TABLE OF CONTENTS

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

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

1.2......... Context 3

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

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

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

2.2......... Human rights and the protection of minorities. 11

2.3......... Regional issues and international obligations. 11

3............ Economic criteria. 13

3.1......... The existence of a functioning market economy. 14

3.2......... The capacity to cope with competitive pressure and market forces within the Union. 18

4............ Ability to take on the obligations of membership. 20

4.1......... Chapter 1: Free movement of goods. 20

4.2......... Chapter 2: Freedom of movement for workers. 21

4.3......... Chapter 3: Right of establishment and freedom to provide services. 21

4.4......... Chapter 4: Free movement of capital 22

4.5......... Chapter 5: Public procurement 22

4.6......... Chapter 6: Company law.. 23

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

4.8......... Chapter 8: Competition policy. 24

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

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

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

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

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

4.14....... Chapter 14: Transport policy. 28

4.15....... Chapter 15: Energy. 29

4.16....... Chapter 16: Taxation. 29

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

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

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

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

4.21....... Chapter 21: Trans-European networks. 33

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

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

4.24....... Chapter 24: Justice, freedom and security. 47

4.25....... Chapter 25: Science and research. 51

4.26....... Chapter 26: Education and culture. 52

4.27....... Chapter 27: Environment and climate change. 53

4.28....... Chapter 28: Consumer and health protection. 54

4.29....... Chapter 29: Customs union. 55

4.30....... Chapter 30: External relations. 56

4.31....... Chapter 31: Foreign, security and defence policy. 56

4.32....... Chapter 32: Financial control 57

4.33....... Chapter 33: Financial and budgetary provisions. 58

Statistical Annex. 60

1. Introduction 1.1. Preface

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

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

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

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

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

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

This report covers the period from October 2013 to September 2014. Progress is measured on the basis of decisions taken, legislation adopted and measures implemented. As a rule, legislation or measures which are under preparation or awaiting parliamentary approval have not been taken into account. This approach ensures equal treatment across all reports and enables an objective assessment.

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

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

1.2. Context

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

1.3. Relations between the EU and Montenegro

Within the framework of the accession negotiations, the screening process was completed in May 2014. By September 2014, twelve chapters, including chapters 23 and 24 on the rule of law, had been opened, two of which, i.e. science and research, and education and culture, have been provisionally closed.

Montenegro is participating in the Stabilisation and Association Process.

Overall, Montenegro continued to broadly implement its obligations under the Stabilisation and Association Agreement (SAA). The protocol on the adaptation of the SAA, to take account of Croatia’s accession to the EU, was signed in December 2013; pending its ratification, the protocol is applied on a provisional basis with effect from 1 July 2013.

Regular political and economic dialogue between the EU and Montenegro has continued through the SAA structures. The Stabilisation and Association Council met in June 2014 and the Stabilisation and Association Committee in December 2013. Various subcommittee meetings have been held since October 2013, plus two meetings of the Stabilisation and Association Parliamentary Committee, in December 2013 and March 2014.

Montenegro participates in ministerial dialogue between the economic and finance ministers of the EU and the candidate countries, which aims at helping the latter gradually meet the economic accession criteria and be better prepared in terms of economic reforms, competitiveness and job creation.

Visa liberalisation for citizens of Montenegro travelling to the Schengen area has been in force since December 2009. As part of the monitoring mechanism in place since visa liberalisation, the Commission has been regularly assessing the progress made by the country in implementing reforms introduced under the visa roadmap. The monitoring mechanism also includes an alert mechanism to prevent abuses, coordinated by Frontex. The Commission has regularly submitted its post-visa liberalisation monitoring reports to the European Parliament and the Council. The next report will be presented by the end of 2014. A visa-waiver suspension mechanism entered into force in January 2014. On this basis, EU Member States can request the Commission, in an emergency situation and as a measure of last resort, to examine the possibility of temporarily suspending the visa waiver for third-country nationals. A readmission agreement between the European Union and Montenegro has been in force since 2008.

The EU has provided financial assistance to Montenegro under the Instrument for Pre-accession Assistance (IPA) for the period 2007-2013, with a total allocation to Montenegro of € 235.7 million. The IPA national programme 2012-2013 stands at € 31.0 million overall, with most of the funding supporting the implementation of reforms relating to the rule of law, public administration and environment sectors, and rural development measures in the agriculture and rural development sector.

The implementation of the IPA allocation continues to be managed by the EU Delegation in Podgorica. Montenegro’s preparations for decentralised implementation of IPA programmes (by the national authorities) have further advanced, and management of IPA components III and IV was conferred on Montenegro.

Under IPA II, Montenegro will continue to benefit from pre-accession assistance for 2014-2020, with a total indicative allocation of € 270.5 million. An indicative strategy paper for the years 2014-2020, drafted in partnership with Montenegro and in consultation with all relevant stakeholders, was adopted by the Commission on 18 August 2014. Over this period, IPA assistance will aim at supporting reform efforts in the areas of the rule of law, democratic governance and competitiveness and growth.

Montenegro continues to benefit from support under the IPA multi-beneficiary and regional programmes and to participate in five cross-border cooperation programmes with neighbouring Western Balkan countries and in transnational cooperation programmes with Member States under the European Regional Development Fund and the IPA Adriatic cross-border programme.

Montenegro participates in the following EU programmes: the Seventh Research Framework Programme, the Competitiveness and Innovation Framework Programme, Culture, Lifelong Learning, and Customs. Montenegro has also recently concluded or is in the process of concluding new agreements for a number of programmes, including: Horizon 2020; Competitiveness of Enterprises and Small and Medium-sized Enterprises, Fiscalis, Erasmus+, Creative Europe, Europe for Citizens, and Employment and Social Innovation.

2. Political criteria

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

2.1. Democracy and the rule of law

Constitution

No amendments were made to the Constitution during the reporting period. On the implementation of the constitutional reforms adopted in July 2013, see Chapter 23 — Judiciary and fundamental rights.

Elections

During the reporting period, elections were held in 17 out of 23 municipalities. They were marred by allegations of abuse of state resources for electoral purposes, vote-buying, and irregularities in the voters’ register. All allegations of electoral irregularities need to be investigated, and, where necessary, prosecuted by the competent authorities. Due to the polarised political climate, the formation of the new administrations in certain municipalities after the elections has been a difficult process. The parliamentary working group on restoring citizens’ trust in the electoral process failed to reach agreement on amendments to the legislative framework in the area of elections and political party financing with a view to addressing shortcomings, including those identified by the OSCE’s Office for Democratic Institutions and Human Rights (OSCE/ODIHR) following previous elections. In January, the tasks of the working group were taken over by the parliamentary Speaker’s Collegium (the Speaker, Deputy Speaker and chairs of parliamentary groups). A package of amendments, originally scheduled for adoption in September 2013, was eventually adopted in February (the law on political party financing and electoral campaigning, the law on the single voters’ register, the law on personal ID cards, and the law on local self-government) and March (the law on the election of municipal councillors and Members of Parliament).

The law on political party financing and the law on the single voters’ register were adopted without cross-party consensus. The other laws were adopted with the support of all political groups. Several amendments entered into force in time to take effect for the spring local elections. The law on the single voters’ register and the law on the election of municipal councillors and MPs contain certain transitional arrangements which are expected to take effect only as of 1 November 2014.

The election legislation reform envisages changes in the composition of the State Election Commission (SEC), by providing for the president and a civil society representative to be non-partisan members elected by parliament. It also introduces a system of electronic identification of voters and centralised management of the voters’ register by the Ministry of Interior. The changes to the law on political party financing aimed at limiting the scope for abuse of state resources in the electoral campaign by prohibiting and restricting certain payments during the pre-election period, for example by imposing stricter limits on temporary employment. The amendments also gave the SEC increased oversight and control competences and introduced additional and stricter penalties for breaches of the law. Parliament failed to appoint the new SEC in time for the May local elections. Revision of the legislative framework did not include the law on financing election campaigns for the president of Montenegro, mayors and presidents of municipalities, as originally envisaged.

The package of amendments addresses several of the outstanding OSCE/ODIHR recommendations, while some issues remain to be addressed in line with European standards and best practices. These include e.g. the right to stand as an independent candidate, proportional public funding to promote a level playing field for all candidates, auditing of political parties, political balance in polling stations and rules on the composition of the election commissions at municipal and polling station levels. The administrative capacity of the SEC needs to be significantly strengthened for it to carry out its mandate effectively.

The implementation of the amendments to the law on political party financing was marked by controversies over the interpretation of certain provisions. In June, following a request by the ruling Democratic Party of Socialists — which had voted against the law — the constitutional court ruled a significant part of the amendments to the law unconstitutional. Certain annulled provisions had been inserted in response to outstanding OSCE/ODIHR and Group of States against Corruption (GRECO) recommendations. Some of the annulled provisions had been considered as problematic by experts when the law was being drafted.

