TABLE OF CONTENTS

1........... Introduction. 4

1.1........ Preface. 4

1.2........ Context 4

1.3........ Relations between the EU and Montenegro. 4

2........... Political criteria. 6

2.1........ Democracy and the rule of law.. 6

2.2........ Human rights and protection of minorities. 12

2.3........ Regional issues and international obligations. 16

3........... Economic criteria. 17

3.1........ The existence of a functioning market economy. 17

3.2........ The capacity to cope with competitive pressure and market forces within the Union. 21

4........... Ability to take on the obligations of membership. 23

4.1........ Chapter 1: Free movement of goods. 23

4.2........ Chapter 2: Freedom of movement for workers. 25

4.3........ Chapter 3: Right of establishment and freedom to provide services. 26

4.4........ Chapter 4: Free movement of capital 27

4.5........ Chapter 5: Public procurement 28

4.6........ Chapter 6: Company law.. 29

4.7........ Chapter 7: Intellectual property law.. 29

4.8........ Chapter 8: Competition policy. 30

4.9........ Chapter 9: Financial services. 31

4.10...... Chapter 10: Information society and media. 32

4.11...... Chapter 11: Agriculture and rural development 33

4.12...... Chapter 12: Food safety, veterinary and phytosanitary policy. 34

4.13...... Chapter 13: Fisheries. 35

4.14...... Chapter 14: Transport policy. 35

4.15...... Chapter 15: Energy. 36

4.16...... Chapter 16: Taxation. 37

4.17...... Chapter 17: Economic and monetary policy. 38

4.18...... Chapter 18: Statistics. 39

4.19...... Chapter 19: Social policy and employment 39

4.20...... Chapter 20: Enterprise and industrial policy. 42

4.21...... Chapter 21: Trans European Networks. 42

4.22...... Chapter 22: Regional policy and coordination of structural instruments. 43

4.23...... Chapter 23: Judiciary and fundamental rights. 44

4.24...... Chapter 24: Justice, freedom and security. 50

4.25...... Chapter 25: Science and research. 55

4.26...... Chapter 26: Education and culture. 55

4.27...... Chapter 27: Environment and climate change. 56

4.28...... Chapter 28: Consumer and health protection. 58

4.29...... Chapter 29: Customs union. 60

4.30...... Chapter 30: External relations. 60

4.31...... Chapter 31: Foreign, security and defence policy. 61

4.32...... Chapter 32: Financial control 62

4.33...... Chapter 33: Financial and budgetary provisions. 63

1. Introduction 1.1. Preface

Since March 2002, the Commission has reported regularly to the Council and Parliament on progress made by the countries of the Western Balkans region. This is the second report on Montenegro’s progress since the Commission published its Opinion on the country’s application for membership of the European Union in November 2010 and the European Council granted Montenegro candidate status in December 2010.

This report on progress made by Montenegro on preparing for EU membership:

– briefly describes relations between Montenegro and the 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 developments as regards Montenegro’s capacity to take on the obligations of membership, that is the acquis expressed in the Treaties, the secondary legislation and the policies of the Union.

This report covers the period from October 2011 to September 2012. Progress is measured on the basis of decisions taken, legislation adopted and measures implemented. As a rule, legislation or measures which are being prepared or awaiting parliamentary approval have not been taken into account. This approach ensures equal treatment across all reports and permits 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 has drawn detailed conclusions regarding Montenegro in its separate communication on enlargement[2], based on the technical analysis contained in this report.

1.2. Context

The Stabilisation and Association Agreement between Montenegro and the EU was signed in October 2007 and entered into force in May 2010.

Montenegro presented its application for membership of the European Union on 15 December 2008. Following a request by the Council, the Commission submitted its Opinion on Montenegro’s application in November 2010. In December 2010, the European Council granted Montenegro candidate country status.

1.3. Relations between the EU and Montenegro

The Commission recommended opening accession negotiations with Montenegro in October 2011. This recommendation was reiterated in May 2012. Following a positive decision by the Council, endorsed by the European Council, accession negotiations with Montenegro were opened in June 2012. The screening of the chapters on judiciary and fundamental rights, and justice, freedom and security took place in spring, in line with the new approach for these chapters. Screening reports to be prepared by the Commission for these chapters will provide substantial guidance, including on the tasks to be addressed in the action plans to be adopted by the Montenegrin authorities, which will constitute the opening benchmarks. The screening of the remaining chapters started in September, with the chapters on science and research, education and culture, and public procurement.

Montenegro is participating in the Stabilisation and Association Process.

Overall, Montenegro continued to implement its obligations under the Stabilisation and Association Agreement (SAA) smoothly. The Stabilisation and Association Committee met in July and five sub-committee meetings have been held since October 2011. The stabilisation and associations meetings between representatives of the European Parliament and of the Montenegrin parliament continued to be held bi-annually. Members of the Joint Consultative Committee between the EU Committee of the Regions and Montenegro’s local authorities have been appointed in March. A Civil Society Joint Consultative Committee between the European Economic and Social Committee and civil society organisations of Montenegro held its inaugural meeting in October 2012.

Montenegro participates in multilateral economic dialogue with the Commission and the EU Member States. The aim of this dialogue is to prepare Montenegro for participation in multilateral surveillance and economic policy coordination under the EU’s Economic and Monetary Union. The dialogue included a ministerial meeting in Brussels in May 2012.

Visa liberalisation for citizens of Montenegro travelling to the Schengen area has been in force since December 2009. The Commission set up a post-visa-liberalisation monitoring mechanism to assess whether the implementation of reforms introduced by the country was consistent with the visa roadmap and sustainable. This was complemented by an alert mechanism to prevent abuses. The Commission presented its second monitoring report to the European Parliament and the Council in December 2011 and adopted the third in August 2012. 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 allocations to Montenegro total € 235.2 million. Adopted in November 2011, the 2011-2013 Multiannual Indicative Planning Document (MIPD) for Montenegro entered into force on 1 March 2012. The revised IPA Regulation transferring Montenegro from Annex II (potential candidates) to Annex I (candidates) entered into force on the same date. The IPA National Programme 2011 came to € 26 million and was adopted by the Commission in November 2011. The total IPA allocation for 2012 is € 35 million and € 34,6 million for 2013. Like the 2011 programme, the 2012-2013 national programme for Montenegro is focused on the priority sectors identified in the MIPD, in particular the rule of law, public administration reform, the environment and climate change. Montenegro also benefits from regional and horizontal IPA programmes. It is participating in five cross-border cooperation programmes with neighbouring Western Balkan countries; including in the new 2011-2013 cross-border cooperation programme with Kosovo* adopted in December 2011. Montenegro is also participating in transnational cooperation programmes under the European Regional Development Fund and in the IPA Adriatic cross-border programme with Member States. The IPA programme is currently managed by the EU Delegation in Podgorica. Montenegro’s preparations for transferring management of components I and II of the IPA programme from the EU to the national authorities have advanced further.

EU financial support has been provided for the development of civil society under the Civil Society Facility.

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; 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 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

Parliament

Following parliament’s decision in July 2012 to shorten its mandate, the President called for early parliamentary elections to be held on 14 October.

As regards the legislative framework for elections, the law on the election of municipal councillors and members of parliament, adopted in September 2011, has started to be implemented. All parliament’s seats have been awarded on the basis of the candidates’ order on the electoral lists, unlike previously, when half of them were awarded at the discretion of the candidate list submitter. The president and nine members of the State Election Commission were appointed by the parliament in December 2011. The new provisions providing for 30% of female candidates on the candidate lists were, for the first time, implemented in elections held in two municipalities in April. Nevertheless, women remain underrepresented in the parliament.

The electoral legislation needs to be amended in line with a number of pending OSCE/ODHIR and Venice Commission recommendations, in particular as regards the dissolution of coalitions and their funding obligations, and the extension of the Central Election Commission’s mandate to municipal elections. The issue of the constitutional two-year residency requirement before citizens can obtain the right to vote remains unaddressed for national elections. No sanctions are provided for certain provisions of the law, in particular with regard to the restriction for public officials to participate in election campaigns.

The parliament amended its rules of procedure in May, which entered into force in July. The new rules provide for more regular control hearings and enhanced guarantees for draft legislation presented by the opposition parties to be examined by the parliament. They also provide for the setting-up of stand-alone parliamentary committees on European integration and anti-corruption matters, chaired by opposition MPs. As a result, the National Council for European Integration has been abolished. European integration remains a key priority for parliamentary work.

There has been further progress with regard to the transparency of the parliament’s work. At the request of civil society organisations, it started publishing the voting record of individual MPs on its website in December 2011. A new law adopted in November 2011 regulates the Parliament’s relations with lobbyists. Further measures have been taken to improve interaction with civil society and the public. The human rights and freedoms parliamentary committee has been tasked to deliberate on petitions and complaints submitted by citizens and civil society. However, procedures for acting upon civil initiatives have not been adopted yet.

