TABLE OF CONTENTS

1........... Introduction. 3

1.1........ Preface. 3

1.2........ Context 3

1.3........ Relations between the EU and Montenegro. 3

2........... Political criteria. 4

2.1........ Democracy and the rule of law.. 5

2.2........ Human rights and the protection of minorities. 9

2.3........ Regional issues and international obligations. 10

3........... Economic criteria. 12

3.1........ The existence of a functioning market economy. 12

3.2........ The capacity to cope with competitive pressure and market forces within the Union. 16

4........... Ability to take on the obligations of membership. 18

4.1........ Chapter 1: Free movement of goods. 18

4.2........ Chapter 2: Freedom of movement for workers. 20

4.3........ Chapter 3: Right of establishment and freedom to provide services. 20

4.4........ Chapter 4: Free movement of capital 21

4.5........ Chapter 5: Public procurement 21

4.6........ Chapter 6: Company law.. 22

4.7........ Chapter 7: Intellectual property law.. 23

4.8........ Chapter 8: Competition policy. 23

4.9........ Chapter 9: Financial services. 24

4.10...... Chapter 10: Information society and media. 25

4.11...... Chapter 11: Agriculture and rural development 26

4.12...... Chapter 12: Food safety, veterinary and phytosanitary policy. 26

4.13...... Chapter 13: Fisheries. 27

4.14...... Chapter 14: Transport policy. 27

4.15...... Chapter 15: Energy. 28

4.16...... Chapter 16: Taxation. 30

4.17...... Chapter 17: Economic and monetary policy. 30

4.18...... Chapter 18: Statistics. 31

4.19...... Chapter 19: Social policy and employment 31

4.20...... Chapter 20: Enterprise and industrial policy. 33

4.21...... Chapter 21: Trans-European networks. 34

4.22...... Chapter 22: Regional policy and coordination of structural instruments. 34

4.23...... Chapter 23: Judiciary and fundamental rights. 35

4.24...... Chapter 24: Justice, freedom and security. 44

4.25...... Chapter 25: Science and research. 48

4.26...... Chapter 26: Education and culture. 49

4.27...... Chapter 27: Environment and climate change. 49

4.28...... Chapter 28: Consumer and health protection. 51

4.29...... Chapter 29: Customs union. 52

4.30...... Chapter 30: External relations. 53

4.31...... Chapter 31: Foreign, security and defence policy. 53

4.32...... Chapter 32: Financial control 54

4.33...... Chapter 33: Financial and budgetary provisions. 55

1. Introduction 1.1. Preface

The Commission reports regularly to the Council and Parliament on the progress made by the countries of the Western Balkans region towards European integration, assessing their efforts to comply with the Copenhagen criteria and the conditionality of the Stabilisation and Association Process.

This progress report, which largely follows the same structure as in previous years:

– briefly describes the relations between Montenegro and the European Union;

– analyses the situation in Montenegro in terms of the political criteria for membership;

– analyses the situation in Montenegro on the basis of the economic criteria for membership;

– reviews Montenegro’s capacity to take on the obligations of membership, i.e. the acquis expressed in the Treaties, the secondary legislation, and the policies of the Union.

This report covers the period from October 2012 to September 2013. Progress is measured on the basis of decisions taken, legislation adopted and measures implemented. As a rule, legislation or measures which are under preparation or awaiting parliamentary approval have not been taken into account. This approach ensures equal treatment across all reports and enables an objective assessment.

The report is based on information gathered and analysed by the Commission. Many sources have been used, including contributions from the government of Montenegro, the EU Member States, European Parliament reports[1] and information from various international and non-governmental organisations.

The Commission draws detailed conclusions regarding Montenegro in its separate communication on enlargement,[2] based on the technical analysis contained in this report.

1.2. Context

The European Council of December 2010 granted the status of candidate country to Montenegro. Accession negotiations with Montenegro were opened in June 2012. The Stabilisation and Association Agreement between Montenegro and the EU entered into force in May 2010.

1.3. Relations between the EU and Montenegro

After the opening of accession negotiations, the screening process was conducted. In line with the new approach for the chapters on judiciary and fundamental rights, and justice, freedom and security, the screening meetings for these chapters took place in spring 2012. By July 2013, all screening meetings had been completed. Two negotiation chapters were opened and provisionally closed, namely: science and research, and education and culture. In June 2013 the government adopted the action plans for chapters 23 and 24, which, together, sketch out a comprehensive reform agenda in the area of the rule of law, including the judiciary and fundamental rights.

Montenegro is participating in the Stabilisation and Association Process.

Overall, Montenegro continued to broadly implement its obligations under the Stabilisation and Association Agreement (SAA). A Protocol to the SAA to take account of Croatia’s accession to the EU has been agreed between the EU and Montenegro. The Protocol is currently under ratification and is being applied on a provisional basis from 1 July 2013. Regular political and economic dialogue between the EU and Montenegro has continued through the SAA structures. The Stabilisation and Association Council met in December 2012 and in June 2013 and various sub-committee meetings have been held since October 2012. The April stabilisation and association meeting between representatives of the European Parliament and of the Montenegrin Parliament was not attended by the opposition Democratic Front, in protest over alleged irregularities during the presidential elections. Montenegro participates in the multilateral economic dialogue with the Commission and the EU Member States to prepare the country for participation in multilateral surveillance and economic policy coordination under the EU’s Economic and Monetary Union.

Visa liberalisation for citizens of Montenegro travelling to the Schengen area has been in force since December 2009. In the framework of the post-visa liberalisation monitoring mechanism, the Commission regularly assesses progress made by the country in the implementation of reforms introduced under the visa roadmap. This also includes an alert mechanism to prevent abuses, coordinated by Frontex. Within this framework, the European Commission has regularly submitted its monitoring reports to the European Parliament and Council. The next report will be presented by the end of 2013. A readmission agreement between the European Union and Montenegro has been in force since January 2008.

The EU provides financial assistance to Montenegro under the Instrument for Pre-accession Assistance (IPA). For the period 2007-2013, IPA allocation to Montenegro totals €235.7 million. The IPA National Programme 2012-2013 amounts to €21.3 million and was adopted by the Commission in December 2012. This programme addresses the priority sectors identified in the Multi-Annual Indicative Planning Document, in particular the rule of law, public administration reform, the environment and climate change, as well as agriculture and rural development. The programme also supports the alignment of national legislation to the EU acquis in areas such as free movement of services, competition, food safety, veterinary and phytosanitary standards. EU financial support has also been provided for the development of civil society under the Civil Society Facility as well as for regional and horizontal IPA programmes. Montenegro benefits from support under the IPA multi-beneficiary and regional programmes. Moreover, it is participating in five cross-border cooperation programmes with neighbouring Western Balkan countries, as well as in transnational cooperation programmes with Member States under the European Regional Development Fund and the IPA Adriatic cross-border programme. The implementation of IPA programmes is currently managed by the EU Delegation in Podgorica. Montenegro’s preparations for the decentralised implementation of IPA programmes by the national authorities have further advanced, Montenegro having submitted application packages for the conferral of management for IPA Components I-IV. Montenegro and the Commission are preparing a comprehensive Country Strategy Paper for the period 2014-2020, which will provide the strategic framework for the support to Montenegro under the new Instrument for Pre-Accession Assistance (IPA II).

Montenegro is participating in the following EU programmes: the Seventh Research Framework Programme; the Entrepreneurship and Innovation Programme and the Information Communication Technologies Policy Support Programme 2011, both under the Competitiveness and Innovation Framework Programme; Culture 2007-2013; Life Long Learning (centralised actions); and Customs 2013.

2. Political criteria

This section examines the progress made by Montenegro towards meeting the Copenhagen political criteria, which require stability of institutions guaranteeing democracy, the rule of law, human rights and respect for and protection of minorities. It also monitors regional cooperation, good neighbourly relations with enlargement countries and EU Member States and compliance with international obligations, such as cooperation with the International Criminal Tribunal for the former Yugoslavia.

2.1. Democracy and the rule of law

Constitution

In July 2013, parliament adopted amendments to the Constitution, in the section on the judiciary, which are broadly in line with the Venice Commission recommendations. The amendments strengthen the independence of the judiciary by reducing political influence on the appointment of prosecutors and high-level judicial officials through more transparent and merit-based procedures, and qualified majority thresholds where parliament is involved. (For more detailed information, see Chapter 23 — Judiciary and fundamental rights.)

Elections

Early parliamentary elections took place in October 2012. The Democratic Party of Socialists — Social Democratic Party — Liberal Party (DPS-SDP-LP) coalition won 39 seats out of 81, the Democratic Front 20, SNP 9, Positive Montenegro 7, the Bosniak Party 3, Forca 1, Croatian Civic Initiative 1, and the Albanian Coalition 1. The formal requirement of 30% of female candidates in the electoral lists was met. However, only 15% of elected MPs were women.

Presidential elections were held in April 2013 and resulted in the re-election of Filip Vujanovic. Mr Vujanovic’s eligibility as a candidate had been unsuccessfully challenged in the Constitutional Court by the junior partner in the governing coalition, the SDP. A legal complaint by the other presidential candidate, Miodrag Lekic, filed after the election in relation to alleged irregularities, resulted in re-elections in a number of polling stations, without changing the overall result. After the completion of the appeal procedures, including a ruling by the Constitutional Court, the State Election Commission announced the final official results on 22 April. The presidential elections were ‘professionally and efficiently administered’, according to the final report of the OSCE/ODIHR, the international observation mission, and were held in a peaceful and pluralistic environment.