Overall, election legislation has improved, although important issues remain to be addressed in line with international recommendations. The local elections held during the reporting period show that the goal of strengthening public confidence in the electoral system has not been achieved yet. The new provisions need to be effectively implemented. Montenegro needs to ensure that its legislative framework in the area of political party financing is fully in line with European standards and best practices and to establish a track record of effective implementation. Full cross-party support will be required for this to be achieved. Allegations surrounding the municipal elections need to be investigated and, where necessary, prosecuted.

Parliament

In March, parliament adopted the 2014 action plan for strengthening its legislative and oversight role. Follow-up to the conclusions adopted by parliamentary committees in oversight hearings remains limited and needs to be reinforced. There was no political follow-up to the technical report adopted by parliament in July 2013 on the alleged misuse of public funds for party political purposes. Judicial follow-up remains to be completed.

As regards its oversight role, parliament has continued to hold consultative and control hearings on a variety of topics. Consultative hearings were held inter alia on foreign policy, public procurement in the health system, the functioning of local self-government, and the implementation of the strategy against domestic violence.

The transparency of parliament’s work continued to be strengthened through direct interaction with citizens and replies to all requests for access to information. Information and documents related to the work of parliament and its working bodies continue to be published regularly. The establishment of procedures for acting upon citizens’ initiatives addressed to the parliamentary committees on human rights and anti-corruption is pending. Parliament has not yet adopted its code of ethics.

In December, parliament unanimously adopted a resolution on Montenegro’s path to European integration, setting out its role, and, in particular, the role of the parliamentary European Integration Committee, in the accession process. To date, the committee has conducted consultative hearings, discussed negotiating positions drafted by the government and government reports related to the EU accession process, and organised public debates on EU-related topics.

In October 2013, parliament amended its rules of procedure, in line with the new constitutional provisions concerning the selection procedures for several judicial and prosecutorial office-holders. After several attempts, the parliament finally appointed a new Supreme State Prosecutor in October. (See also Chapter 23 — Judiciary and fundamental rights).

Parliament continued its intensive legislative activity. Upon proposals from the working group on building trust in the electoral process, taken over by the Speaker’s Collegium, parliament adopted comprehensive changes to the electoral legislative framework. Underlying tensions among political parties and a lack of consensus on some features of the reform affected the process. (See above — Elections).

The overall number of staff fell over the reporting period from 153 to 130. Training courses continued to be provided. Continuous efforts are needed to further increase parliament’s administrative and expert capacity.

Overall, the adoption of the resolution on Montenegro’s EU accession is a welcome step forward in defining parliament’s competences in the accession process, including vis-à-vis the government. Transparency continues to be ensured. Parliament’s legislative activity has grown and needs to continue to be strengthened. Parliament has continued to increase its oversight role, including through control and consultative hearings. Conclusions adopted in oversight hearings need to be followed up more effectively. Parliament’s administrative capacity needs to be strengthened.

Government

The government remained focused on the objective of EU membership. It adopted a number of strategic documents in the context of the EU integration process, including the 2014-2018 EU accession programme; the 2013-2016 pre-accession economic programme; and the 2014-2018 strategy for informing the public on the EU accession process.

In March, the government adopted amendments to the decision on the establishment of the negotiating structures. In addition to enhancing the competences of the working groups, the Rule of Law Council, chaired by the Minister of Justice, was established as a new body in charge of monitoring rule of law-related activities in the negotiation process, including the implementation of the action plans for chapters 23 and 24. A new Commission for European Integration, headed by the Chief Negotiator, was also established to monitor the implementation of the 2014-2018 EU accession programme, and of the obligations stemming from the Stabilisation and Association Agreement. The new structures need to result in better coordination among the various institutions involved in the accession negotiations. The government published two reports on the implementation of the action plans for chapters 23 and 24. The government also established a commission to monitor the competent authorities’ actions in the investigation of old and recent cases of threats and violence against journalists, chaired by a representative of the media. Its recommendations need to be fully followed up by the authorities. (See Chapter 23 — Judiciary and fundamental rights).

The administrative capacity of the Ministry of Foreign Affairs and European Integration was further strengthened. The ministry’s overall budget for 2014 was increased compared to 2013, although the EU accession programme was allocated fewer funds than in 2013. As regards transparency, the government has continued to publish, on the ministry’s website, translations of the screening reports endorsed by the EU Council. Communication with citizens improved, including through direct interaction via social media and the use of existing channels for reporting suspected cases of corruption and the informal economy. The internet platform for e-petitions remains active; however, only two petitions have received a sufficient number of electronic signatures, and only one of them was endorsed by the government.

With regard to local self-government, in February parliament adopted amendments to the law on the territorial organisation of Montenegro, whereby Gusinje (previously part of Plav municipality) was granted municipal status. Elections were held in 17 municipalities (see above — Elections). The 2014 action plan for the reform of local self-government was adopted. In the context of election legislation reform, a positive step was taken in transferring management of the voters’ register to the Ministry of Interior, removing this competence from local self-government.

Overall, the government remained focused on EU integration. The structures for the accession negotiations were further strengthened, as was the administrative capacity of the Ministry of Foreign Affairs and European Integration to coordinate the EU accession process. Coordination among the various institutions must be strengthened. Efforts to increase government transparency brought limited results. Transparent, efficient and accountable local administration needs to be established. The criteria for creating new municipalities should include financial and administrative sustainability.

Public administration

Montenegro has a comprehensive strategic framework for public administration reform in place. The Public Administration Reform strategy 2011-2016 covers the state administration, local government and publicly-owned bodies and agencies. The areas it addresses include civil service reform; public-sector wage reform; improving the quality of legislation and strategic planning, including the introduction of regulatory impact assessments; modernisation of administrative procedures for better service delivery; reform of the inspection supervision system; and local-level organisation and administration, including financing and public financial management. The coordination and monitoring mechanism for implementing the strategy was further strengthened through the establishment, in November, of an inter-ministerial body led by the Ministry of Interior, while overall coordination is led by the Deputy Prime Minister. The revised 2014-2015 action plan and reports on implementation during the previous period and the first half of 2014 were adopted in December and July respectively. A special group on PAR, established as a forum for policy dialogue between the Commission and Montenegro in the framework of the SAA, met in February and July to discuss and monitor implementation of the strategy.

Policy development and coordination across the sectors are operational, but need to be further improved. The scope of inter-ministerial consultations on legislative proposals needs to be broadened. The link between policy planning and available financial resources needs to be further developed. There is a lack of formal requirements for medium-term resource planning. Inter-ministerial coordination and consultation with civil society is mandatory and underpinned by government decree, but in practice does not happen on a regular basis. The existing rules for regulatory impact assessments need to be amended to ensure that an impact assessment is prepared prior to public consultation and that it is updated before the government takes its decision. An impact assessment should accompany any draft law that is presented to parliament.

With regard to public service and human resources management, the implementing legislation for the new law on civil servants and state employees was completed at the end of 2013. The focus should now be on ensuring effective application of the new legal framework in the public sector. Appointments and dismissals need to be closely and transparently monitored and reported on, especially in the case of senior managers, in order to avoid arbitrary decisions. In the reporting period, the Human Resources Management Authority introduced a new training module for senior management staff in the public administration and induction training for newcomers. The Authority’s capacity needs to be further strengthened to ensure effective monitoring of the implementation of the law on civil servants and state employees in all public-sector bodies. Human resources plans still need to be prepared in all state bodies. The central personnel records needs to be further updated, as the majority of institutions have not yet provided the relevant data. No progress has been made in enhancing the transparency, efficiency and accountability of local government administration. The law on local self-government needs to be harmonised with the new rules on public service management.

As regards the undated resignation letters submitted at the request of the government by senior officials and heads of administrative bodies, which had been an issue of serious concern, in January the Minister of Interior confirmed that they had been destroyed at the request of the government.

The plan for the reorganisation of the public sector, as part of the public administration reform (PAR) strategy, was published in November. Based on a sector analysis, the plan provides for a gradual reduction of employees in all sectors by 10 % over the next four years. Major savings are expected in the health, education and internal affairs sectors. The plan, which now needs to be implemented, must also take into account the Montenegrin programme of accession. A body to monitor the implementation of the plan started its work in December, with regular reporting obligations.

The first phase of the merger of different inspection services into one centralised body was completed, aiming at enhanced transparency, consolidation of resources and greater effectiveness and efficiency of operations.

There has not been any progress in improving accountability and service delivery. The new law on general administrative procedures needs to be adopted. Transparency and accountability of the work of the public institutions and officials need to be ensured. Finding the right balance between the right to free access to information and the protection of personal data remains a challenge.