The parliament has continued its intensive legislative activity, which has included a number of areas relating to European integration, such as preventing money laundering and the financing of terrorism, and auditing EU funds. The work of the research department has been strengthened. The role and the capacity of the parliament in monitoring the process of bringing Montenegro’s laws into line with EU law have been enhanced. The new rules of procedure tasked the parliamentary committees to monitor the implementation and the compliance of new legislation with the EU acquis in the areas of their competence. Their capacity and expertise are to be further strengthened in this regard.

Parliament’s oversight role has been enhanced, notably through the adoption of a law on parliamentary inquiry, amendments to the parliament’s rules of procedure and to the law on data secrecy, as well as a steady increase in the number of parliamentary questions, scrutiny and consultative hearings with high-level state officials and discussions of reports submitted by various institutions. The defence parliamentary committee has been tasked by the new rules of procedure to monitor the work of all security bodies and for the first time, under the law on parliamentary oversight of the security and defence sector, it examined the activity report of the police and the state of security. As regards parliamentary oversight of anti-corruption matters, in February the parliament decided, for the first time, to open a parliamentary investigation and establish a committee of inquiry in charge of collecting information and preparing a report on alleged corruption in the privatisation of the company ‘Telekom Crne Gore’. The law on parliamentary inquiry, enacted in July, defined the scope of work of the committee of inquiry and provided it with the possibility to request information from all state and local bodies and legal entities. Follow-up to the conclusions adopted by parliamentary committees in oversight hearings is limited and needs to be reinforced.

The Parliament’s administrative capacity has been strengthened, notably through increased staff numbers, from 100 in October 2011 to 122 in August 2012, and a number of training courses. Continued efforts are needed to further enhance the parliament’s administrative and expert capacity, for all parliamentary committees too. Office space and technical equipment is lacking, even for MPs. Training of existing staff and the recruitment of qualified new staff need to be pursued.

Overall, progress has been made with regard to Parliament’s functioning and its legislative and oversight role in matters including the rule of law. Implementation of recently adopted legislation on elections has started, and the administrative and expert capacity of the parliament has been reinforced. Transparency has improved and stand-alone committees on European integration and on combating corruption have been provided for. Efforts undertaken to enhance the parliament’s legislative and oversight capacity need to be pursued.

Government

The composition of the government changed in March and July. The Parliament appointed a new Minister for Foreign Affairs and European Integration, following the resignation of his predecessor. A new Minister for Minority Rights was appointed, while the Deputy Prime Minister and Minister of Justice took over the human rights portfolio. A new Minister of Defence was also appointed.

In December, the government appointed the Chief Negotiator for Montenegro’s accession negotiations, who also became State Secretary for European Integration and National Coordinator for the IPA. In February, the government adopted a decision on the structure of accession negotiations with the EU. The working groups for negotiations on chapters 23 and 24 were set up in March, while those for chapters 5, 25 and 26 in July. They include representatives of civil society. The working groups for the remaining chapters are being gradually appointed.

In December, the government adopted a rulebook for the internal organisation of the Ministry of Foreign Affairs and European Integration with the aim of strengthening its structures and human resources. The administrative capacity for the coordination of European integration and the accession negotiations of most of the acquis chapters needs to be substantially strengthened.

The government’s rules of procedure, adopted in December and in force since January, introduced mandatory impact assessments for draft legislation and required the government to submit its work programme to the parliament. The rules also provided for enhanced public consultations on draft legislation and strengthened expert support for the government’s working bodies. Two related decrees were adopted, setting out procedures for cooperating with NGOs and for conducting public debates. The government also adopted its 2012 work programme and an analysis of the implementation of laws and by-laws, concluding that law enforcement is deficient in certain areas and adopting a number of follow-up measures.

With regard to local self-government, a law on the territorial organisation of Montenegro was enacted in November and the law on local self-government amended in July, with a view to enhancing the transparency, efficiency and accountability of the administration at local level. An obligation was introduced for the municipal authorities to publish all contracts with natural or legal persons on their official websites. In June, the government adopted an analysis of the functioning of the local self-government, which contains recommendations for further legislative amendments. Local administration needs to be rationalised and its efficiency strengthened.

Overall, government policy-making has further improved. The structures for the accession negotiations are gradually being set up and include representatives of civil society. The administrative capacity for the coordination of European integration, including financial assistance, needs to be further strengthened to meet the requirements of the accession negotiations. The overall capacity of ministries to produce high-quality legislation and impact assessments needs to be enhanced. As regards local government, further efforts are needed to implement recent legislation and to establish a transparent, efficient and accountable administration.

Public administration

During the reporting period, Montenegro continued to work on modernising its public administration. Comprehensive reform of the public sector was launched, led by the Ministry of the Interior and the Ministry of Finance, aimed at rationalisation and modernisation.

In April, the government endorsed a 2012-2016 plan for reorganising the public sector with a view to increasing its efficiency, as part of the broader reform in this field. The plan presents an initial analysis of the state institutions affected by the reform, and sets out an initial timeline and actions. It aims to make better use of budget resources by making the salary system more uniform and transparent and by identifying overlaps. At the same time, it lays the basis for the building capacity in areas relating to European integration. The plan covers the state administration, all public authorities and all institutions which have either been set up by the government or financed, even partly, by the state budget. Follow-up to the measures included in the reorganisation plan need to be ensured to accomplish effective progress in the public administration’s rationalisation process. The implementation of the public administration reform strategy (AURUM) has to benefit from better coordination and monitoring mechanisms.

With a view to streamlining public administration and increasing its efficiency, the government continued to adopt relevant implementing legislation. In December the government adopted a decree on the organisation of the state administration, reducing the number of public procurement entities and facilitating internal auditing. The decree was amended in April to re-establish the financial autonomy of some independent bodies.

For the purpose of rationalising the public administration, the parliament amended the Law on Inspection Control to bring inspections within a single authority and improve the business environment. Implementing regulations are still needed.

The Law on Salaries of Civil Servants and State Employees was amended in November and February, widening its scope to cover employees in State funds. The law allows the parliamentary services and administrative services of the judiciary to adjust the variable part of their employees’ salaries. A corresponding action plan was endorsed by the government. The Law on General Administrative Procedures remains to be revised in line with European standards and best practice.

Since January 2012, impact assessments have been carried out for new legislation and submitted to the government together with the opinion of the Ministry of Finance on the impact that the implementation of the new law will have on the state budget. To increase transparency, the government adopted additional implementing legislation aimed at strengthening cooperation between state administration bodies and non-governmental organisations.

The Human Resources Management Authority (HRMA) organised a number of training courses in fields relevant to the work of the public administration, together with international partners. The HRMA’s capacity to coordinate training activities throughout the administration and its remit need to be strengthened.

With regard to the State Audit Institution (SAI), several steps have been taken to improve audit methodology. The SAI’s powers were extended to auditing of political party financing via amendments to the Law on Political Party Financing. A strategy for the development of this institution was endorsed by the government in April. Additional amendments to the law, aimed at strengthening SAI’s independence with regard to financial management and staff recruitment, have not yet been adopted. The SAI’s capacity needs to be reinforced especially with regard to its new powers. (See also Chapter 32 – Financial control)

As regards e-government, a decree which entered into force in November allows all state institutions to use electronic management of documents in their work.

The Ombudsman’s administrative capacity and budget have been strengthened. The Ombudsman’s cooperation with civil society is continuously improving, and the influence of the office has generally increased. Yet, the law on the Ombudsman remains to be aligned with the acquis, for what concerns its independence. The financial and human resources of the Ombudsman have been strengthened but need to increase.

Overall, Montenegro has taken further steps to address the challenges of public administration reform. The legislative framework and the implementation of the recent legislation need to be improved, in a financially sustainable manner and with adequate verification mechanisms. The capacity of the Ombudsman has been reinforced but needs to be further enhanced.

Judicial system (See also Chapter 23 – Judiciary and fundamental rights)

With regard to the independence and impartiality of the judiciary, implementation of the legislation on courts, the Judicial Council and the State prosecutor’s office, amended in July 2011 to strengthen judicial accountability and independence, continued. The Judicial Council and the Prosecutorial Council adopted rules of procedure setting out their organisational structure, functioning and decision-making procedures. The new Judicial Council was constituted in June and the new Prosecutorial Council in July. The first written tests for judges were held in February, in accordance with the new criteria. Future work needs to focus on setting up a single, country-wide recruitment system for judges and prosecutors, based on transparent and objective criteria. The promotion criteria for judges and prosecutors lack clarity and objectivity due to the lack of periodical professional assessment of judges and prosecutors’ performance. The work of the Judicial and Prosecutorial Councils is hampered by insufficient administrative capacity and budget allocations. The ongoing constitutional revision, aimed at adressing undue political influence in the judiciary, needs to be completed in line with European standards.

Random allocation of cases continues to be ensured in courts with the aid of an IT system, with the exception of smaller courts with limited staff.