The OSCE/ODIHR report also stated that electoral legislation needed to be amended in line with a number of previous OSCE/ODIHR and Venice Commission recommendations. These include issues such as the right to stand as an independent candidate, the establishment of clearer procedures for the allocation of seats to minority lists, and the extension of the Central Election Commission’s mandate for municipal elections.

In its final report, the OSCE/ODIHR raised issues such as the constitutional two-year residency requirement before citizens can obtain the right to vote, which it deemed excessive. It recommended an audit of voter lists, demanded better investigations into alleged misuse of state resources and suggested facilitating requests for election observation. The OSCE/ODIHR also drew attention to the recommendations by the Council of Europe’s Group of States against Corruption (GRECO), which had also stated that rules prohibiting elected officials from using the administrative resources of their public office in election campaigns lack enforcement.

Parliament

In protest against the alleged irregularities in the presidential elections, the largest opposition parliamentary group, the Democratic Front, suspended its participation in parliamentary work. Following parliament´s passing, on 31 May, of two resolutions, one aiming at strengthening trust in the electoral process and the other enabling an inquiry committee into the issue of the alleged use of public funds for party political purposes (see below), the Democratic Front resumed its parliamentary activity.

In March, parliament adopted an action plan for strengthening the body’s legislative and oversight role, also in response to the recommendations of the 2012 European Commission’s Progress Report on Montenegro.

In November, parliament set up a working group in charge of drafting a resolution on European integration. The adoption of this resolution is expected to define more closely the role of the parliament and the committee on European integration in the accession process, as well as the relationship between the committee and other stakeholders, including the government.

Regarding the transparency of parliament’s work, additional measures have been taken to improve interaction with civil society and the public. Parliament replied to all access to information requests received over the reporting period. The sittings of the parliamentary committees are open to the public, subject to the approval of each committee’s chair. The establishment of procedures for acting upon civil initiatives is still in the preparatory stage.

Parliament’s oversight role has been enhanced. In March, it adopted amendments to the law on data secrecy to give members of the Committee on Anti-Corruption access to confidential data without prior permission. Five control hearings were held: on the case of alleged corruption in the privatisation of the company ‘Telekom Crne Gore’, on the Prevlaka border issue with Croatia, on the 2004 murder of a journalist, on the alleged illegal activities and violation of state interests regarding the issue of electricity supply to KAP, and on the fulfilment of the obligations stated in the report of the Council of Europe’s Commission against racism and intolerance of February 2012. Seven consultative hearings were held by the Committee on European Integration on issues relating to the work of the Ministry of Foreign Affairs and European Integration and current developments in the negotiation process. Consultative hearings were also held by the Committee on Education, Science, Culture and Sports, and the Administrative Committee. A committee of inquiry looked into the ‘Telekom Crne Gore’ case. Since there was no committee majority in favour of concrete conclusions, a technical report was submitted to the plenary.

On 31 May, parliament formed a committee of inquiry into alleged misuse of public funds for party political purposes. The committee completed its work at the end of July. Parliament limited itself to a technical report, which failed to draw political conclusions. Judicial follow-up remains to be completed. On 31 May, parliament also set up a working group on building trust in the electoral process. It was asked to submit to parliament proposals for amendments to relevant legal framework. The working group already adopted a draft law on a single voters’ list, to replace the law on voters’ register, as well as draft amendments to the law on personal identity cards. An ad hoc committee was set up to monitor media reporting during the elections. The number of parliamentary questions, scrutiny and consultative hearings with high-level state officials and discussions of reports submitted by various institutions has increased. Follow-up to the conclusions adopted by parliamentary committees in oversight hearings remains limited and needs to be reinforced.

Parliament’s administrative capacity has been further strengthened, notably by increasing the number of staff by more than a fifth. Available office space has increased. Training courses were conducted. Continued efforts are needed to further enhance parliament’s administrative and expert capacity, in general and for all parliamentary committees.

Overall, with regard to parliament’s functioning and its legislative and oversight role, its administrative and expert capacity has been reinforced. Transparency has further improved. Efforts to enhance parliament’s legislative and oversight capacity need to continue.

Government

Following the October parliamentary elections, the new government — headed by Prime Minister Milo Djukanovic — took office on 4 December.

It kept the same number of ministries (16, plus 1 minister without portfolio). Minor changes have been made to the portfolios of three ministries. The number of deputy prime ministers doubled to four. Thirteen out of 19 members of the previous government participate in the new cabinet. There are only three female members of cabinet.

The four-year programme of the new government puts a strong emphasis on EU integration, socio-economic development and the rule of law.

The government completed the establishment of the negotiating structure, which comprises 33 working groups for the chapters under negotiation. Civil society representatives have continued to be selected for membership of the working groups through calls for expression of interest.

The administrative capacity and financial resources of the Ministry of Foreign Affairs and European Integration to coordinate the EU accession process has been strengthened. As regards transparency, the government started publishing translations of the screening reports endorsed by the Council on the Ministry´s website. Also, with a view to facilitating direct communication with the citizens, in October 2012 the government launched an internet platform for e-petitions, open to Montenegrin citizens and foreigners with permanent residence.

Two (not legally binding) parliamentary resolutions called on the government to re-nationalise the privately held shares in the highly-indebted aluminium producer KAP and to commission a long-term sustainability study of the industry. Parliament also demanded that the state audit institution assess the company´s debt. The government took no action on this. In July, the acting public prosecutor told the parliamentary Committee for economy and budget that his office had started collecting evidence regarding the unlawful supply of electricity to KAP.

With regard to local self-government, elections were held in four municipalities. There were no developments in the rationalisation and efficiency of local administration. Implementing legislation for the new law on civil servants and state employees at local level has not been adopted yet.

Overall, the structures for the accession negotiations have been set up and include representatives of civil society. The administrative and financial capacity of the Ministry of Foreign Affairs and European Integration to coordinate the EU accession process has been strengthened. Additional efforts have been made to increase transparency and citizen’s participation in the policy-making process. The overall capacity of ministries to prepare high-quality legislation and impact assessments needs to be enhanced. As regards local government, further efforts are needed to establish a transparent, efficient and accountable administration.

Public administration

The plan for the reorganisation of the public sector, which had been endorsed by the government in April 2012, was finalised and adopted in July 2013. This version provides a sector analysis with a view to identifying adequate staffing levels and increasing efficiency. Reorganisation measures continued to be taken and fourteen administrative bodies were formally incorporated into their parent ministries.

As regards the overall public administration strategy, the coordination and monitoring mechanism for its implementation needs to be strengthened. Responsibility for the coordination of public administration reform is spread among three structures. A consistent legislative framework for public administration bodies and agencies needs to be developed.

The adoption of implementing regulations for the law on inspection control, designed to bring inspections within a single authority and improve the business climate, is well on track.

The 2011 law on civil servants and state employees entered into force in January 2013. It lays the foundations for developing a professional and impartial public administration. Subsequently, amendments to the law entered into force to restrict the re-employment of employees who had left the service and had received severance payments. The majority of necessary implementing legislation has been adopted, including on the recruitment process and the internal organisation of administrative bodies. Some ministries have updated their rulebooks on internal organisation. The process has yet to be completed by all ministries. The law on general administrative procedures has yet to be revised in line with European standards and best practice.

The Human Resources Management Authority has organised a number of training courses and seminars in the fields pertinent to the work of the public administration. The Authority has been tasked with monitoring the implementation of the new law on civil servants and informing the competent inspection authority of potential irregularities. The Authority´s administrative capacity has been strengthened, notably by increasing the number of staff from 24 in 2011 to 29 at the end of 2012. Further efforts are needed with regard to maintaining and updating the central human resources register.

Amendments to the law on the state audit institution, aimed at strengthening the institution´s financial independence, remain to be adopted. (See also Chapter 32 — Financial Control).

At the end of 2012, 112 senior officials and 36 heads of administrative bodies delivered, at the request of the government, undated resignation letters. Subsequently, a small number of these resignations were accepted. Even if motivated by the desire to enhance performance, this practice breaches employment rights and undermines public officials’ professional independence of undue political influence.

Overall, in the area of public administration reform, the adoption of the plan for the reorganisation of the public sector and the entry into force of the new law on civil servants and state employees are positive steps forward. Proper implementation needs to be ensured. More efforts are needed to implement the public administration reform strategy. Significant further efforts are needed to improve and to implement the legislative framework. The undated resignations are an issue of concern and should be returned to the staff who signed them.

Ombudsman

The capacity of the Ombudsman’s office remains limited, despite the additional staff recruited. A number of awareness-raising activities and seminars have been held; reports on abuse of children via internet, on prison conditions and on protection from discrimination have been completed. Monitoring capacity in the area of torture and ill treatment, and the office’s involvement in bringing cases of discrimination to court, need to be substantially enhanced. The law on the ombudsman still presents shortcomings with regard to the office’s independence.

Civil society

Representatives of civil society organisations continue to be involved, to some extent, in the activities of the state and local administration, including working groups on the EU accession negotiation chapters. However, the transparency of the government’s procedures for cooperation, consultation and funding of NGOs should be further enhanced.