Montenegro still needs to develop a comprehensive public financial management reform programme to address more systematically the necessary reforms in the different parts of the public financial management system. The Public Expenditure and Financial Accountability (PEFA) assessment from 2013 provides a basic framework for preparing the reform programme. Montenegro adopted the legal basis for the multiannual budgetary framework and the introduction of numerical fiscal rules on budget deficit and public debt in April. A gradual shift to programme-based budgeting needs to be ensured. Significant investment is required to upgrade the expenditure management system with a focus on improving registration, reporting and monitoring commitments in connection with contracting, and on producing real-time data on spending in relation to appropriations.

Overall, there has been some progress in the area of public administration reform. Implementation of the public administration reform strategy is on track but further efforts are needed to improve the quality of legislation and local administration. Montenegro also needs to address the necessary public financial management reforms more comprehensively and ensure appropriate sequencing of reform actions. The legislative framework and its implementation need to be improved. Public administration needs to be further rationalised and the strengthening of administrative capacity for European integration ensured. In many areas, the work on the preparations for EU accession takes up a substantial part of the human and financial resources available to the relevant parts of the administration.

Ombudsman

The capacity of the Ombudsman’s office remains limited, in terms of both human and financial resources. Amendments to the law on the Ombudsman were adopted, enhancing Montenegro’s alignment with European and international standards. The fact that the amendments have weakened the role of the Ombudsman in dealing with anti-discrimination cases remains a matter of concern. Despite the overall rather high number of staff, the number of posts in the departments dealing with substantive human rights and anti-discrimination issues is rather limited, and various positions remain vacant, including two out of four deputy posts. This raises concerns about the institution’s capacity to fulfil its broad remit and efficiently handle complaints. Little follow-up is given to concrete cases of discrimination.

Civil society

An empowered civil society is a crucial component of any democratic system and should be recognised and treated as such by state institutions. In July, the new Council for development of non-governmental organisations was appointed by the government. Among its main tasks, there are those related to monitoring of the strategy for development of civil society organisations (CSOs) and the relevant part of negotiations’ action plan on chapter 23. The Council should be in the position to better steer the process of development of civil society. Representatives of CSOs continue to be involved in the activities of the state and local administration, including working groups on the EU accession negotiation chapters. On various occasions, civil society representatives have voiced their dissatisfaction with their level of involvement in the process. Greater transparency is needed in the government’s procedures for cooperation with and consultation of CSOs, especially in legislative drafting. Continuous cooperation between CSOs and public administration bodies is not yet guaranteed. A sustainable system of public funding for CSOs and an appropriate institutional framework need to be further developed. The current system of public funding has so far proved to be inefficient, as acknowledged by the latest report from the State Audit Institution. An enabling legal framework for volunteering activities and corporate social responsibility/philanthropy also remains to be established. Relations between CSOs and the government have been overly adversarial on occasion, especially on issues concerning the political situation, rule of law and fundamental rights. Some civil society activists have been targeted on a personal basis by local media. CSOs have a crucial role in this area, which is distinct from that of political parties but integral to the political and socio-economic process.

Judicial system

In the area of judicial reform, some progress has been made. Key reforms of the recruitment, promotion and disciplinary systems for judges and prosecutors are still pending. They need to fully reflect European standards and best practices, and to be understood and supported by all stakeholders so as to ensure effective implementation. Following alignment of relevant legislation with the constitutional reforms of July 2013, key judicial and prosecutorial officials were elected. Parliament finally agreed on the appointment of a new Supreme State Prosecutor. The slightly negative evolution of the clearance rate and the number of pending cases as compared to last year is due to a significant increase in the number of incoming cases. The length of proceedings has decreased, and overall courts managed to solve considerably more cases than in the previous year. The efficiency of the judiciary should increase further. It is a matter of serious concern that the power to conduct misdemeanour proceedings has still not been transferred to courts. Montenegro needs to step up its efforts to fight impunity for war crimes, and effectively investigate, prosecute, try and punish war crimes in line with international standards.

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

Fight against corruption

In the area of anti-corruption, progress has been limited. The legislative framework remains to be strengthened. Pending the establishment of a new anti-corruption agency, the capacity of existing institutions in the area of prevention of corruption needs to be improved and they need to take a more proactive approach. The system of checks for conflicts of interest and asset declarations is not effective. Following the constitutional court’s annulment of a significant part of the amendments to the law on political party financing designed to reduce the scope for abuse of state resources for electoral purposes, Montenegro needs to ensure that its legislative framework in the area of political party financing is fully in line with European standards and best practice and to provide an initial track record on the correct implementation of the law, including application of deterrent sanctions where required. Increased efforts are needed with regard to the development of a solid track record of investigation, prosecution and final conviction in corruption cases, including high-level cases, and the systematic use of the power to seize and confiscate assets. Cooperation between the prosecution and the police in pre-trial investigation remains to be improved. The impact of anti-corruption measures so far has been limited. Corruption remains prevalent in many areas and continues to be a serious problem, requiring effective implementation of deep and lasting reforms.

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

Fight against organised crime

In the area of organised crime, the legislation needs to better clarify the role of the judiciary and the police in the pre-trial phase. While Montenegro has continued to develop a track record in the fight against drugs, and new cases were opened on people smuggling, more needs to be done to combat trafficking in human beings, cybercrime and money laundering. Financial investigations and the confiscation of assets are not yet applied systematically. More efforts are needed to improve interagency coordination. Cooperation with neighbouring countries and EU Member States, at bilateral and regional and international levels, continued.

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

2.2. Human rights and the protection of minorities

Some progress was made on fundamental rights; the country is gradually familiarising itself with the international reporting mechanisms stemming from the international conventions ratified so far. A gap remains between legal alignment and implementation of human rights standards in the policy framework, and practice. This particularly affects the disadvantaged and the most vulnerable groups. Amendments to the law on the Ombudsman were adopted, in line with European and international standards; preparation for the adoption of implementing legislation should continue without delay. Human rights institutions’ action is hampered by the lack of staff, skills and financial resources, and by frequent staff turnover. Attacks against the media are cause for serious concern. Some cases of violence against journalists and attacks on media property have been successfully investigated and processed. In other cases, investigations are pending and both the material perpetrators and those allegedly behind the attacks remain to be identified. Some progress was made in the area of civil registration and education of Roma. In April a new action plan to implement the Strategy for improvement of position of Roma and Egyptians in Montenegro was adopted. Overall, the Roma community face discrimination, especially in the field of employment, health issues and housing. Some progress was made on lesbian, gay, bisexual, transgender and intersex (LGBTI) issues, especially through capacity-building activities for civil servants and police officers. Attacks against LGBTI persons and activists continued, reflecting a widespread hostility to sexual diversity.

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

2.3. Regional issues and international obligations

With regard to cooperation with the International Criminal Tribunal for the former Yugoslavia, Montenegro neither received any requests for assistance nor had cases referred back to its national authorities by the court for possible further investigations.

For the handling of domestic war crimes cases, see Chapter 23 — Judiciary and fundamental rights.

Montenegro still maintains a 2007 bilateral immunity agreement with the United States, granting exemptions for US citizens from the jurisdiction of the International Criminal Court. In doing so, it is not complying with the EU Common Positions on the integrity of the Rome Statute or with the related EU guiding principles on bilateral immunity agreements. Montenegro needs to align with the EU position in the framework of accession negotiations.

Montenegro, along with Bosnia and Herzegovina, Croatia and Serbia, has continued to closely cooperate in the Sarajevo Declaration Process, which aims to find sustainable solutions for people who became refugees and displaced persons as a result of the armed conflicts in ex-Yugoslavia during the 1990s. In March, the United Nations High Commissioner for Refugees (UNHCR) recommended that UN member states terminate refugee status for refugees originating from Croatia, at the latest by the end of 2017.

Implementation of the regional housing programme, expected to provide lasting housing solutions for some 6 000 people in Montenegro, has started. The legal framework and the national implementation bodies have been set up. Three waves of projects, representing € 10 million in grants, have been approved; two further projects are in the planning stage. The construction of the first project is scheduled to begin in 2015. Good overall cooperation between the partner countries on the process and its housing programme needs to continue.

The unresolved fate of missing persons from the conflicts in the 1990s remains a humanitarian concern in the Western Balkans. Montenegro, Serbia, Bosnia and Herzegovina and Croatia signed in August a Declaration on the role of the state in addressing the issue of persons missing as a consequence of armed conflict and human rights.

Regional cooperation and good neighbourly relations form an essential part of Montenegro’s process of moving towards the EU. Montenegro has continued to actively participate in regional initiatives, including the South-East European Cooperation Process, the Regional Cooperation Council, the Central European Free Trade Agreement, and the Energy Community Treaty. Montenegro hosted the first meeting of the Enhanced Cooperation within the Stabilisation and Association Process. Montenegro continues to actively support the Coalition for Reconciliation Commission (RECOM) and Igman initiatives on regional reconciliation.

