Addendum 9a

Seminar on the Promotion of
Foreign Direct Investment toSoutheastern Europe

Yugoslavia

8 November 2002, Tokyo, JIIA
Ministry of Foreign Affairs of JapanThe Japan Institute of International Affairs

REPUBLIC OF SERBIA
Ministry of International Economic
RelationsMrs. Gordana Lazarevic, Assistant Minister

Documentation on the Federal Republic of Serbia

Document produced in co-operation with the following members of the MIER’s
staff:
1. Mr. Branko Obradovic, Special advisor, bobradovic@mier.sr.gov.yu
2. Mr. Ernest Hercog, Special advisor, ehercog@mier.sr.gov.yu

11. Transition to market economy
Case of the Republic of Serbia•

Republic of Serbia, far larger of the two republics comprising Federal
Republic of Yugoslavia, has the territory of 88361 km² (86,7% of the area of
the FRY) and 89778991 inhabitants (94,1% of the population of FRY).

•

The territorial organization of the Republic of Serbia consists of 185
communities and four cities. Within Republic of Serbia are region of Vojvodina
and Kosovo and Metohija like a form of territorial autonomy.

•

Dinar is official legal tender in the Republic of Serbia. Dinar is exchanged for
61,5 for 1 EUR; 62,5 for 1 USD ;50,1 for 100 Υ.

What we inherited•

Democratic government took its office in January 2001. Serbian economy
was in the deepest slump. The new leadership inherited a country

wounded by a decade of wars, sanctions, and a mismanaged economy.
With its social imbalance, its relations with its neighbours as well as theentire international community severely ruptured, its economy ruined,
and its treasury looted:
o
o
o
o
o
o
o
o
o

GDP - only 50% of the 1990;
Inflation - 120%;
Foreign exchange market was non-existent;
Banking sector - in bad shape;
Government budget running deficit and huge arrears;
Foreign debt was in arrears since 1992; amounting 12,2 bill. USD or
145% of GDP;
Unemployment – 27,3 %; high redundancy;
Industry working only with 60% of its capacities, obsolete equipment;
Shortages – electricity, medical drugs, oil and gas, fertilizer, food(sugar, cooking oil, wheat etc).

General achievements:•

Serbia’s authorities launched a comprehensive program totransform Serbia from a regional instability into a democratic,
peaceful and free market oriented nation.

•

Government reestablished its membership in:oUnited Nations – November 2000;oInternational Monetary Fund - December 2000;oEuropean Bank for Reconstruction and Development – December
2000;

o

World Bank – May 2001.

2

•Government has two mayor long term general goals:oAccession to the EU - by 2010;oMembership in WTO – by 2005.

•

Serbian government is moving quickly to place economic policy on a soundfooting. Significant changes have happened in Serbia’s economy across all
sectors. The legislative framework covering the socio-economic reforms in
Serbia is aimed to be in line with the prerequisites for integration with theEuropean Union.

•

The strong commitment of the Government to sound macroeconomic
and structural reform policies resulted in a major improvement of key
macroeconomic indicators during 2001.

•

Since December 2000 Government entered in three successive financial
agreements with IMF to support its stabilization and market reforms policies:o

Post conflict facility-end of 2000 –June 2001 (154 mil. USD - 100%
disbursed);oStand - buy agreement - June 2001 – May 2002 (260 mil. USD -100%
disbursed);oEnhanced structural adjustment facility – June 2002 – June 2005 (820
mil. USD – two tranche disbursed – regular review underway).

Government fulfilled all the conditions of the two first mentioned agreements.
The third is in implementation and under the first review with IMF.
•

Entering into the agreements with IMF was the precondition for successful
restructuring of the foreign debt :oDebt towards IMF was cleared;oParis club debt –66% forgiven; the rest rescheduled under on periodof 22 years of which 8 years grace period;oDebt towards EBRD (1,815 mil. USD) consolidated and rescheduledon the period of 30 years;oDebt towards European Investment bank (225 mil EUR) – debt –to
debt- swap - rescheduled on period of 15 years with grace period of
10 years;oLondon club debt under negotiation as the debt towards the third
creditors.

Movements for the period: 2001-2002• In order to promote stability and create a business friendly environment, big
strides have been made in macroeconomic stabilization, structural reform andreintegration with the international community since its forming on January 25th,
2001:

3

Main indicators of macroeconomic stability

Indicators

Year 2000

Year 2001

GDP (material product), 6.4%
5.5%
growth rate
(The biggest increase:transport,
communications,construction and industry,
the biggest decrease:agriculture)GDP

USD 8.1 billion
USD 10.8 billion(according to IMF)
USD 9 billion (according
to World Bank)

GDP per capita

USD 966

USD 1200

Industrial production,
growth rate

10.9%
(Jan-Dec 2000 / JanDec1999)

6.0 % (Dec2001/Dec2000)
0.1% (Jan-Dec2001/JanDec2000)

Retail prices, growth
rate

113%
(Dec 2000/Dec 1999)

39% (Dec2001/Dec2000)

Unemployment rate

27.3%

27.8%

Fiscal deficit

1.3% of GDP

Real net wage increase 5.5% (2000/1999)

12.6% (Oct2001/Oct2000)

Average net wage in
EUR

46

125

Exports

15.6 % (changes to theprevious year)

28% (changes to the previous
year)

Imports

13.8 %(changes to the previous
year)

10.5%
(changes to the previous year)

Export in billion USD

1,7

1,9

Import in billion USD

3,7

4,8

Foreign trade deficit in 2
USD billion

2.9

The ongoing reform process, supported by the three-year loan from the IMF
approved in May 2002, aims to achieve the following economic objectives in the shortand medium term:•

GDP growth of 4%. The structure of GDP by sectors is expected to change
significantly; the agriculture sector will hardly exceed the level of output
achieved in 2001, due to the weather conditions, while an increase of 2,5 3% is expected in the construction sector due to the initiation of investment
cycle. In the medium term, economy growth rate is projected at 5% per year.

4Estimated by Economics institute (figures for Yugoslavia)•

Inflation is targeted to 20% by the end of 2002. Over the next three years,
further lowering of inflation is expected - 12% in 2003, 8% in 2004 and 7% in
2005.

Source: G-17.

The monetary policy will remain tight and aimed at lowering inflation. The foreignexchange reserves of the NBY are projected to rise by 37% in 2002. By 2005, thereserves should amount to a level sufficient to finance import payments over 6
months.
The exchange rate will take account of conditions in the inter-bank market, althoughmonitored closely as the exchange rate policy will continue to balance between
safeguarding external competitiveness and stabilizing inflation expectations.
The foreign exchange market will be further liberalized. In general, all restrictions
on current account transactions will be eliminated, and capital account transactions
will be considerably liberalized with the exception of lending and investing abroadand short-term capital movements.

5

The foreign trade deficit is expected to increase between USD 2.8 and USD 2.9billion while its share in GDP will diminish. Exports of goods and services will grow at
14% on average. Imports will continue to grow intensively at 15%, although at a
slower pace than in 2001 (30%). The current account deficit should amount to USD
1.5 billion (12.9% of GDP) in 2002, reflecting the resumption of the external debt
service. External debt servicing will be secured from the budget ranging between 2
and 3 % of GDP. The current account deficit will be financed by FDI and donations,
USD 400 and USD 391 million respectively. FDI inflows will particularly play anincreasing role as the privatization program and other economic reforms reach anadvanced stage.

Source: Republic bureau for informatics and statistics

6

The fiscal policy will aim to support economic recovery and reform while ensuring
progress towards further lowering of inflation and fiscal sustainability. The fiscal
deficit is projected to 4.3% of GDP. The deficit will be financed mostly throughdonations, loans and privatization revenues that should amount to USD 539 million.

Fiscal and Budget Reform
Previous system

New system

 More than 230 fiscal

 6 main taxes and few

forms

fiscal forms

 9 different excise
 4 sales taxes
 7 rates of sales tax and One excise tax
 One sales tax
 One tax rate, almost Numerous special

 Unified and 7 special services for Unified financial

taxes

many tax exemptions

no exemptions

accounts

consolidated budget

financial audit

audit

Strict wage policy in the public sector stayed unchanged in 2002, in order toprevent wage pressures from gaining momentum. Ratio between wage bill of thegovernment, that of the state-owned enterprises and the GDP will be constant in realterms. A new Labour law that has liberalized employment contracts and the wage
determination increased labour market flexibility during 2002, which should,
considering rising unemployment, further compress the growth of wages.
Law on foreign investment, enacted in January 2002, opens up the economy byallowing foreign investors to set up businesses in all sectors apart from weapons
production and trade. Modelled on similar legislation in more developed European
economies, it removes red tape and envisages lower import duties on necessary
equipment for setting up production in Yugoslavia. Investors are able to repatriate
their funds and buy real estate without restrictions.

For more detailed information on macroeconomic policies please visit the web site of
the Ministry of finance and economy at http://www.mfin.sr.gov.yu.

7

Reform goals achieved•

In the year 2001 and 2002 Government concentrated its efforts on reforms inthe:oFinancial sector






o

Rehabilitations of banking sector – closed four banks mayor
state owned banks and additional 19 minor banks;
Increased census for establishment of a bank;Foreign banks started to operate in the country - HVB bank,
Reiffeisen bank, National bank of Greece, Microfinance bank,
Alpha bank, Societte Generale and others;
Payment system to be transferred from NBY to the banks by2003 (in implementation);
Adoption of International Accounting Standards (IAS) to be
implemented in 2004.

Investing in banking sector









The Law on banks and other financial institutions regulates
investments in banking sector;
A bank should be founded by at least two parties. The
founding of any bank is subject to approval by the National
Bank of Yugoslavia;
NBY also grants licenses for establishing a branch or arepresentative office of a foreign bank in Serbia;
The minimum capital requirement for a bank is USD 5 million;
A foreign bank may have its subsidiary in Republic of Serbia.
Subsidiary enjoys the status of a legal entity, and as such isentered in the Court Register;
NBY makes the decision on issuing or revoking of theoperating license of a foreign bank branch with legal entity
status (a subsidiary) under the same conditions as those for
issuing a Banking License;
A foreign bank can found its representative office on the
territory of the FR Yugoslavia. Representative office does nothave a legal entity status.