Judicial system

Transparency of the work of the courts has improved and the backlog of court cases has decreased. Further steps have been taken to rationalise the court network. Constitutional amendments strengthening the independence of the judiciary have been adopted. A single countrywide recruitment system of judges and prosecutors and an objective and merit-based promotion system have yet to be introduced. Measures need to be taken to reinforce accountability and integrity safeguards in the judicial system. The enforcement of civil and administrative decisions remains weak. As regards domestic handling of war crimes, Montenegro needs to tackle impunity and ensure that decisions by the Montenegrin judiciary on war crimes cases are in line with international humanitarian law, reflect the jurisprudence of the International Criminal Tribunal for the former Yugoslavia and fully apply domestic criminal law.

For a detailed analysis of developments in the judicial system, see Chapter 23 — Judiciary and fundamental rights.

Fight against corruption

Corruption remains prevalent in many areas and continues to be a serious problem. The implementation of the relevant legislative framework has shown a number of shortcomings, which require further legislative action. The capacity of supervisory institutions in charge of checking political financing and conflict of interest still needs to be enhanced. Increased efforts are needed to establish a credible track record of investigation, prosecution and conviction in corruption cases, including high-level cases.

For a detailed analysis of developments in the area of anti-corruption policy, see Chapter 23 — Judiciary and fundamental rights.

Fight against organised crime

Additional efforts are needed in the fight against organised crime. Montenegro is actively involved in regional and international police and judicial cooperation. Some progress was made in the fight against drugs trafficking; however, more efforts are needed in terms of drug seizure. A track record of proactive investigations and final convictions in other organised crime areas has yet to be established, including confiscation of criminal assets. Additional efforts are needed to improve coordination between law enforcement agencies and the judiciary, and to increase capacity to carry out financial investigations in connection with complex criminal investigations. The annulment of first-instance verdicts in cases of organised crime gives rise to serious concern.

For a detailed analysis of developments in the fight against organised crime, see Chapter 24 — Justice, freedom and security.

2.2. Human rights and the protection of minorities

Montenegro has further aligned with norms and best practice stemming from international conventions in this area during the negotiation process. The law prohibiting discrimination remains to be amended in order to be aligned with the acquis. Shortcomings persist in the enforcement of rights, especially in the area of discrimination against vulnerable groups, notably by judicial authorities. Administrative capacity and financial means to implement the relevant policies in this area remain limited.

The fight against ill-treatment requires increased attention from the authorities; prison conditions need to be brought into line with international standards in this area. Despite recent convictions and investigations into cases of violence against the media, a number of old and recent cases of threats and violence against journalists, including attacks against media property, need to be solved by stepping up investigations and prosecutions. The recent rise in cases is a cause for concern. Efforts to privatise state-owned print media have been unsuccessful. Some progress has been achieved in introducing a media self-regulation funding model. Promotion of professional and ethical standard should continue.

Consolidation of the legal and policy framework in the field of economic and social rights continued. They need to be brought closer in line with international and EU standards in this area, and the capacity of the state authorities strengthened, especially in the field of justice.

Montenegro’s 2013-2014 presidency of the Roma Decade is an important opportunity to enhance its commitment to improving the situation of the Roma, Ashkali and Egyptian (RAE) population not just in Montenegro, but at regional level. These groups face discrimination in everyday life, especially in terms of economic and social rights. Violence against women, in particular Roma women, and domestic violence persist. The adoption of a strategy on lesbian, gay, bisexual, transgender and intersex (LGBTI) rights and convictions in cases of attacks on LGBTI individuals are positive examples of the authorities’ commitment in this area. Still, violence and hate speech against LGBTI individuals continue, and have increased since the July 2013 Pride parade in Budva, which showed a high level of homophobia in the country to be addressed by the authorities. Attacks are rarely reported; criminal offences need to be properly prosecuted and penalties reinforced. Activists are still exposed to discrimination.

For a detailed analysis of developments in the area of human rights and the protection of minorities, see Chapter 23 — Judiciary and fundamental rights. For developments in the areas of trade union rights, anti-discrimination and equal opportunities, see also Chapter 19 — Social policy and employment.

2.3. Regional issues and international obligations

With regard to cooperation with the International Criminal Tribunal for the former Yugoslavia (ICTY), Montenegro neither received any requests for assistance nor had cases referred back to its national authorities by the Court for possible further investigation. (For domestic handling of war crimes see 2.1 — Judicial system.)

Montenegro still maintains a 2007 bilateral immunity agreement with the United States, granting exemptions from the jurisdiction of the International Criminal Court. This does not comply with the EU Common Position on the integrity of the Rome Statute or with the related EU guiding principles on bilateral immunity agreements. Montenegro needs to align with the EU position in the framework of accession negotiations.

Progress has been made as regards the Sarajevo Declaration Process, which brings together Bosnia and Herzegovina, Croatia, Montenegro and Serbia and aims at finding sustainable solutions for the refugees and displaced persons as a result of the armed conflicts in ex-Yugoslavia during the 1990s. The implementation of the Regional Housing Programme, which aims at providing housing solutions for the most vulnerable refugees and displaced persons in the four countries and is extensively supported with EU financial assistance, has started with the approval of the first round projects by the international donors in April. Joint regional information campaigns on the programme have been carried out throughout the region. However, the implementing capacities of the partner countries need to be further improved and a series of documents and procedures need to be finalised in order for the approved country projects to start. Efficient project implementation units and rigorous beneficiary selection procedures as well as beneficiary data cross checking remain to be established. The good cooperation overall between the partner countries on the process and the housing programme, and on civil documentation and pensions issues, needs to continue.

Regional cooperation and good neighbourly relations form an essential part of Montenegro’s process of moving towards the European Union. Montenegro continues to be strongly involved in developing regional cooperation. It also continues to actively participate in regional initiatives, including the South-East European Cooperation Process, the Regional Cooperation Council, the Central European Free Trade Agreement, the Energy Community Treaty and the European Common Aviation Area Agreement. Montenegro has continued to support the Igman Initiative on reconciliation, which brings together NGOs from Bosnia and Herzegovina, Croatia, Serbia and Montenegro. Montenegro also supports the RECOM initiative on regional reconciliation.

Montenegro took a leading role in strengthening regional cooperation at the highest political level, through its proposal for the establishment of the ‘Western Balkan Six’ initiative, which aims at bringing together the region’s leaders in an effort to enhance cooperation on European integration. In this context, close cooperation with the Regional Cooperation Council is important. A meeting of the proposed ‘Western Balkans Six’, at political directors’ level, took place in July.

Montenegro continues to maintain good bilateral relations with other enlargement countries and neighbouring EU Member States. However, the delimitation of borders with Croatia, Serbia, Bosnia and Herzegovina and Kosovo* is still pending. In May, Montenegro, Albania, Bosnia and Herzegovina and Croatia signed a memorandum of understanding for cooperation on the Trans-Adriatic Pipeline and Ionian Adriatic Pipeline projects. A bilateral convention on regional cooperation under Article 15 of the SAA has not yet been concluded with Albania; such a convention will also have to be concluded with Serbia, following the recent entry into force of its SAA.

Agreements were signed in various fields with Albania, including on mutual protection of classified information, education and electronic exchange of customs data. The agreement on border railway transport was ratified in March. A protocol of cooperation between the police of the two countries during the summer tourist season was signed in June. A treaty on extradition with Bosnia and Herzegovina was ratified in March. Negotiations to finalise a border agreement continued.

The agreement with the former Yugoslav Republic of Macedonia on police cooperation was ratified in March. The agreement on readmission of persons residing without authorisation and the agreement on the conditions of travel for the nationals of the two countries entered into force in December 2012. An agreement on cooperation and mutual assistance on customs issues was signed in March.

The prime minister of Serbia visited Montenegro in September. The agreement on police cooperation with between the two countries entered into force in March. An agreement on consular protection and services in third countries was ratified in July. A readmission agreement was signed. A joint special task force for fighting corruption and crime is operational and has already resulted in police actions in the two countries. There were no developments in the dispute between the Orthodox churches in the two countries.

Concerning Kosovo, negotiations are under way to conclude agreements on extradition, mutual enforcement of judicial decisions in criminal matters, and on legal assistance in criminal matters. A joint commission on border demarcation has started work.

Montenegro and Turkey worked closely in the field of economic cooperation and tourism. The two countries signed a readmission agreement and a consular protection agreement. Agreements in the field of science and health were also signed.

Montenegro and Croatia signed agreements on cooperation in the field of economy and tourism. The amended local border traffic agreement has not been signed yet. The temporary agreement on the Prevlaka peninsula continues to be implemented smoothly, at technical level. A joint commission on border demarcation was set up in February to solve the Prevlaka issue. The two countries agreed to submit the border demarcation issue to the International Court of Justice only if bilateral negotiations failed.

In November, Montenegro and Italy signed an agreement on cooperation in the field of the environment. Two agreements on enhancing the application of the European Convention on Extradition and the European Convention on Mutual Assistance in Criminal Matters were signed in July, as well as an agreement on scientific cooperation.

Overall, Montenegro continues to meet the Stabilisation and Association Process conditions on cooperation with the International Criminal Tribunal for the former Yugoslavia and regional cooperation. A number of bilateral issues with neighbouring countries are still open, notably in the area of border demarcation.

3. Economic criteria

In examining economic developments in Montenegro, the Commission’s approach was guided by the conclusions of the European Council in Copenhagen in June 1993, which stated that membership of the Union requires the existence of a functioning market economy and the capacity to cope with competitive pressure and market forces within the Union.

3.1. The existence of a functioning market economy

Economic policy essentials

In January 2013, the country presented its second Pre-accession Economic Programme (PEP), covering the period 2013-2015. The priority is still to strengthen fiscal and financial stability as a prerequisite for long-term economic growth. Overall, the political consensus on market economy fundamentals and economic policy was broadly maintained.

