SERBIA: OBSTACLES TO FOREIGN DIRECT INVESTMENT

UNCLAS BELGRADE 000793

SENSITIVE
SIPDIS

USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH

E.O. 12958: N/A
TAGS: ECON EINV EFIN SR MW
SUBJECT: SERBIA: OBSTACLES TO FOREIGN DIRECT INVESTMENT

REF: a) STATE 0460

SUMMARY
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1. During a series of meetings, business representatives, local
analysts, and government officials told us significant impediments
remained to foreign direct investment (FDI) in Serbia. All
observers highlighted political instability and the difficulty in
obtaining permits for construction on urban land as major concerns
for domestic and foreign investors alike. Corruption, especially
regarding permits and licenses, is problematic. Overall, our
contacts believe Serbia views U.S. firms positively and there is
strong interest for more direct investment from the United States.
End Summary.


INVESTORS FOCUSING ON POLITICAL RISK...
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2. The Serbia Investment and Export Promotion Agency (SIEPA),
Foreign Investors Council (FIC),and business executives during a
series of meetings the week of July 28 through August 1 commented to
us on the importance of political stability to foreign investors and
on recent political developments that were raising confidence in the
country's investment climate. Bozidar Laganin, special advisor to
the SIEPA Director, and Ana Vlajic, Executive Director at FIC, said
that political risk has been the biggest problem for foreign
investors in Serbia over the last few years. Vlajic emphasized the
uncertainty stemming from "too many elections" within the last two
years as having had a negative impact on the development of business
strategies for FIC members, rendering the business climate unstable
and unpredictable. The elections also exacerbated the government's
lack of capacity in implementing and enforcing existing laws
adequately.


3. Aside from obstacles, Laganin also spoke of the new government's
prospects for attracting FDI, particularly in greenfield projects,
noting that only 25% of Serbia's total FDI stock was greenfield
investment at best (Comment: the government adopted a plan on July
21 to refund 25% of funds to greenfield investors who invested at
least 200 million euros and created a minimum of 1000 jobs in the
automotive, IT, electronics, or telecommunication sectors). Also,
the deal signed in April between Zastava and Italian auto
manufacturer Fiat on establishing a joint venture (reftel A) in
Kragujevac had sparked investor interest in Serbia, according to
Laganin.


4. Regarding the new government, all individuals with whom we met
were cautiously optimistic that the coalition would stay together
and push through needed reforms. Marko Micanovic of Altis Capital,
a financial advisory firm, said that the Democratic Party (DS) "has
to show something now" by pushing through business-friendly reforms
in the country's regulatory framework, noting that former Prime
Minister Kostunica's party achieved more during its first term than
last year's DS-led coalition.

...AND LAND PERMITS
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5. Zoran Skopljak, regulatory affairs advisor at the American
Chamber of Commerce (AmCham),told us that problems related to land
titles and permits were a key obstacle for foreign investors in
Serbia, a view shared by FIC. The 2006 Constitution ended the
state's monopoly on owning urban land, but many laws had yet to be
changed to correspond to the constitution, effectively perpetuating
state ownership of urban property. As a result, companies
experience major difficulties in obtaining building and construction
permits, which at times range from "two months to two years." The
uncertainty surrounding urban land ownership has led to companies
being able to own a building, but not the land the building
occupies. The situation hinders investment and capital expenditures
by compelling businesses to operate in a legal grey zone.
Executives at the engineering and construction firm Energoprojekt
reinforced this view, commenting on the inability to buy or sell
urban land and how land permits and paperwork for licenses were not
properly regulated.

SHALLOW CAPITAL MARKETS, POOR INFRASTRUCTURE
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6. Observers also mentioned capital market issues and poor
infrastructure as additional impediments to FDI. Skopljak stated
that restrictions on capital outflows and money transfers deter some
holding companies from doing business in Serbia. This makes "cash
pulling" more difficult, where companies move funds among
subsidiaries, leading some Serbian companies to move their
activities abroad. Also, low liquidity on the Belgrade stock
exchanges and the lack of deep markets for municipal bonds restrict
access to a larger pool of funding and keep foreign investors away,
according to local investment consultant Milan Kovacevic. Regarding
infrastructure shortcomings, SIEPA and local economic journalist
Misa Brkic said that poor roads, railways, and airports constrained
investor projects. The low quality of public services delivered
kept business costs high (even in relatively well-off places in
Vojvodina),hurting FDI and keeping investors away, according to
Vlajic.


CORRUPTION REMAINS A MURKY ISSUE
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7. All agreed that corruption was a concern, but no one emphasized
it as among the most pressing problems or put forward any specific
examples. The difficulties in obtaining construction permits create
an environment where those looking to build or expand facilities
depend on the goodwill of municipal authorities, therefore leading
to opportunities for bribe solicitation. FIC spoke in terms of
seeking a level playing field for all participants and that rules
needed to apply to everyone equally, suggesting that clientelism was
present in some forms at both the central government and municipal
level. Investment consultant Kovacevic said outright that the
perception of corruption was bigger than the actual level because
government clerks and institutions did not function transparently.
Contacts at U.S. firms in Serbia have spoken to Embassy about
kickbacks and shady practices regarding licenses and permits in the
"third level of government," i.e., among administrators and
regulators. These contacts state that they in no way participate in
such practices, and once they have established their position, are
rarely re-approached in such a manner. Nevertheless, they must still
navigate the quagmire that such an environment creates to get
business done.

COMMENT
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8. Everyone the Embassy spoke with last week echoed the same
concerns: political stability, corruption, infrastructure,
efficiency and transparency. All observers, however, were
optimistic about the new Prime Minister Mirko Cvetkovic. They
considered Cvetkovic was a pragmatic former Minister of Finance in
the last government and a proponent of western investment. However,
fiscally imprudent coalition concessions such as the anticipated 10%
increase in pensions may impact the investment climate with higher
inflation and further macroeconomic instability. Both the public
and private sectors remain highly interested U.S. FDI, placing
political differences behind commercial interests. In fact, as
AmCham mentioned, U.S. investment has been viewed positively in some
regions such as in Smederevo (approximately 30 miles east of
Belgrade) where US Steel's presence raised average salaries there
and stimulated other commercial activity. We are skeptical of
assertions that corruption plays a tertiary role in discouraging
foreign investment. Our contacts more likely were reluctant to
discuss corruption's saturation of Serbian society. Certainly
greater transparency in business transactions and expectations of
political stability will help to address the root causes of
corruption in Serbia. End Comment.


BRUSH