For more information please visit National Bank of Yugoslavia, central bank of thestate: http://www.nby.yuoFiscal and budget reformTax Law establishes only 6 main taxes (more then 230
previously); one excise tax (9 ) one sale tax (4) one tax rate
almost no exemption (7 and many exemptions);
Unified and consolidated budget (numerous special accounts,
extra budgetary funds etc);
Adoption of VAT (to be implemented from 2004);
Treasury established in May 2002.

8

• Businesspeople in Serbia certainly have a comparative advantage among thenations in transition. Although officially being a country under a communist
regime, the former Yugoslavia was heavily involved in the world market
economy. It is important to note that the former Yugoslavia was never signatory
to the Warsaw Treaty, and was thus never under pressure from the Soviet
command economy. This environment produced both management and labour
fit to cope with extensive demands of Western markets. In that respect, Serbian
managers have had a preferential starting point since the beginning oftransition. The majority of Serbian businessmen speak English as a foreign
language, and a large number of managers speak other languages as well,such as German, French, Russian, Italian and Spanish.

92. Industrial structure

Source: Republic bureau for informatics and statistics

There are a number of industrial sectors in Serbia that will be attractive for foreign
investment due to advantages they posses compared to similar industries inneighboring countries and other transitional economies. These advantages aremostly of a location-specific nature such as easier and cheaper access to raw
materials or minerals and friendlier government policies towards foreign direct
investment. Furthermore, imperfections in international labour markets in theregion make Serbia very attractive due to competitive wage-cost differentials.
These advantages are present across many industrial sectors and Japanesecompanies might have special interests the IT and electronics sector,
pharmaceutical sector, chemical sector, automotive assembly and component
sector, textiles sector, agribusiness sector and the timber sector.

a.

IT and electronics sectors

This sector will have a key developmental role in areas of infrastructure and in
the process of modernisation. The IT sector is expected to form the infrastructure
for modern commerce and to become an export commodity itself. It is planned forthese sectors to achieve development rates of 6.9% and 14.4% for the periods
2001-2005 and 2006-2010, respectively.
Development basis:a) Solid quality of domestic engineers and workforce in general. However,there is a quality gap in information technology.
b) Huge world demand for a quality IT workforcec) High current export rates of electrical machinesd) Current competitiveness of most products and the ability to reach animmeasurable level of competitiveness in the future, especially intelecommunications and the electrical industries.
e) Assuredness that a national informational infrastructure will be developed
and deregulation of telecoms undertaken.
f) Assuredness that a stimulating environment for products and exports will becreated and maintained in Serbia.

10

Export Strategy: The export of application software is a big opportunity and wewill accept offices of foreign companies and tailor to their programs. Then
sectors will be chosen in which Serbia can produce for the world market. The
telecom industry has to modernize its products through domestic development
and to reach a broader market in middle and less developed nations. The
electrical industry has to modernize its products through a transfer of foreigntechnology or through domestic development or it will not attain a serious levelof export. In the field of electrical machines, export is already a substantial
component and thus support for the creation of export credits is necessary.
Certain infrastructural projects in Yugoslavia would benefit from developmentsin this field and further the developments of the energy and agro industries.
Key Strategic Actions and Changes:• Modernization of current capacities through domestic development(telecommunications) or foreign direct investment (electrical industries).
•

Realization of big domestic watering projects and constructions of minihydoroelectric power plants.

• Deregulation of telecommunications alongside the gradual formation ofnational information infrastructure – firstly for e-government and an
academic network – and for e-business after June 2005.
• Stimulating tax policy for IT companies and IT personnel.
• Reorganization of the academic system and enlargement of enrolment in
the study of information technology and telecommunications.
Needed investments: Total investments for technological modernization andthe enlargement of productive and export capacities of this sector are estimatedat around $US 150million for the period 2002-2010. The rate of return is high,and the period of return is short, especially for information technology.

b. Pharmaceutical industry
The industry aims to secure and provide domestic self-sufficiency in medical
supplies and increases in exports of quality medicines. Production of this sector
will grow at an average annual rate of 6.8% in the period of 2001-2005, and arate of 10.7% in the period of 2006-2010. The possible GDP of this sector in theyear 2005 is $US 150 million, and $US 250million in the year 2010.
Development Basis:• Availability of a high quality professional workforce in this field.
• Relatively good equipment that is on average 5-15 years old.
• The system of quality is at a very good level.
• The existence of strong domestic and export demand.
• Close co-operation with large EU industries.
• Products are competitive in both domestic and foreign markets.
Export Strategy: Export of quality final products and engineering services andthe sale of technology on markets of the Russian federation, Romania,
Macedonia, The Serb Republic, Near and Far East, Africa, Germany andCanada, together with a positive balance of payments in this sector.

11Key Strategic Actions and Changes: Continual education of all worker
groups. The raising of system quality to world-class levels. Partnershipformation among domestic companies and together with foreign companies.
Investing in reconstruction, modernization, and the broadening of capacities inharmonization with laws and regulations of the EU and FDA. Transparency ofdomestic regulations and institutions (of production, turnover, quality control,
import and export) alongside the administration of certain safety controls during
the change-over period (minimum 5 years).
Needed Investments: Total needed investments amount to about $US
150million for the period up to the year 2010. The period of investment capital
return is relatively short, and the return rate large alongside a positive foreignexchange balance.

c. Chemical industry
The role of the chemical industrial sector is to supply domestic enterprises withdomestic inputs and increase export levels. In the field of export maximization,polymers, elastomers, organic chemicals and pneumatics are very important.
This sector will be developing with the following annual production growth rates:
3.5% for the period 2001-2005 and 9.2% for the period 2006-2010. Export
growth dynamics in this sector will be very high – the average annual export
growth for the period 2001-2010 will be 15%, that is, a doubling every 5 years.
The export of gross production of this sector in the year 2010 will be $US 9501000million.

Development basis:•

Presently built-up primary capacities of base chemicals and thepossibilities of valuating available base chemicals through production
development of accumulative derivatives.

•

The existence of export markets and domestic demand.

•

The existence of a competent labour resource.

•

The opportunity of attaining needed cost competitiveness of products
alongside the acceptable current non-cost level of productcompetitiveness.

Domestic supply and export strategy: 75% of products of the chemicalindustry go into reproductive consumption (agriculture, construction, otherindustries) and around 25% into personal and general consumption.
Revitalization of current basic and processing capacities and construction of
new processing capacities with the goal of maximizing domestic inputs andforming a strategy of competitive supply channels. Export strategy of thechemical industry is based upon higher levels of processing of raw materials
from the base sector. Practically all investments should be export oriented.
Key strategic action and changes: Reconstruction and modernization ofexisting capacities (towards a revitalization programme) including parametric,
techno-energy and ecological optimization of processes and formation.
Construction of new export oriented capacities. Demonopolization in the supplyof natural gas, and a world market price for large users that use gas as raw
material. This is a precondition for survival and equal/competitive partaking in
the market. Preparation of needed personnel for the period after 2010.
Coordinated development of technology transfer and engineering services, for12the sake of more efficient technological development and increases in export
services.
Needed Investments: Investments for the revitalization of existing capacities
amount to $US 200million and for the enlargement of productive and export
capacities around $US 850million.

d.

Automotive assembly and components industry

The developmental role of the automotive assembly and components industry
in the Republic of Serbia is a) raising quality of its products and services to thelevel of maximum possible for the needs of the global market. B) averagecoverage of up to 50% of domestic requirements for automotive assembly andcomponents. C) maximization of its role in exports and decrease in trade
deficits of Serbia. D) This sector will be developing with high growth rates:
average annual production growth rate of 24% for the 2001-2005 period, and32.2% for the period 2006-2010. The export dynamics of this sector will follow
the production growth dynamics because the strategic goal is to export up to
30% of products of this sector to foreign markets until the year 2005, and over
50% in the year 2010.
Development basis:•

real needs and requirements of domestic transport and other industries
for automotive assembly and component parts•

great world market demand for products and services of this sector•

automotive assembly and car industry in general is the most vitalindustry in the world•

Serbia has a 50 year old tradition and experience in this sector•

relatively good worker potentials especially with higher education•

current cost competitiveness and the possibility of attaining non-costcompetitiveness in the near future.

•

attainable export strategy and attainable strategy for creating foreign
partnerships.

Industries of tools and precision mechanics have helped to build a stablefoundation for the automotive industry.
Export Strategy: Export of final products of the car manufacturing industry(cars, trucks, buses, tow-cars, special vehicles, universal tractors). Strategic
export markets: countries of the Former Yugoslavia and neighbouring countries,
Russia and CIS countries, EU, Africa and Asia. Targeted export level is $US
264million in the year 2005 and over $US 1780million in 2010.
Key Strategic Actions and Changes: Strong relationships with strategic
partners; product and technology restructuring; decomposition of current
capacities to smaller companies; concentration of existing firms and functional
integration of existing companies; liquidation of certain capacities and thecreation and development of new (small, medium and large) ones; formation ofa centre for harmonization with international technical, ecological and otherlaws; the formation of an information centre of the automotive industry.

13

Needed investments: Investments (production start-up, working capital,
reengineering, product and capacity development) of an average annual rate of
10% of sector GDP. It is possible to achieve short periods of return and highreturn rates.
e.

Textile industry

The aim of the textile industry is the re-attainment of its past export position
through an enlargement of current export capacities. This sector, currently
underutilized and jeopardized, is one of the most vital in Serbia, with a potential
to develop at a growth rate of 9% for the period 2001-2005, and 7% for theperiod 2006-2010. Until 2004, the textile industry will export through finishingworks almost 95% of its production. After the rejuvenation of its primary
productions, in the period of 2005-2010 this industry will export over 60% of its
total production.
Development basis:•

Very significant production capacities already exist.

•

Textile agreement with the EU is already under negotiation.

•

Great interest of former and new partners for cooperation.

•

The relocation of West European textile industries to Mediterraneancountries, the Balkans, the Near and Far East, Central America andAfrica. This presents a genuine opportunity for Serbia to take part in the
newly formed work segmentation.

•

Current cost competitiveness and the opportunity to attain non-costcompetitiveness in the future.

•

Quality workforce geared towards the demands of the European market•

Only simple training is necessary to enable a large workforce to cater toa large number of jobs.

•

Great possibility of opening new, flexible and small enterprises withsmall investments especially in underdeveloped regions.

•A stimulating environment for growth and development will result
following privatization.