Macroeconomic stability

After two years of moderate growth, the economy entered into recession in 2012. Real GDP contracted by 2.5%, pulled downward by the poor performance of industry, construction, transport, financial services and agriculture. Industrial production contracted by 7% year-on-year, driven by the decline in manufacturing, particularly the metals industry. On the expenditure side, private consumption and investments remained weak, due to stagnant disposable income and the decline of construction works. Net exports had a positive impact on growth with stronger tourism partly compensating for the fall in merchandise exports (-18% year-on-year). The average per-capita income in purchasing power standards represented 42% of the EU-27 average in 2012.

The economy came out of recession in 2013 with real GDP expanding by 1.1% in the first quarter of 2013, and by 3.4% in the second quarter thanks to the positive performance of industrial production, and notably utilities. Other sectors, like construction, forestry, transportation, and retail trade recorded annual expansion but their overall contribution to growth remains limited. GDP growth slowed somewhat in the second quarter of 2013. In the first half of 2013, industrial output grew by 10.4% year-on-year, maintaining a similar pace in July and August too. In the first six months of 2013 the value of finalised construction works recorded 1.8% annual growth, and the number of tourists increased by 4% year-on-year, supporting 6.5% year-on-year increase of retail sales. However, private domestic demand still remains subdued due to the contraction of wages, low credit and a stagnant labour market. Overall, growth has been largely driven by external demand and one-off base effects, compensating for a still weak domestic demand.

In 2012, the merchandise trade deficit widened to 44% of GDP from 40.4% of GDP a year before. The increase in tourism revenues and higher surpluses from transfers of Montenegrin workers abroad did not suffice to fully compensate for the expansion of the trade deficit. As a result, the 2012 current account deficit 19% of GDP. In the four quarters to June 2013, the current account deficit narrowed to some 16% of GDP as the aggregated balances of services, current transfers and income were in surplus while the trade deficit contracted as a result of the improvement in the energy balance. In 2012, after two consecutive years of contraction, net foreign direct investment (FDI) climbed by 16.6% year-on-year to 14.7% of GDP. In the four quarters to June 2013, net FDI totalled 14.2% of GDP. Net errors and omissions remain a substantial source of finance, related to unrecorded revenues from tourism, remittances and other unregistered cash payments totalling 7.7% of GDP in 2012. Overall, despite some improvement, external imbalances still remain very large.

Unemployment remains very high at nearly 20%, practically unchanged since 2010 according to the Labour Force Surveys. In 2012, labour market participation improved marginally to 50% compared to 49% a year before. Regional disparities are significant. In the coastal and central regions, the unemployment rate is 10% and 15.6% respectively, but it rises to 36.7% in northern Montenegro. At national level, both the number of employed and the number of unemployed persons increased by 2.6% year-on-year in 2012. Long-term unemployment remains a serious concern, since 68% of unemployed persons have been out of work for more than two years. Unemployment particularly affects the young (15-24 years), who account for more than 40% of the total. Poor labour market dynamics have also been reflected in wage moderation. Average gross wages contracted in real terms by 3% in 2012 and by 1% in the first half of 2013. Overall, a poorly performing labour market with low participation and high unemployment rates, particularly among the young and the long-term unemployed, remains a serious challenge.

Unilateral euroisation implies that there is limited scope for monetary policy discretion. Changes in reserve requirements remained the key tool for steering liquidity in the financial system. The Central Bank of Montenegro (CBM) did, however, test the scope for curbing lending interest rates in November 2012. Rates on new corporate and household loans were capped, during a six-month period, at 14% and 15% respectively. The measure mostly provided relief for those new property or tourism investment loans whose rates were above these thresholds. Yet, the CBM decided not to renew the measure. At aggregated level, the weighted average lending interest rate contracted moderately, from 11.3% in October 2012 to 10.3% until June 2013.

Average consumer price inflation accelerated somewhat to 4.1% in 2012 compared with 3.1% a year earlier, on the back of administrative price increases for electricity and water as well as higher or new excises on tobacco, alcohol, carbonated drinks and coffee. Inflationary pressures eased in the first six months of 2013 as consumer disposable income contracted due to a personal income tax hike in February 2013. The consumer price index declined further to 2.2% in June, down from 3.9% a year before, as a result of the deceleration of prices of housing (which includes utilities), alcoholic beverages and tobacco, transport, as well as restaurants and hotels. In July, when the upper VAT rate was increased, CPI inflation accelerated to 2.7% year-on-year, but declined again to 2.2% in August. The impact of the VAT hike on inflation remained marginal as the tax increase did not apply to items benefitting from the reduced rate (i.e. some 50% of the consumer basket). Overall, inflation remains moderate.

In 2012, despite fiscal consolidation efforts, the government had difficulties meeting its budgetary targets. The budget deficit remained high, at 5.6% of GDP, considerably higher than the deficit target of 2.4% GDP, reflecting weaker than expected growth together with the activation of state guarantees and the accumulation of tax arrears. General government spending broadened to 47% of GDP, from 45% a year before representing a substantial deviation from the planned figure of 41%. Social security transfers increased moderately (by 0.7%) driven by the increase in military pension beneficiaries, while public sector gross wages decreased marginally.

In the first half of 2013, the government pursued fiscal consolidation through a set of new fiscal measures, including a freeze on pensions and limits on salary increases for public enterprises and members of the parliament. Revenue measures consisted of increases of the personal income tax rate from 9% to 15% for salaries above the national average, and as of July, of the upper VAT rate. In the first half of the year, total revenue grew by 5.3% year-on-year, supported by accelerating economic activity, higher tax rates and more efficient collection, while saving measures reduced expenditures by 5.2% year-on-year. As a result, the general government deficit fell to 1.9% of annual GDP, compared with 3.9% in the same period a year before. The stock of cumulated tax arrears since the outbreak of the crisis is estimated at some 11% of GDP.

In July 2013, prompted by the Finance Ministry, the Commercial Court launched bankruptcy proceedings for the aluminium factory KAP. The government took over some of KAP’s debts totalling some 3% of GDP, when two state guarantees were called. The Ministry of Finance managed to postpone parts of the debt payment to 2014. In view of strengthening fiscal discipline the government proposed in July 2013 a budget and fiscal responsibility law (i.e. fiscal rules), setting upper limits for public debt and budget deficit at 60% and 3% of GDP respectively. The bill, which is yet to be adopted by parliament, also foresees an independent fiscal council (within the existing state audit institution) to evaluate the government’s economic policy and report to the parliament. Overall, fiscal risks remain high. The fiscal position of the government remains challenged by substantial contingent liabilities and growing debt.

In 2012, the public debt increased to 54% of GDP. External indebtedness expanded by 22% year-on-year in 2012 and accounts for three quarters of total public debt. State guarantees amounted to an additional 12% of GDP at the end of 2012. The public debt climbed to 52.5% in August following the activation of KAP’s state guarantees. Given the shallowness of the domestic financial markets, Montenegro largely relies on foreign markets to finance its debt. Overall, roll-over needs keeps rising, together with the risks related to dependence on foreign investor sentiment.

The limited scope for monetary and exchange rate policies and the country’s vulnerable external situation imply a strong role for fiscal and structural policies in safeguarding macro-financial stability. In that sense, the recent efforts to strengthen fiscal consolidation represent a further step to improve the policy mix. However, ensuring fiscal sustainability, coping with a weak external position, and public debt reduction, especially after the KAP bankruptcy, remain major challenges.

Interplay of market forces

In 2012, the state had majority ownership in some 30 companies, some of them in the process of liquidation or bankruptcy. The most important ones are concentrated in network industries and the aluminium-bauxite conglomerate. The tenders for the dairy Zora and part of the agricultural company Montepranzo were successfully closed. However, the sales of the publishing house Pobjeda and the institute for physical therapy failed. The government renegotiated, and in two cases cancelled, the sales contracts of hotels whose new owners failed to invest in them. Some companies, like Montenegro Post and a few attractive state-owned tourist resorts, are being successfully developed as concessions under public-private partnership schemes. Overall, the privatisation process, while relatively advanced, suffered some setbacks due to unsatisfactory investors’ offers and some cancellations due to failures in post-privatisation investment.

In 2012 fuel prices were removed from the list of administered prices and their aggregated weight reduced in the harmonised index of consumer prices basket to 5.5%, from 10.7% a year before. At the beginning of 2013, the domestic energy market was further opened after the liberalisation of prices for large industrial consumers. In 2013, the weight of administrative prices in the consumer basket was revised upwards to 7.4% after electricity and bread were given greater weight in the annual household budget survey. Overall, the influence of the state in price dynamics remains limited.

Market entry and exit

In 2012, 3 540 new businesses were registered, or 6.5% less than in 2011. However, a more favourable environment in the first half of 2013 reversed the trend, with new registrations rising to 2 367, or 21% more than in the same period a year before. Montenegro has made some improvements in terms of the environment for starting a business. After the introduction of electronic business registration in May 2012, further measures to facilitate registration were implemented at regional level too. An electronic portal was opened to simplify procedures for granting business licences and to reduce the cost of and the time required for obtaining permits. In spring 2013, the parliament adopted amendments to the law on spatial planning and construction, shortening deadlines for issuing construction permits, increasing the number of ‘objects of public interest’ exempted from communal fees and utility charges during construction, and introducing government oversight of municipal fees. Concerning market exit, in 2012 the number of liquidations totalled 1 894, declining 9.4% compared to 2011. However, in the first half of 2013 the number of liquidations rose to 1 067, increasing by 25% year-on-year. The time to clear bankruptcy is estimated at two years, with a recovery rate of 43%. Overall, procedures for market entry were further simplified, while some limited progress has been achieved in making bankruptcy proceedings less cumbersome.