Concerning the accountability of the judiciary, all decisions of the Administrative Court and the Appellate Court became publicly accessible. Commissions for monitoring compliance with the Codes of Ethics of judges and prosecutors were appointed. Members of the Disciplinary Commissions were appointed, together with two staff to investigate complaints of corruption in the judiciary. However, corruption and conflict of interest are still insufficiently monitored in the judiciary. The disciplinary system needs to be further strengthened and differentiated in line with the principle of proportionality, and the Disciplinary Commission’s dual role in investigating and deciding on disciplinary proceedings reviewed. Procedures for removing professional immunity need to be strengthened to ensure that judges and prosecutors are fully accountable under criminal law. A reliable system of professional evaluation of judges and prosecutors still needs to be established. Plans to publish all court rulings have been only partially implemented.

Regarding the efficiency of the judiciary, the backlog of cases has been further reduced by approximately 4%. Seven further notaries were appointed, bringing their total number to 40 out of the 65 foreseen notary posts. Following the entry into force of the Law on Enforcement and Security of Claims, transferring powers for civil enforcement to the bailiffs, the Parliament enacted the Law on Public Bailiffs in December. Initial steps have been taken to rationalise the court network, but Montenegro remains one of the countries with the highest number of basic courts, judges, prosecutors and administrative staff per capita in Europe. Due to this high administrative cost, there are not enough budget resources to implement the new Law on Free Legal Aid or to remedy shortfalls in infrastructure and equipment, which continue to hinder judicial efficiency. The quality of judicial statistics needs to be improved and a system to monitor the length of trials introduced. Enforcement of civil decisions remains weak, as bailiffs have yet to be recruited. The independence and the administrative and financial capacity of the Judicial Training Centre need to be strengthened and initial training with set curricula for all members of the judiciary established.

Overall, Montenegro has made some progress on the judiciary. Implementation of recently adopted legislation has started. Progress has been made with regard to the publication of court rulings and the case backlog. The process of constitutional reform to stengthen the independence of the judiciary in line with European standards remains incomplete. Further efforts are needed to ensure merit based appointments and career development, as well as to strengthen accountability and integrity safeguards within the judiciary.

Anti-corruption policy (See also Chapter 23 – Judiciary and fundamental rights)

Some progress has been made in the fight against corruption. The strategy for fighting corruption and organised crime and the revised 2011-2012 action plan are being implemented. The overall institutional framework for monitoring implementation of the action plan is working well.

Montenegro has further strengthened its anti-corruption legal framework, with a view to ensuring alignment with the relevant European and international standards. Amendments to the Labour Law enacted by the parliament in November extended protection for whistleblowers to cover the private sector. Amendments to the Law on Free Access to Information were enacted by the parliament in July. Amendments to the Law on Political Party Financing were enacted in December, covering supervisory institutions and in-kind contributions and fixing the ceiling for membership fees at 10 % of a member’s annual income. Recently adopted legislation on conflicts of interest and public procurement started to be implemented. The mechanisms for checking on the funding of political parties and electoral campaigns and imposing penalties need to be reinforced and set out in legislation. Civil servants’ asset declarations are still not being checked on substance to establish cases of illicit enrichment. The professional capacity and independence of the supervisory institutions, in particular the State Election Commission, the State Audit Institution and the Commission for the Prevention of Conflicts of Interest, need to be enhanced. The control system for public procurement remains to be strengthened.

Some progress was made on prevention of corruption. In December, the Directorate for Anti-Corruption Initiatives (DACI) was transferred to the Ministry of Justice to ensure better coordination of anti-corruption activities. The DACI conducted a number of awareness-raising campaigns on reporting corruption and on the protection of whistleblowers. Civil society organisations have continued to actively contribute to enhancing the strategic framework and have provided evidence in corruption cases. The recommendations contained in the risk assessment of areas vulnerable to corruption started to be implemented. Judges and prosecutors have been given training on combating corruption, in particular to help them implement the new Criminal Procedure Code. Measures have been taken to prevent corruption in the judiciary. A special allowance has been given to judges working on organised crime and corruption cases, and two staff were appointed to assist the Disciplinary Commission with checking on complaints of corruption in the judiciary. Nonetheless, asset declarations made by judges and prosecutors are not yet cross-checked against other data and mechanisms to prevent corruption in the judiciary need to be further strengthened. The DACI’s capability needs to be upgraded and its capacity to monitor implementation of the government’s action plan for fighting corruption and organised crime reinforced.

Some progress has been made on suppression of corruption. The full entry into force of the new Criminal Procedure Code in September 2011 has helped to speed up the criminal investigation procedure and has reduced the risk of information leakage. In June, the parliament amended the Law on Custody of Seized and Confiscated Property to define the methods of management of seized or confiscated proceeds of crime. The institutional and operational capacity of prosecutors, judges and police to fight corruption has been strengthened through further training support and additional equipment. The use of special investigative measures is more systematic and a special investigative team has been operational in the Special Prosecution Office since October 2011. Its capacity needs to be increased, in particular by acquiring access to relevant databases. Inter-agency cooperation has improved to a certain extent, but needs to be further developed.

Montenegro’s track record in combating corruption has improved. Three second-instance and four first-instance verdicts have been issued against 29 individuals for abuse of office and bribery. Among those convicted to imprisonment are the former Mayor of Budva, his deputy, a member of the parliament and a number of municipal officials. Nevertheless, corruption remains widespread and continues to be a serious cause for concern. It continues to represent an important vulnerability in law enforcement investigations of organised crime. A track record of combating corruption needs to be steadily built up, particularly in terms of investigations and convictions in high-level corruption cases. The capacity of prosecutors and police to conduct financial investigations, trace criminal assets and present related evidence before the courts needs to be improved. Inter-agency cooperation and information exchange, in particular between police and prosecutors, needs to be further enhanced. There are still no corruption cases in which seizure or confiscation of assets was ordered. The independence of the judiciary remains a matter of concern affecting the country’s determination to combat corruption.

Overall, some progress has been made on fighting corruption. Implementation of recently-adopted legislation in the key areas of political party financing, prevention of conflicts of interest and public procurement has started. The capacity of the supervisory institutions, in particular the State Election Commission, the State Audit Institution and the Commission for the Prevention of Conflict of Interest, needs to be enhanced. Montenegro has further developed its track record of investigations, prosecutions and convictions in corruption cases, but their number remains low and there are still no seizure or confiscation of assets ordered for corruption offences. Corruption remains widespread and continues to be a serious cause for concern, hindering law enforcement investigations of organised crime.

2.2. Human rights and protection of minorities (See also Chapter 23 – Judiciary and fundamental rights)

Observance of international human rights law

As regards international human rights instruments, Montenegro signed the third optional protocol to the convention on the rights of the child in February and ratified the Hague Convention on protection of children and cooperation in respect of inter-country adoption in March, to prevent children being sold for adoption. Nevertheless, the Constitution (Article 20) is not yet in line with Article 13 of the European Convention on Human Rights (ECHR), in relation to safeguarding the right of an effective remedy before the national authorities for violations of rights under the convention. Montenegro has not yet started the ratification process for the Convention on Reduction of Statelessness. Its implementation of international human rights standards needs to be stepped up and the national legislation brought into line.

As regards the European Court of Human Rights (ECtHR), efforts have been made to ensure national courts’ compliance with ECtHR case law, partly by holding training courses for judges and prosecutors. During the reporting period the ECtHR delivered judgments on 17 applications finding that Montenegro had violated rights guaranteed by the ECHR, most of them relating to freedom of expression, protection of property and the right to a fair trial. A total of 264 new applications have been submitted to the ECtHR since September 2011, bringing the total of pending applications to 851.

With regard to the promotion and enforcement of human rights, some progress has been made. The administrative capacity and budget of the Protector of Human Rights and Freedoms (the Ombudsman) have been strengthened; this institution produced three reports analysing the state of police premises used for detainees, protection from discrimination, and the situation of child begging. The Parliamentary Committee for Human Rights and Freedoms endorsed these reports between October and November, demonstrating increased involvement in the promotion of human rights. The Ombudsman’s cooperation with civil society is continuously improving.

The authorities, including those at the highest level, showed a more positive attitude towards human rights discourse. In March, the Justice and Human Rights portfolios were merged under the Deputy Prime Minister. The human rights role of the state prosecutor remains limited. The capacity of the Ombudsman needs to be further strengthened. Shortcomings persist in the protection of human rights by judicial and law enforcement authorities, some of them in relation to alignment with European standards and ECtHR case law.

Civil and political rights

Progress was made in the prevention of torture and ill-treatment and the fight against impunity. The Ombudsman started to implement the monitoring mechanism; a deputy ombudsman was specifically appointed in June to monitor the prevention of ill-treatment. Nevertheless, competence in this area needs to be further developed and staff need further training. The number of reported cases of ill-treatment remains low, while processing of reported cases continues to be slow. The legal and institutional framework for prohibiting ill-treatment still needs to be brought into line with international standards, particularly with regard to prison conditions and the treatment of convicted persons.

