TABLE OF CONTENTS

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

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

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

1.3........ Relations between the EU and Bosnia and Herzegovina................................................... 4

2........... Political criteria............................................................................................................... 7

2.1........ Democracy and the rule of law........................................................................................ 7

2.2........ Human rights and the protection of minorities................................................................. 15

2.3........ Regional issues and international obligations................................................................... 20

3........... Economic criteria.......................................................................................................... 23

3.1........ The existence of a functioning market economy.............................................................. 23

3.2........ The capacity to cope with competitive pressure and market forces within the Union........ 28

4........... European standards...................................................................................................... 30

4.1........ Internal market............................................................................................................. 30

4.1.1..... Free movement of goods.............................................................................................. 30

4.1.2..... Movement of persons, services and right of establishment.............................................. 32

4.1.3..... Free movement of capital.............................................................................................. 35

4.1.4..... Customs and taxation.................................................................................................... 35

4.1.5..... Competition.................................................................................................................. 36

4.1.6..... Public procurement....................................................................................................... 37

4.1.7..... Intellectual property law................................................................................................ 38

4.1.8..... Employment and social policies, public health policy...................................................... 38

4.1.9..... Education and research................................................................................................. 40

4.1.10... WTO issues................................................................................................................. 42

4.2........ Sectoral policies........................................................................................................... 42

4.2.1..... Industry and SMEs....................................................................................................... 42

4.2.2..... Agriculture and fisheries................................................................................................ 43

4.2.3..... Environment................................................................................................................. 45

4.2.4..... Transport policy........................................................................................................... 46

4.2.5..... Energy.......................................................................................................................... 48

4.2.6..... Information society and media....................................................................................... 49

4.2.7..... Financial control........................................................................................................... 50

4.2.8..... Statistics....................................................................................................................... 51

4.3........ Justice, freedom and security......................................................................................... 52

4.3.1..... Visa, border management, asylum and migration............................................................ 52

4.3.2..... Money laundering......................................................................................................... 55

4.3.3..... Drugs........................................................................................................................... 55

4.3.4..... Police........................................................................................................................... 56

4.3.5..... Fighting organised crime and terrorism........................................................................... 57

4.3.6..... Protection of personal data........................................................................................... 59

Statistical Annex......................................................................................................................... 60

1. Introduction 1.1. Preface

Since March 2002, the Commission has reported regularly to the Council and Parliament on the progress made by the countries of the Western Balkans region. This progress report broadly follows the same structure as in previous years. The report:

– briefly describes relations between Bosnia and Herzegovina and the Union;

– analyses the situation in Bosnia and Herzegovina in terms of the political criteria for membership;

– analyses the situation in Bosnia and Herzegovina on the basis of the economic criteria for membership;

– reviews Bosnia and Herzegovina's capacity to implement European standards, i.e. to gradually approximate its legislation and policies with the acquis, in line with the Interim Agreement/Stabilisation and Association Agreement and the European Partnership priorities.

This report covers the period from October 2010 to September 2011. Progress is measured on the basis of decisions taken, legislation adopted and measures implemented. As a general rule, legislation or measures which are being prepared or awaiting parliamentary approval have not been taken into account. This approach ensures equal treatment across all reports and enables an objective assessment.

The report is based on many sources. As usual, these include contributions from the government of Bosnia and Herzegovina and from the EU Member States, reports by the European Parliament[1] and information from various international and non-governmental organisations.

The Commission has drawn detailed conclusions regarding Bosnia and Herzegovina in its separate communication on enlargement[2], based on the technical analysis contained in this report.

1.2. Context

Bosnia and Herzegovina is a potential candidate for EU membership.

An international presence under UN auspices - the Office of the High Representative (OHR) - has been in place in Bosnia and Herzegovina since 1995. The Peace Implementation Council Steering Board has set objectives and conditions[3] to be met for the closure of the Office of the High Representative.

The country's Constitution was drawn up as part of the internationally agreed 1995 Dayton/Paris Peace Agreement. It establishes a complex political structure that provides for governments at State, Entity and District levels. The State-level comprises a tripartite rotating Presidency, a Council of Ministers (executive branch) and a bicameral Parliamentary Assembly consisting of a House of Representatives (lower chamber) and a House of Peoples (upper chamber). The judicial branch established by Dayton consists of a State-level Constitutional Court, with the State Court of Bosnia and Herzegovina and the High Judicial and Prosecutorial Council being established later.