Legal system

Judicial proceedings, in particular to enforce commercial contracts, are reported to be slow and burdensome. Some progress has been made on simplifying government legislation and using regulatory impact analysis. After the introduction of a ‘regulatory guillotine’ in 2012, less than half of the relevant recommendations have been followed so far. In order to streamline caseload, the parliament adopted a law on out-of-court enforcement of commercial contracts by bailiffs. However, the implementing legislation for it is not complete. A land register is in place but modernisation of the land registry is still under way. The Tax Administration is tackling the informal economy mostly by stepping up surveillance of undeclared economic activities. In June 2013, the law on prevention of illegal business came into force. To prevent tax evasion, the law limits cash transactions (including for salaries), increases banks transparency on money transactions, and prohibits the establishment of new business for owners of companies undergoing bankruptcy proceedings. Overall, further efforts are required to improve the legal system and tackle corruption with the aim of improving the business environment.

Financial sector development

The withdrawal of foreign parent bank funding from Montenegrin bank deposits abated towards the end of 2012 thanks to calmer financial markets and stronger deposit growth (9% year-on-year in 2012 and in the first half of 2013; compared to 1.5% in 2011). In 2012, the guarantee for banks deposits was raised from €35 000 to €50 000. After several years of contraction, bank lending started to grow in 2013, expanding by 4.6% year-on-year in the first half of the year. The ratio of non-performing loans (NPL) increased to 16.9% of total loans at the end of 2012 compared with 15.5% a year earlier. At the end of 2012, loan-loss provisions covered 40% of NPLs, which net of provisions represented 68% of banks’ capital. Following the introduction in January 2013 of international accounting standards (IAS/IFRS), loans previously recorded as losses are required to be transferred back onto the banks’ balance sheets. In the first half of 2013, the NPL ratio worsened, reaching 18.5% at the end of June.

Following the central bank’s recommendations resulting from the stress tests performed in 2012, three banks raised their capital by the end of the year. However, at the end of 2012 the aggregate capital of commercial banks fell by 5.4% year-on-year as lenders wrote off losses. Consequently, the capital adequacy ratio (CAR) declined to 14.7% at the end of 2012 compared to 16.5% a year before. In the first six months to June 2013, bank’s capital expanded by 4%, improving the CAR to 15.5%. Some 83% of banks’ capital remains foreign-owned and 2.7% in public ownership. Banks’ return on assets and on equity remained negative in 2012, at 2.1% and 18.3% respectively, reflected in the negative profitability of the financial sector in 2012, with an aggregated loss of €56 million compared with a €3 million loss a year earlier. The rebound of economic activity in the first six months of 2013 conveyed positive return on assets and on equity of banks (1.3% and 9.2% respectively), along with an aggregated profit of €18.5 million. Overall, the banking sector continues to deleverage, increasingly relying on deposits to fund their loans. The high level of non-performing loans still weighs on credit supply, constraining investments and growth.

The domestic non-bank financial sector remains shallow. The insurance segment recorded 3.2% annual growth in 2012, supported by government subsidies on insurance for agriculture. Insurance companies’ gross premium represents some 2% of GDP. Non-life insurance continues to dominate its product structure with a market share of 86% compared with 14% for life premiums. Leasing contracts offer an aggregated value of around 4% of GDP. However, most of these contracts (97%) are for the purchase of vehicles rather than productive equipment. The stock exchange’s annual turnover fell by 44.6% to €32.7 million in 2012, after increasing by 7.6% to €59 million a year earlier. Overall, the small size of the domestic financial market makes the country highly dependent on external financing, and therefore, vulnerable to shifts in market conditions.

3.2. The capacity to cope with competitive pressure and market forces within the Union

Existence of a functioning market economy

Macroeconomic stability was broadly preserved. The country came out of recession in 2013 driven by external demand. Domestic demand remains subdued and the unemployment rate high. Credit started to slowly flow back into the economy, but the high level of non-performing loans still weigh on bank capitalisation and hence, on credit supply. External imbalances, albeit declining, still remain very high. The government pursued further fiscal consolidation measures. However, the fiscal position weakened burdened by substantial liabilities from the bankrupt aluminium industry.

Human and physical capital endowment

Employers complain about the lack of university graduates with the right set of skills. However, further reform of the education and vocational training systems has been delayed due to budgetary constraints. So far, government efforts are focused on subsidies for employers to recruit those with more difficulties into the labour market as well as young graduates without working experience. The large number of workers in early retirement remains a particular issue for the sustainability of public finances. Overall, more efforts are needed to promote skills in order to build the capacity of businesses to meet international competitive pressure.

A substantial part of investment in infrastructure is funded externally through FDI and international financial institutions. Work on the power transmission line for the interconnection project with Italy started in 2013 and will develop the local and regional electricity markets. The construction of several small hydropower plants is under way, and in June 2013, a tender for additional concessions on eight watercourses was launched. Work on two wind power plants has been delayed pending the release of the urban plans. In July 2013 the Podgorica-Niksic railway line, linking the two largest cities together with the steel factory and bauxite mines to the port of Bar, was reopened after several years’ closure for upgrading. In the tourism sector, the second phase of Porto Montenegro and work in Lustica peninsula and Kumbor are ongoing. Overall, capacity increase in transport, energy, and tourism sectors are setting the basis for future exports and overall growth performance.

In 2012, gross expenditure on research and development (R&D) represented some 0.4% of GDP, roughly the same as a year before. The private sector accounts for barely 27% of this figure. Overall, although public institutions participate actively in European research programmes, private sector involvement remains limited (See Chapter 25 — Science and research).

Sector and enterprise structure

The development of a regional electricity market is under way, and includes preparation of the interconnection infrastructure between the Italian and Balkan peninsulas through Montenegro and new connections between regional power systems, increased capacity and the establishment of the South-East European Coordinated Auction Office in Podgorica. In May 2013, the government signed a memorandum of understanding with Albania, Croatia and Bosnia and Herzegovina as a preliminary step towards developing a domestic gas market connected to the Ionic-Adriatic pipeline. The postal market has been formally liberalised. The restructuring of Montenegro Airlines is being implemented before re-listing the company for privatisation. The future of the aluminium industry remains uncertain. The company is bankrupt and (if accepted) a restructuring plan would still require substantial investment and subsidies. Overall, Montenegro’s industrial structure is shifting from aluminium towards energy. At the same time, the overall structure of the economy is shifting towards services. In 2012, a breakdown of average employment by sectors showed 76% of workers to be employed in services, of which 24% were employed in wholesale and retail trade. Industry accounted for 18% (with 7% in manufacturing, 6% in construction, 2.4% in utilities and 1% in mining), and agriculture (including forestry and fishing) 5.6%. Overall, the expansion of the service sector is mostly in the non-tradable sector.

Small and medium-sized enterprises (SMEs) find it difficult to access credit. Public-sector support for SMEs remains limited. The value of financial relief provided by the state Investment and Development Fund (IDF) to SMEs in 2012 was €14 million. The IDF also provides some credit lines for start-ups and factoring facility. Some public support is also available to organise public export promotion programmes, including participation in trade fairs, trade missions and market research studies.

The informal sector is large and is fuelled by weaknesses in tax and expenditure policies and in law enforcement, including the fight against corruption. In an effort to reduce the informal economy, the government strengthened controls on excise goods, retail trade records and the labour market. Overall, credit constraints and unfair competition from the large informal sector remain major challenges for the development of SMEs.

State influence on competitiveness

In 2012, the government allocated €42 million or 1.3% of GDP in state aid, of which 84% was allocated to Montenegro Airlines. Yet, the state aid report does not cover the support to KAP for the supply in electricity, state guarantees or tax arrears. Parliament’s decision in April 2013 to keep loss-making KAP going implies that state aid would continue until the company is thoroughly restructured or liquidated. Under the Stabilisation and Association Agreement and EU competition rules, any state aid must be temporary and accompanied by compensatory measures, and depends on a restructuring plan ensuring the long-term viability of the company. Overall, state aid has been largely concentrated on two companies: KAP and Montenegro Airlines.

Economic integration and convergence with the EU

In 2012, Montenegro’s trade openness fell by 4% to 69% of GDP, due to the contraction of exports. Sales to Italy, Hungary and Greece plunged by between 60% and 90% over the year, reducing the EU’s share to 36.8% of Montenegro’s total trade in 2012, from 41.3% the year before. The CEFTA countries increased their share to 47.5% of Montenegro’s total trade in 2012, from 44% a year earlier. In the six months to June 2013, the share of trade with the EU and CEFTA decreased marginally to 36.4% and 47.1% respectively. In 2012, the EU accounted for 50% of total investment in Montenegro. Russia is still the single largest investor in Montenegro, with 25% of total FDI, of which 82% is in real estate. CEFTA countries accounted for 5% of total net FDI. The reduction of production costs through wage moderation preserved Montenegro’s external competitiveness to some extent. Overall, trade integration with the EU remains high.