Export Strategy: Exports of textiles and lohn jobs at 95% of production, tomarkets of past and currently interested partners: Germany, Italy, Holland,
Austria, France, Great Britain and Greece. Return to very accessible andabsorbing markets of Russia and other eastern markets, and revitalization of
the domestic market. The creation of conditions conducive to exports throughvertical integration of primary production, final production and trade. Programsof domestic high quality brand design and development, with the ultimate goalof exporting the most demanding clothes to luxury and high-cost brandcustomers and eventually also to the majority of middle-cost buyers, byresearching new markets in the Near East and in some African countries.

Key Strategic Actions and Changes: Enabling faster development throughtechnological modernization of the most dynamic and most resistant firms thathave good market access (parts of clothes industry, knitwear, rugs), and offirms that require little investment to become attractive to the European market.

14

Reduction of production, disintegration and liquidation of firms that do not
operate through market mechanisms, or have very old equipment and low
product quality. The strongest accent will be given to design and product quality
improvement.
Needed Investments: Revitalization and enlargement of export production are
possible through urgent investments of up to $US 500 per worker, totalling $US
50million and a further $US 70million until the year 2010. After the recovery, thetextile and clothes industries would use their own resources to fund theirdevelopment.

f.

Agribusiness
The key role of this sector is to develop national self-sufficiency in foodproduction and an export surplus. This sector will be aggressively developed
until 2005 due to a very low base in the year 2000. The annual growth rate ofthis sector for the period 2001-2005 is estimated at 4.7% while for the period
2001-2005 it is estimated to be 5%. The possible export component of this
sector in the year 2010 is estimated at 20% GDP.
Development basis:•

Serbia’s natural potential (the area of cultivable land per capita is above
average for Europe),•

national demand characteristics absorb a large percentage of family
budgets,•

dynamics of world demand,• reputable R & D sectors, with no genetic modifications,•the existence of developed processing capacities that merely requirereconstruction and modernization,•

the ability to create a coherent agricultural policy and institutions thatwould implement it.

Export Strategy: Diversified and pending upon demand dynamics of target
markets. The republics of the Former Yugoslavia and other countries ofSoutheastern Europe can absorb a greater part of strategic agricultural
products: corn, oil cultures and oil, and some types of meat. Similar is true for
the Russian Federation. EU countries import Serbian fruits, vegetables andprocessed food products: lamb meat, medical herbs and oils. Certain overseas
countries like the US and Japan can be export markets for processed meats,high quality cheeses, fine wines and similar products.
Key Strategic Actions: Enlargement of farmland. Modernization of export
capacities in the processing industry through strong business relationships withexperienced foreign companies. Ownership transformation of large publicagribusinesses without segmentation of individual property. Formation of anexpert group for market research and export maximization, the majority ofwhom should be centred around agribusinesses and not around government.
Needed investments: Monetary subsidies from the agricultural budget areneeded at the present rate of around $US 150m annually. Necessary
investments for watering amount to $US 530m for the period up to the year
2010. The greatest investments will be undertaken by the producers
themselves in individual agricultural sectors.

15

g. Timber industry
The developmental role of the timber industry in the Republic of Serbia is thelong-lasting maximization of its role in the enlargement of export capacities andthe lowering of trade deficits. If the appropriate conditions are met, this sector
can achieve very high growth rates: a productive increase of the order of 10.8%
annually for the period 2001-2005, and 17.6% for the period 2006-2010. The
dynamics of export growth of this sector will be very high: in 2005 this sector
will export, profitably and without export stimulus, around 60% of its key
products. The same figures are expected for the year 2010.
Development basis:• Sufficiency and quality of domestic raw materials• Growing demand for timber products in developed countries• Relatively good current standards of timber industry• Current price competitivenesscompetitivenessandpossiblefuturenon-price

Export Strategy: Export of massif furniture; special program for chair exports;
innovative design, quality and functionality improvements; focus on markets ofGermany, France, Great Britain, Italy and Russia; increases in exports offinished products. Increase in the production and export of veneer, focused on
the Italian, German, Belgian and Dutch markets. Increase in joinery exports,
floors, and interior furnishings through overseas building projects, especially in
Russia and the Near\Middle East.

Key Strategic Actions and Changes: Modernization of current capacities.
Connection of cooperative producer-business coalitions with the goal ofeliminating domestic competition on foreign markets. Decomposition of bulky
timber complexes. Creation of a centre for the certification of timber products.
Lowering of customs duties for the import of wood-preparing machines to 1-3%
with the aim of rapidly modernizing technological processes, increasing wood
product quality and wood product competitiveness.

Needed Investments: The total investments for technological and othermodernization and enlargement of productive and export capacities of this
sector for the 2002-2010 period amount to around US $100million. The periodof return is short (2-4 years) and the return rate is high.

16

The following charts illustrate domestic exports and imports by countrygroups and by industrial products.

Source: Republic bureau for informatics and statistics

17

3. Socio-economic infrastructure•

Rail and road improvements have been identified by the government as
investment priorities. Despite extensive damage suffered during the previous
decade years, the primary transport routes are already back to full capacity.
All the remaining roads should be full reconstructed by the end of 2005.
Priorities for the current period include Corridor X and Corridor VII networks,
railways, air traffic control and airport infrastructure.
Corridor X will allow Serbia to recapture the bulk of north-south transEuropean traffic, which will facilitate the movement of goods and trade within
Serbia and re-establish regional linkages within the country. Investments areneeded along the existing right of way with corresponding commitments fromthe fiscal budget to increase resources for road maintenance on a predictablebasis. A Roads Law has been passed recently, addressing financing issues
and how the network is operated.
Railway operations alongside Corridor X is governed by a new Railway
Law which is currently before Parliament. The law provides for theestablishment of central government support, regulates access by nonYugoslav operators and allows for the separation of infrastructure fromoperations.

Corridor X•

Corridor VII
Corridor VII – the River Danube - is a vital pan-European trade route. It
currently operates under significant free capacity and thus has the potential to
become the backbone of a sustainable transport system connecting the
Danube countries to the European market. Projects that will integrate the
Danube into modern supply chains are thus of strategic importance to the
Republic of Serbia and Europe.
Investments along corridors VII and X over the next decade may arise up to
3.5 billion USD.

•

Major investment (154 USD) for upgrade will be undertaken for the air traffic
control system. The Federal Air Traffic Control Association (FATCA) is
responsible for operating the current network. The Government is currently
evaluating an appropriate mechanism to finance a complete overhaul of thesystem including the option of IFI funding for transparent and competitive
procurement.

•

Public utilities require institutional reform to improve efficiency of service
delivery and to ensure financial stability and accountability. Individual service

18companies are not yet in a position to borrow given inadequacies in financial
control and the generally low level of tariffs. In most cases they remain
effectively divisions of the municipality itself. Progressively as these
institutions cover their costs through higher service fees, impose reliable
collection methods and demonstrate effective financial management, they willseparate from the municipality and become independent companies. Local
public utilities will also be offered as private concessions throughpublic/private partnerships. A number of regulatory changes have alreadybeen put in place to allow greater transparency and accountability of local
government finances which give local government the authority and financial
capability to borrow and invest.
•

Environmental protocols and regulations recently introduced contain newenvironmental law concerning the requirements for the sustainable use ofnatural resources and assessments of their ten-year impact on theenvironment. The attention given to environmental matters is truly unique fora country in its second year in transition. Environmental infrastructure has
become a high priority for the government of Serbia.

•

The Energy sector experienced heavy damage of infrastructure during
NATO bombing. The investment needs for rehabilitations are estimated at 2.8
USD. The solution to the problems is in policy adjustment and reconstruction.
Foreign aid Serbian budgetary resources have been channeled toward
repairs in the electrical power sector and several plants had their capacities
increased or restored in 2001. Resolution of the energy problem is an
essential step towards attaining sustainable growth.
Power transmission, gas distribution, and the oil sector have been
strategically designated for privatization. These sectors have also been
problematic in recent years: the coal industry supplied thermoelectric plants
with coal below cost, with corresponding losses financed through soft loans;
oil refineries suffered significant damage during NATO bombing; natural gas
is imported from the Russian federation (80% of consumption).
To obtain financing and cover operational costs, tariffs in these and otherenergy sectors are set to rise in the near future. Rehabilitation and import ofelectricity resulted in stable consumption. No shortages have been
experienced since 2001. Managing the political impact of reform, particularlyof tariff increases and public utilities, is currently a major challenge for theGovernment of Serbia.

19

4. Commodity market•

Serbia concluded a number of different trade agreements with other countries
and regions in order overcome trade barriers:

South East Europe Free Trade Area (SEE FTA)
The basis for the South East Europe Free Trade Area was laid out in the
Memorandum of Understanding on Trade Liberalization and Facilitation signed
on 27 June 2001 by the following countries: Albania, Bosnia and Herzegovina,
Bulgaria, Croatia, Federal Republic of Yugoslavia, FYR of Macedonia, Moldova
and Romania.
The main points of this agreement are the following:
•
•
•
•
•
•
•

Conclusion of bilateral free–trade agreements with all signatory countries
by the end of 2002;
Liberalization of at least 90% of mutual trade by the end of 2008;
An appropriate common set of preferential rules of origin;
WTO–consistent provisions for the application of antidumping,countervailing and safeguard measures;Transparent and non–discriminatory measures concerning public
procurement, state aid and state monopolies;
Harmonization of trade legislation with that of the EU (especially customs
procedures, competition law, company law, company accounts and taxes
and banking law);
Intellectual property protection in accordance with the WTO standards.

The Effects of SEE FTA
The South East Europe Free Trade Area will be comprised of eight countries
covering an area of 647 379 sq. km and a population of 59,6 million people. The
strategic location, good growth prospects and abundant human and natural
resources make the SEE Free Trade Area a location with considerable market,
resources and economic potential.
The South East Europe region is a good location for the export of goods andservices to the European Union, to Central and Eastern Europe and to Western
Asia. The transport time is typically three to four days from manufacturinglocations within SEE region to the above–mentioned destinations. Over 50% ofSouth East Europe’s trade is with the European Union.
South East Europe is the transport, telecommunications and energy crossroad
between Europe, Asia, and Africa with six Pan–European Transport Corridors (IV,V, VII, VIII, IX, X) crossing the region and linking it to Northern and Western
Europe, Russia, Ukraine, the Middle East and Central Asia. While the traffic
density remains high, regional governments, in cooperation with the International
Community, are investing billions of dollars in modernizing the infrastructure in
key sectors, like transport, energy, telecommunications, water and environment.
The Danube River, together with the Rhein–Main Canal, is the most important
link from the SEE Free Trade Area countries to the Western Europe. A new
railway and road crossing between Bulgaria and Romania, to be completed by
2003 and situated in the lower part of the Danube, near Kalafat–Vidin, will add tothe potential of the region.
In the region’s telecommunication sector, telephone line penetration is high.
However the mobile telephony segment is still undeveloped compared to that of
the Western Europe. This offers a great opportunity for foreign investment.