One year after the general elections of 3 October 2010, the process of establishing executive and legislative authorities remains to be completed with the establishment of a State-level Government. The failure to reach a political agreement on the formation of authorities has hampered Bosnia and Herzegovina's progress on much needed reforms, in particular as regards the harmonisation of the Constitution with the European Convention on Human Rights (ECHR)[4] and the adoption of a State Aid Law at State-level. Moreover, the adoption of the State-level Law on Household and Population Census remains essential for the socio-economic development of Bosnia and Herzegovina and future EU integration steps.

A shared vision by the political representatives on the overall direction and future of the country and its institutional setup is lacking. The EU accession process requires political will and functional institutions at all levels with an effective coordination mechanism on EU matters. The EU has reinforced its role in the country and continued to implement the objectives of the EU agenda, in line with the March 2011 Council Conclusions. The European Union Special Representative (EUSR) to Bosnia and Herzegovina and Head of the EU Delegation took up office in September as a single EU Representative.

1.3. Relations between the EU and Bosnia and Herzegovina

Bosnia and Herzegovina participates in the Stabilisation and Association Process. The Interim Agreement (IA) has been in place since July 2008. The Stabilisation and Association Agreement (SAA) has been ratified by all EU Member States, but has not yet entered into force. Implementation of the Interim Agreement by Bosnia and Herzegovina remained uneven, including as regards various measures introduced to protect the domestic market. The country is in breach of the IA due to non-compliance with the European Convention on Human Rights and with the rules on State aid.

The overall pace of reforms has been very limited. Respect for democratic principles and the right to equal treatment without discrimination, as embodied in the ECHR, remain essential requirements of the IA and of the SAA. The lack of a credible process for the harmonisation of the Constitution with the European Court of Human Rights' (ECtHR) decision[5] of December 2009 in the Sejdic-Finci case, remains an issue of serious concern.

Within the framework of the Stabilisation and Association Process, Bosnia and Herzegovina engaged with the EU on a Structured Dialogue on Justice in June, aiming at ensuring an independent, effective, impartial and accountable judicial system. In reply to the request for technical information handed during the first meeting of the structured dialogue, the authorities of Bosnia and Herzegovina submitted a detailed report on their judicial system.

The EU provides guidance to the authorities on reform priorities, including the European Partnership. Progress on these reform priorities is encouraged and monitored by the bodies established by the IA. Six Interim Sub-Committee meetings and one Interim Committee meeting were held during the reporting period. Furthermore, the multilateral economic dialogue between the Commission, EU Member States and potential candidate countries in the context of the pre-accession fiscal surveillance took place at an expert meeting in May 2011. At the end of 2010, an agreement was reached on the supply of electricity to Brcko District and on the launch of a comprehensive review of electricity legislation.

The EU has continued to deploy considerable resources in Bosnia and Herzegovina under the Common Foreign and Security Policy and the Common Security and Defence Policy. In September, the EUSR mandate was transferred from the OHR to a single EU representative acting under a double-hatted mandate as EUSR and Head of the EU Delegation. The mandate includes a broad and balanced set of instruments to maximise the incentives provided by the EU.

In March, the Foreign Affairs Council underlined the fact that the EU Police Mission (EUPM) and EUFOR Althea are important elements of the EU overall strategy for Bosnia and Herzegovina. The mandate of the EUPM focuses on the fight against organised crime and corruption. The EUPM has continued to monitor and assess implementation of police reform and accountability, and to provide training. The mission currently has 273 officers and its current mandate will end in December 2011. The EUFOR/ALTHEA military operation contributed to maintaining a safe environment in the country. Particular emphasis has been placed on providing capacity-building and training. EUFOR forces number about 1,300 troops in theatre. In 2010, the UN Security Council extended the mandate of EUFOR until November 2011. Both missions will be kept under regular review, including on the basis of the situation on the ground.

Visa liberalisation for citizens of Bosnia and Herzegovina was granted by the European Parliament and the Council as of 15 December 2010. It applies to holders of biometric passports travelling to the Schengen area. This decision was based on fulfilment of the specific conditions set out in the roadmap for visa liberalisation. The rules for visa-free travel have been respected by the vast majority of travellers. To ensure the continued implementation of the commitments, a post visa liberalisation monitoring mechanism was established in view of increased numbers of asylum seekers from the region. The Commission presented its first monitoring report to the European Parliament and the Council in June 2011. A readmission agreement between the European Union and Bosnia and Herzegovina has been in force since January 2008.