In December, Montenegro, Bosnia and Herzegovina and Serbia signed a protocol to establish a joint centre for police cooperation in Trebinje (Bosnia and Herzegovina), which opened officially in March. An agreement between Montenegro, Albania and Kosovo, on the meeting point of the state border and its maintenance, was signed in July. On 29 September 2014, Montenegro, Bosnia and Herzegovina, the former Yugoslav Republic of Macedonia and Serbia signed an agreement on reducing the prices of roaming services on public mobile communications networks.

Montenegro continues to maintain good bilateral relations with other enlargement countries and neighbouring EU Member States. However, the delimitation of borders with Croatia, Serbia, and Kosovo* remains pending. A bilateral convention on regional cooperation under Article 15 of the SAA was concluded in December with Serbia, but has not yet been concluded with Albania.

Montenegro continued to maintain good relations with Albania. In April, both countries signed an agreement on cooperation in the field of tourism.

In December, Montenegro signed a protocol on cooperation in the area of forensic examinations and expertise with Bosnia and Herzegovina. A protocol on exchange of information and evidence in war crimes between the state prosecutor’s offices of the two countries was signed in April. A bilateral border agreement was initialled in May.

Montenegro and the former Yugoslav Republic of Macedonia signed an agreement on sharing diplomatic and consular services and a protocol on cooperation in the area of military training. In October 2013, Montenegro ratified the readmission agreement with the former Yugoslav Republic of Macedonia. Agreements on mutual enforcement of court decisions in criminal matters and on legal aid in civil and criminal matters were also signed in December.

The Montenegrin Prime Minister visited Serbia in December for the first such visit in a decade. A memorandum of understanding and cooperation in the field of tourism was concluded in February. Cooperation agreements on diplomatic training and mutual sharing of premises for diplomatic and consular offices were signed in June. A joint operation between Serbia and Montenegro contributed to the arrest of the alleged leader of a prominent organised crime group. There were no developments in the dispute between the Orthodox churches in the two countries.

Concerning Kosovo, the embassy of Montenegro in Pristina became fully operational. An agreement on recognition of pension rights was signed in December, while agreements on police cooperation, on the opening of joint border crossings, on local border traffic as well as protocols on joint border patrols and border cooperation were signed in March. The joint commission on border demarcation continued its work. A Protocol on cooperation in the fight against trafficking in human beings was signed in April.

Montenegro ratified the readmission agreement with Turkey in October 2013. An agreement between the two countries on technical cooperation in the field of standardisation was signed in February, while an agreement on cooperation and mutual assistance in customs matters was signed in September.

Montenegro and Croatia worked closely in the field of education and scientific research. In May, the two countries signed a protocol on police cooperation during the summer season. The amended local border traffic agreement has not been signed yet. The temporary agreement on the Prevlaka peninsula continues to be implemented smoothly. In June, the prime ministers of the two countries indicated again that the issue will most likely be solved through international arbitration. No developments have taken place on border demarcation.

Montenegro and Italy signed an agreement on scientific and technological cooperation. In December, Montenegro ratified the two agreements concluded with Italy on enhancing the application of the European Convention on Extradition and the European Convention on Mutual Assistance in Criminal Matters. In March, an agreement on transport of passengers and freight in international road transport was also signed, while a protocol for the implementation of the readmission agreement between the two countries was initialled.

Overall, Montenegro continues to play an active role in regional cooperation and maintains good relations with the neighbouring enlargement countries and EU Member States. Certain bilateral issues with neighbouring countries are still open, notably in the area of border demarcation. Montenegro needs to align with the EU position on the integrity of the Rome Statute and with the related EU guiding principles on bilateral immunity agreements.

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.

Monitoring of the economic criteria needs to be seen in the context of the increased role of economic governance in the enlargement process, as welcomed by the General Affairs Council of 17 December 2013. To this end, the ECOFIN Council in May adopted targeted policy guidance for Montenegro based on its Pre-Accession Economic Programme.

3.1. The existence of a functioning market economy

Montenegro’s macroeconomic stability recorded some improvement and the economy recovered from the 2012 recession. However, several challenges hinder the efficient allocation of resources. The current-account and fiscal imbalances persist and domestic demand remains subdued as banks are not yet playing their intermediation role in the economy. Labour market conditions, as well as diversification and overall competitiveness are all still weak while key investments are at an incipient phase of development or delayed.

Economic policy

The government’s third Pre-Accession Economic Programme (PEP), covering the period 2014-2016, presents a broadly consistent, albeit somewhat optimistic, medium-term macroeconomic and fiscal framework based on the projection of a gradual acceleration of growth from 3.6 % in 2014 to 3.8 % in 2016. The key objectives of the programme remain fiscal consolidation, achieving a nearly balanced budget in 2015, and improvements in the business environment to support economic growth. Overall, the political consensus on market economy fundamentals has broadly been maintained, with one particular exception concerning the resolution of the bankrupt aluminium firm (KAP) and its debt clearance. Montenegro needs to step up its efforts, in line with the conclusions from the ministerial dialogue between the economic and finance ministers of the EU and the candidate countries from May 2014 to set public debt on a declining path, reduce the high burden of banks’ non-performing loans, and improve the business environment as well as labour market conditions.

Macroeconomic stability

The economy recovered from a double-dip recession in 2013, growing by 3.3 % after contracting by 2.5 % the year before, according to latest data from the national statistical office. Growth was largely driven by investments thanks to stronger activity in the construction sector, as well as by net exports fuelled by stronger external demand for electricity and for tourism services, but also by a sharp contraction of imports. Private and public consumption recorded some slight growth of around one percentage point in real terms. Investment expanded thanks to stronger activity in the construction sector. Tourism continues generating good results, but external shocks from floods in neighbouring countries and from tensions between Ukraine and Russia — that are important tourism markets as well as foreign direct investment (FDI) sources for Montenegro — cannot be discarded. Growth continued in 2014, with the economy expanding in the first two quarters by 1.7 % and 0.3 % year-on-year respectively, driven by investments (mostly construction) and some recovery in private consumption. However, industrial output turned negative in the first six months of 2014. While manufacturing and mining recorded some expansion, the sharp decline in utilities after an exceptionally high electricity output the year before, led to an overall decline in industrial production, down in the first half of 2014 by an average 15 % year-on-year. Moreover, downside risks to a sustained economic recovery persist as domestic demand remains subdued due to credit growth constraints, high unemployment, and falling wages. Growth recovery led to a modest rise in average per-capita income expressed in purchasing power standards to 42 % of the EU average in 2013, compared to 41 % a year earlier. Overall, the recovery remains fragile due to the weakness of domestic demand and high dependency on the external environment.

External imbalances are easing. The current-account deficit declined in 2013 to 14.6 % of GDP from 18.7 % a year earlier due to a stronger contraction of imports rather than an improvement in exports. Yet, the trade deficit remains one of the main structural problems, reflecting the local economy’s narrow production base, lack of competitiveness and high import dependence. In 2013, the strong export performance of electricity was due to exceptionally favourable weather circumstances, and consequently exports in 2014 are more modest. In the first half of 2014, the trade deficit widened 4.5 % year-on-year as exports declined much faster than imports and the base effect from past energy exports faded off. As a result, in the four quarters to June the current-account deficit slightly increased to 14.8 % of GDP. So far, risks have been mitigated on the financing side. In 2013, total net capital inflows were greater than the current-account deficit, driven by net FDI inflows worth 9.7 % of GDP and by transfers. This allowed the central bank to increase its reserves. In the four quarters to June 2014, net FDI remained broadly stable at 9.6 % of GDP. Overall, despite some improvement, the sustainability of the external position remains a key challenge.

Despite some marginal improvement, the unemployment rate remains very high, above 19 %, with a large predominance of long-term (82 %) and youth (42 %) unemployment. The 2013 employment and activity rates of the population aged 20-64 stand at a low 52.6 % and 65.1 % respectively. These weak labour market conditions are exerting downward pressure on wages, which continued to contract, weakening private consumption. Overall, labour market imbalances are reflected by persistently high youth and long-term unemployment.

Given the unilateral use of the euro, the ability of the central bank of Montenegro to conduct monetary policy is limited. The strength of the euro together with lower international prices exert downward pressure on imported inflation from energy and food, while falling wages and tight credit conditions also added to the deceleration of prices. As a result, over the course of 2013, the average harmonised consumer price inflation declined to 1.8 %, from 4.0 % a year before. Disinflation turned into negative growth rates in January 2014, recording afterwards six consecutive months with negative consumer price growth, despite uninterrupted growth of retail sales during the same period. Overall, Montenegro faces a general fall in the aggregate price level, driven by a drop in global commodity prices in the absence of a proper monetary policy rather than by a decrease in aggregate demand.