20Internet and IT market is constantly growing, with a high number of well–educated computer specialists developing high quality products at significantly
lower costs than in the EU.
A well–developed education system, available throughout most of the region,
reflects a modern economy. Illiteracy rates are low, compared to theneighbouring countries in Europe, ranging from 2% to 3%.
In addition, the number of people with a high–level education is comparable to
the EU standards. Wages are quite competitive, with hourly compensation for
production workers in manufacturing ranging from $0,8 to $1,3, compared to the
EU average of $20,2 per hour. Management salaries range from $500 to $1 000
per month, while skilled software developers can earn up to $1 200 per month.
South East Europe is a rapidly developing market with a considerable potential
for growth in the future. Political, economic and social reforms implemented in theregion have created a healthy environment for profitable investments.
Meeting the SEE FTA Obligations
The signatory countries have committed to concluding all bilateral Free Trade
Agreements by the end of 2002. FR Yugoslavia is actively working to meet thisdeadline, and has already accomplished the following:•

FTA with FYR of Macedonia - A trade agreement with FYR of Macedonia
has been operational since 1996. Currently the agreement is undergoing arevision to bring it in line with the WTO and EU regulations.

•

FTA with Bosnia and Herzegovina - The Federal Republic of Yugoslavia
and Bosnia and Herzegovina have agreed on the initial free trade agreement,
which will facilitate the lifting of trade barriers between the two countries by
2004 on an asymmetrical basis. So far, the proposed agreement is toimmediately abolish import duties for Bosnian products, except for:•crude oil and petroleum products and•protected and unprotected pneumatics.
For these two groups of products duty and customs rates will be reduced to
60% when the agreement comes into force; from 1. January 2003. customs
duties will be further reduced to 40% and from 1. January 2004. imports ofthese two groups of products will be completely free. The same dynamics areto be applied in the case of the abolishment of import duties for Yugoslav
products to Bosnia and Herzegovina. Export duties and technical obstacles
are to be abolished on both sides. This agreement will set the rules fordetermining the origin of products.

•

FTA with Croatia - Negotiations with Croatia are currently taking place. It is
expected that this agreement will envisage a progressive reciprocal
elimination of duties and customs. At the moment, each side is preparing alist of industrial and agricultural products to be fully liberalized within the time
period to be agreed between the two sides.

•

FTA with Albania, Bulgaria, Moldova and Romania – Preliminary
consultations with Bulgaria were held in April 2001 in the context of the Joint
Yugoslav–Bulgarian Commission for Economic Cooperation. The negotiations
continued in Sofia in July 2002.
Cooperation with Romania has started. A contract on free trade is going to besigned by the end of the year.

21The official talks with Moldova are in the preliminary process. On 24.
September Albania and Yugoslavia initiated a Free Trade Agreement.
Other Trade Agreements
In addition to SEE FTA, FR Yugoslavia has signed a number of agreements withother countries and trade organizations.
FR Yugoslavia and the World Trade Organization (WTO)
FR Yugoslavia has applied for membership in WTO, and it has been granted an
observer status in February 2001. Negotiations are ongoing.
Free Trade Agreement with Russia
A free trade agreement with Russia, concluded in August 2000, makes FR
Yugoslavia particularly attractive to foreign investors and manufacturers. It provides
for a gradual elimination of barriers to export of Yugoslav products to the Russian
market by 2005.
The agreement stipulates that the importing country regulates the rules of origin, in
accordance with WTO principles. The list of products not covered by the duty freeagreement is updated annually, and it currently includes poultry, sugar, chocolate,alcoholic beverages, soap, cotton, carpets, wooden furniture, household appliances,and motor vehicles.
The accord is the first such agreement Russia has signed with any country outside
the Commonwealth of Independent States. It is important to mention that although
the agreement has been operational in practice for more than a year, it has not yet
been ratified by the Russian parliament.
FTA with Hungary
The initial agreement with Hungary has been concluded and ratified by bothparliaments. The agreement, which is asymmetrical and favours Yugoslavia, defines
three categories of products:• The common list of industrial products
both countries will relax the import duties until fully abolishing them by 2004;• Yugoslav list of sensitive products
Yugoslavia will gradually reduce import duties until abolishing them by 2006;• Agricultural products
the list of products will be revised on an annual basis, as will the quota and duty
levels for the products on this list.
It is worth noting that the above agreement will be in force until Hungary joins theEuropean Union. After accession, Hungary will automatically implement agreementsthat Yugoslavia has signed with the European Union.
FTA with Slovenia
An Agreement on Free Trade was initiated on 27 September 2002. After the signingand ratification of the agreement Slovenia will immediately abolish all custom taxes
on industrial goods and Yugoslavia will abolish the custom rates gradually by theyear of 2007.
EFTA countries (Switzerland, Norway, Iceland and Liechtenstein)

22

A preliminary declaration of cooperation was signed with EFTA in December 2000,
pledging asymmetric treatment of Yugoslav products in the markets of the four
member countries. This declaration has paved the way for a future free trade
agreement between EFTA and FR Yugoslavia.
At the first official meeting of the working group in September 2001, EFTA has
ascertained its commitment to following the dynamics of liberalization of Yugoslav
trade with the European Union.
European Union
The EU has taken steps to stimulate exports of countries in the region through theestablishment of autonomous trade preferences (ATP) that provide duty–free entry
for over 95 per cent of goods. Exemptions include wine, meat and steel.

23

5. Labour market• According to the information released in 2000, there are 2,149,911 people
employed in Serbia, among which there are 1,253,015 men and 896,896
women. Average monthly salary is estimated at around US$ 185. As for thefurther statistical breakdown of the labour market, please use the tables below;
Employed by the level of
education
Higher (including Ph.D.s and MAs)

Total employment
Economic activities

1.689.912

214.687

Industry715.633(14.547)

Agriculture

86.216

College147.439

Forestry

12.536secondary vocational

836.188

secondary general

554.174

primary or lower

437.813

Ph.D.s and MAs

employees:
in public enterprises
in private enterprises

16.226

Construction

108.922

Transport and communications

161.058Trade

298.852

Catering trades and other85.114

Arts and crafts

81.618Public utilities

32.231131.533

Finance, commercial services

91.5112.018.378

Non-economic
activities

412.7231.652.550

Education and culture

166.212

Employed by status of
employment
employers and self-employed

Water works, supply

287.132

in mixed and cooperative
enterprises

78.696

unpaid family workers

156.739

Public health and other131.650

Public services and other

114.860

Liberal professions

11.366source: Statistical yearbook 2000, Federal bureau of statistics

Labour Act


Introduction of new Labor Law – December 2001;
Amendments on Pension Law – retirement age increased for
women – 58 and men –63; further increase might be expectedin the near future;

24




Law on protection at work;
General, specific(sector) and individual contracts.

The Labour Act brought the greatest pro market changes. It made labour market
conditions comparable with the rest of Europe. This Act was the base for the
beginning of the successful enterprises restructuring in Serbia. For the first time thestress was on entrepreneurs and employers not on unilateral protections of workers
and Trade Unions. This is the main reason why gave a very detailed explanation on
regulations considering labour.
The most important provisions of Labor Act 2001 are as follow:
The provisions of this Law apply to employees working in the territory of the Republicof Serbia with the domestic or foreign legal or natural person (the employer), as wellas to the employees that the employer has send abroad.
The provisions of this Law apply to foreign nationals working with an employer in the
territory of the Republic of Serbia, unless otherwise provided by the Law.
The Law does not provide the obligation of the employer to announce vacancies in
the public information media. The employer may, however, announce vacancies in
the public information media if he or she considers it necessary.
General requirements for entering into the labour relationship are: the employee has
to be older than 15 years and to be medically fit to work (general work ability).
The labour relationship is established by a labour contract concluded between theemployer and the employee. The Law does not prescribe the form of the contract.
Types of Employment Contracts
The labour contact may be concluded for an indefinite or definite period of time. If thelabour contract does not stipulate the period for which the employment relations arebeing established, it shall be considered that the employment relations were
established for an indefinite period.
Working Hours
Full working hours is 40 hours a week. The change to the previous Law is theprovision that the employees with less than 18 years of age may not work longer than
35 hours a week.
It is obligatory to introduce reduced working hours for the work done underparticularly difficult working conditions involving harmful effects on the employee's
working and health capacity. The working hours are reduced in proportion to theharmful effects of the working conditions, but by not more than 10 hours a week.
The employee may not work overtime more than four hours a day and not more than
240 overtime hours in a calendar year.
The working week lasts five working days and as a rule the working day lasts eight
hours, unless the nature of the task and organization of work require a different
schedule of working hours, which is decided by the employer.

25

Leave and Absence
Annual leave
The minimum annual leave is 18 working days. The maximum duration of the annual
leave, as well as longer leave for older employees and the employees working on thebasis of reduced working hours is not prescribed. The Law does not prescribe theobligatory criteria for determining duration of the annual leave.
During the annual leave the employee has the right to compensation of the earnings
in the amount that he would have earned if he had worked.
Absence from work with paid earnings (paid leave)
Paid leave may not last longer than five working days in the calendar year.
Protection of the Employment
Maternity leave
Maternity leave lasts up to three months counting from the day of delivery. An
employed woman may start using the maternity leave 45 days before the estimateddate of delivery and is obliged to do so 28 days before the delivery.
Upon expiry of the maternity leave, the mother or father of the child may use the rightto paid leave for the purpose of infant care for the total of 365 days, counting from theday on which maternity leave began.
Prohibition of Dismissal
The employer may not dismiss an employee during the employee's pregnancy,maternity leave or absence from work for the purpose of childcare unless theemployee has violated the working obligation or the employment relations were
established for a definite period.
Wages and Salaries
The Law provides that all employees should be paid the same for equal work, or forthe same value of work, from the same employer. The earning shall be paid only inmoney, unless otherwise provided by Law.
The elements for determining the earnings are not established by the Law.
According to the previous regulations the earnings consisted of the price ofwork, the work performance, the time spent at work, the allowance for a mealat the place of work, the subsidy for the annual leave and the field allowance.
Increased earnings
The employee has the right to increased earnings for the following:••••

Overtime work;
Work during public and religious holidays;
Night work;
Work in shifts.