Some progress has been made as regards the prison system; the legal and policy framework was enhanced. An action plan for improving the prison system was adopted and it is being implemented. The prison administration was transferred in December under the Ministry of Justice, ensuring better coordination; yet, the capacities of the relevant staff have to be enhanced. The newly adopted law on alternative sanctions has started to be implemented but further efforts are needed to reduce the prison population, especially the non-violent offenders, since prison overcrowding remains a concern. Living conditions in prisons have improved, but are still not fully in line with international standards, in particular as regards education, prison regime, healthcare and medical treatment. The detention conditions in Bijelo Polje remain of particular concern.

With regard to access to justice, some progress has been made. The Law on Free Legal Aid came into effect in January and relevant services are now available in all the basic courts in Montenegro. Nevertheless, certain categories of people are not covered. Administrative capacity needs further development. The length of court proceedings remains an issue of concern.

Progress has been made in promoting freedom of expression. The decriminalisation of defamation helped to improve the media environment. The authorities continued to promote a more favourable environment for journalists. In June 2012 the parliament adopted the Law on Amnesty, which, inter alia, enables the President to grant a pardon for individuals convicted of defamation and insult, even in the absence of a request. There have been first instance convictions in some recent cases of violence against journalists; yet, efforts to investigate and prosecute cases of violence against journalists need to be stepped up. The media environment remains highly politicised and divided.

Additional staff were hired to increase the monitoring capacity of the Electronic Media Agency, but the self-sustainability and monitoring capacity of the audiovisual regulator are a concern. Recent amendments to the law on electronic media put the regulator’s independence at risk. Reform of the public broadcaster, aimed at making it more modern and self-financing, has to continue.

Progress has been made with regard to freedom of assembly and association. Cooperation between state institutions and civil society organisations is improving. Dialogue with NGOs dealing with social reform and gender equality needs to be further strengthened.

Freedom of thought, conscience and religion is generally ensured; tensions persist between the Serbian and Montenegrin Orthodox Churches, notably with regard to property issues.

Overall, good progress was made in improving the legal and administrative framework for civil and political rights in Montenegro, and enforcing them. The Ombudsman’s power to act against ill-treatment needs to be enhanced, and living conditions in prisons require improvement. Efforts to investigate and prosecute old cases of violence against journalists need to be stepped up.

Economic and social rights (See also Chapter 19 – Social policy and employment)

Little progress has been made with regard to women’s rights and gender equality. The strategy for implementing the law on protection from family violence was adopted. However, domestic violence is still an issue of concern. Implementation of the legal and institutional framework for promoting and enforcing gender equality is hindered by the scarcity of human and financial resources. Women remain under-represented on the labour market.

Some progress has been made with regard to children’s rights. The Ombudsman is more involved in their protection. Awareness-raising campaigns have been launched. The Law on Juvenile Justice was adopted in December 2011. The Ombudsman’s capacity in relation to children’s rights and those of the Council on the Rights of the Child need to be further enhanced.

Some progress has been made with regard to the rights of the socially vulnerable and/or persons with disabilities. In March, the government adopted the Action Plan for the integration of persons with disabilities 2012-2013. The law on disabled persons still presents shortcomings as regards conformity with the EU acquis. The Council for the care of disabled persons was established in May. The monitoring and sanction mechanisms of institutions dealing with persons with disabilities need to be further strengthened.

Some progress has been made in the area of anti-discrimination policies. The Ombudsman produced various reports on human rights issues, which were discussed by the parliamentary committee on human rights. The Ombudsman’s capacity remains limited despite the appointment of new staff; the relevant legislation still presents several shortcomings, e.g. concerning the Ombudsman’s independence. The anti-discrimination law also needs to be amended, to bring it in line with the acquis. The implementation of anti-discrimination policies and the monitoring and enforcement of human rights need to continue. As regards the rights of lesbian, gay, bisexual and transgender (LGBT) persons, some progress has been made. The government showed greater openness to promoting and defending LGBT rights and has taken concrete steps to this end. The Prime Minister’s adviser on human rights and protection against discrimination has continued to be active on LGBT rights. A shelter and a counselling line for LGBT persons are active. The authorities ensured the rapid identification and arrest of the alleged perpetrators who attacked in September an actor and the director of a video against homophobia; yet, more generally, the authorities’ handling of LGBT rights cases remains slow. LGBT persons, as well as civil society activists engaged in promoting and protecting LGBT rights, are still subject to discrimination.

Labour and trade unions rights are generally respected; yet, more attention is needed to ensure full transparency of representativeness and the right to establish new unions, in line with the relevant national regulations. Negotiations on a new collective agreement have not yet finished and social dialogue needs to improve. The capacity of the Social Council remains limited. Amendments to the Labour Law are still required to bring it into line with the EU acquis and implementation remains a challenge.

Little progress has been made in the area of property rights. The process of restitution is not yet fully ensured and the work of the relevant commissions is proceeding slowly. Displaced persons with permanent residence in the country still face discrimination in relation to access to land.

Overall, Montenegro has made progress on social and economic rights, by consolidating the relevant legal and institutional framework. The more positive attitude of the authorities has contributed to the promotion of these rights, but additional financial allocations, and skilled human resources, need to be deployed to enforce them. The handling of violations of social and economic rights needs to improve.

Respect for and protection of minorities, cultural rights

As regards the promotion and protection of minorities and cultural rights, progress has been made. The implementation of the Law on Minority Rights has continued. The Minority Fund has some shortcomings regarding the implementation of the projects it finances. Interethnic relations in the country are generally good, but Roma are still underrepresented in the public institutions.

Progress has been made on the inclusion of Roma, Ashkali and Egyptians. The strategy for improving the status of Roma and Egyptians in Montenegro 2012-2016 and the Action Plan for 2012 were adopted by the government in April, in line with the operational conclusions of the social inclusion seminar on Roma issues; their implementation is slow. Some progress has been made to facilitate civil registration, in particular of displaced persons among the Roma, Ashkali and Egyptian population. Nevertheless, discrimination is prevalent in access to employment and to social and health care, although a limited number of measures were undertaken to facilitate employment and education.

Progress has been made on resolving the issues of displaced persons. In September 2011, the government set up a Coordination Board to oversee implementation of the Strategy for finding durable solutions to the status of displaced and internally displaced persons in Montenegro, with particular focus on the Konik area. The government provided a quick and efficient emergency response to the fire in Konik camp in July, which left 800 Roma IDPs homeless. In November, the parliament adopted the amendment to the Law on Foreigners which extended the deadline for applications for the status of foreigner with permanent residence to 31 December 2012. The number of applications has increased. An office of the Ministry of the Interior opened in Konik camp for some months, to facilitate the registration of displaced persons. The temporary decree enabling access to social and economic rights for displaced persons was also extended, to June 2013. Additional measures and amendments are needed to ensure full access to economic and social rights for both foreigners with permanent residence and displaced persons.

The detailed urban plan proposing changes to the Konik area was adopted in February, setting the framework for the construction of housing for the existing population; yet, the capacity within the government to effectively implement projects on this scale needs to be improved. The Law on Social Housing has not yet been adopted.

Overall, Montenegro made progress in the protection of minorities and cultural rights. The adoption of the Strategy to improve the situation of the Roma, Ashkali and Egyptian population and the relevant Action Plan are positive developments to this end, but the inclusion of the Roma, Ashkali and Egyptians needs to be improved, in particular through the implementation of the relevant policy documents, as they still face discrimination. Progress in granting legal status to displaced persons has continued, but there are still gaps in access to economic and social rights for these people.

2.3. Regional issues and international obligations

With regard to cooperation with the International Criminal Tribunal for the former Yugoslavia (ICTY), Montenegro neither received requests for assistance nor had cases referred back to its national authorities from the ICTY for possible further investigation.

Three out of four local war crimes cases in Montenegro are still open. Four members of the former Yugoslav People’s Army were convicted in January for war crimes committed in the Morinj camp in 1991-92. A new trial has started in the case of the deportation of Bosniaks in 1992. The processing of war crime cases needs to be stepped up and fully aligned with international human rights and humanitarian case law.

As regards the International Criminal Court, Montenegro still maintains a 2007 bilateral immunity agreement with the United States, granting exemptions from the jurisdiction of the 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.

Significant 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 who were displaced as a result of the armed conflicts in ex-Yugoslavia during the 1990s. The four countries signed a ministerial declaration in November 2011 in Belgrade, renewing their political commitment to bringing this chapter to a close. They agreed on a Regional Housing Programme assisting some 27,000 households or 74,000 individuals. The programme was presented for international donor support at the Sarajevo April 2012 donors’ conference, which resulted in some € 265 million being pledged. Programme implementation is at an early stage. Good cooperation needs to continue between the four countries on all outstanding issues in the process, including data exchange and statistics, civil documentation and pension rights.

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 is also continuing to actively participate in regional initiatives, including the South East European Cooperation Process (SEECP), the Regional Cooperation Council (RCC), the Central European Free Trade Agreement (CEFTA), 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.