Fiscal reporting and accounting remains an issue. In 2013, the unplanned payment of state guarantees as well as substantial disbursements related to obligations from previous years for restitution, old foreign currency saving and some court decisions claims, brought the consolidated budget deficit to 5.3 % of GDP, up from the preliminary estimate of 2.3 %, albeit a marginal improvement compared to the 5.9 % deficit recorded a year earlier. Measures were adopted to boost revenue, including an increase in personal income tax and in the standard VAT rates while, in order to reduce expenditure, the government froze pensions and public-sector wages and cut capital spending. Unburdened from past liabilities, the cumulated budget deficit recorded some improvement in the first seven months of 2014, declining to 1 % of the full-year GDP compared to 3.6 % a year earlier, as budget revenue — supported by higher VAT and social security contributions — kept growing faster than expenditure. In the past, loans to cover state guarantees contributed to a further increase in public debt, which has doubled since 2008 to reach 58 % of GDP in 2013, although marginally declined to 57.5 % of GDP at the end of June 2014.

Montenegro’s main policy challenge is to restore fiscal stability, together with curbing the large current-account deficit. The adoption of fiscal rules in April 2014 seems to confirm the continuity of consolidation efforts, although the efficiency of its enforcement mechanism needs to be verified once the law is implemented. However, expensive construction projects (prone to risks of delays and cost overruns) like the Smokovac-Mateševo highway section, may require additional measures to contain public debt within the fiscal rules threshold. Moreover, public finances are characterised by a high degree of non-discretionary spending and some persisting risks of slippages, over and above a sizable stock of state guarantees. Overall, as the fiscal position failed to improve despite consolidation efforts, the challenge of ensuring fiscal sustainability and steering the public debt in a downward trajectory remains.

Interplay of market forces

The development of the private sector is financed through a sustained inflow of foreign investment facilitated by public property concessions and privatisations. State ownership of the economy is comparatively low and predominantly concentrated in transport and utilities, together with a few firms in the agriculture, publishing and tourism sectors. The aluminium conglomerate KAP, in which the state had a 29 % stake, was declared bankrupt in October 2013 after having accumulated debts worth several times the company’s value. Its assets — divided into several groups — were sold to local companies in 2014, thus putting an end to the state’s role as a shareholder. One of the former co-owners (CEAC) filed several complaints against the sale of KAP that were rejected by local courts. However, a Nicosia court adopted a decision banning the sale of KAP’s assets. As a result, the sale of KAP remains on hold until the bankruptcy administrator can transfer the property free of litigation, with risks of a new round of contingent liabilities for the public finances. The state also had a 29 % stake in the Nikšić bauxite mines that were declared bankrupt in February 2014 but, in the absence of a reorganisation plan by the owners (i.e. the state and CEAC); the bankruptcy administrator offered the company’s property for sale at the end of July although investors have shown no interest so far. Concerning administrative prices, these remain moderate, accounting for 7.4 % of the consumer price basket. Overall, state ownership of the economy has been reduced following the bankruptcy of the aluminium factory and bauxite mines.

Market entry and exit

The number of new companies rose substantially in 2013 to 4 146, or 17 % more than the previous year. These figures must be treated with caution, however, as some of these might be former companies that have re-established themselves as a way of escaping debt. It remains difficult to obtain credit particularly for small and micro businesses, which have either very few, or, in most cases, no alternative means of financing apart from the banking sector, and therefore endure severe liquidity problems. The ongoing modernisation of public administration including the simplification of procedures and, ultimately, the creation of a more efficient administration remains a challenge for the years to come. In 2013, the number of companies liquidated as a result of bankruptcy proceedings declined markedly, totalling 217 or 25 % less than a year before. Overall, as the recovery takes hold, the number of Montenegrin companies is growing.

Legal system

Uncertainties relating to the Montenegrin legal and judicial system may in some cases entail risks for economic agents. Laws sometimes contain ambiguous provisions and are therefore difficult to implement. Moreover, the outcome of judicial proceedings is difficult to predict as Court orders are not always enforced or followed by law enforcement institutions. Out-of-court resolution of commercial disputes through the mediation centre has made further progress, with both the number and the value of commercial disputes successfully resolved increasing.

Licensing, tax administration procedures, and contract enforcement are priority issues identified by the business community as key obstacles. In April 2014 the first public bailiffs started work on the task of improving contract enforcement. In early September 21 public bailiffs, out of a total of 32 stipulated by the law, had been appointed. Progress has been made on reducing municipal fees for construction permits and making it easier to obtain them by shortening deadlines, streamlining procedures and setting up one-stop shops. However, the business registration service has yet to be extended to all regional tax administration offices. In July 2014, the parliament adopted the Law on e-Government with a view to improve communication with the users of state administration services. The e-Government Portal was revamped, although only part of the administration has started working with electronic documents in a production environment. There has been little progress on the regulatory impact assessment project, which is intended to assess the regulatory framework and issue recommendations on simplifying regulation (e.g. by means of a ‘regulatory guillotine’). Overall, simpler and more predictable regulation of business and further efforts to tackle corruption are needed to improve the business climate.

Financial sector development

The banking sector has remained stable. In May 2014, the central bank of Montenegro issued an operating licence for a new local one, raising to 12 the number of banks in the country. However, the number of entities does not seem to have had a noticeable impact on interest rates for new loans, which remain persistently high, at above 10 %. Risk premiums appear to be the main cause for the elevated lending rates. The sector is dominated by foreign banking groups, which account for 83.5 % of total bank capital. However, all banks are increasingly resorting to own deposits financing to offset the decline in foreign funding. Banks posted positive financial results in 2013 as well as in the first half of 2014, compared to substantial losses in 2012. Credit quality still remains a key concern as banks struggle with a large stock of bad loans. Thus, the banks’ credit activity remains constrained by the high level of non-performing loans (NPL), and burdened by lengthy procedures for banks’ collateral execution through the judicial enforcement of contracts. Despite a timid recovery[3] in 2013, the total amount of credit to the economy contracted in the first six months of 2014.

In order to address this problem, the central bank adopted a decision in November 2013 requiring banks to develop resolution strategies for non-performing loans. However, the parliament still needs to adopt the law on voluntary financial restructuring known as the ‘Podgorica approach’. This would provide a framework for out-of-court proceedings for restructuring the debts of economically viable companies, including through purchases of debtors’ claims supported by tax and supervisory incentives. Meanwhile, some banks have offloaded part of their bad loans to factoring companies. However, factoring services are not regulated, creating legal uncertainties for some types of transactions. Hence, the authorities initiated in September 2014 proceedings to prepare a law on factoring with a view to improving the legal framework and establishing an appropriate level of supervision.

Altogether, the non-banking financial sector remains relatively small and underdeveloped. In 2013, the total annual market turnover of the stock market represented less than 1 % of GDP, while insurance companies’ gross premiums accounted for some 2 % of GDP. However, some recent developments could help to expand these markets in the future. Thus, in May 2014, Montenegro’s stock exchange recorded the first trade in government bonds, while the Insurance Supervision Agency delivered the first licence to a bank to engage in insurance operations.

Overall, together with other measures, the swift implementation of the ‘Podgorica approach’ to tackling banks’ non-performing assets will be instrumental in restoring bank lending and thereby support domestic demand.

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

Human and physical capital endowment

The high unemployment rate requires the gap between supply and demand for labour skills to be bridged by supporting labour mobility and by making active labour market policies and education more effective. Internal labour mobility remains a key issue. Montenegrins are reluctant to apply for seasonal jobs (which account for some 70 % of the total offer of employment) and employers resort instead to recruiting workers from neighbouring countries.[4] Standard active labour market programmes have been implemented with relatively few funds, focusing on finding work for young people and seasonal workers. Based on evaluations, more effective and outcome-oriented active labour market measures should be expanded, with greater emphasis on the poorest areas of the country. There is also a need to increase the quality of education, particularly vocational education and adult learning.

A number of major infrastructure projects in energy, transport and tourism are being developed in an effort to diversify and strengthen the economy. The electric power company is in the process of selecting the bidder for the construction of a new block for the thermal power plant. Once completed, this plant will reinforce energy independence (including from weather conditions) with the potential to gradually turn ‑together with two planned hydropower plants‑ the country into a net exporter of electricity. Meanwhile, construction works for the electricity interconnection with Italy and the reinforcement of the transmission grid are ongoing. In June 2014, concession contracts for building 10 small hydropower plants were signed. On transport infrastructure, in May 2014 the government adopted a law on the Bar-Boljare highway, and in September, the Chinese Exim Bank approved the loan for this project, providing for construction work to start by the end of 2014. The container and general cargo terminal in the port of Bar started investing in new equipment. Construction of two large tourist resorts started at the end of 2013, and concessions for developing new ones are at different stages of development.

Montenegrin institutions have started to participate more actively in international programmes run by the EU and in bilateral cooperation with EU Member States. The funds allocated to research and development (R&D) programmes increased in 2014; a centre of excellence in bioinformatics (BIO-ICT) began operations in July 2014 and plans for the establishment of a science and technology park (Technopolis) are advancing. The Ministry of Science continued co-financing in 2014 the second research year, counting with 104 national projects, although total R&D financing (at some 0.5 % of GDP) still appears modest. Moreover, private sector participation in R&D remains low.

