4 3262-BOS 1999 Bosnia and Herzegovina Enterprise and Bank Privatization Project 50.0 14.0 3257-BOS 1999 Bosnia and Herewgovina Enterprise Export Facility Project 12.0 4.9 3269-BOS 1999 Bosnia and Herewgovina Pilot Culkual Heritage Project (IUL) 4.0 2.2 3258-BOS 1999 Bosnia and Herzegovina Second Public Finance (Strucral Adjustment) 72.0 18.4 3351-BOS 2000 Bosnia and Herzegovina Education Development Project III 10.6 7.5 3400-BOS 2000 Bosnia and Herzegovina Mostar Water and Sanitation 12.0 8.8 3385-BOS 2000 Bosnia and Herzegovina Emergency Labor Redeployment 15.0 13.2 3439-BOS 2000 Bosnia and Herzegovina Social Sector Structural Adjustmnent Gredit - TA 3.55 3.2 Q2370-BOS 2001 Bosnia and Herzegovina Trade and Transport Facilitation in SEE 11.0 10.7 34650-BOS 2001 Bosnia and Herzegovina Social Sector SAC(SOSAC I) 20.0 O.C 35330-BOS 2001 Bosnia and Herzegovina Local Initiative II 20.0 19.7 35340-BOS 2001 Bosnia and Herzegovina Electric Power 3 35.0 32.8 35380-BOS 2001 Bosnia and Herzegovina CommunityDevelopment 15.0 14.7 3531-BOS 2001 Bosnia and Herzegovina Privatization TA 19.8 19.5 36080.BOS 2002 Bosnia and Herzegovina Private Sector Credit 10.0 9.9 36260-BOS 2002 Bosnia and Herzegovina Road Mnagement Safety 30.0 30. Total 749.6 229.4 I_Grand Total 899.6 229.4 a/ The status of these projects is described in a separate report on all Bank/IDA financed projects in execution, which is updated twice yearly and circulated to the Executive Directors on April 30 and Otober 31. b/ Consolidation Loans A, B, and C were approved on June 13, 1996 and became effective on June 14, 1996. c/ Trust Fund for Bosnia and Herzegovina. 46 ANNEX 7A: STATUS OF IFC OPERATIONS Bosnia and Herzegovina STATEMENT OF IFC Held and Disbursed Portfolio As of r 18, 2002 For Febniar , FY2002 _ _ _ _ _ _ _ _ _ _ _ _I I I - _ I I --------------- IFC ield . _ IFC Disbursed FY institutionShortNme Loan Equity Quasi Partic Loan Equity Quasi Partic 1997/99/01 Bosnia Micm 0 1,229,746 0 0 0 1,229,746 0 0 1985 Energoinvest 7,131,729 0 0 0 7,131,729 0 0 0 1997 Enterprise Fund 0 1,684,388 0 0 0 1,056,073 0 0 2001 PBS Group 8,429,797 260 887,347 0 8,429,797 0 887,347 0 1997 Sarajevska 1,718,227 0 0 0 1,718,227 0 0 0 1998 SEF Akova 1,404,670 0 0 0 1,404,670 0 0 0 1999/01 SEF Bosnalijek 2,012,457 1,841,848 0 0 2,012,457 1,841,848 0 0 1999 SEF Kopex 1,212,230 0 0 0 1,212,231 0 0 0 1998 SEF Lignosper 1,841,245 0 0 0 1,597,225 0 0 0 1999 SEF Lijanovici 1,697,051 0 0 0 1,697,051 0 0 0 1977 TKA Gazin 2,954,866 0 0 0 2,954,866 0 0 0 1998 Wood AgenryAL 3,962,231 0 0 0 0 0 0 0 1999 Wood Inza 1,397,581 0 0 0 279,516 0 0 0 1999 Wood Konjuh 1,987,283 0 0 0 1,765,446 0 0 0 1999 Wood Kozara 1,397,572 0 0 0 1,175,735 0 0 0 1999 Wood Podgradci 957,226 0 0 0 779,756 0 0 0 1999 Wood Vrbas 1,397,581 0 0 0 279,516 0 0 0 Total Portfolio 39,501,745 4,756,243 