As regards regional judicial and police cooperation, an agreement on extradition between Montenegro and the former Yugoslav Republic of Macedonia entered into force in 2012. A memorandum of cooperation was signed with the police authorities of Bosnia and Herzegovina, aimed at improving the joint fight against organised crime, corruption, terrorism and drug trafficking. A similar agreement was signed with the former Yugoslav Republic of Macedonia in March.

Montenegro continues to maintain good bilateral relations with other enlargement countries and with neighbouring EU member state Italy. However, the delimitation of borders with Croatia, Serbia, Bosnia and Herzegovina and Kosovo remains pending.

Cooperation intensified with Albania in economic and trade relations. The two countries initialled an agreement on cooperation in education and signed an agreement on recovery of Albania’s debt to Montenegro, an agreement on opening a joint border crossing point, and a cooperation plan on defence.

Relations with Bosnia and Herzegovina remained good. Agreements were signed and/or ratified in various fields of cooperation, including international transport, mutual protection of classified information, legal aid and enforcement of court decisions. A dual citizenship agreement was concluded in June.

Montenegro continued to have good relations with Croatia. The two countries signed an agreement on mutual enforcement of court decisions in criminal matters and a memorandum on cooperation in the area of health. The temporary agreement on Prevlaka continues to function smoothly. There has been no further progress in the procedure for submitting the border demarcation to the International Court of Justice.

Cooperation with the former Yugoslav Republic of Macedonia was further strengthened. The extradition agreement entered into force, as did agreements on economic cooperation and on the EU accession process. Agreements on the readmission of persons residing without authorisation and on police cooperation were signed.

Relations with Serbia remained good, overall. The Serbian Prime Minister led a senior delegation in a visit to Podgorica in December. The two governments signed a number of agreements on sectoral policies, an agreement on cooperation on air traffic control and a protocol on cooperation in resolving the fate of missing persons. There were no developments regarding the dispute between the Orthodox churches in the two countries.

Montenegro continued to maintain good relations with Kosovo, even though border demarcation has not progressed. The return of those displaced persons willing to come back to Kosovo is proceeding slowly.

Relations with Turkey are good. The two countries signed a number of agreements on protection and promotion of investments, air transport and social security, and a memorandum of understanding on education. Montenegro and Turkey worked more closely together in the field of economic cooperation.

Overall, Montenegro continues to satisfy the Stabilisation and Association Process conditionality on cooperation with the ICTY and regional cooperation. Certain bilateral issues with neighbouring countries are still unsolved, especially 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 2012 the country presented its first Pre-accession Economic Programme (PEP), covering the period 2012-2014. The priority of the programme is to reinforce economic and financial stability by continuing with fiscal consolidation and structural reforms. Overall, the political consensus on market economy fundamentals and economic policy remained strong.

Macroeconomic stability

The economy continued to recover in 2011 for a second consecutive year, with real GDP growing at a similar growth rate as in 2010 (at around 2.5%). In 2011 the recovery was primarily driven by private consumption fed by continued increases in tourism, whereas the contribution of net exports to growth dropped significantly, reflecting import developments and the recovery of commodities exports. Retail sales increased by 15% at constant prices, reflecting demand from tourism. Nonetheless, domestic demand still remained constrained as bank lending further contracted, investments slowed down, employment growth remained limited, and net wages rose only marginally. In the first half of 2012, economic activity slowed down. The value of construction works contracted in real terms by 16% year-on-year in the first half of 2012, after recording an average expansion of 7% in 2011. Industrial output declined by 7.5% year-on-year in the first six months of 2012, due to a decrease in electricity production and mining , while manufacturing recorded 4% expansion. Still, domestic consumption continues to be resilient, as reflected by the increase in retail sales by 9% in real terms in the first half of 2012, once more supported by tourism. Average per-capita income in purchasing power standards rose to 43% of the EU average in 2011, up from 41% in 2010. Overall, although the economy is still in the process of recovering, the performance of several sectors remains weak.

The current account deficit contracted to 19% of GDP in 2011, compared to 25% a year earlier. The improvement was driven by an increase in the surplus of the balance of services from 13% of GDP in 2010 to 16% in 2011. However, the trade deficit still accounts for 40% of GDP. The income balance shifted from a deficit to a surplus, while current transfers improved marginally. On the financial account, net FDI inflows contracted markedly, totalling 12% of GDP, compared to 18% a year before. As a result of lower net capital inflows, the central bank had to use foreign exchange reserves equivalent to 3% of GDP to finance the high current account deficit, underlining vulnerabilities related to the high reliance on external financing. In the first half of 2012 the trade deficit deteriorated following a sharp decline in exports as a result of the contraction of industrial production as well as terms of trade losses in aluminium, causing an 8.7% year-on-year expansion of the current account deficit to 14.5% of annual GDP. The surpluses in the services and current transfers’ balances improved significantly compared to the previous year, but were partially offset by the negative results in the income balance. The financial account surplus contracted by 9% year-on-year while the capital account deficit came close to balance. Net FDI inflows contracted to 4.3% of annual GDP from 5.6% a year earlier while net loans inflows (i.e. other investments) reached 3% of GDP, largely reflecting government financing operations. Net errors and omissions accounted for additional 6% of GDP. Overall, the large external imbalances deteriorated, reflecting weak export capacity.

Unemployment was very high at 20% on average in 2011 and in first half of 2012, according to the Labour Force Survey (LFS) Although employment declined markedly by -6.4% in 2011 compared to the previous year, the rate of contraction decelerated in the first half of 2012 (‑0.9%). The activity and employment rates remained low at around 57% and 46% respectively during 2011 and the first half of 2012. There remain significant discrepancies in labour statistics between Labour Force Surveys (LFS) and the Agency for Employment (AEM) administrative records. Slow labour market dynamics have been reflected in the moderation of wages. In the first half of 2012 the average gross wage grew by nominal 0.7% year-on-year. In December 2011, amendments to the labour law introduced several changes with the aim of encouraging job creation. These amendments limit the length of fixed-term contracts to 24 months, and put an end to the possibility of an unlimited number of renewals. They regulate temporary employment agencies. They also reduce collective dismissal costs and limits the room for discretionary labour dispute resolution. Additional amendments were introduced in the law on employment of foreigners and disabled persons to facilitate their hiring. Also in December, the parliament adopted the laws on recognition of foreign professional diplomas and qualifications. Overall, the performance of the labour market remained weak.

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 system. In November 2011, the central bank further lowered the reserve requirement ratios to 9.5% for deposits with maturity of up to one year, and to 8.5% for deposits with maturity over one year.

Inflation reached 3% in 2011, a significant increase after a deflationary episode in 2010. However, core inflation remained low, at around 1%. Consumer price inflation accelerated to 3.9% in June 2012. The main contributors were alcohol and tobacco reflecting a pronounced base effect from the increase in excises duties at the beginning of the year. Increases were also recorded in accommodation services (i.e. restaurants and hotels), food, as well as fuels and housing, the latter as a consequence of the increase in water supply prices and electricity tariffs. Overall, inflationary pressures have been increasing.

In 2011, the consolidated budget deficit reached 5.4% of GDP, up from the 5% deficit recorded the previous year. Total revenues fell to 39% of GDP in 2011, down from 42% a year earlier. Tax income remained broadly stable in 2011, with the corporate income tax and value added tax revenues recording some moderate growth over the year. However, social security contributions declined and the accumulation of tax arrears reached almost 1% of GDP during 2011, weakening revenue performance. Consolidation efforts translated into a reduction of general government expenditures to 44.6% of GDP, compared to 47.2% the year before. Spending was reduced on several items such as supplies and services, as well as on regular maintenance and capital expenditure. However, the impact of early retirements granted to workers from restructured companies offset efforts to cut expenditure. Further revenue shortfalls in the first quarter of 2012 (around 12% lower than to the same period last year), followed by the call of a state guaranteed loan to the aluminium plant worth 1% of GDP, resulted in a budget deficit of 3.2% of GDP in April, compelling the government to adopt a budget rebalance in May. The revised 2012 budget comprises additional expenditure cuts of 0.3% of GDP and tax increases for additional 0.7% of GDP. The budget deficit broadened further to 3.5% of GDP in May, to stabilise at 3.7% in both June and July. Overall, the stability of public finances is challenged by a receding economy and substantial contingent liabilities.

Contracting external demand, falling aluminium prices as well as production, and lower capital inflows have exposed the country to stronger external financing and liquidity constraints. The fact that Montenegro is using the euro as its sole legal tender, and has therefore abandoned standard monetary policy tools, leaves fiscal policy as the main effective policy instrument. As a response, the authorities have continued to aim at tightening fiscal policy, notably through public spending adjustments. Overall, macroeconomic stability has been broadly maintained, but risks and uncertainties persist due to the high reliance on external financing.

