“It is necessary to move reforms from the production of laws in the Parliament towards their transparent and consistent implementation by an efficient public service. Moreover, the authorities need to involve the business and civil sectors in the reform process and organize timely consultations in order to prepare both market and society for the upcoming changes” Serbia’s economic barometer has been, for the past ten years, the White Book of the Foreign Investors Council (FIC). In this interview for CorD, FIC President Costin Borc speaks candidly about the various successes and shortcomings of efforts to shore up the Serbian economy all the while reiterating the dual mantras of predictability and transparency as being vital for progress.
The tenth edition of the “White Book” compiled by the Foreign Investors Council (FIC) was presented in mid– October. Could you tell us about the key changes that happened in business environment in the last decade?
First, we at FIC believe that a lot has been done in the past decade, and the Serbian market is far more competitive than it was ten or twelve years ago. Nonetheless, we believe that more could have been achieved and that reforms could have been executed at a faster pace. In terms of achievements, Serbia introduced the pillars of market economy and to a large extent harmonized its laws with EU regulation. However, issues that Serbia has not yet properly addressed pertain to strong structural deficiencies, an unfinished privatization process, unsustainable public finances and inefficient state administration. All these elements impact economic development.
During that period, which reforms could have and should have been more intense and with which ones are you especially satisfied?
We advocate the acceleration of reforms in general with the dual goal of improving business conditions and bringing Serbia closer to the European Union. Looking back over the years, from FIC’s foundation, we can say that a significant number of FIC proposals have been accepted. Serbia has finished the first part of the transition and we are satisfied with the fact that in the previous period, the largest part of the legal framework was adapted to EU acquis as part of the EU integration process.
At the presentation of the White Book, you said that Serbia was a good place to invest and that it had a qualified and professional workforce. Do you think that that is the only advantage that Serbia, as an investment destination, has over other regional countries?
A qualified and professional workforce is certainly not the only advantage of Serbia, but it is an important one. Sustainable profitability of any company cannot be achieved without good quality human capital. Also, in times of economic crisis, human capital becomes increasingly important. Although the labour market demand has decreased, resulting in fewer job opportunities, the retention of key personnel is more than ever in the focus of HR professionals as something which is vital for surviving the crisis. It can be said that Serbia compares relatively well with its neighbours, but it is not only with neighbours that Serbia competes. Serbia gains advantages from its well-developed frame of free-trade agreements, not only within the region through CEFTA, but also with Russia, Ukraine, Belarus, Turkey and EFTA countries. All things considered, it is a good place to invest if you are a big company, and you are coming with a large investment. Big companies are in a position to cooperate with the authorities to establish a relatively solid framework for business and can negotiate directly and openly. They are less vulnerable, and their voices are better heard. But if you are a smaller investor, there are too many obstacles, such as bureaucracy and stiff competition. As we all know, economic growth cannot be based solely on big investments, and Serbia definitely needs to do more to become more attractive for small and medium sized businesses.
You have also mentioned several sectors with a great future like industry and agriculture and said that a stable and predictable business environment was needed for big investments. This is not the first time that we have heard that. The question is: what does that mean for those sectors?
I can give a concrete example related to the agriculture sector. Namely, agriculture has been cited by most governments in our recent history as a development opportunity, an export-boosting sector, and a source of competitive advantage in the region, and all governments have declared their dedication to agriculture as one of their priorities. Unfortunately, a strong dedication to maintaining agriculture high on the agenda did not follow these announcements. We have seen frequent policy changes and altered subsidy programmes, coupled with a lack of consistency in the implementation of adopted legislation, which has led to an increased level of uncertainty and a lack of predictability in this important field. Starting from the lack of systemic and consistent support in infrastructure investment and subsidies programmes, through the speedy adoption of horizontal legislation without an appropriate consultation process, to a lack of implementation of adopted regulations or followthrough with relevant bylaws – these have all contributed to the uncertainty being faced by all those operating in the agricultural sector. Therefore, one of our key recommendations is the enactment of important bylaws to complement recently adopted laws.
One of the FIC’s demands, which is also not new, is the demand for the creation of a predictable business environment. What do you and your colleagues think of this environment today and how much does “unpredictability” affect business operations?
The biggest obstacle for foreign direct investment in Serbia, apart from the euro-zone crisis, is this lack of predictability in the business environment. Issues pertaining to inadequate law implementation, too much bureaucracy and an inefficient public sector remain the key obstacles to more investments. It is necessary to move reforms from the production of laws in the Parliament towards their transparent and consistent implementation by an efficient public service. Moreover, the authorities need to involve the business and civil sectors in the reform process and organize timely consultations in order to prepare both market and society for the upcoming changes. Abrupt changes in the regulatory framework send negative signals to both current and potential investors.
What kind of influence does the overall macroeconomic environment have on investors and how would you describe this environment in terms of business development? How much is this environment stimulating or not?
Overall the macroeconomic environment is very relevant for investors. In the short run, the support of international financial institutions will be critical to keep the framework under control, and the news that IMF arrangement has not been negotiated does not represent a positive sign. Therefore, macroeconomic environment is not currently stimulating to doing business, and we express the hope that serious structural reforms will be conducted in the upcoming period that will help businesses grow and prosper.
The Foreign Investors Council wants the government to continue with structural reforms, transparency and modernizing state administration. Which reforms are we talking about and what does transparency in decisionmaking process mean for investors?