4. Ability to take on the obligations of membership

This section examines Montenegro’s ability to take on the obligations of membership — that is, the acquis as expressed in the Treaties, the secondary legislation and the policies of the Union. It also analyses Montenegro’s administrative capacity to implement the acquis. The analysis is structured in accordance with the list of 33 acquis chapters. In each sector, the Commission’s assessment covers progress achieved during the reporting period and summarises the country’s overall level of preparations.

4.1. Chapter 1: Free movement of goods

There have been no developments as concerns general principles. As regards horizontal measures, following the entry into force, in the previous year, of the law on technical requirements for product and conformity assessment, two implementing regulations on conformity marks and recognition documents were adopted in December 2012. Further alignment remains to be achieved, e.g. in the meaning and terms of use of the CE marking.

The strategy for introducing free movement of goods still needs to be elaborated and adopted in order to plan for Montenegro’s alignment with the acquis in this chapter, enhance coordination, and strengthen administrative capacity to ensure effective implementation. No progress has been made on reviewing existing implementing and technical legislation with a view to ensuring compliance with Articles 34-36 of the TFEU.

As regards standardisation, by September 2013 the Institute for Standardisation of Montenegro (ISME) had adopted over 10 000 standards, 31% of which are harmonised European standards according to the ‘New Approach’. The ISME set up six new technical committees, which brings the total to 14. The ISME successfully introduced Internal Rules for Standardisation, thus meeting one of the criteria for full membership of CEN/CENELEC. Further efforts are needed to meet all membership criteria, e.g. introducing real-time synchronisation of developing standards with the European Committee for Standardisation (CEN), the European Committee for Electrotechnical Standardisation (CENELEC) and the European Telecommunications Standards Institute. A strategy for the development of standardisation has not yet been adopted. While capacity is gradually improving, resource limitations remain a concern.

In the area of conformity assessment, the framework law still needs to be amended in line with the acquis and a large body of implementing legislation remains to be adopted. The requirements for designating conformity assessment bodies need to be further clarified and specified.

As regards accreditation, in December 2012 the Accreditation Body of Montenegro (ATCG) adopted new rules on participation in inter-laboratory comparisons and schemes for examining qualifications, in line with the standards of the European and international organisations for accreditation (EA/ILAC/IAF). A formal application to sign the EA Multilateral Agreement has not been submitted yet. Since January 2013, the ATCG granted accreditation to two more testing laboratories for drinking water and physical noise, while two accreditations were voluntarily revoked. In total, 19 conformity assessment bodies have been accredited so far, but interest in accreditation remains low. There has been no progress on adopting a strategy for accreditation.

As regards metrology, implementing legislation was adopted in June 2013 to further align with the EU Directives on Measuring Instruments and on Non-Automatic Weighing Instruments. The Bureau of Metrology (BoM) improved its internal management, reporting and information system. In March 2013, the BoM applied to the ATCG for accreditation of three laboratories working in the area of mass, length, and temperature. BoM resources remain limited. This hampered calibration activities in 2012 and impedes the accreditation of the metrological laboratories. In October 2012, the BoM joined the International Association of Assay Offices. The BoM actively participates in the work of EURAMET Technical Committees and in international inter-laboratory comparisons. The strategy on metrology has yet to be adopted.

In the area of market surveillance, the new single market inspection authority was strengthened and now comprises 28 inspection services. Five other inspection services have yet to be included. Internal procedures are needed to ensure uniform and coordinated application of market surveillance activities across the different inspection services. The annual plan for market surveillance for 2013 was drafted in March 2013. The new laws on general product safety and on market surveillance still need to be pursued to further align the legal framework with the acquis.

As regards ‘Old Approach’ product legislation, in November 2012 the Ministry of Health adopted guidelines on good distribution practice for wholesale medicines in line with the 2011 law on medicines.

There have been no developments as regards the ‘New and Global Approach’ product legislation.

In the area of procedural measures, in January 2013 Montenegro adopted a regulation on notification procedures in the field of technical regulations, standards, conformity assessment procedures and regulations on information society services. The capacity of the quality infrastructure department of the Ministry of Economy, currently three staff members, needs to be strengthened to ensure effective coordination among the various stakeholders, especially on legislative and enforcement issues. No progress was made on alignment with the acquis on the acquisition and possession of weapons and on cultural goods.

Conclusion

Limited progress was made in the area of free movement of goods. Montenegro needs to strengthen capacity and improve coordination and ownership to further align with and implement the acquis. Overall, preparations in the area of free movement of goods are relatively advanced.

4.2. Chapter 2: Freedom of movement for workers

In the area of access to the labour market, the current legislation still requires EU nationals to obtain work permits. An analysis has been made of a unified procedure for issuing work and residence permits for foreigners. Preparations in this area are starting.

In preparation for future participation in the EURES (European Employment Services) network, a EURES department is being set up in the new employment agency, and further training of potential EURES advisers has been provided. Preparations in this area have started.

Administrative capacity for the coordination of social security systems has been strengthened slightly. A bilateral social security agreement with Croatia was signed in July 2013, and negotiations on the relevant co-operation agreements with Slovakia and Bosnia and Herzegovina continued. Preparations in this area are starting.

Preparations for the European Health Insurance Card still need to be launched.

Conclusion

Some progress has been made in the field of freedom of movement for workers. Steps have been taken to strengthen administrative capacity. Overall, alignment with the acquis is still at an early stage.

4.3. Chapter 3: Right of establishment and freedom to provide services

In the field of the right of establishment, company registration procedures are advancing at central level. The new electronic portal for business licences was launched in December 2012 to further simplify procedures and reduce both the cost of and time required for licensing. Additional efforts to implement the reforms are needed at local level.

As regards freedom to provide cross-border services, preparations for transposing the Services Directive began. The council for promoting the business environment, regulatory and structural reforms set up a working group in February to coordinate transposition of the Services Directive and related regulations into national legislation.

In the area of postal services, the postal market has been fully opened from the beginning of 2013. Legislation to implement the law on postal services has been adopted. After public-private partnership tenders for Montenegro’s postal service failed, it remains in the privatisation plan for 2013. The administrative capacity of the national regulatory authority remains unchanged.

In the field of mutual recognition of professional qualifications, there were no further legislative developments. There is still a need to draft a list of regulated professions and to harmonise study programmes with the minimum requirements of the acquis. Administrative capacity needs to be strengthened.

Conclusion

Overall, some progress was made on the right of establishment and freedom to provide services. Substantial efforts are still needed to align the legislation and implement the acquis on mutual recognition of professional qualifications.

4.4. Chapter 4: Free movement of capital

As regards capital movements and payments, Montenegro has essentially liberalised them, but further efforts are needed to fully align legislation with the acquis.

Regarding the payment system, there were some developments.

With regard to the fight against money laundering, implementing legislation on information on the payer in electronic transfers was adopted in November 2012.

Inter-agency co-operation needs to be strengthened and a coordinating body to manage this system needs to be established, since the current memoranda of understanding between institutions are not enforced effectively. The Ministry of Finance, the Administration for the Prevention of Money Laundering and Terrorist Financing (APMLTF), and the Central Bank of Montenegro jointly worked on drafting the third progress report on anti-money laundering and terrorism financing submitted to the Council of Europe’s Moneyval, which noted progress in this field, and adopted the report in December 2012.

The APMLTF’s capacity remains unchanged. It conducted an organisational and legal review which served to identify strategic objectives and legal shortcomings. Its IT system still needs to be updated so that it can support the workflow effectively. The APMLTF has a very high staff turnover and the human resources issues must be addressed before proceeding with the IT investment needed.

The supervisory authorities’ administrative capacity for conducting anti-money laundering inspections still needs to be strengthened. Similarly, further efforts are needed to improve awareness to ensure adequate implementation of the anti-money laundering rules, and to enhance co-operation between the APMLTF, the regulators/supervisory bodies and the sectors concerned in enforcing anti-money laundering legislation.

Conclusion

Little progress was made on free movement of capital. As regards combating money laundering and terrorism financing, further efforts are needed. Major efforts are required to enforce legislation, enhance inter-agency coordination and establish a track record of fighting money laundering and financial crime. Overall, preparations are moderately advanced.

4.5. Chapter 5: Public procurement

As regards the general principles applying to public procurement in Montenegro, legislation on concessions, utilities, and defence procurement has yet to be harmonised with the acquis. Further alignment of procurement methods and consultancy services is required. Transparency needs to be improved, particularly as regards updating the concessions register and the publication of concession contracts and of payments. The internal rules for enhancing integrity need to be further developed.

As regards the award of public contracts, steps were taken to consolidate the number of contracting authorities, which fell from over 1 000 to 679 in the course of 2012. Further efforts are needed to enhance the use and effectiveness of framework agreements and central purchasing. The 2012 annual report on public procurement was adopted by the government in July 2013.

The Public Procurement Authority (PPA) employs currently 15 staff out of 18 posts on its organisation chart adopted in April 2013. The PPA trained 540 procurement staff at central and local level in 2012. Montenegro set up a certification programme and 14 procurement officers obtained a professional qualification in public procurement. The new IT system, introduced in 2012 and refined in 2013, allows constant monitoring of the procedures, with basic indicators, quick compilation of annual data, and improved transparency for traditional procurement procedures. Currently there are 3 000 registered users, 15% of which are foreign users.

The implementation of the new public procurement law that entered into force in January 2012 remains a concern. The PPA’s responsibilities, e.g. in monitoring and assessing contract implementation and the risk of irregularities, analysing infringements and deviations from good practice, and providing legislative advice, still need to be clarified and strengthened. Major problems were detected with procurement in the health sector in 2012.