Interplay of market forces

The share of administered prices in the harmonised index of consumer prices (HICP) basket remained unchanged in 2011, at 10.7%. Administered prices concern: bread, electricity, water supply, sewerage collection, refuse collection, fuels, public pre-primary institutions, compulsory vehicle insurance and administrative fees. The telecommunications and energy markets were further liberalised. At present, the Agency for Electronic Communications and Postal Services (EKIP) can regulate prices only if a company has a dominant market position. The energy regulator no longer sets the price of coal for electricity generation. Overall, the influence of the state in price dynamics is being limited by the independence of market regulators.

In April 2012 the Parliament requested the government to renationalise the ailing aluminium company and to execute the collateral of a state guaranteed loan after the majority owner of the company failed to honour it. However, at the time being the execution is being delayed. At the same time, the bankruptcy of the Niksić steel plant ended with the successful sale of all the factory assets (including 21.9% of state-owned shares) to a Turkish steel maker. Several transport companies, including railways, port and the national airlines have been listed in the privatisation plan for 2012. In the first half of 2012 calls for tenders were launched for the tobacco factory (NDKP), the Institute for Physical Therapy, as well as the container and bulk cargo terminal of the port of Bar. In July 2012, the privatisation council concluded a 90-year lease contract to develop a tourism resort on the former barracks site of Kumbor (Kotor Bay). However, negotiations on the sales agreement for newspaper Pobjeda and for dairy Zora are not yet concluded. Overall, the privatisation process resumed after two years of stagnation.

Market entry and exit

In 2011 there were 3,072 new enterprises registered in Montenegro, or 17% less compared to 2010. The pace of registration recovered during the first half of 2012, totalling 1,948 new businesses. The procedure for electronic registration of companies through the eGovernment portal became operational in May 2012 and the application of the regulatory guillotine further pursued. Line ministries started in mid-2012 monitoring the implementation of amendments to or revocation of parts of the legislation identified in the regulatory impact assessments as creating barriers to businesses. Credit constraints and the slow and lengthy process of granting municipal licences still hamper investment prospects and delay the establishment of new businesses. The number of bankruptcy cases has fallen significantly to 565 in 2011, compared to 2,196 a year before, although reaccelerated to 824 in the first half of 2012. Overall, while some improvement has been recorded in market entry procedures and bankruptcy recovery, further efforts are still required to facilitate municipal licences.

Legal system

In December 2011, the parliament enacted the Law on Public Bailiffs, transferring powers for the civil enforcement of commercial contracts to these new legal officers. However, enforcement of civil decisions remains weak and bailiffs are yet to be recruited. There have been no further legislative developments in the field of property rights after the adoption in June 2011 of the Law on State Surveying and the Land Registry. The modernisation of the land registry’s current electronic system continues. Although the strategic and legislative framework to combat corruption has been strengthened, its implementation remains uneven. In order to address weaknesses in tax as well as in law enforcement, the government adopted in May 2012 a series of measures to combat the grey economy, increasing the number of inspection controls, notably on excise products, retail turnover accounts, and labour market registration. As a result, in May and June 2012 there were 5,700 inspections resulting in 1,400 infringement reports and two criminal charges. Overall, a new system has been introduced to improve the efficiency of civil enforcement of claims. However, weaknesses in the rule of law and corruption continue to have an adverse effect on the business environment and remain a major challenge.

Financial sector development

The repair of the balance sheets of banks continued during 2011 and 2012. Banks (of which 83% of capital is foreign-owned while 2.7% remains in state ownership) have sold part of their non-performing assets to their international parent banks or to factoring companies. Consequently, total bank assets contracted by the end of 2011 by 4.5% year-on-year, to some 86% of GDP, and further declined to 83% of GDP at the end of July 2012. The share of total gross loans has stabilised since October 2011 until July 2012 at around 57% of GDP, and most of this credit (94%) has been extended to the private sector. However, total bank lending still contracted by 11% year-on-year in 2011 and by 4% in the first seven months of 2012. Yet, a return of confidence is being recorded in the recovery of banks’ deposits, growing by 1.5% year-on-year in 2011 and accelerating to 4% in July 2012. Moreover, foreign companies increased their saving in local banks (by 11% year-on-year in July 2012) for the first time since August 2009.

The interest rate spread of more than 6 percentage points (average lending interest rates were 9.73% in December 2011 compared to deposit rates of 3.08%) suggests there is room for increased efficiency in financial intermediation and the high risk aversion related to the still elevated ratio of non-performing loans (NPL). The NPL ratio fell to 15.5% of total loans at the end of 2011 compared to 21.5% a year before. In 2011, the liquidity of the banking sector remained above the minimum legal requirement of 10%. The capital adequacy ratio (CAR) further improved to 16.5% in 2011, up from 15.9% a year earlier. The profitability of the financial sector also improved compared to the previous year, although it still remained negative at the end of 2011. The sector recorded an aggregated loss of € 3 million in 2011, compared to € 82 million a year before. However, in the first half of 2012 credit activity still remained negative while NPLs were on the rise again, reaching 17% in June, and the CAR ratio declined to 14.5% due to negative financial results of some banks. Overall, weaknesses remain in the financial sector. Although deposits are gradually flowing back into the system, banks’ capital and lending are declining.

In 2011, there were five leasing companies, the same as a year before, and they recorded an annual increase in the value of contracts of 11% in real terms, totalling 1% of GDP, a modest figure compared to the volume of bank loans. Most contracts related to passenger cars (86%) followed at distance by commercial vehicles (8%). In 2011, the Montenegro stock exchange index plunged by 35% and continued contracting during the first eight months of 2012 by 21% compared to the same period a year before. Furthermore, market capitalisation fell in August 2012 by 6.6%, although the total turnover surged by 122% year-on-year to € 5 million. Overall, the share of non-bank financial intermediaries remains low.

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

Existence of a functioning market economy

The financial sector has gained in stability, but is still unable and too risk averse to provide much needed credit to the economy. Unemployment remained high. Although market mechanisms are becoming more efficient, the aluminium plant indebtedness presents a potential risk for public finances.

Human and physical capital endowment

The recent educational reform focuses on the qualification system, which consists of several types of external examinations –on grounds of recommendations from industry and businesses– and aims to improve the quality of education and to align curricula with professional needs (see Chapter 26). The first Matura and vocational exams were organised for the 2011/2012 school year. Its results are now replacing entrance examinations to universities and other institutions of higher education at the end of high school. However, a high share of students from vocational and technical (VET) schools enrols in the university instead of entering the labour market, while employers report shortages for graduates with the right set of skills. Some 20% of persons with vocational education after primary school and 16% of persons with tertiary education remained unemployed in 2011. Overall, labour law reforms and measures to improve the quality of the education system have been initiated, but further efforts are required to re-align skills mismatches.

Investments in Montenegro rely heavily on foreign savings, with FDI inflows playing a key role in improving economic competitiveness, diversifying the industrial base and raising the productive capacity of the economy. Despite a sharp slowdown, annual net FDI inflows have remained above 10% of GDP, indicating sustained investor interest. However, investments have been largely focused on real estate, totalling 39% of total equity investments in Montenegro in 2011, while companies and banks received 33%, and a still significant 28% share concerned the settlement of inter-company debt. The liberalisation of telecommunications and energy has facilitated the opening of their respective markets (see Chapters 10, 14 and 15). However, important constraints are still present in energy, transport and environmental infrastructures. Overall, the country needs to attract further investments to develop its infrastructures.

In 2011 some 0.4% of GDP was invested in research and development, compared to 0.1% a year before. The Ministry of Science, with the support of the World Bank, commenced the project on higher education research for innovation and competitiveness. The Ministry also supported five initiatives by Montenegrin teams to participate in EU research projects. The ministry also co-financed scientific professional training abroad, doctoral and master studies and the publishing of scientific papers in reference scientific journals. Overall, Montenegrin institutions have started to participate more actively in European research programmes although private sector participation still remains insufficient.

Sector and enterprise structure

The steel company, one of the country’s two large metal producers, was eventually sold in June 2012 after several unsuccessful tenders. However, the situation of the aluminium plant (KAP) remains uncertain as the company still needs to go through major restructuring. Meanwhile, further progress was recorded in network industries. The liberalisation of the electronic communications market has been completed. In November 2011 the Law on Postal Services was adopted and the national postal service was converted into a joint stock company, laying the basis for the complete opening of this market. The energy market was further liberalised. In March 2012 the government adopted the restructuring plan for Montenegro Airlines. The opening of the air transport market has been formally achieved. However, although the legislative work for the opening of the railways and the maritime transport markets was initiated, it has not yet been concluded (see Chapter 14- Transport policy). Overall, the restructuring of network industries is facilitating the opening of their respective markets.