Overall, further efforts are required on research, development and innovation to strengthen the competitiveness of domestic companies as well as on building the necessary infrastructure to support sustainable expansion of the economy. Pursuing education reform to reduce the skills gap, strengthening active labour market policies, and introducing more flexibility in the labour market through distinct collective agreements for the public and private sectors are essential to reduce unemployment.

Sector and enterprise structure

The structure of the economy has changed in the last decade. It is no longer driven mainly by industrial production — metallurgy, in particular — but by the service sector, mainly tourism, together with transport, retail sales, and to a lesser extent, construction and energy production. While the restructuring of the aluminium industry remains uncertain, the renovation of the steel mill by its new owner is well underway. The company, acquired in May 2012 following bankruptcy by its former owners, has invested in new machinery and, on completion — planned within two years — production capacity is expected to increase substantially. Furthermore, the new owner is in the process of procuring two other companies; a machine builder and a foundry located next to the steel mill. In the network industries, various services of the port of Bar have been privatised. The railways and Montenegro Airlines are being restructured and listed — for several years now — for privatisation. In the energy sector, the state remains the major shareholder in the electric power company EPCG, and increased its share by two percentage points to 57 % after the company’s tax arrears were converted into equity in July 2014. However the influence of the state remains contractually limited as the privatisation contract — by which an Italian investor acquired a participation of more than 40 % — also assigned the management rights to the company. The state also retains a majority stake (55 %) in the electricity transmission system operator CGES.

Public-sector support schemes for small and medium-sized enterprises (SMEs) remain limited. The — de facto — development bank of Montenegro (the Investment and Development Fund), provides support through a variety of instruments, mainly credit lines, but also credit guarantees, factoring, and to a lesser extent, support for start-up businesses, export promotion programmes and studies. However, the fund’s financial capacity to sustain all these activities appears modest (around 1 % of GDP per year). The government is also supporting the economic development of the less developed regions. It has adopted development plans for six municipalities, set up two new business zones, and provided incentives for five industrial clusters dealing with agro-food and forestry products. In addition, the government continued the efforts to reduce the informal economy by stepping up checks on excise goods, retail trade, and labour.

Overall, the economy is going through a transformation process, reinforcing the services and energy sectors while older industries like metallurgy and transport are being restructured.

State influence on competitiveness

The aluminium conglomerate has severely drained public funds. Between its privatisation in 2005 and its recent liquidation in June 2014, KAP cost the government some € 350 million in state guarantees and subsidies for electricity, in addition to unpaid taxes and social security contributions. The total amount of state aid granted in 2013 reached 3 % of GDP compared to 1.3 % a year earlier. The activation of state guarantees accounts for a substantial share of this aid in the last two years. The general government budget foresees a substantial decline in state aid for 2014, planning 0.6 % of GDP for subsidies in addition to 0.3 % of GDP for state guarantees ‑already disbursed‑ in the first half of this year. However, other forms of state support, apart from direct budgetary transfers, are also available, either from the Investment Development Fund, or through grants and loans for agricultural producers. Investors may also benefit from tax exemptions (usually releases from municipal utility fees while premises are under construction). In addition, for some very large projects of strategic importance, ad hoc measures may be adopted to help the investor, like the law on the Bar-Boljare highway, granting exemption from VAT and custom duties. Overall, after the liquidation of the former aluminium conglomerate, the allocation of state aid funds has dropped markedly.

Economic integration and convergence with the EU

Montenegro remains a very open economy. In 2013, the total trade of goods and services was close to 104 % of GDP, albeit down from 113 % the year before. Exports of goods and services totalled 42 % of GDP in 2013, according to the latest national data. Merchandise exports to the EU represented 41 % of Montenegro’s total exports compared with 49 % to CEFTA countries, while goods from the EU remain predominant, accounting for 44 % of total imports compared with 39 % from CEFTA. In services and foreign investment, Russia remains Montenegro’s single most important partner, accounting for 28 % of tourism stays and of FDI inflows. The EU accounts for 20 % of tourism and 39 % of foreign investment, while CEFTA’s contribution stands at 36 % of the tourism total, but only 4 % of FDI inflows. Since 2011, Montenegrin exports have gained some marginal competitiveness as wages have continued to contract in real terms. Overall, further efforts are still necessary to strengthen export capabilities and the integration of Montenegrin businesses in the common market.

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 the country’s administrative capacity to implement the acquis. The analysis is structured according to the list of 33 acquis chapters. In each sector, the Commission’s assessment covers the progress achieved during the reporting period, and summarises the country’s overall level of preparation.

4.1. Chapter 1: Free movement of goods

As regards horizontal measures, the strategy and action plan for introducing free movement of goods have been prepared but not yet adopted. The coordination role and powers of the Department for Quality Infrastructure have been strengthened in some respects. In contrast, budgetary resources have declined over the last few years. More work is needed to ensure the functioning of a contact point dealing with World Trade Organisation (WTO) and EU technical regulations.

As regards standardisation, 11 393 standards were adopted, 26 % of which are harmonised standards, and 15 technical committees were established. Further work is needed to meet all membership criteria of the European Committees for Standardisation and for Electrotechnical Standardisation (CEN/CENELEC). Preparations for membership in the European Telecommunications Standards Institute are at an early stage. The number of accredited conformity assessment bodies increased to 21 but remains low. Montenegro’s 2014-2018 accreditation strategy was finalised in March but is still awaiting adoption. A formal application to sign the European Cooperation for Accreditation Multilateral Agreement has not yet been submitted.

As regards metrology, the Bureau of Metrology calibration laboratories for length, mass and temperature were accredited in March. Three other laboratories — for time and frequency, pressure, and electric quantities — are preparing for accreditation. In January, a regulation on fixed storage tanks entered into force.

In the area of market surveillance, parliament adopted amendments to the law on market surveillance in July. Rulebooks for recording inspections and for fees for phytosanitary inspections were also adopted in March. In 2013, 24 512 dangerous products were identified, of which 9 384 high-risk items have been banned from the market.

As regards ‘Old Approach’ product legislation, three rulebooks on textiles, footwear, and crystal glass were prepared but have not yet been adopted.

As regards ‘New and Global Approach’ product legislation, parliament adopted the new law on construction products in March. The rulebooks on low voltage equipment and on lifts were adopted in January. Amendments to the law on explosive materials were adopted in July. The rulebooks on measuring instruments and on non-automatic weighing instruments were found to comply with the EU acquis on European Conformity (CE) marking. The rulebook on radio and telecommunications terminal equipment and on electromagnetic compatibility still needs to be aligned in this regard.

In the area of procedural measures, in March the government adopted the 2014-2018 strategy for integrated border control and a five-year action plan.

Conclusion

There has been limited progress to align the legislation and build up implementation capacity in the area of free movement of goods, but work is ongoing. Montenegro needs to strengthen its capacity, coordination and ownership in order to implement the ambitious harmonisation programme and ensure the implementation of newly adopted EU legislation. The limited resources of all quality infrastructure bodies are an issue of concern. Preparations in this area are relatively advanced.

4.2. Chapter 2: Freedom of movement for workers

In the area of access to the labour market, the current legislation still requires EU nationals to obtain work permits.

Administrative capacity for the coordination of social security systems still requires strengthening. Negotiations on bilateral social security agreements with Slovakia and Bosnia and Herzegovina progressed further.

Training on the European Health Insurance Card took place in March 2014.

Conclusion

There has been limited progress in the field of freedom of movement for workers. A number of important adjustments to Montenegrin legislation are necessary to align it with EU rules on access to the labour market. Sustained efforts are also required in particular to develop administrative capacity for the coordination of social security systems. Preparations in this area are still at an early stage.

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

With regard to the right of establishment, electronic company registration is not yet fully available. Activities on streamlining procedures for issuing construction permits at local one-stop-shops further continued.

As regards freedom to provide cross-border services, preparations for transposing the Services Directive continued.

Some of the implementing legislation for the law on postal services was adopted. The postal service (Posta Crne Gore) is still planned for privatisation in 2014. The administrative capacity of the National Regulatory Authority remains unchanged but is sufficient.

In the field of mutual recognition of professional qualifications, in April the government adopted a national plan for developing qualifications for practising regulated professions and an action plan for 2013-2018.

Conclusion

Some progress was made on the right of establishment and freedom to provide services. Substantial efforts are still needed to implement the acquis on mutual recognition of professional qualifications and the Services Directive. Overall, preparations are moderately advanced.

4.4. Chapter 4: Free movement of capital

As regards capital movements and payments, further efforts are needed to complete legislative alignment with the acquis.

In December, parliament adopted a new law on the payment systems to bring legislation further in line with the acquis.