26

Minimum earnings
The Government, the representative trade union and the representative
employers association establish the minimum earnings by mutual consent.
If the agreement is not reached the Government makes the decision. The
amount of the minimum earnings is determined by the working hour. Thismeans that the right to minimum earnings depends on the time spent at work.
Compensation of earnings
The employee is entitled to compensation of the earnings during sick leave(65% of the earnings), occupational disease and injury at work, annual leave,
public holidays and paid leave (100% of the earnings).
Termination of employment
The Law provides that the employment shall be terminated in the following cases:••••

By notice on the part of the employee.
By notice on the part of the employer.
Regardless of the employee's or employer's will.
By mutual consent of the employer and the employee.

Redundancy
The Law prescribes the obligation to adopt a program of solving the problem of
redundancies only in the following cases:••

If the number of employees exceeds 50 persons.
If the employer intends to cancel the labour contracts of more than 10% of
the total number of employees.

The employer with less than 50 employees is not obliged to adopt the
program of solving the redundancy problem, regardless of the number of theemployees that he intends to dismiss.
Severance pay
In the case of dismissal the employer is obliged to give to the employee aseverance pay equalling not less than two and not more than five of theemployee's salaries, depending on the insured years of service.
Collective contracts
Conclusion of the collective contract is voluntary. The collective contracts
regulate the rights, obligations and responsibilities in the field of employment
relations. The Government and the Chamber of Economy of Serbia are nolonger participants in the conclusion of the general collective contract

27

The collective contracts may be concluded as:
1. General - for the territory of the Republic
2. Special - for the territory under the local government or a unit withterritorial autonomy
3. Individual - with the employer28

6. Industrial policy
A. Privatization
Recent developments in the process of privatization are:












Introduction of the Law on Privatization –May 2001;
Establishment of Privatization Agency June 2001;
Law on Share fund;Plan to privatize all enterprises by 2005;
Two main methods of privatization – Sale of equity (no less then70%; Free of charge distribution of shares- up to 30% toemployees and citizens);
Sale by tender and by auctions (English and Dutch models);
Privatization agency organize and manages the sale of minority
stakes owned by the state (through the Share fund) in thecompanies privatized according to the previous privatization
regulations (around 900 companies);
Total value of stakes in Share fund estimated at 2,5 billion USD;
Over 100 companies planed to enter the process of divestiture in2002;
In 2001 privatized three cement factories; in the first half of 2002
additional 15 big factories; 44 large companies currently in processof privatization- for example :

Zastava – car manufacturer;
Largest chemical producers;
Largest paper producers;

The privatization process enjoys fully pledged support of the donor
community. The World Bank financially supports the engagement of the most
reputable names as financial advisors like Morgan Stanley, Nomura, CAIB,BNP Paribas, HSBC, Reiffeisen, Mainl Capital Advisory, Fieldstone etc.
Simultaneously with tender sale of the big enterprises, the privatization ofsmall and medium enterprises through public auctioning at the Belgrade
Stock Exchange is well under way. The plan is to privatize around 1000
SMEs by year-end.
In the third of the privatization routes, the corporate and financial restructuring
will take place prior to privatization. The restructuring has 3 phases, and it isexpected to last between 18 and 48 months. Six enterprises have alreadyentered Phase 1, and will be followed by additional 40 enterprises in thefollowing year.
The Share Fund, the owner of equity that remained non-privatized undervarious privatization laws in 1990s, already collected some EUR 22 million inreceipts for the sale of minority stakes in the six Serbian enterprises at theBelgrade Stock Exchange.
Natural resources, goods in common usage and goods of common interest
are not included in privatization. The buyers of capital or land can bedomestic or foreign legal entities or individuals.
Privatization process may be initiated only by the enterprise which is to be
privatized, the Privatization Agency or Ministry for Economy and Privatization.

29

Privatization process starts with an initiative (the foundation act of theenterprise which is to undergo the process, with a corresponding letter ofintent) and preparation of documentation (detail data on the subject which is
to be privatized). The privatization process is illustrated below:

Privatization process.

For more detailed information on the privatization process, please visit the web site of
the Ministry of economy and privatization at http://www.mpriv.sr.gov.yu
The speech by Serbian Minister of Economy and Privatisation, Mr. Aleksandar
Vlahovic, as well as the FAQ section with regards to the privatisation process canbe reviewed in the annex at the end of this document.

B. Anti-monopoly policy measures
There is still a lot to be done in the field of anti-monopoly policy measures.
Analysis of market structures in Serbia demonstrates a relatively high degree ofsupply concentration. Highest supply concentrations occur in the energy sector
and heavy industrial sector. Non-manufacturing businesses, with the exception oftransportation industries and industries that are legal monopolies, show a lower
level of supply concentration. Civil engineering is one of the industries with thelowest levels of supply concentration due to low barriers to entry.

30

Political (non-commercial) risk has been a substantial barrier to new entries in
the past, especially in the case of FDI, but also in the case of domestic private
entrepreneurs and investors. Risk is perceived on the basis of political instability
due to the weak coalition in power, political pressure for new elections, constantinternational pressure on the political affairs of the country and the uncertain
future of the joint state of Serbia and Montenegro.
Economic barriers to entry are the most resistant of all barriers to entry as they
are generated by factors that are hard to change or eliminate. Economies ofscale represent a significant barrier for Serbia (and indeed many other small
countries) as many companies require a certain threshold market size as aprerequisite for investment. This barrier can only be overcome by developing
export markets. Furthermore, the underdeveloped capital market in Serbia, bothin terms of financial and real capital, generates high costs of exit and entry tovirtually all industries and constitutes one of the crucial economic barriers to entry.
Institutional barriers to entry are technically easy to remove but require strong
political will. Although they have been slightly reduced over the past two years,
current institutional barriers remain high.

Foreign trade reforms introduced at the end of 2000 and mid 2001 led to theabolition of non-tariff barriers, the reduction and simplification of custom tariff
rates and considerable reductions in import procedure barriers. However,substantial barriers to import still exist, primarily tariff and technical barriers.
Naturally, these barriers vary from product to product, the highest being in thecase of agricultural products, consumer goods and durables.
Import barriers are being reformed within the context of joining the World Trade
Organization and the obligation to conclude the agreements on Free Trade
Zones. Import liberalization has most significantly reduced the supply
concentration of durable consumer goods and capital goods. Industries producing
aluminium, ceramics, glass, paper and iron products, construction materials, andthe basic chemical industry were least affected. Thus the most non-competitivemarkets are those for raw materials and inputs and components.
Domestic competition regulation is codified in a Federal Competition Law, butthere is also a whole string of laws and decrees regulating competition, someprovisions of which are contrary to the Competition Law.
The competition legislation is exclusively concerned with the abuse of monopoly
power and the consequences of non-competitive market structures – not withthose structures themselves and not with the process of their initiation. As aresult, it does not halt acts that lead to the creation of these structures. Therefore,
the law does not provide for merger control, and does not differentiate between
horizontal and vertical mergers.
Attempts to prevent free entry and exit go unpunished under the current
legislation. Large powers of discretion are left to the authorized institution todecide quite arbitrarily whether a company has a dominant position and whether
it is abusing it. Cartel agreements are punishable by law, even though they are
not a violation of the law per se.
The central competition legislation is the Federal Antimonopoly Commission.

31Generally speaking, the current legislation and accompanying institutional
solutions do not satisfy the needs of a modern competition policy. This is largely
due to the fact that existing legislation was made with conceptual solutions
borrowed from the period of self-managed socialism. Consequently, as it is notpossible to reform the existing legislation, it will be replaced in its entirety.
The introduction of new regulations will be accompanied by the construction of a
new competition institution, primarily a Competition Commission, which will
implement a consistent competition policy.

7. Trade and investment system

32

Serbian government quickly recognized the necessity to change domestic polices
in order to attract foreign investment. This especially applies on legislation sector
where dramatic changes are taking place. There is already new Law on Foreign
Direct Investments which regulates national treatment for foreign investors.
The new law provides freedom of payment, exchange and transfer for theinvestors. Furthermore, there is Law on Concession, which is awaiting ratificationby the parliament. The Law on Concessions is aimed to provide modern investing
environment in infrastructure. It also outlines sectors subject to concessions,simplifies procedure for giving concessions and provides regular tender
procedures.

Trade liberalisation
Trade liberalization was one of the first measures implemented as theGovernment took office. Though these regulations are under authority of theFederal Government of FRY all the laws were drafted within the Centre for Legal
Reforms Ministry for International Economic Relations (MIER) Republic of Serbia.
The area of foreign trade is regulated by the following laws: the Foreign Trade
Law, the Customs Duties Law, and the Law on foreign currency transactions.
o

Law on customs and Tariffs

Law on Customs and Tariffs was enacted in June 2001. The new Law on
Customs Tariff did not change the legal aspects of the previous law, but only
modified the level of customs that are specified by the Customs tariff
nomenclature, which is an integral part of the Law on Customs Tariff.






o

The goals were: fewer tariff categories; simplification of procedures;
removal of non tariff barriers, decreased tariff rates. Instead of 36 tariff
rates, the new law contains only 6. The new rates are 1, 5, 10, 15, 20
and 30%.
All restrictions were eliminated – no import quotas; minimal export
quotas. Out of a total of 8538 products specified in the Customs tariff
nomenclature, 296 require an export license, 344 an import license,
while quotas regulate the export of 37 products.
Customs duties were decreased: tariff rate were reduced from anaverage rate of 14,6% to 9,4% (level acceptable by WTO for
developing countries); custom rate (clearance rate) reduced from 1%
to 0,5%

Law on Foreign Trade

The import and export of goods is free (LB), except for goods that arenecessary for the adequate supply of the local market. The latter are
regulated by export quotas and mainly relate to agricultural products(wheat, corn, soy beans, sunflower seeds, sugar, molasses, noodles
made of sugar-beet, oil pies, cattle-feed and wood).
In order to be imported or exported, certain goods require additional
approvals from the following bodies:••••

Federal Ministry of Health and Social Policy.
Federal Ministry of Agriculture.
Federal Institute for Measures and Precious Metals.
Federal Institute for Standardization.