There has been little change in the sectoral structure of the economy. The services sector remains the largest, accounting for some 70% of GDP. Agriculture represents about 9% of GDP, industry 14% and construction 7%. The informal sector remains large and is fuelled by weaknesses in tax and expenditure policies, as well as in law enforcement. SMEs account for some 66% of total employment. SMEs are still confronted with difficult access to credit. Some financial relief continued to be provided through the Investment and Development Fund (IDF) which increased the number of loans and established a factoring facility. However, the total amount of this support represented only 1.4% of total banks loans to private companies in 2011. The IDF project for development of business zones continues with the development phase in Podgorica and the selection of two new zones: in Berane and Kolasin. However, public sector financial cutbacks and organisational difficulties have led to a decline of support available to SMEs. The IDF established a credit guarantee scheme in April 2011, although no guarantees have been issued so far. Overall, the large informal sector and difficulties to obtain credit represent two major challenges for enterprise development.

State influence on competitiveness

Some progress has been recorded in the functioning and independence of regulators. In May 2012 the Agency for Electronic Communications and Postal Services instructed the incumbent operator to enable other companies to use the capacities of the cable infrastructure. Also in May, the Commission for the Control of Public Procurement annulled two important public tenders due to procedural irregularities, revealing increased independence despite the risk of interruption of the provision of medicines or internet services to the public administration. State aid was marginally reduced, from 2.3% of GDP in 2010 down to 2% in 2011. In May 2012 the Montenegrin Commission for State Aid Control ruled for the government to recover from the aluminium company € 30 million of state guarantees paid to a bank after the firm failed to service a loan. Overall, direct public support remains limited, but state guarantees are high and represent a risk for public finances.

Economic integration and convergence with the EU

Montenegro became a full member of the World Trade Organisation in April 2012. The total value of exports and imports of goods and services increased to 101% of GDP in 2011, compared to 94% a year before. However, the importance of the EU as the main trading partner has decreased somewhat, as the EU received 50% of total merchandise exports, compared to 56% a year earlier. The share of imports of goods from the EU fell moderately to 36%, from 38% a year before. The CEFTA market remains the second largest for Montenegro exports, receiving some 40% of its outbound trade in 2010 and 2011. The share of imports from CEFTA countries continued increasing, from 40% to 43%. Foreign direct investments decreased substantially in 2011. However, the share of EU investments expanded further, totalling 53% of total inflows into the country compared to 50% a year before. The Real Effective Exchange Rate (CPI-based) began to depreciate in 2011 (by 3.2%) after having stabilised the year before, thus marginally contributing to improved external competitiveness. Overall, while trade integration with the EU has somewhat slowed, the EU remains the main destination for Montenegro’s exports and the main source for FDI.

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 has been no progress in the area of general principles. Some progress has been achieved in the case of horizontal measures. The new Law on Technical Requirements for Products and Conformity Assessment, the Law on Market Inspection and the Law on Inspection Surveillance were adopted in November 2011. Further alignment with the acquis remains to be achieved in both areas. The Law on Technical Requirements for Products and Conformity Assessment is still non-compliant with the acquis in several aspects, e.g. in the meaning and terms of use of the CE marking.

In the area of standardisation good progress can be reported. The capacity of the Institute for Standardisation of Montenegro (ISME) is gradually improving, despite its limited financial and human resources. By the end of August 2012, ISME adopted 8409 European and international standards, and completed the public inquiry on 400 standards. 34% of adopted standards are harmonised standards in the meaning of the ‘New Approach’. The compliance with the membership criteria of the European Committee for Standardisation (CEN) remains to be fulfilled. ISME still has to adopt most of its rules of procedure. The majority of internal rules remain to be adopted. ISME has established six new Technical Committees, bringing the total number to eight. An information service on standards was established in compliance with the acquis. Further investment will be required to develop a complete ICT system enabling real-time synchronisation on developing standards with CEN, the European Committee for Electrotechnical Standardisation (CENELEC) and the European Telecommunications Standards Institute (ETSI). The National Strategy for Standardisation has not yet been approved by the government.

Some progress can be reported in the area of conformity assessment. The new Law on Technical Requirements for Products and Conformity Assessment created a legal framework for conformity assessment for certain products even though the law still needs to be amended to be in line with the acquis. The requirements for the designation for the conformity assessment bodies have been decided, although they need to be further clarified and specified. Conformity assessment bodies (CABs) are still showing limited interest in becoming designated bodies despite the fact that two bodies were prepared to implement the functions of notified bodies. The new strategy on conformity assessment needs yet to be adopted.

Good progress can be reported in the field of accreditation. In November, the Accreditation Body of Montenegro (ATCG) became a full member of the European cooperation for Accreditation (EA). This was preceded by the adoption of new rules for cross-border accreditation, witnessing and information security. Three technical committees were established. The ATCG strengthened all its bodies, including the Accreditation Committee and the Complaints Committee, and accredited two more CABs, while revoking the accreditation of one CAB bringing the total number of accredited CABs to 19. The established Register of accredited CABs in Montenegro is well maintained and available on the internet. The ATCG has developed and implements a surveillance plan, including monitoring visits and re-assessment of accredited organisations. The application for the EA MLA (Multilateral Agreement) signatory status in the areas of testing laboratories and inspection bodies needs still to be prepared.

There has been progress in the area of metrology. After becoming a CGPM (General Conference on Weights and Measures) associate, Montenegro signed in October 2011 the CIPM MRA (Mutual Recognition Arrangement of the ‘Comité International des Poids et Mesures’). Limited resources remain of concern, particularly with a view to the necessary calibration activities. A metrological traceability chain was established also in the remaining areas. The Bureau of Metrology set up a quality management system in line with the requirements of standard ISO/IEC 17025 for the laboratories of mass, length and temperature. These and the remaining metrology laboratories have yet to be accredited, and the strategy for metrology development adopted.

There has been good progress as regards market surveillance. In November, Montenegro adopted a Law on Market Inspection and the Law on Inspection Surveillance. The new Regulation, adopted in December 2011 and amended in 2012, on the organisation and method of operation of the state administration established a single inspection authority called the Market Inspection (uniting 34 inspection services in charge of market surveillance of non food products) as an independent body. The head of the authority was selected in May, but not all old inspections have been integrated so far. The reform in the inspection service remains to be completed with the adoption of the necessary implementing legislation and the finalisation of the operational and procedural set-up of the authority. The revision of the General Product Safety Law and the planned new market surveillance law need to be pursued.

Coordination in the market surveillance area was strengthened. A Memorandum on Cooperation between the Market Inspectorate and the Customs Authority was signed in February 2012. The Coordination Body for Market Surveillance (CBMS) is taking the lead in ensuring smooth coordination. In March 2012, the CBMS adopted the 2012 National Programme for Market Surveillance, based on the individual annual market surveillance programmes of each inspection service. In April the government adopted the report of the Coordination Body for 2011 with a list of competences of different inspections by groups of products.

The Market Inspectorate improved the market surveillance methodology and internal operational rules, and substantially trained its staff. The newly introduced IT system allows the planning, recording and tracking of market surveillance operations to be improved and establishes a good basis for introducing a proper risk management system. A new web-page of the Market Inspectorate was launched at the end of 2011.

As regards the ‘Old Approach’ product legislation, some progress was made with the adoption in November of the new Law on Pharmaceuticals and rulebooks on pre-packaged products and on bottles as measuring containers. The Agency for Drugs and Medical Devices established a reference laboratory for identification of forgeries and created a database providing information on relevant stakeholders. The Ministry of Transport and Maritime Affairs established a Department for Motor Vehicles to develop and ensure the adoption of technical regulations for the type approval of motor vehicles. The Law on Traffic Safety, regulating motor vehicles in use, has yet to be adopted, as does the new Law on Chemicals.

Little progress was registered in the area of ‘New and Global Approach’ product legislation. Rulebooks on electromagnetic compatibility as well as radio equipment and telecommunications terminal equipment were adopted and entered into force in July.

In the area of procedural measures, no progress was made.

Conclusion

Overall, Montenegro has made some progress in the area of free movement of goods. Additional efforts, better coordination and stronger ownership are needed to further align with the acquis. Overall, preparations in the area of free movement of goods are relatively advanced.

4.2. Chapter 2: Freedom of movement for workers

There has been no further progress in the area of access to the labour market. Existing legislation still requires work permits for EU nationals. To comply with EU law on the free movement of workers, EU nationals must not be subject to any work permit requirement as from accession. Preparations in this area are at an early stage.

There has been some progress regarding preparations for future participation in the European Employment Services (EURES) network, with the initial establishment of new administrative structures within the employment services, and training of potential EURES advisers. Preparations in this area have been launched.

There has been little progress in the field of coordination of social security systems. Montenegro has ratified a cooperation agreement with Slovenia and signed an agreement with Turkey. Negotiations are currently under way with the Slovak Republic, Bosnia and Herzegovina and Croatia. There was no progress towards strengthening administrative capacity. Preparations in this area are at an early stage.

There were no developments as regards the European Health Insurance Card. Preparations in this area still need to be launched.

Conclusion

Little progress has been made in the field of freedom of movement for workers. Overall, alignment with the acquis is still at an early stage.