887,347 0 32,438,222 4,127,666 887,347 0 __ __ _ __ _ _ _App rovals Pending Commnitmnt _t FY InstitutionShortNne Loan Equity Quasi Partic 2001 PBS Pre-Priv. [ 0 0 3,087,819 0 Total Pending | 0 0 J 3,087,819 0 _ 47 ANNEX 8: COUNTRY AT A GLANCE Bosnia and Herzegovina at a glance 1/01 Bosnia Europe & Lower- POVERTY and SOCIAL and Central middle- Herzegovina Aeia income Develepment diamond' 2000 Population. mid-year (millions) 3.9 475 2,046 i Life expectancy GN per capita (Atlas method, USS) 2,010 1,140 GNI (AtWas melthoc USS billions) 956 2.327 7 Average annual growth, 1994-00 Population %) 1.3 0.1 1.0 Gr Labor force (%) 1.6 0.6 1.3 pNI Gross Iper primary Most recent estimate (latest year available, 1994-00) cepita I enrollment Poverty (% of'population below nationaf poverty lineJ) Urban population (. of total populatiaon) 43 67 42 ULie expectancy at birth (years) 73 69 69 tntant mortality (per 1,000 live births) 13 21 32 Child mainutrition (% o/ children under 5) II. 1 ' Access to improved water source Accss to an improved water source (% o/population) go90 s0 lDiteracy (% of population age 15+) 3 15 Gross primary enrollment (%, ofscliool-age population) 100 114 Bosnia and Herzegovina Mate 101 116 Lower-middle-incore group Female 99 114 __ KEY ECONOMIC RATIOS and LONG-TERM TRENOS 1980 1990 1999 2000 IEconomic ratios- GOP (US$ billtons) .45 4.4 Gross domestic investmentiGOP 20.6 20.4 T Exports of goods and services/GDP 26.5 27.1 Trade Gross domeslic savings/GDP .13.0 -10.3 Gross nalional savings/GDP -0.6 8 0.2 Current account balarrceGDP . . 21.4 -20.7 o I Inlerest paymentsiGOP 1.1 1.3 Investment Total debtUGDP 48.1 46.7 savings Total debt semicelexporis 10.9 19.7 Present value of debt/GDP .. Present value of debt/exports Indebtedness 1980-90 1990-00 1999 20D0 2000-04 (average annual growth) GDP 27.3 10.0 58 60 Bosnia and Herzegovina GDP per capita 24.8 6.8 4.7 5.5 Lower-midde-irncome group Exports ot goods and services . 41 8 -3.9 4.2 6 6 STRUCTURE of the ECONOMY 1980 1990 1t99 2000 Growth of Investment and GDP (%) (°0 ol GDP) Agriculture 13.8 12.2 Indusiry 252 26.0 Manufacturing 15.4 15.8 Services 61.0 61.8 C Private consumption Qs . 96 9Z 5r 9Y. e General government consurnption , GDI -0--GOP Imporos ot goods and services 60.1 57.9 1980-90 1990-00 1999 2000 Growth of exports and imports () (avwefage anniual gromh) Agriculture 8.1 -3.0 -8.3 1l Industry 26.2 11.2 5.7 ,oA Manufacturing .. 17.1 0.1 72 Services 37.9 17.5 7.9 Private consumption ° .. .. .4 General government consumption o. Gross domestic investment 35.6 9.9 4.4 .E1pOis rirmpofis Imports of gcods and services 21.6 -3.1 -5,9 Note: 2000 data are preliminary estimates. The diamonds show tour key indicators in the couolry (in bold) compared with its income-group average. If data are missing, the diarnond vaIl be incomplete. 