With regard to the fight against money laundering and terrorism financing, Montenegro adopted the 2013-2014 action plan to implement the Strategy for the Prevention and Suppression of Terrorism, Money Laundering and Terrorism Financing 2010-2014. A new law addressing the Financial Action Task Force recommendations in this area was adopted in July. Montenegro amended its criminal code and drafted a new law on capital markets based on part of the Moneyval recommendations. Interagency cooperation still needs to be strengthened. The IT system of the Administration for the Prevention of Money Laundering and Terrorism Financing (APMLTF) still needs to be upgraded.

Conclusion

Some progress was achieved in the area of free movement of capital. The legal framework still needs to be upgraded in line with Moneyval recommendations in particular. The IT system of the APMLTF needs to be upgraded. More efforts are needed to enhance interagency coordination and the capacity to carry out financial investigations. Overall, preparations are moderately advanced.

4.5. Chapter 5: Public procurement

As regards the general principles applying to public procurement, Montenegro prepared amendments to the law on public procurement, in view of further harmonising the legislation with the EU rules particularly in the utilities and defence sectors. Adoption is pending and some further harmonisation efforts will be needed. Montenegro has to also align its legislation with the 2014 EU procurement acquis. The process of accession to the WTO Government Procurement Agreement was launched in November and is at an advanced stage.

As regards the award of public contracts, the number of contracting authorities has been reduced further. The public procurement market shrank in terms of the number of contracts, total value, and percentage of GDP. The public procurement administration’s capacity to enforce the law on public procurement and to monitor the award of public contracts is improving. Annual reporting and data collection needs to be strengthened. The quality of the procurement process and the business communities’ awareness of the existing remedies have gradually increased as a result of capacity-building measures. Further efforts are needed to improve the use of framework agreements and central purchasing. The number of public procurement inspectors increased from one to two, but the capacity of the inspection service needs to be built up to ensure more effective control of contract procedures and of the contracts awarded.

As regards remedies, the 2012 annual report of the State Commission for the Control of Public Procurement (SCCPP) was adopted by parliament in November 2013. In July, the government adopted the 2013 Annual Report. The number of SCCPP decisions taken in 2013 rose by 30 % compared to 2012, but capacity needs to be increased still further. Nine per cent of the decisions were challenged in the Administrative Court. The high rejection rate of SCCPP decisions by the Administrative Court and the rate of implementation of the SCCPP recommendations remain issues of concern.

Conclusion

Limited progress has been made with regard to public procurement. The efficiency and effectiveness of the public procurement system improved but progress in this direction needs to continue, and administrative and enforcement capacity at all levels needs to increase. Monitoring should focus on economic impact, effectiveness, and efficiency as well as formal requirements. Overall, preparations in the area of public procurement remain moderately advanced.

4.6. Chapter 6: Company law

National legislation on company law is largely in line with the acquis. Key outstanding issues relate to legislative alignment in the areas of transparency, cross-border mergers and takeover bids. Following the introduction of the electronic application for registration in May 2012, full electronic registration of companies remains to be completed.

Regarding corporate accounting and auditing, preparations have advanced for initiating the World Bank project on the setting up and implementation of an independent public oversight body for auditors and a related system of quality assurance.

Conclusion

Little progress was made in the field of company law. Overall, preparations remain moderately advanced.

4.7. Chapter 7: Intellectual property law

In the area of copyright and neighbouring rights, the Intellectual Property Office of Montenegro authorised the collective management of film producers’ rights in Montenegro. Alignment with the new acquis of the terms protection, ‘orphan works’ and collective rights management organisations remains to be achieved.

In the area of industrial property rights, amendments to the law on trademarks aimed at further alignment with the acquis were adopted in March. The regulation on the professional exam for representatives of trademarks and designs was adopted in April. The Intellectual Property Office’s IT infrastructure is still weak.

With regard to enforcement, the Ministry of Economy prepared a report on the implementation of the national intellectual property rights (IPR) strategy for 2013. Overall, enforcement in the commercial court and customs administration is good, with the exception of criminal prosecution. The number of cases brought before the commercial court fell in 2013 due to the introduction of a simplified customs procedure, which provides for seized goods to be destroyed in customs detention. The Intellectual Property Office recruited two new staff members. Specialised training for the office’s staff and employees of other IPR-related bodies increased. Specialisation of first-instance judges and market inspectors is still needed. The office cooperated with universities and SMEs to raise awareness of the practical implications of IPR, research and innovation.

Conclusion

Some progress was made in the field of intellectual property. Legislation on intellectual property is largely in line with the acquis, but further work is needed to achieve full legislative alignment, in particular with regard to the laws on copyright and related rights, the legal protection of industrial design, the protection of semiconductor topographies, and patents. Coordination of all IPR-related bodies needs to be further strengthened through the introduction of formal cooperation mechanisms. Lack of IT and human resources are still a challenge for the Intellectual Property Office. More work is needed on specialisation and training, and on setting up effective enforcement mechanisms. Overall, preparations are advanced.

4.8. Chapter 8: Competition policy

As regards anti-trust and mergers, in February the government adopted seven by-laws regulating block exemptions. Cases of conflicting legislation should be eliminated, notably as regards third parties’ access to confidential information.

Montenegro’s enforcement record has improved, particularly as regards anti-trust policy. The fact that merger control consumes a substantial part of the agency’s resources may jeopardise the enforcement of cases concerning cartel and abuse of dominance. More resources need to be devoted to such cases. On abuse of dominant position, the agency initiated one ex officio case, completed four new cases and conducted its first dawn raid. A ruling by the administrative and supreme courts upholding a previous agency decision on abuse of dominance, along with agency decisions on anti-competitive agreements, contributed to raising public awareness of competition rules and their enforcement. The agency’s current administrative and investigative capacity is still insufficient and needs to be strengthened. Moreover, the capacity of the judiciary to deal with complex competition cases must be reinforced.

As regards state aid, in March the new decree on criteria, conditions and procedures for granting state aid was adopted, obliging the Ministry of Finance to publish all relevant EU acquis related to state aid on a regular basis. Amendments to the law on state aid control remain necessary, in particular on procedural aspects, to ensure that Montenegro’s state aid procedures comply fully with the acquis. The State Aid Control Commission (SACC) prepared a harmonisation programme for aligning aid schemes and measures with the state aid rules. In December, parliament adopted amendments to the laws on personal income tax and on corporate profit tax but further alignment is still needed. Amendments to align the business development incentive programme and the law on free zones with the state aid rules have yet to be adopted. A new regional map of state aid was adopted in June.

The administrative capacity and operational independence of the SACC and the State Aid Control Unit (SACU) still need to be strengthened and their enforcement record improved. Progress was made with the upgrade of the SACC’s internet site, on which its state aid decisions are published. The state aid reports for 2012 and 2013 have not been adopted yet by parliament.

The resolution of the bankruptcy procedure of the aluminium plant KAP remains an issue of serious concern and must be done in compliance with state aid rules. The company is still operating and aid is still being granted in breach of SAA obligations. The sole bid for the assets made by the privately-held firm Uniprom was accepted by KAP’s bankruptcy administrator in February but no final agreement has been reached on the price of electricity supplied to KAP or the company’s future.

As regards liberalisation, Montenegro needs to align its system with the EU rules and redefine the scope of ‘services of general economic interest’ in its legislation.

Conclusion

Some progress was made on competition policy. Administrative capacity needs to be improved, as does the independence of the state aid authorities. Compliance with SAA state aid rules in the case of KAP needs to be urgently ensured. Overall, preparations are moderately advanced.

4.9. Chapter 9: Financial services

In the area of banks and financial conglomerates, the central bank of Montenegro passed a set of implementing decisions for the consumer credit law in October. In November, amendments to the decision on minimal standards for management of credit risk in banks were adopted.

In the area of insurances and occupational pensions, the Insurance Supervision Agency adopted several rulebooks, notably on restrictions related to depositing and investing technical reserves funds and capital funds, on detailed contents of books of claims and on the professional exam for working as a certified actuary. In terms of staffing, the agency has 21 full-time employees, excluding the president of the Agency’s Council.

No developments have taken place on financial market infrastructure.

In the area of securities markets and investment services, the Securities and Exchange Commission produced several analyses, notably on the implementation of the directive on markets in financial instruments in the Montenegrin regulatory system and on the impact of the introduction of tax exemptions and state incentives in voluntary pension funds. The capacity of the Securities and Exchange Commission needs to be further upgraded.

Conclusion

There has been some progress in the field of financial services. The Insurance Supervision Agency strengthened its operational capacity. The capacity of the Securities and Exchange Commission needs to be further upgraded. Substantial efforts are needed to further align with the acquis, notably in the insurance field. Overall, preparations are moderately advanced.