33

Detailed information on tariffs can be found on Serbian Investment and Export
Promotion Agency – Business Opportunities in Serbia http://www.siepa. sr.gov.yuoThe Foreign Exchange Law






New Law adopted in April 2000 significantly liberalized and simplified
the foreign exchange market and the foreign payment operations.
Dinar became convertible in Accordance with Article 8 of IMF
Non-resident may freely make transfer of proceeds of current
international transactions from a foreign currency, or dinar account,provided that has met the obligations with regard to income or profit
taxes due to the amount to be transferred.
Firms can make advance payments for exports of goods and services
and simplifies foreign payment transactions, which will result in ssignificant decrease in banking costs.

Foreign investment regulations
Government looks at the increase of FDI as the main instrument of achieving
long-term balance of payment sustainability. To achieve this main reform has
been done in a very short period of time. Basic legal framework was changed. In
the Parliament is a set of laws to be adopted concerning additional incentives toattract foreign investors.
oForeign Investment Law

The new Foreign Investments Law came into force on January 19,
2002
Long-term goal was to create a legal system that is compatible with
the EU legislation.
Law equalizes the rights and responsibilities of domestic and foreign
investors
The law regulates foreign investments in enterprises and other formsof establishment engaged in profit generating activities in the FR
Yugoslavia.
Foreign investments in insurance companies, banks, other financial
institutions and free trade zones are regulated in conformity withfederal law governing their founding and legal status.
Foreign investment may be made by founding a new enterprise or bybuying stakes or shares in the existing domestic enterprise
Additionally, a concession may be granted to a foreign investor for
exploitation of natural resources or goods in general use (e.g., roads)
or for carrying out activities of public interest, in accordance with thelaw. B.O.T. (build, operate and transfer) schemes are also
permissible.
The separate law regulates the concessions.










34

A foreign investment is:Investment in a Yugoslav enterprise granting the foreign investor
stakes or shares in the initial capital of that enterprise;
Acquisition of any other property right through which the businessinterest in the FRY is being realized.

Restrictions
Foreign individual or legal entity may not, by itself or with other foreign
investor, establish an enterprise in the field of production and trade inarmaments, or in areas defined as restricted zones by law.
Foreign investor may establish an enterprise in the above-mentioned
field and areas, or invest its capital in it together with a domestic entity,
but without acquiring the majority rights in management of suchenterprise and only upon the consent of the Federal Ministry of
Defence.

Forms of investment:A foreign investment can be in the form of foreign convertible currency,
goods, intellectual property rights, securities and Yugoslav dinars,
which are transferable abroad under the foreign exchange regulations.
A foreign investor may convert its established claim into a businessshare or stake of the debtor company.
A foreign investor has the same status, rights and duties as adomestic legal entity and enjoys full legal security and legal protection
in respect of rights acquired by virtue of the investment.
A foreign investor may, in the respect of any payment related to theforeign investment, freely convert domestic currency into foreign
convertible currency.

A foreign investor has the right to:









Control or take part in management of the enterprise he has founded
or in which he has invested his capital;
Transfer the rights and obligations (set out in the investment contract
or the founding act) to other foreign or domestic persons;Share and freely dispose the profit accruing from its investment;
Inspect the books and business operations of the enterprise in which
he has invested;
Audit the interim and annual financial statements either himself or
through an authorised representative;
Foreign investor is also allowed to buy real estate business andresidential premises, provided the reciprocity condition is met.
Urban construction land is still state-owned, implying that a foreign
investor (as well as a domestic investor) may be given only the right touse it, for which it's charged.
A foreign investor may, once commitments are met in accordance withdomestic law, freely and without delay transfer abroad in convertible
currency all-financial and other assets related to the foreign
investment (profits, dividends, additional payments, property upon
dissolution of the enterprise etc.).

35

Foreign Investment IncentivesForeign investor is free from paying customs duties and fees on theimported equipment on the basis of foreign investment, except for thepassenger's transport vehicles and slot machines.
Import of goods that represent the investment share of a foreign investor isunrestricted, providing such goods comply with environmental protection
laws.
A foreign investor and enterprise with a foreign investment enjoy tax andcustoms benefits in accordance with the law.

Concessions

New law in the Parliament waiting to be adopted;
Under the existing Concessions Law, exploitation of natural resources or
public goods is subjected to the provisions of this Law. Issuing of permits forundertaking public activities is also subjected to this law. The BOT contracts
are specially noted in the law. Concession can be granted to both domestic
and foreign citizen. The Law contains a list of relevant sectors (including oil,gas, minerals and telecommunications). At present, concession can be
granted for 30 years at longest. The concessionaires are chosen throughthe public tender, while the result of the tender must be published.

Free Trade Zones


Companies which operate in the free trade zones are entitled to import andre-export products from these zones without restrictions and without paying
the customs duties, charges or the Sales Tax. A permit for opening a tax
free zone is issued by the Federal Government.
There are currently 12 free trade zones in Serbia with more than 170,000
square meters of production and storage space and related infrastructure.
The free trade zones are located in Belgrade (with sub zones in Pancevo,
Smederevo and Kovin), Sabac, Novi Sad, Sombor, Prahovo, Pirot, Lapovo,
Sremska Mitrovica, Senta, Nis, Vladicin Han and Backa Palanka.

• There are also solutions suggested to simplify company registration procedureand the process of obtaining work permit and other permits necessary for
performing business in Serbia:
a. One-stop shop
The goal is to simplify procedures of obtaining permits by issuing allnecessary documents in one spot as well as offering complete
information about starting a business in Serbia.
b.

Self-certification
The person or entity submitting documents guarantees theirauthenticity, significantly accelerating the procedure.

c.

Default approval of the administration office
If the investor does not receive an answer from the administration
office within the defined time period, approval is automatically given.

d. Business Ombudsman
Position would observe the work of government administration andcourts, reinforcing transparency.

36

The following laws are to be approved by the end of year 2002:
1.

Law on public companies and services of generalinterest

2.

Law on preventing conflicts of interest3.

Law on denationalization

4.

Law on the construction

5.

Concession law

6.

Accounting law

7.

Law on banks and other financial transactions

8.

Law on telecommunications

9.

Energy Law

10. Securities Law and Investment fund law
11. International Arbitration Law
12. Leasing law
13. Anti Trust Law
14. Law on Foreign Trade Regulations

8. Dispute resolution systems

37• Serbia/Yugoslavia recognizes international arbitrage which is regulated by the
Law on legal proceedings. The court in charge of foreign trade arbitrage at the
Yugoslav Chamber of Commerce in Belgrade was established in 1947. There isa possibility of application the UNICITRAL rules. Serbia/Yugoslavia is also an
endorsee of all important conventions related to arbitrage: the Convention onrecognition and application of foreign arbitrage award in New York, theEuropean Convention on international trade arbitrage, and the Convention on
settlement of investment disputes in Washington.

9. Institutions to promote foreign investment38• Ministry of International(www.mier.sr.gov.yu)• SIEPA–
Serbian(www.siepa.sr.gov.yu)

Economic

Investment

Relationsandof

ExportRepublic

PromotionofSerbiaAgency• Ministry of Privatisation (www.mpriv.sr.gov.yu) / Agency for Privatisation(www.pa-serbia.co.yu)• Ministry of Finance (www.mfin.sr.gov.yu)• National Bank of Yugoslavia (www.nbj.yu)• Federal bureau of statistics (www.szs.sv.gov.yu)• Chamber of Commerce (www.pkj.co.yu)• Ministry of foreign affairs (www.mfa.gov.yu)

ANNEX

39

Facts about privatization: Supplied below are excerpts taken from a speech byAleksandar Vlahovic, Minister of Privatization and Economy, at the opening of aparliamentary debate of the new legislation on privatization.
Public support
Governed by the fact that privatization is of extreme importance, not only for one
political party, but for our entire society, we made an effort within the Government
and the Ministry to set in motion a powerful public campaign, with the goal of
educating all citizens and participants in the process concerning the new conceptof privatization, in order to achieve the social consensus and consensus of all theparticipants in privatization. This was driven by the fact that even the best of
privatization regulations will not have a chance for successful implementation if
they lack support from participants.
In the course of the public campaign, we had more than 30 meetings withentrepreneurs across Serbia and eight talks with all the relevant trade unions
where we presented the chosen route of privatization, the proposed concept ofprivatization. We also held presentations at five conferences, because all
professionals should also support this Law on privatization. We had presentations
at eight investment forums. We met also with privatization experts from othercountries, who used privatization as a powerful instrument for effective transition.
Thus, we consulted the former directors of agencies and ministers for financefrom Hungary, Czech Republic, Poland, Slovenia, Estonia, therefore, fromcountries where the privatization process had been successful. We had strong
support of the World Bank and its experts. In short, we made sure that we utilize
all the positive experiences and practices that these countries had in the courseof creating this concept of the Law on privatization and other corresponding
regulatory acts that will enable the implementation of the privatization process inour country.
State of the economy
We began by analyzing the present state of our economy when the creation of
the privatization process was initiated. We came to the conclusion that theeconomy of Serbia today is in deep financial and operational crises, that we lackover 660 billion dinars of working capital, that the last year's accumulated losses
exceed 500 billion dinars, that the external debts are extremely high for a country
in transition, that the internal debt exceeds 847 billion dinars and that a latent
insolvency is present, all this due to the economy with an inherited structure fromthe seventies and beginning of eighties. We have come to the conclusion that theprocess of privatization has to produce an open structure of the economy andcapital for new investments.
That is why when I mention privatization; I actually mean investments, strong
corporate governance and strong management. When I talk about privatization I
do not mean that we should sell out Serbian enterprises. Here we are talking
about the arrival of foreign strategic investors who will invest in our enterprises
and our economy, who will inject the essential capital not only in the funds for theworking capital but into the fixed assets funds as well.
When I mention privatization, I am thinking also about two other elements in theeconomic reform, those are: development of small and medium sized enterprises
and direct investments into new industries.