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

There has been little progress in the field of the right of establishment. The implementation of recently amended legislation (on water, agricultural land, protection and rescue, geological research, electronic communication and spatial planning) faced some hurdles at local level. Following its establishment within the central registry of the Commercial court, the one-stop shop for business registration became an integral part of the tax administration in March. However, registration is not yet possible at the regional units of the tax administration. Electronic company registration became operational in May through e-government portal. Some progress has been achieved at central government level. However, additional efforts in implementing the reforms are still needed at local level.

As regards freedom to provide cross-border services, no progress can be reported on transposition of the Services Directive. Designation of a central body to coordinate its implementation and other related activities are at the planning stage.

Good progress can be reported in the area of postal services. A new Law on Postal Services was adopted in November with a view to further aligning the national legislation with the acquis. This law sets a new regulatory framework for postal services, providing for further liberalisation of the postal market and its full opening as of the beginning of 2013, which is in line with the timeframe of the ‘second group’ of countries under Directive 2008/6/EC (‘Third Postal Directive’). The law also provides for the independence of the national regulatory authority, sets up instruments for ensuring the sustainability of the universal postal service, and simplifies the procedure for issuing an authorisation. Legislative alignment is very advanced (with Directive 2002/39/EC, the ‘Second Postal Directive’) and only some minor issues are pending, which could be introduced in the envisaged implementing legislation. Montenegro’s postal service changed its legal status into a joint stock company in January and preparations are ongoing for a public-private partnership tender. The administrative capacity of the national regulatory authority remains limited.

There has been some progress in the field of mutual recognition of professional qualifications. The Law on Recognition of Foreign Qualifications for Access to Regulated Professions entered into force in April. The law partly transposes Directive 2005/36/EC on the recognition of professional qualifications by setting out the general framework for the recognition of foreign diplomas. There is still a need to strengthen administrative capacity.

Conclusion

Some progress can be reported on the right of establishment and freedom to provide services. Montenegro made good progress towards aligning the new law on postal services with the acquis. On the right of establishment, legislative reforms need to be implemented. Considerable efforts are still needed regarding the alignment of legislation with the Services Directive, on mutual recognition of professional qualifications and as regards interinstitutional cooperation. Overall, preparations in this area are moderately advanced.

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.

No legislative developments can be reported on free movement of capital or on payment systems.

With regard to the fight against money laundering, some progress can be reported. Amendments to the law on prevention of money laundering and terrorism financing were adopted in February. Further to the recently issued Financial Action Task Force (FATF) 2012 report, a new series of anti-money laundering initiatives will require further amendments to the existing legislation and strengthening of the administrative capacity.

Cooperation between the Ministry of Finance, the Administration for the Prevention of Money Laundering and Terrorist Financing (APMLTF), the Central Bank of Montenegro, the Securities and Exchange Commission and the Insurance Supervision Agency was improved by means of a Memorandum on cooperation and data exchange in the area of prevention of money laundering and terrorist financing, signed in December. The police are not a party to the Memorandum and the current arrangements for receiving information on suspicious transactions from the APMLTF are time-consuming and delay financial investigations.

Montenegro produces a low level of suspicious transaction reports and accounts for a large document flow (estimated at about 300,000 documents per year). Of the 34 reports of suspicious transactions (in the period September 2011–March 2012), 24 came from the banking sector. There have been very few convictions for money laundering.

The IT system of the APMLTF needs to be updated so that it can support the workflow effectively. There is a need to establish a clear IT policy, including plans to update and maintain the current hardware and obtain software allowing data analysis, and to allocate funds under the national budget.

Following the adoption of the rulebook on the internal organisation of the APMLTF in 2011, there was no further increase in the number of staff. One staff vacancy in this administration, which serves as the national Financial Intelligence Unit (FIU), was filled, bringing the total to 29 staff out of 38 posts assigned.

The administrative capacity of the supervisory authorities to conduct anti-money laundering inspections in the supervised institutions needs to be enhanced. Similarly, further efforts are needed to improve the awareness of the obligated sector to ensure adequate implementation of the anti-money laundering rules, and to enhance cooperation between the APMLTF, the regulators/supervisory bodies and the obligated sector in enforcing anti-money laundering legislation.

In January, the administration signed agreements on exchanges of financial intelligence data with Japan and Canada.

Conclusion

Little progress can be reported on free movement of capital although preparations are on track. Full alignment with the acquis, as regards payment systems and strengthening administrative capacity, mainly in the area of the fight against money laundering, will need to be further pursued. As regards combating money laundering and financing of terrorism, preparations are still at a relatively early stage. Major efforts are required to enforce legislation, enhance inter-agency coordination and establish a track record on fight against money laundering and financial crime. Overall, preparations are on track.

4.5. Chapter 5: Public procurement

There has been good progress as regards the general principles applying to public procurement in Montenegro. The new law on public procurement and the related bylaws, which entered into force in January, aligned to a large extent the general principles with those of the EU acquis. The new law covers the remedies system, taking the alignment forward in this area. Further work is required to bring the legislation on concessions, utilities and defence procurement into line with the acquis.

In the second half of 2011, a number of implementing provisions were adopted. In order to strengthen procurement capacity and reduce the risk of conflicts of interest, the government adopted in December 2011 the Decree on the functioning of the state administration, which aims to transfer the management of the public procurement procedures of 34 independent and semi-independent bodies to the competent line ministry. The impact of the decree will be to reduce the number of contracting authorities and procurement procedures. Montenegro adopted a new strategy for public procurement for the period 2011-2015 in December 2011 and established a coordinating body to monitor its implementation. Resources for implementing the strategy still need to be ensured.

As regards the award of public contracts, some progress has been achieved with the entry into force of the new public procurement (PP) law. The helpdesk at the Public Procurement Directorate is operational. The Public Procurement Directorate launched a new portal on public procurement in January 2012, which publishes the procurement notices, award decisions and procurement plans of the contracting authorities. The system is only available in the Montenegrin language. It provides for more transparency but needs to be further developed.

The administrative capacity for public procurement continues to improve. The new rulebook on internal organisation and job descriptions of the Public Procurement Administration (PPA) was adopted by the government in November 2011. The staffing of the PPA is 14. The new organisation of the PPA envisages the establishment of the new inspection service, which is expected to monitor the regularity and timeliness of procedures for contracts below € 500,000. This complements a similar function of the State Commission for contracts with a value above € 500,000, and is independent of the general complaints review mechanism, which is also operated by the State Commission. The competences of the inspection service and its powers need to be clarified by precise implementing provisions, and sufficient staff needs to be allocated. Furthermore, clearer separation of the functions of the different units needs to be ensured to avoid any possible overlaps with the PPA’s advisory and approval function. The PPA organised training activities to familiarise contracting authorities with the new PP law. Guidelines on the implementation of the new PP law were prepared and seminars were held on anti-corruption policy and the prevention of conflicts of interest. Yet further efforts in terms of training and additional staffing are needed to increase the enforcement capacity.

As regards the remedies system, good progress has been achieved with the system being covered by the new PP law. A new State Commission for the Control of Public Procurement Procedures (SCPP) was established on 23 February 2012. The new Commission has a staff of 6 and has obtained stronger powers and competences. A complaint fee of 1% of the contract value, with a maximum of € 8,000, has been introduced. Since its establishment until 14 September 2012, SCPP has performed 26 controls of public procurement procedures and the average time for completing a case was 10 days.

Conclusion

Overall, good progress has been achieved in the area of public procurement. Implementation of the new legislation remains a concern. The legislative framework for concessions remains to be aligned with the acquis. The role, powers and competences of the future inspection services need to be clarified and sufficient staff provided. Preparations in the area of public procurement are moderately advanced.

4.6. Chapter 6: Company law

As regards company law, there were no further developments. The national legislation is largely aligned with the acquis.

As regards electronic signatures, the Root Certificate Authority at national level (Montenegro Post) issued more than 2,500 digital certificates, mostly to legal entities. Following the first wave of digital certificate issuance, the certificate authority receives 4-5 requests per day.

With regard to corporate accounting and auditing, there are no further developments. Work on the amendments to the Law on Accounting and Auditing is ongoing. The amendments are to establish an independent public oversight body for auditors and a quality control system.

Conclusion

Little progress can be reported 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, are yet to be adopted. Overall, preparations are moderately advanced.

4.7. Chapter 7: Intellectual property law

In the area of copyright and neighbouring rights, the Regulation implementing the Copyright Law was adopted.

In the area of industrial property rights the Implementing Regulation on Trademarks was adopted in October 2011. The amended Trademark Law was adopted by the parliament in July. The Regulation implementing the Patent Law remains to be adopted.

The Regulation implementing the Law on Legal Protection of Industrial Design entered into force in March. Amendments to the Law on Legal Protection of Industrial Design have not yet been adopted.

In March, the Patent Law Treaty and the Vienna Agreement establishing the International Classification of the Figurative Elements of Marks entered into force in Montenegro.

Montenegro adopted the Law on Confirmation of the Nice Agreement Concerning the International Classification of Goods and Services for th