4.10. Chapter 10: Information society and media

As regards electronic communications and information and communications technologies, following the adoption in July 2013 of the new law on electronic communications, the Ministry of Telecommunications and Information Society and the Agency for Electronic Communications and Postal Services (EKIP) adopted 48 pieces of implementing legislation. EKIP is still required to transfer any budget surplus to the state budget. Parliament continues to have the authority to dismiss the entire EKIP Council in case the latter does not approve EKIP’s financial report. In the context of the new law, EKIP re-launched an appeal against this provision before the constitutional court. The court had dismissed the previous case on the same provision in February. The government has abolished the one-euro tax on all SIM cards and internet and cable connections. While competition in mobile services has resulted in the highest mobile penetration in the region at 160 % and over 35 % penetration of the mobile broadband (when including 3G services), competition in fixed voice and broadband services remains low. In 2013, fixed broadband penetration was at 14.1 % (EU average of 29 %).EKIP has paid particular attention to broadband access and pricing. In February, an EKIP decision resulted in a reduction in prices for fixed and mobile networks in accordance with the cost method of accounting and separate accounting.

As regards information society services, the law on e-government was adopted in July. Montenegro has not yet established a legal basis for the re-use of public-sector information. The ‘wireless Montenegro’ project is currently providing free public wireless internet access for around 300.000 users in specific locations and its services are being further expanded to cover new locations throughout the country. In March, parliament adopted a law ratifying the European Convention on the Legal Protection of Services Based on or Consisting of Conditional Access.

In the area of audiovisual policy, the Agency for Electronic Media remains obliged to transfer all budget surpluses to the state budget and to have its financial and technical reports approved by the parliament. This clearly undermines the Agency’s independence. Its overall capacity to fulfil its tasks has been strengthened, particularly its monitoring capacity. A number of broadcasters have not been able to pay licence fees to the agency, and the agency filed lawsuits against them to recover revenues. The lack of or delay in collecting revenues puts at risk the agency’s capacity to meet its mission. The digital switchover is on track. The state public service broadcaster RTCG’s main challenge remains financial unsustainability, with its three public channels

Conclusion

There has been some progress in the area of information society and media. A good level of legal alignment has been reached. There are still concerns as regards the independence of the EKIP and of the Agency for Electronic Media, particularly for want of a decision by the constitutional court. The independence of the state broadcaster RTCG is undermined by the lack of appropriate financial resources to meet its public broadcasting and digitalisation obligations. Overall, preparations in the area of information society and media are moderately advanced.

4.11. Chapter 11: Agriculture and rural development

In the area of horizontal issues, the amended law on agriculture and rural development and implementing legislation on the registration of agricultural holdings were adopted. The strategy for agriculture and rural development remains to be adopted. Direct support measures will need to be brought into line with the acquis, by decoupling them from production and introducing a system of payment entitlements.

In the area of common market organisation, preparations are at an early stage. Efforts to develop the olive oil sector are being made. A law on olive growing remains to be adopted.

As regards rural development, the Directorate for payments in the Ministry of Agriculture and Rural Development is set up to undertake its duties for the Instrument for Pre-accession Assistance for Rural Development (IPARD) agency. A separate budget was approved for the directorate, which consists of five departments responsible for implementing IPARD. Thirty-six members of staff are assigned to setting up systems in the payments sector. Clear individual responsibilities have been assigned and a budget for additional staff allocated. Permanent staff members need to be recruited in line with the organisation chart to ensure continuity. The premises for the future IPARD agency were designated but still need to be renovated and furnished. The programme has not yet been adopted. Review of the accreditation package by an external audit company has been finalised. Major findings for the IPARD Agency and the Managing Authority are mostly related to human resources management. Further preparation for accreditation of operating structures will depend on the audit findings. Capacity building for the payments sector, the rural development sector and the National Fund within the Ministry of Finance is on track.

In the field of quality policy, Montenegro’s law on designations of origin, geographical indications and designations of traditional specialty agricultural products and foodstuffs is broadly in line with the acquis. Implementing legislation needs to be adopted and particular attention should be paid to implementation.

With regard to organic farming, the law on organic production was adopted in December.

Conclusion

There has been some progress on agriculture and rural development policy. The agriculture and rural development national strategy needs to be adopted and additional capacity building is required to ensure future implementation of the IPARD programme and to develop overall capacity for implementing the common agricultural policy. Overall, alignment with the acquis is at an early stage.

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

As regards general food safety, a strategy for the transposition and implementation of the acquis in this area remains to be adopted. The implementing legislation on the method and sampling procedure for laboratory testing of food of plant origin in primary production was adopted in February. The revised law on food safety remains to be adopted. Capacity building is on track in the fields of controls on contaminants in feed and food; EU legislation on feed; veterinary and plant health inspection; food composition and information; investigation of foodborne outbreaks; food hygiene and controls; and veterinary and food safety control checks at border inspection posts.

In the area of veterinary policy, the implementing legislation on prevention, detection, control and eradication of classical swine fever was adopted in March. The multiannual programme for the eradication of rabies continued. The 2013 programme of mandatory animal health protection measures was implemented and the programme for 2014 adopted. Veterinary control checks at border inspection posts are on track and construction works have started at the border inspection post in the port of Bar, to facilitate checks on animal products (not live animals). The extension of the animal identification and registration system to pigs and the establishment of the monitoring system of live bivalve molluscs are on track.

With regard to the placing on the market of food, feed and animal by-products, preparations for the classification of all food establishments and all establishments handling animal by-products, based on the acquis, have started.

In the area of food safety rules, the monitoring programmes for pesticide residues in and on food of plant and animal origin and for nitrate in plant foods and leafy vegetables for 2014 were published, as was the list of active substances permitted for use in plant protection products. The 2013 programme for pesticide residues has been implemented.

In the area of phytosanitary policy, amendments to the law on plant protection products were adopted in April, as was implementing legislation on several issues, such as control and eradication of some harmful organisms, inspections, the register of plant protection products, licences for scientific research and the register of agricultural plants. The 2013 programme of phytosanitary measures was implemented. The programme of phytosanitary measures and the action plan for the eradication and control of red palm weevil was adopted and published and implementation started. Amendments to the law on plant health protection remain to be adopted.

Conclusion

There has been some progress in the field of food safety, veterinary and phytosanitary policy. Further efforts are needed on all aspects of this policy area, in particular the conclusion of the strategy for the transposition and implementation of the acquis. Overall, preparations remain at an early stage.

4.13. Chapter 13: Fisheries

Montenegro has started preparing a strategy and action plan on the EU requirements and future implementation needs under this Chapter. Amendments to the law on marine fishery and mari-culture are under preparation. Montenegro has adopted a number of implementing legal acts.

In the area of inspection and control, the capacity of the fisheries inspectorate remains very limited. Substantial work is still needed to ensure systematic processing of data from logbooks, adequate registration of catches and landings, the use of sales notes and systematic cross-checking between catch composition and logbook records.

Conclusion

No progress was made in the field of fisheries. The national strategy and action plan need to be adopted. Work is needed to strengthen administrative capacity, align legislation with the acquis and implement EU standards, particularly in the areas of resource and fleet management, inspection and control, market policy, structural policy and state aid policy. Overall, preparations in this area are at an early stage.

4.14. Chapter 14: Transport policy

In the area of road transport, amendments to the law on road transport, adopted in March, provided for further alignment with the acquis relating to the road transport market, but full alignment still needs to be achieved. Montenegro adopted the action plan for implementing the road safety strategy for 2014 and rulebooks for applying the law on road traffic safety. Further efforts are needed to improve technical and administrative capacity to ensure adequate implementation of the relevant road safety acquis in connection with roadside inspections, vehicles roadworthiness tests, driving licences, professional drivers’ qualifications and infrastructure safety. Legislation aimed at alignment with the acquis on the transport of dangerous goods was adopted in July.

As regards rail transport, the new law on the safety, organisation and efficiency of railway transport was adopted in December, providing further alignment in the area of safety and interoperability. Preparations are being made to set up a joint national body for independent investigation of accidents in air, railway and maritime transport. The business plan for 2013 -2017, drafted by the Railway Directorate, has yet to be endorsed by the government due to financial constraints.

On air transport, a memorandum of understanding on setting up a functional airspace block (FAB) was signed in November between the Montenegro’s Agency for Civil Aviation, Serbia’s Directorate of Civil Aviation and the Serbia and Montenegro Air Traffic Services. Further work to ensure compliance with European Common Aviation Area (ECAA) Agreement requirements needs to be carried out, especially regarding consumer protection (air carrier liability and passenger compensation for denied boarding and flight cancellation). The National Commission for Investigation of Accidents and Serious Incidents in Civil Aviation is still not fully operational due to financial constraints. Further work is needed to increase and improve incident reporting as part of safety management. The government privatisation plan for 2014 includes Montenegro Airlines.

As regards maritime transport, the new law on maritime safety and security, further aligning the national legislation with the acquis, entered into force in January. Amendments were made in June to the law on the prevention of sea pollution from vessels. The amendments aim to further align the legislation with the relevant international conventions and the acquis on port re