40

I feel that privatization is a strong, powerful instrument in the transition of ourcountry, due to the poor results in our economy to date. In the past, we had
regulated the transformation of ownership from socially owned capital into otherforms of ownership. Actually, we had laws whose headings spoke for themselves
about the extent in which this country has been involved in the process ofprivatization.
For the first time, we have wide categories of participants in privatization. That
includes not only the employees but also the structures outside, all citizens aged
above 18, because I believe that all generations who contributed towards thecreation of the social ownership have to participate in privatization.
The social consensus
The social consensus is crucial; all citizens are welcome to participate, both theemployed and unemployed. Our country has an unemployment rate of 27% andmost of all, over 600 thousand of the employed are only working in enterprises
which exist only formally and which failed to distribute salaries at regular intervals
for more than six months, or even a year.
This army of people, of citizens, will get a chance to participate in a part of theprivatization process. This package of regulations adequately forms a balance
between the centrally conducted privatization process and the initiative todecentralize the process to the enterprise level.
In other transitioning countries, the privatization process of the entire economy
was carried out by the state privatization agency. We did not think that this wasappropriate, because we believe that management in our country is at a higher
level than it was in the countries of central Europe in the beginning of the nineties.
For this reason, a large number of enterprises will be allowed a complete
decentralized initiative and implementation of the privatization process. The
Agency, as a central institution, will focus mostly on the privatization of the stateowned capital and privatization of the largest socially owned enterprises.
What are our objectives?
Our main objective is to build an efficient economy. An efficient economy needs
efficient privatization. Our goal, as well, is to have a clear ownership structure,since that is the only way to be efficient and to prevent illegal privatizations anddetrimental contracts for the enterprise. When social ownership is present, there
is no other way to prevent this.
Our goal is to maximize the inflow of foreign capital and foreign direct investment
through privatization. That is why when I say privatization, I really mean
investments in enterprises.
Our goal is to have strong corporate governance, and to have better
management. Privatization will create a market economy where, in addition to thecompetition on the enterprise level, competition will exist among the workers andthe management, where the management will be appointed according to theirexpertise and not political ties and connections.

41

Management's main task will be to provide the highest profit possible for theowners, and that will be the only criterion on whether they will stay on as
managers or be replaced by better performing ones.
Our goal is to create an open and liberal economy through the process ofprivatization. In addition, we plan to support the development of the stock
exchange, and to allow for all shares to be traded, including the shares fromprevious privatizations whose trading was forbidden in the secondary market. We
hope that this concept will result in all companies being quoted on the Belgrade
Stock Exchange.
It is certain that the above-mentioned procedure will be realized for the large
enterprises. In accordance with that fact, we have created the basic premises,
economic growth and social stability. Another important premise is the price,where the value of the capital is determined in accordance with the market
conditions, based upon flexibility and complete transparency.
Because of these facts it would be beneficial to conduct a debate on these threelaws, in order to be able to see things clearly. This time privatization is going to
be compulsory and time-constrained.
Our task is to have a completely efficient, objective regulatory framework. As you
have already seen, the object of privatization is going to be capital and property.
Tenders and auctions
Even though it has not been explicitly stated in the Law, all large enterprises,
their number not exceeding 150, will be privatized by tender privatization carriedout by the Privatization Agency, and all small and medium sized enterprises will
be privatized through auctions. We have more than seven thousand small andmedium sized enterprises and we defined the auction privatization to be highly
decentralized on an enterprise level.
The enterprise organizes and carries out the auction. The commission for auction
just assists the auction while the enterprise completes the necessary
preparations. The Agency organizes the tender, because the tender procedure ishighly serious.
The Ministry and the Government have control over the Agency, therefore, it is
not correct to say that the Agency controls itself. Governed by the principles oftransparency of all the processes, we have delegated to the Agency
responsibilities and rights making sure that the entities to be privatized arepromptly announced to the public.
The overall transparency of the process will be guaranteed only when acoordinated, coherent action by all bodies is established. For that reason a
proposal for the foundation of a separate committee, appointed by the Assembly,
whose task will be to monitor all the processes, is necessary.
The law provides for a strong initiative coming from the employees in privatization
through auction. In the case of auction, 30% of the employees, prior employees
and pensioners have the right to distribute their shares. I expect that thecompetition will be formed within the enterprise and that several different groups
will make their offers and compete for its purchase.

42

In the case of large enterprises we need strategic partners. Also, we need to offer
our citizens a quality portfolio of shares and the Privatization Register, proposedby this law, has to contain a limited number of portfolio shares, which, once wecomplete the tender privatization, will deliver to the citizens shares from thePrivatization Register free of charge, and I am confident that those shares will be
traded on the stock exchange.
Only then, the citizens will be given quality shares and not worthless paper. That
was our objective, to achieve this fairness.
In the tender procedure 70% of capital is sold to the buyer, probably a strategic
partner, because here we are talking about large enterprises which require
extensive investment, 15% will be distributed to the employees, and 15% will be
distributed through the Privatization Register.
How do we distribute the shares, and when?
First comes the sale and only then the distribution to the employees, because
when you sell 70% of the capital for 7 million DEM, than you know for sure that
30% of the remaining capital is worth 3 million DEM; then there are no frauds, noillusions, and no surprises.
In that case, the person holding the paper will see that the nominal value is equal
to the real value. The majority of the capital is in the hands of the strategic
partner who has the finance to invest into the enterprise, taking into account theopportunity of those shares to grow. If we introduce the free distribution of shares,
the economy would freeze and slowly sink further down, because the employees
and all citizens do not possess the funds to invest, and do not readily see that the
crucial criteria for participation is the amount of investments.
Therefore, the privatization through auction, with its incentives scheme, is based
upon the assumption that all the various interested groups, employees, willcompete. Besides the national currency, in accordance with the Foreign Currency
Operations Law, we have allowed foreign currencies as instrument for payment,
as well as the bonds issued for the old hard currency savings.
We have defined specific assignments for making use of the revenues.
Privatization will not produce unemployment. Unemployment already exists dueto the inefficient structure of our economy. Privatization will resolve suchproblems: inefficiency, excess labour force, excess external debts and old hardcurrency savings debt that tumbled down through this inefficient economy.
These problems were derived from an erroneously structured economy. That is
why we have to utilise the revenues of privatization in order to eliminate thenegative effects. Based on the premises of the restructuring in Privatization law,
we will use the proceeds of privatization i.e. revenues, to support the social
security programs implemented in every enterprise independently, and also, use
those funds for repayment of the external debts and of the old hard currency
savings debt.
That means that the State is going to take over the existing debts, and these aregoing to be covered with the revenues from privatization. Why is the State taking
over the responsibility to cover debts - because it has been estimated that we

43

have at least 30 large enterprises, unattractive for privatization due to theirinsolvency.
Part of the revenues should also be distributed towards special purposes like thecompensation for owners of nationalized property, therefore, the restitution will be
conducted wherever feasible. The restitution of property will be regulated by the
Law on denationalization, but here we speak mostly about enterprises.
Enterprises of today are not the same as the ones from 1944. The restitution ofproperty is not feasible, therefore we propose financial compensation, becausemoney is the most liquid of assets. We think it is the best possible way to deal
with this problem.
Part of the proceeds will be used for the development of the small and mediumsize enterprises, for the creation of the flexible economy.
Institutions conducting the process
In the case of the tender privatization, the decision making process is split
between the Agency and the Tender Committee. The Tender Committee isappointed by the Ministry of Economy and Privatization with the aim to organize
the tender, evaluate the bids, and participate in all stages of the bidding process.
The Tender Committee has the last say.
When the Auction Sale is the case, the role of the Agency is only one oforganizing of the Auction, all other activities are done by the enterprises.
According to the Law, the Agency has to promote, initiate, conduct and control
the process of privatization. The Agency is controlled by the Government, i.e. by
the Ministry through the Managing and Supervisory Boards. Once more, I would
like to mention that the Assembly will form a Committee, which will conduct
monitoring and control related to all entities participating in the process ofprivatization.
What is the role of the Share Fund? The role of the Share Fund is to operate
efficiently, that means to release shares from its portfolio and this should be donein the limited period of time. As you know, the Share Fund was created as aconsequence of the previous concept of privatization and has little in common
with the new concept of privatization, but nevertheless the Share Fund should
operate with due professional care, which means that we care a great deal about
the potential buyer of shares from the Share Fund. These are aimed, whenever
the Share Fund sells more than 25%, at securing a strategic partner, which is
why we shall negotiate with our enterprises with a view to forming a majority offer.
Only by tender sale we can control the level of investment revenues. This will be
the task of the Share Fund which will have to conduct this process within the
period of six years with due professional care.
This Law does not include retroactive provisions. As promised the legal
procedures will not include retroactions related to the privatization process,because retroaction would mean risk involved in ownership. Obviously themonitoring of all performed activities is a continuous process. Let me remind youthat 400 enterprises entered the privatization process in the period from
November 2000 to January this year, while prior to this period only 354. What isgoing to be our priority? Our aim is to create conditions for the transactions ofshares on the secondary market. If we intend to develop financial markets, than itis necessary to abolish the Preferred Purchase Rights, because we are talking
about the shares issued in the privatization process. With the Preferred Purchase44

Rights in operation, the functioning of the Stock Exchange is out of question, it
disables the operation.
Our task will also be to release part of shares from the Fund for Pensions andDisabled Insurance and to transfer these shares into the Share Fund. By theformation of the majority share offer we intend to attract prospective strategic
investors to join the bidding process. Also we do not intend to keep 10% of
shares in the Pension Fund, because they proved to be completely ineffective.
10% of revenues from the privatization will be available for financiallystrengthening the Fund.
The initiative, ladies and gentlemen, is on management, and I hope that thisinitiative will be used wisely and strongly, because we have strong support toconduct economic reforms in our country and that is it. We are talking about
efficient transition, new economy structure, and about Privatization Law as a solidbase which enables us to build an efficient structure of our economy.

Section 6 – Industrial Policy – Privatization - Public Tender Procedure:
What is a A public tender is a method of selling capital or property by
public tender? obtaining offers from potential buyers through a publicannouncement in conformity with defined conditions of sale.
When is a public tender When an enterprise fulfills the criteria in terms of:• size (a large enterprise);used• strategic importance andas a method of• there is interest from buyers
privatization?
What is sold Social or state capital of an enterprise is sold by a public tender.
by a public tender? The value of that capital is expressed by the nominal amount oras the percentage share of that capital in the total value of anenterprise.
What are the rights Employees may acquire shares free of charge up to 15% of the capitalof employees that is privatized. Through the preparation of the tender dossier andin an enterprise through their member on the Tender Commission, employees actively
privatized through a participate in the preparation of the tender conditions and criteria, as
public tender? well as in monitoring the procedure and approving the results of atender.
What are the rights At least 15% of the capital of every enterprise privatized by publicof citizens arising tender is for distribution free of charge to citizens. All citizens of thefrom privatization of Republic of Serbia who are over 18 years of age at the time of theenterprises by distribution of capital are eligible to participate.
public tender?
What is the This is the register in which a record is made of the capital which isPrivatization reserved for distribution among the citizens. Entries are madeRegister? throughout the privatization process. Capital will be distributed within
two years from the expiration of the period envisaged for privatization.
Who organizes A tender is organized and carried out by the Privatizationa public tender? Agency which may engage consultants for the organization of
the tender and selection of the best offer.
What are The Agency is authorized to:the powers• organize the public tender;of the Agency?
• prepare the tender dossier;• issue the public invitation;• organize a visit to the enterprise being privatized;• evaluate the offers received from bidders;• propose the selection of the best bid to the Tender
Commission.