48 ANNEX 8: COUNTRY AT A GLANCE (CONTINUED) Bosniai anid Herzegov'ina PRICES and GOVERNMENT FINANCE i2omestic ~~~~~~~~~~1980 1990 1999 2000 IInflation (%f Consumer prics .. .. 0.9 5.3 o Implicif GDP deflator . .. 3.1 4.7 0*se xi c Government finance (%of GDP, inclutdes cu,wenl grants) Current revenue . . 31.7 31.0 Currenrl budget balance .. .. 0.9 .-l 2 GOP deflator -O--CPI Overall surplusfdoficll .. . 17.4 *15.9 ___________________ TRADE ~~~~~ ~~~~~ ~~1980 1990 1999 200 Export anid Import levels (USS mill.) (US$ rinllions) Total expofts (fob) 649 732 ao n.a. n.a. Manufactures Total Imporls (Oil)02 2,4 Food .) Fuel and energy Capital goods Export price index (1995= 100).. . Imnport price index (1995=-100) jEot aImrs Termns of tfade (1995=-100) _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BALANCE of PAYMENTS (US$ ~~~~~ ~~~~~ ~~1980 1990 1999 2000 CuFrent account balance to GOP(% E Voris of goods and services . .. 1,201 1,192 0 rImpors of goods and services . .. 2,728 2.543 ~ Resource balance .. . 151 135 r Net incorne . .. 272 225 E Net cutrerenransfers , . 284 217 2 Current account balance .. .. 971 -909 1980 1990 1999 2000 ~ ~ ~ ~ K~~ILT3 Financing items (net) . .. 1.233 935 Changes In niel reserves . . -262 -28 FReserves including gold (UJS$t million) . .. 455 508 Converaion rate (DEC. 1o"11VSS) 1. . .e 2.1 EXTERNAL DEBT arid RESOURCE FLOWS (LJSS million) i Compositioni of2000 debt (USS mill.) Total debt oLdtallndintg anid disbursed . .. 2,183 2,052 lSOR . . 578 562 G49 IDA 33 38F 3 Trofal debt service . .. 170 297 W 18110 . 34 33 IDA . .. 2 3 (7:s52 Composition of nel reowurce fto%s Official grants . . O11 icia creditors16 4 Privae crediotos ..4 .. 09 Foreigrr direct irwveltnenta Portfolio equity . World Bank progrms Comnmilmenerts . 163 41 A - IMO E -Bflateral Disbursements . . 68 44 8.- IDA 0 -Other multitrlwarel F -Private Principal repayrnents . .. 0 0 C - IMF G - Shorit-trm Net flows . .. 68 44 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ Interest paypnenls . 36 36 Net Iranslers . . 32 8 The World Bank Group: htlpJ/w%vw.worIdbank.org1dala/ 0110 49 IBRD 28578R To ZagR T CIROATIA ToVnkovc To( + \ Jezero X i Trovn,k +% ; W ekoTOi fN |> -\> ~~~~~~Bosonsk. Groovo Gr osn A5orve °- Vrs nio u Der,etoo Brod kon .° rornc Zaor \)1JPOLplNDn UKRAINE3/ EDRA LI o: )g;3, ,, : a( Biel/R (SERBIA - DAYTON~~~ AGReccEMENTELNEGRL 'o O)DV 420 iatic SeLECTED CITIES OD n SnATI O CAPITAL t eoa IMope e 25 50t 7 oo otn fom n evn k shot )I I,x I- I Bownski ~~~~~~~~~~h as f h oni Be- - 40 BOSNIA aneet on tNe HERZEGOVINA A -.(A logo1 ~ 1 stE oZEC eny entot / UKA IN DAYTONAGEEMENTLok a e or R . a L42° O SELECTEDCITIES r < t. RvATN k > Jp~~~~~~~~~~~~~~~~iv. CRO~~~~eIATIOA ICAI IC) BMov eignUt o h 3IDRP<_- ~~ ~ ~ ~ G Ppfrn ludgmeJe n fee I ekoS awcceptaonce of sac!, See TURKEYEt5 rn 160 1 7° houndones 10¢ C 20