Montenegro has not yet secured the resources to set up an effective inspection service for contracts lower than €500 000. This jeopardises the correct implementation of the law and supervision of contract procedures and the contracts awarded. The one appointed inspector conducted 45 checks in 2012, and, in 2013, 28 checks on tender procedures below €500 000. This resulted in the cancellation of three public procurement procedures.

In November 2012, the state audit institution issued recommendations on the public procurement system, including on unrealistic planning, non-transparent procedures and overuse of direct agreements, failure to appoint public procurement officers, cases where single public procurement contracts had been split into several contracts, and poor reporting. In 2013, the Ministry of Finance established an action plan to follow-up on these recommendations.

As regards remedies, the State Commission for the Control of Public Procurement (SCCPP) has consolidated its operations since having been set up in 2012. In 2012, the SCCPP reviewed 682 cases, 95% of which were completed, and conducted 49 controls on contracts above €500 000. Statistics show that 42% of all appeals submitted to the SCCPP were upheld and one third of the procurement procedures checked were partially or fully cancelled. However, the high rate of rejection of SCCPP decisions by the administrative courts is an issue of concern.

Conclusion

Some progress has been made in the area of public procurement. Montenegro is still at an early stage with regard to harmonisation with the acquis on utilities, concessions, and defence procurement, and needs to strengthen implementation and enforcement capacity at all levels. Overall, preparations in the area of public procurement are moderately advanced.

4.6. Chapter 6: Company law

National legislation concerning company law is largely aligned with the acquis.

Electronic applications for company registration were introduced in May 2012. Montenegro decided to postpone the adoption of new legislation on corporate accounting and auditing following substantial revision of the EU acquis.

An Agreement with the World Bank on a project to set up a body for public supervision was signed in August 2013.

Conclusion

Little progress was made in the field of company law. New amendments to the law on accounting and auditing, establishing an independent public oversight body for auditors and a related quality control system, have yet to be adopted. Overall, preparations remain moderately advanced.

4.7. Chapter 7: Intellectual property law

Legislation on intellectual property is largely in line with the acquis.

In the area of copyright and neighbouring rights, the regulation on depositing and registering copyright works and related rights was adopted.

In the area of industrial property rights (IPR), the regulation on the procedure for recognition, changes and renewal of the validity of industrial design was adopted. The amendments to the law on legal protection of industrial design were adopted. The Nice Agreement concerning the international classification of goods and services for the purposes of the registration of marks was ratified. The protocol amending the TRIPS Agreement was ratified. IT infrastructure in the Montenegro Intellectual Property Office is weak. There is no effective patent or trademark database. Financial investment in IT is not sufficient and its lack is impeding progress.

Regarding enforcement, the Ministry of Economy drafted its first report on the implementation of the IPR strategy 2012-2015. Effective monitoring and implementation of the strategy needs additional efforts and resources. The number of judges specialised in IPR matters in the commercial court has increased from three to five, a significant improvement. There is no specialisation in the first instance civil courts. There are two customs officers working directly on IPR issues. The market inspectorate is responsible for IPR investigations but inspectors do not specialise in IPR. Capacity within the police and prosecution in IPR enforcement is weak. There is no staff specialisation and training is scarce. Overall, there is a good enforcement record in the commercial court and the customs administration, with the exception of criminal prosecution.

Conclusion

Some progress was made in the area of intellectual property. Legislation is largely in line with the acquis. Further efforts are needed to improve staffing levels and IT infrastructure and to implement the acquis effectively in the medium term. Overall, preparations are advanced.

4.8. Chapter 8: Competition policy

As regards anti-trust and mergers, the new law on competition, further aligning the national legislation with the acquis, entered into force in October 2012. Additional secondary legislation was also adopted.

The new Agency for Protection of Competition (APC) was founded in February 2013 and became formally operational in March. The number of case-handlers increased from five to seven.

There has been no improvement in Montenegro’s enforcement record, mainly due to its focus on reorganising the activities of the new Agency. As regards mergers, the APC approved 15 out of 19 merger requests submitted (two were withdrawn, two are still pending). ACP launched three ex officio cases, which resulted into imposing the first periodic fine for failure in data delivery. On abuse of dominant position, the ACP dealt with six cases, in only one of which did it establish abuse of dominant position. Two ACP decisions were partially or fully endorsed by the administrative court. The capacity of the judiciary to deal with complex competition cases needs to be strengthened.

As regards state aid, the government amended the decree on state aid notification and the Ministry of Finance revised the rulebook on the annual report. State aid secondary legislation has yet to be fully aligned with the acquis. A number of existing fiscal aid measures need to be adjusted to align them with the acquis.

The administrative capacity of the State Aid Control Unit (SACU) at the Ministry of Finance, acting as a secretariat for the State Aid Control Commission (SACC), was reinforced slightly with the recruitment of a new official, but its operational capacity still needs to be built up. In 2012, SACC assessed 10 notifications on state aid and launched one ex officio investigation. Nine of the notifications were approved. Given its institutional set-up, the SACC/SACU’s independence from the state-granting bodies, in particular, remains to be secured. Its decisions and recommendations should be binding to the parliament and the government.

There has been some progress regarding major state aid cases; aid been granted to Montenegro Airlines and in the steel sector. Subsidies to the aluminium plant KAP remains an issue of serious concern. The company is highly indebted, loss-making and poses a risk to public finances. EU rules and the requirements of the Stabilisation and Association Agreement for restructuring aid must be complied with. The SACC/SACU’s annual report was adopted by the government and submitted to the parliament in July 2013.

As regards liberalisation, the period of exclusive rights for postal services granted to Montenegro Post expired in December 2012.

Conclusions

Some progress was made as regards the alignment of the legislative framework with the acquis. The independence of the competition authorities, particularly in the state aid field, needs to be demonstrated through the enforcement record, which still needs to be significantly improved. Special attention needs to be given to the aluminium plant KAP. Overall, preparations are moderately advanced.

4.9. Chapter 9: Financial services

As regards banks and financial conglomerates, implementing legislation amending the decision on minimum standards for credit risk management in banks came into force as of January 2013. In line with that, implementing legislation was adopted to bring banks’ obligations in line with the International Accounting Standards. As of January 2013, a new deposit guarantee threshold of €50 000 is in place, and the deadline for payment of guaranteed deposits has been reduced from 45 to 20 working days.

In the area of insurance and occupational pensions, following the entrance into force of the new law on compulsory insurance in transport and amendments to the law on insurance, relevant implementing legislation was adopted by the end of 2012. Rulebooks on detailed conditions for granting licences to operate an insurance business, and on the content of opinions of the authorised actuary, were adopted in 2013.

The Insurance Supervision Agency has significantly improved its human resources and it now has 20 employees. The Agency is upgrading its staff’s capacity in relation to actuarial education and accounting. The Agency performed eight on-site inspections of insurance companies and four off site besides regular quarterly off site inspections of all insurance companies.

There were no developments on financial market infrastructure.

In the area of securities markets and investment services, legislation implementing the law on investment funds was adopted. The Securities and Exchange Commission co-signed a memorandum of cooperation in the area of Alternative Investment Funds by the European Securities and Markets Authority (ESMA). New software application for the control of investment funds has yet to be introduced. A new law on capital markets has been drafted and will replace the current law on securities.

Conclusion

There has been some progress in the field of financial services, in particular in aligning banking legislation with International Accounting Standards, adopting implementing legislation in the area of insurance and the securities markets, and strengthening insurance supervision capacity. Substantial efforts are still required to align with and implement the existing acquis. Overall, the level of alignment is moderately advanced.

4.10. Chapter 10: Information society and media

As regards electronic communications and information and communications technologies (ICT), a new law on electronic communications was adopted by parliament in July 2013, entering into force in August 2013, aligning with the acquis on conditional access and aiming at aligning with the 2009 EU telecom package. The new law requires the Agency for Electronic Communications and Postal Services (EKIP) to transfer any budget surplus to the state budget until 1 January 2016. It also foresees that the parliament can dismiss the President and the members of the Council if it fails to adopt the Activity report with the Financial statement. EKIP has completed analyses of seven markets. Assessments have been made and operators have been issued with instructions in line with the market assessment conclusions. EKIP has focused on improving capacity and resources by providing training for its staff. The Ministry for Information Society and Telecommunications has increased its capacity to process appeals from service providers in line with the previous law. The government has introduced a one-euro tax on all SIM cards and internet and cable connections as a temporary measure. After two years, no decision has yet been made by the constitutional court on the appeal EKIP lodged against legislative amendments of September 2011, providing for the automatic dismissal of its board and executive director if its financial report is not approved by parliament. Montenegro recorded fast growth rates in the fixed broadband penetration and it reached 14.2% of the population according to the latest available data.

As regards information society services, the work of the computer incident response team was further developed, with 12 rulebooks adopted by the government in September 2012. A strategy on cyber-security was adopted in September 2013. An Analysis of the condition of e-government in Montenegro for 2012 was adopted by the government in June 2013 and implementation of the e-Government Portal project has continued.

In the area of audio-visual policy, amendments to the law on electronic media were adopted in January 2013, requiring the Agency for Electronic Media to transfer any budget surplus to the state budget. Parliament also obliged the Agency to amend its financial plan for 2013. This clearly undermines the Agency’s independence. The overall capacity of the Agency to fulfil its tasks is weak, and in particular its monitoring capacity remains limited. As regards digitisation, equipment has been delivered and installed. Uncertainties still remain over whether the second phase of the digitisation process will be launched in time to meet the deadlines (17 June 2015). The public service broadcaster has made some efforts to restructure. The key financial challenges it faces are to meet digitisation needs and to provide — with the existing financial resources — high quality content for three TV channels (two radio channels), including a parliamentary channel.