45

What are The Tender Commission, set up by the minister for privatization,
the powers is authorized to:of the Tender Commission?
• monitor the tender procedure;• approve the results of the tender as proposed by the
Agency.
The Tender Commission consists of five members. Threemembers are the representatives of the Government of the
Republic of Serbia, one member is the representative of thelocal municipality at which the head office is located, and one
member is the representative of the enterprise being privatized.
Who cannot be involved in Neither persons from the Agency nor from the Tender
carrying out the tender? Commission may be involved in the tender process if they:• have ownership rights in the enterprise being privatized,• participate in the tender,• have a relative up to the third degree in a straight line who
participates in the tender
Who is eligible A domestic legal entity or individual and a foreign legal entity or
as a buyer individual.
in a tender?
Who is not Participation in the tender as a buyer is not permitted for:eligible as • a domestic individual or legal entity who has not settled its
a buyer in liabilities under the Law on the Lump-Sum Windfall Profit Tax
a tender? and• a subsidiary company in the case of the sale of the parent
company.
What are • initiation of the privatization procedure;
the stages in • preparation of the tender;
the tender process? • tender implementation.

Who can initiate
privatizationof an enterprise andhow?

Privatization of an enterprise can be initiated by:• the enterprise,• Ministry for Economy and Privatization,• A potential buyer.
by submitting to the Agency the initiative for privatization,
which represents a written intent to privatize the enterprise.
How is the public The Agency announces the Prospectus in the public media (press,
informed of the television, the Internet).
privatizationof an enterprise?

What is a A Prospectus is a presentation of the basic data about the enterprise being
Prospectus? privatized by which the Agency invites potential buyers to submit their
letters of interest.
What is A document expressing the interest of a potential buyer in the privatization
a letter of an enterprise.
of interest?
How is the The Agency submits to the enterprise information about the privatizationenterprise informed method selected on the basis of the Prospectus and received letters of
about the selected interest submitted by potential buyers.
privatization
method?

46

What are therestrictions
on the enterpriseduring the tender
procedure?

How isa tenderprepared?

Who is theadviserand how is heselected?

During the course of the public tender, the enterprise can make decisions
on the following matters only with the consent of the Ministry for Economy
and Privatization:• capital increase;• capital decrease;• reorganization;• restructuring;• investment;• conclusion of long-term arrangements;• sale of part of the property.
A tender is prepared in three stages:a) selection of the adviser and appointmentb) of the tender commission;b) preparation of the tender dossier;c) announcement of the public invitation to tender and receipt of bids.
The adviser is a consulting company, investment bank or a legal firm which
has experts in the field of sale of companies, corporate finance, share saleand purchase agreements, etc. The selection of the adviser is madethrough public request for bids or by invitation.

What does The adviser is engaged to provide technical assistance in the organization
an adviser do? of the tender and selection of the best bidder. In cooperation with theenterprise and the Agency, the adviser prepares the tender dossier.
What is A public invitation is an offer to potential buyers to submit their bids for thea public purchase of the enterprise. The date of the publication of the public
invitation? invitation in the media (at least one daily paper, the Internet and, as
required, the foreign press) is considered as the date of the opening of thetender.
How is the buyer • the confidentiality agreement;
informed about the • information memorandum on the enterprise;enterprise which is • conditions and timing for participation in the tender;
being sold and • description of the procedure;
about the tender • timing and procedures of site and data room visit;
conditions? • criteria for the evaluation of bids as determined by the Agency;• a copy of the Regulation on the Sale of Capital• and Property by Public Tender;• draft share sale and purchase agreement and• other information and documentation necessary for sale by tender.
What actions A buyer is obliged to:must the buyer • buy the tender dossier,undertake prior • sign the confidentiality agreement,
to submission • pay the deposit.
of a bid?
Can a potential Yes, after he signs the confidentiality agreement.
buyer visit theenterprise during
the courseof the tender?
What is The amount paid which ensures that only serious potential buyers
a deposit participate in the tender.
in a tender?
How is a bid A bid is submitted to the Agency directly or by registered mail in a sealed
in a tender envelope which contains another two envelopes:
submitted? • an envelope marked "original" containing the original bid and• an envelope marked "supporting documentation" containing:• a copy of the original bid;
• documentation for identification of the participant (a copy of an identity
card or passport, or a copy of the registration document for legal entities);47• certificate of the payment of the deposit;• the number of the bank account to which deposit refund in case the bid is
not accepted, will be remitted.

What is the Opening of bids is public and may be attended by all participants in theprocedure for tender or their representatives, or agents with power of attorney. The
opening bids ? Agency, in the presence of the Tender Commission, opens the bids anddetermines:• whether the bids were sent in on time
• whether the envelopes marked as "original" and "supporting
documentation" contain all the required information.
What bids A bid is invalid if it:
are considered • does not fulfill the tender conditions (as assessed by the Agency andinvalid? confirmed by the Commission);• was not received on time;• is incomplete.
Who evaluates The bids are evaluated by the Agency, within 30 days from the date of
the submitted bids? opening the bids. At the proposal of the Agency, the results of the tender
are approvedby the Commission.
What happens if If there is only one participant in the tender, and the bid is assessed as
there is timely and complete, the Tender Commission, at the suggestion of the
only one participant Agency, may decide:in the tender? • to complete the tender procedure with one participant with the aim ofconcluding a contract, or• to repeat the tender.
If the tender is carried out with one participant, the minister in charge ofprivatization will appoint a new commission - the Negotiation Commission which will complete the tender procedure.
What is A tender list is a list, done by the Agency that ranks bids according toa tender list? predetermined criteria. The best bid is ranked first on the tender list.

According to whichcriteria are theparticipants ranked
on the tender list?

Who is considered
the buyer ofan enterprise ata tender?
How areparticipants
informed of
the results ofthe tender?
Do the tenderparticipants
have the rightof appeal?

The criteria for ranking the participants on the tender list are:• continuity of the enterprise operations;• investments in the enterprise;• social program;• environmental protection program;• price offered for capital or property of the enterprise.
The offer of the tender participant for each of the criteria shall become an
integral part of the Share Sale and Purchase Agreement.
The buyer is the person whose bid, after the analysis of all criteria, isassessed as the most favorable, and who is ranked first on the tender list.
The Agency sall inform this person of their selection and invite them toconclude the Share Sale and Purchase Agreement.
Within three days from the approval of the results of tender the Agency
shall inform in writing all ranked participants.

Yes. An objection concerning the legality of the tender procedure is to belodged with the Ministry for Economy and Privatization within eight days ofthe day on which the result of the tender was announced. The ministry is
obliged to make a decision concerning the objection within a period of eightdays from the day on which the objection was received.

48

When is A tender is deemed unsuccessful if:
the tender declared • none of the bids fulfills the conditions of the tender,
unsuccessful? • a satisfactory agreement was not reached in negotiations with a soletenderer• the first-ranked bidder, and after that the second-ranked bidder on thetender list both refuse to sign the Share Sale and Purchase Agreement.
Is the deposit The deposit is refunded to:refunded to • the participant who withdraws his bid;
the participants? • the participant whose bid is assessed as invalid and• the participant whose bid is not accepted.
The deposit is not refunded:• to a participant in the tender proclaimed as the buyer (it is credited
against the sales price);• to a participant in the tender whose bid is evaluated as the mostfavorable, but who fails to sign the Share Sale and Purchase Agreement;• to the tender participant whose bid is evaluated as the most favorable,
but who refuses to sign the contract or who fails to make payment of thesales price within the specified time.
Who concludes The Share Sale and Purchase Agreement is concluded by the buyer andthe Share Sale representatives of the Agency and the enterprise.
and Purchase
Agreement?

What arethe means of
payment used
in a tender?

The buyer may pay the sales price in:• domestic currency;• convertible foreign currency;• bonds issued to the nationals of the Republic of Serbia
according to the conditions for the frozen foreign currency
savings of citizens, which mature at the latest by the dateof sale of the enterprise.
What happens if the If the buyer fails to sign the The Share Sale and Purchase Agreement
buyer withdraws within the specified time, the Agency shall offer it to the next best bidder onfrom the purchase? the tender list. If this bidder also fails to sign the contract, the Agency shalldecide, in cooperation with the Ministry, on the further course of action.
By what means
is it ensured that
contractual
obligations on thepart of the buyer
are fulfilled?
When does thebuyer become
the owner?

What are the legal
consequences of
the changeof enterpriseownership?
Is the tender
documentation
preserved?

For each contractual obligation the buyer shall provide a performance bondissued by a bank, which is activated if the buyer fails to perform theobligation within the specified time or in the specified amount. The
Privatization Agency regularly controls the execution of buyers' obligations.

The buyer becomes the owner of the enterprise upon the payment of thefull amount of the contracted sales price, minus the amount of deposit, in
accordance with the Share Sale and Purchase Agreement. From thatmoment on, the buyer takes possession of the enterprise and enjoys freeuse of the acquired property.
The change of ownership of the enterprise capital is entered in the court
register. Appropriate changes to the Statute and other internal regulationsof the enterprise are also made, and the owner acquires the right toparticipate in the management of the enterprise in proportion to the amountof his ownership share.
Yes. The Agency is obliged to keep the tender documentation at least
three years from the date of the conclusion of the Share Sale andPurchase Agreement.

49

Who receives
the proceedsfrom the tendersale?

The proceeds from the sale of enterprise capital in the privatization
process are paid to the account of the budget of the Republic of Serbia andare to be used for the following purposes:• 10% for financing the Republican Employees Pension and Disability
Insurance Fund,• 5% for financing infrastructure development of the territorial region where
the enterprise headquarters are based,• 5% for financing infrastructure development of the local municipality
where the enterprise has its headquarters,• 5% for identification of persons whose property has been nationalized,• financing of the economic development and environmental protection
programmes,• servicing of debts where the Republic of Serbia is the creditor or
guarantor,• to cover the costs of sales incurred in the privatization procedure,• other purposes.

50