In order to address the issues in a sustainable manner, Serbia needs to undergo painful structural reforms: tackle current structural deficiencies, finalize the privatization process, improve the structure and mechanisms of public finances, and, very importantly, create a more efficient state administration. This would lead to a more stimulating environment for doing business. The most important element is the transparency of the system including the decisionmaking process and also doing away with discrimination between foreign and domestic players. This is specifically important in public procurements, tenders and other statecontrolled activities. One of our key recommendations is a level playing field for all participants in this market, whether foreign or domestic.
Immediately after coming to power, the new government adopted economic measures which are mainly focused on changing tax laws. What is your view of these changes, the abolishment of certain parafiscal burdens and of the macroeconomic situation in Serbia?
Firstly, with regard to the changing of tax laws, I would like to be clear: the FIC does not comment on any economic policy issues as it is the sovereign right of the government to develop the policy-mix which would drive economic growth. Secondly, the recent government decision to abolish 130 parafiscal charges is a step in the right direction, and it is welcomed by investors. Thirdly, the restoration of macroeconomic stability is a must, and synchronized monetary and fiscal policies will be needed to address burning issues of the fiscal deficit and rising public debt, as well as tackling price instability, economic recession and unemployment.
You were very vocal about layoffs being inevitable. What does that exactly mean? What is your prediction of economic tendencies next year?
I tend to look into the situation realistically, believing that it is the only sustainable way to advance further. We cannot close our eyes and say that the crisis is over since it is still all around us, and it certainly highly influences the economic situation in each and every country. Being in a transition, Serbia is much more vulnerable to the crisis, and unfortunately there are some industries, such as, for example, real estate, which were severely affected by the crisis, resulting in the bankruptcy of even big domestic players on this market. This also means that layoffs were inevitable. I think that the perception of the bankruptcy is somehow often wrong. We shouldn’t be afraid of it and should be aware that bankruptcy is happening to companies in Serbia as well as in the rest of the world. It is a normal cycle of a company which, at a certain time period, does not operate profitably. At the same time, and unfortunately, bankruptcy is not a good situation, neither for the country, companies nor its citizens; but it just happens sometimes. It is hard to predict economic tendencies for next year and in that regard we are waiting to see the budget for 2013.
This year, inflation will reach 12%. How much does inflation rate affect businesses?
It certainly affects businesses. But let us not forget two things. First, companies make long-term business plans including predictions of the inflation rate, and, secondly, the question is how much we can influence foreign exchange rate fluctuations? The reality is that we cannot do much regarding that but only to comply with the changes.
Government representatives, who took part in a debate at the presentation of the White Book, said that they were ready not only to cooperate with the Council, but also to apply the suggestions made by the investors. Could you tell us about the cooperation with the government during the past 100 days?
It is too early to talk about our cooperation, bearing in mind that the new authorities have just recently taken power and they should be given sufficient time to prepare and present their strategies for the next year and the following period. We very much appreciate that high government officials participated at the promotion of the newest White Book and FIC’s 10th year anniversary expressing their readiness to implement our proposals. That being said, the FIC welcomes the positive steps taken to abolish the 130 parafiscal charges, as well as the measure taken by the National Bank to repeal the statutory reserve requirement for financial leasing. We do hope that these are indications of more positive policies going forward. The new government also expressed its readiness to continue the process of EU integration, which means conducting serious structural reforms and working on the improvement of the business environment. In that sense, we look forward to seeing the new government’s economic policy for 2013 and the way it will address major macro and micro economic issues going forward.
The Economy and Finance Minister announces new excise and fee policies. Do you think that investors should be happy with this announcement?
As I have mentioned earlier, the government’s recent decision to eliminate 130 parafiscal charges is a step in the right direction, and we expect further positive developments in this regard. With regards to the announced new excise policies, I believe that the investors in tobacco industry will be satisfied with the mid-term calendar if the calendar itself is in line with purchasing power, thus generating higher government revenues from tobacco as well as allowing for smooth harmonisation with minimum EU requirements in the area of tobacco without a distortion of the domestic tobacco market. It is important to have determined a mid-term excise policy that will bring better certainty to the companies. Better certainty is also important for the tax policy in general. Therefore, regarding tax policy, we have three major expectations going forward. First, we expect going forward the introduction of safe-guard measures to block the accumulation of new parafiscal charges. Second, and very important, we hope that process of future tax reforms will include consultations with stakeholders. Thirdly, we hope that the government, and especially Ministry of Finance and Economy, will consider the introduction of new mechanisms, such as binding rules, and increasing the capacity of the tax administration to ensure consistent application of the tax regulations. In a nutshell, in order to preserve present investors and attract more investors, Serbia needs to create and maintain predictable tax surroundings, where companies can understand the business conditions under which they operate.
Finally, at the presentation of the White Book, you underlined the importance of Serbia getting closer to the EU. How important is that for foreign investors and what does the economy stand to gain from stronger ties with the Union?
The FIC advocates Serbia’s economic integration into the EU, as it brings predictability and transparency to the business surroundings, as well increasing the competitiveness of the Serbian market. Its positive aspects are multiple, both in economic and regulatory spheres. The EU negotiation process includes an evaluation of EU economic criteria, where the country needs to demonstrate that it has a functioning market economy and that it is competitive. This means that a number of important economic elements are considered, such as macroeconomic stability, free interplay of market forces, an adequate legal system, state influence on competitiveness, and so forth. This having been said, the EU integration process is a great mechanism to evaluate domestic laws and regulation, their mutual relations, as well as their impact on the economy, citizens and society at large. Also, through the EU integration process, the ability of the state to implement its laws is consistently assessed and how the institutional capacity of the state is built to foster a transparent and predictable environment. Lastly, through this process, the Serbian market will rise in the global competitiveness charts and become more familiar to potential investors.
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