Conclusion

There has been some progress in the area of information society and media. A good level of legal alignment has been reached. There are persistent concerns as regards EKIP’s independence notably because of the lack of a Constitutional Court decision on the EKIP appeal. In the area of audio-visual policy, the independence of the Agency for Electronic Media continues to be undermined by parliament. First steps have been taken to reform the public service broadcaster, but its financial sustainability is a concern. Overall, preparations are on track.

4.11. Chapter 11: Agriculture and rural development

In the area of horizontal issues, some efforts are being made to de-link direct support measures from production, but the majority of production remains closely linked. Direct support measures will need to be brought into line with the acquis, by decoupling them from production and introducing a system of payment entitlements.

In the area of common market organisation, preparations still need to be launched.

As regards rural development, support for national rural development measures continued. The operational manual for the fourth public call for investments in agriculture holdings was published in February 2013. The rural development programme under the Instrument for Pre-Accession Assistance for Rural Development (IPARD) remains under preparation.

The Head of the Payments Sector has been appointed. Currently the sector has 25 members of staff involved in preparations for IPA component V (IPARD), while the sector for rural development has five employees.

The Ministry of Agriculture and Rural Development has set up a working group to monitor activities related to establishing the decentralised management and control systems for IPA component V (IPARD). The accreditation package for the IPARD operational structures was presented to the National Fund in July for national accreditation. Preparations are at an early stage in this area.

In the field of quality policy, implementing legislation under the law on designations of origin, geographical indications and designations of traditional specialty agricultural products and foodstuffs needs to be adopted. Preparations in this area are moderately advanced.

As regards organic farming, the law on organic production has yet to be adopted. Preparations in this area are moderately advanced.

Conclusion

There has been some progress as regards agriculture and rural development policy. The Agriculture and Rural Development national strategy needs to be prepared and additional capacity building is required to ensure future implementation of the IPA rural development programme. Overall, alignment with the acquis is at an early stage.

4.12. Chapter 12: Food safety, veterinary and phytosanitary policy

As regards general food safety, a strategy for the transposition and implementation of the acquis in this area is under preparation. The implementing legislation on microbiological criteria for food safety was adopted. A rulebook on microbiological food safety criteria was adopted. The revised law on food safety has yet to be adopted. Preparations in this area are at an early stage.

In the area of veterinary policy, the multiannual programme for the eradication of rabies has continued and the effectiveness of the vaccination campaigns was evaluated based on laboratory analyses conducted by the veterinary diagnostic laboratory. The laboratory was equipped and the staff trained for this purpose. Monitoring of classical swine fever in wild boars was conducted. Preparations in the field of veterinary policy are at an early stage.

With regard to the placing on the market of food, feed and animal by-products, a feasibility study has been finalised on the establishment of a rendering plant for disposal of animal by-products in accordance with EU standards. No decision has been made yet on the source of funding or whether to opt for a regional solution. Preparations in this field are at an early stage.

In the area of food safety rules, the Ministry of Agriculture and Rural Development has adopted a programme for monitoring residues in animals and products of animal origin intended for human consumption for 2013. The programme for 2012 has been implemented. Preparations in the area of food safety rules are not very advanced.

As regards specific rules for feed, preparations are at an early stage.

In the area of phytosanitary policy, the International Convention for the Protection of New Varieties of Plants was ratified. Implementing legislation was adopted on a range of issues including the registration of operators. Capacity-building activities for the administration, laboratory staff and inspection continued. Preparations in the area of the phytosanitary sector are moderately advanced.

There were no developments on alignment and implementation of the acquis in the area of genetically modified organisms (GMOs).

Conclusion

Some progress was made in the field of food safety, veterinary and phytosanitary policy. Further efforts are needed on all aspects of this policy area, in particular on further legislative alignment with the acquis. Overall, preparations remain at an early stage.

4.13. Chapter 13: Fisheries

There were no developments as regards resource and fleet management.

In the area of inspection and control, fishery inspection capacity remains limited. Three rulebooks in the field of marine fisheries and mariculture were adopted. Serious efforts are needed to ensure systematic processing of data from logbooks, adequate registration of catches and landings, the use of sales notes and systematic cross-checking between catch composition and logbook records. No developments have taken place in the area of administrative capacity.

There were no developments as regards structural actions, market policy, state aid, or international agreements on fisheries.

Conclusion

No progress was made in the field of fisheries. Efforts are needed to strengthen administrative capacity, align legislation with the acquis and implement EU standards, in particular in the areas of resource and fleet management, inspection and control, market policy, structural policy and state aid policy. Overall, preparations in this area are at an early stage.

4.14. Chapter 14: Transport policy

As regards road transport, the new law on road traffic safety entered into force in January 2013 and Montenegro drafted an action plan for implementing the road safety strategy for 2013, setting the framework for further improvement of existing road safety legislation and for the implementation of measures to rebuild the road infrastructure. In the area of passenger rights, Montenegro adopted amendments to the law on contracts in road transport to ensure further alignment with the acquis. The new law on transport of dangerous goods is yet to be adopted. Further alignment is needed in road safety, notably concerning vehicle roadworthiness inspections and roadside checks, driving licences, professional drivers’ qualification and training, infrastructure safety.

In the area of rail transport, the agreement on border railway transport between Montenegro and Albania was ratified in March 2013. Further alignment with EU legislation remains necessary for the agreement with Serbia. The new Railway law was adopted in May 2013 aiming at setting a new regulatory framework for managing the railway infrastructure and transport services, defining the competences of the Railway Directorate as the regulatory body, and improving the competitiveness and quality of transport. A five-year business plan was prepared by the Railway Directorate for 2013-2017, but it has not yet been endorsed by the government. Further alignment with the acquis in the area of rail transport safety is needed, in particular with regard to the train driver licenses and interoperability. The track access charges for freight trains are at €3 per train km of a 1 000 t train, which is rather high, whereas charges for passenger trains only amount to €0.2. The latter seem to be below direct costs and thus not in line with EU rules.

Montenegro has limited inland waterways transport, which is currently regulated under the same provisions as maritime transport. Lake Skadar and the connecting rivers need to be reclassified as inland waterways, with limited applicability of relevant EU acquis in this area.

There were no developments as regards combined transport.

In the area of air transport, the national Commission for Investigation of Accidents and Serious Incidents in Civil Aviation was appointed in September 2012, establishing the fundamental principles governing the investigation of civil accidents and incidents. New rulebooks aiming at aligning the national legislation with the EU acquis on working time and technical requirements for cabin crew were adopted. Following a review mission by the European Commission in September 2012 to assess the implementation of legislation under Annex 1 of the European Common Aviation Area (ECAA) Agreement, it was concluded that Montenegro had stepped up progress towards meeting the phase 1 requirements under the ECAA agreement and that the great majority of these requirements had been complied with. Some matters, especially in the field of economic regulation, had not been adequately transposed into the national legislation.

As regards maritime transport, the law on safety of maritime navigation as well as implementing legislation is not adopted yet. Parliament adopted in May 2013 the amended law on ports, providing for the new organisation of port infrastructure and adjustment of concession policies. In the area of sea pollution prevention, the international convention MARPOL 73/78 Annex VI was ratified in March 2013. Montenegro needs to make additional efforts to become a full member of the Paris memorandum of understanding on Port State Control. Professional capacity needs to be enhanced, with properly qualified, trained and authorised officers, in particular harbourmasters, and remains a major challenge.

Conclusion

There has been some progress in the field of transport policy. Further progress needs to be made in the rail transport sector concerning interoperability, setting up an accident investigation body, and ensuring the independence of the railway regulator. The safety and security requirements in the maritime sector and standards for the transport of dangerous goods by road have still not been adopted. Overall, preparations in this area are advanced.

4.15. Chapter 15: Energy

The Energy Development Strategy for the period to 2030 is yet to be adopted.

In the area of security of supply, the decree on mandatory strategic stocks of oil and petroleum products still needs to be adopted. Currently there are no strategic reserves of petroleum products or crude oil in Montenegro. Montenegro has no stockholding body.

As regards the internal energy market, the Energy Regulatory Agency has further developed implementing legislation which fulfils some of the preconditions for establishing a functioning energy market. Most secondary legislation to the 2010 energy law has now been adopted. All eligible customers connected to the distribution system remain entitled to be supplied at regulated tariffs. The energy regulator granted in September 2012 a second licence for energy retail supply to the state-owned company, Montenegro Bonus. As of the end of 2012, the three customers connected directly to the transmission system (large industrial clients) can no longer be supplied under regulated tariffs. Two of them concluded supply contracts, but the largest customer, the Aluminium Plant Podgorica (KAP) did not negotiate any contract. Its subsequent unauthorised and unpaid electricity consumption has put an important burden on the Montenegrin electricity system and has caused a serious imbalance in the Montenegrin electricity system, which is part of a synchronous system. These imbalances therefore had to be compensated by other producers in the Continental European region, with significant financial consequences. The accumulated imbalance was compensated through an extraordinary compensation program. Full compensation was achieved by the end of July. Since mid-June KAP has an electricity supply contract. The government of Montenegro has taken over the control of KAP.

The distribution company remains integrated in the Montenegrin Electric Power Company (EPCG). There ha