As regards the common foreign and security policy (CFSP), during the reporting period Bosnia and Herzegovina aligned itself, when invited, with 45 out of 66 relevant EU declarations and Council decisions (68 % alignment).

Bosnia and Herzegovina receives financial assistance under the Instrument for Pre-accession Assistance (IPA). The EU Delegation to Bosnia and Herzegovina is responsible for the implementation of financial assistance in the country. Little progress has been made by the country's authorities towards establishing the necessary structure for decentralised management of EU funds (DIS). The legal basis for the operating structure, appointment of the necessary programme officers and adoption of the roadmap towards a decentralised implementation system are still not agreed.

The implementation of the 2007-2009 national IPA programmes is ongoing. The Multi-annual Indicative Planning Document (MIPD) for the period 2011-2013 has identified the following three priorities for IPA support: supporting the strengthening of the rule of law, improving the capacity and efficiency of the public administration and supporting social and economic development.

The lack of agreement between stakeholders in the country regarding the projects to be financed under the IPA 2011 national programme[6] delayed the completion of the programming exercise in 2011. The difficulties encountered during the programming exercise demonstrate the need to urgently address the issue of coordination on EU matters within the country's institutions at every level. Strengthening coordination mechanisms on the programming of future EU financial assistance and on other EU matters, is an issue to be addressed as a matter of urgency.

Furthermore, Bosnia and Herzegovina benefits from the IPA multi-beneficiary programmes.

Development of civil society in Bosnia and Herzegovina continues to be supported under the Civil Society Facility, with the emphasis on building the capacity of government institutions and civil society to engage in a dialogue, reinforcement of local democracy, environment and climate change.

The implementation of the cross-border cooperation programmes 2007-2009 between Bosnia and Herzegovina and its neighbours Croatia, Montenegro and Serbia is ongoing.

Bosnia and Herzegovina participates as a full member in the 7th Framework Programme for research, technological development and demonstration activities (FP7) and in the COST and the EUREKA networks. Bosnia and Herzegovina became an associate member of the Culture 2007-2013 programme. Bosnia and Herzegovina is preparing for its participation in the Lifelong Learning Programme.

2. Political criteria

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

2.1. Democracy and the rule of law

Constitution

The Dayton/Paris Peace Agreement put an end to the 1992-1995 war and brought peace to Bosnia and Herzegovina. However, Bosnia and Herzegovina's Constitution, which is Annex 4 to the Agreement, established a complex institutional architecture, which remains inefficient and is subject to different interpretations. The complicated decision-making process has contributed to delay structural reforms and reduce the country's capacity to make progress towards the EU. Few credible steps have been taken to improve the adoption of key legislation relevant to EU integration and to harmonise legislation between the State-level and the Entities.

The Constitution of Bosnia and Herzegovina prevents citizens who do not identify themselves as belonging to one of the three constituent peoples (Bosniak, Serb and Croat) from standing as candidates for the Presidency and the House of Peoples of the Parliamentary Assembly. No agreement has emerged to align the Constitution with the European Court of Human Rights (ECtHR) decision[7] regarding discrimination against citizens on the grounds of ethnicity. The lack of a shared vision by the political representatives on the direction of the country has hampered progress on this issue. The first inter-institutional working group which was set up to implement the ECtHR decision failed to reach an agreement. The establishment of a new Working Group, as recommended by the Council of Ministers in August, is outstanding.

The Republika Srpska National Assembly (RSNA) adopted Conclusions and a decision on holding a referendum challenging the State-level judiciary institutions and the legitimacy of some decisions by the High Representative. Following the EU facilitation, in June the RSNA repealed the decision on holding a referendum and amended the Conclusions. Within the established framework of the Stabilisation and Association Process, Bosnia and Herzegovina has engaged with the EU in a Structured Dialogue on Justice.

The Federation's Constitution entails complex and costly governance structures with overlapping competences between the Federation, the Cantons and the municipalities. Regarding the harmonisation of legislation with the acquis, the lack of harmonisation mechanisms between the different levels remains an issue to be addressed.

On the basis of the Dayton/Paris Peace Agreement (DPA), the international community continued to maintain a presence in Bosnia and Herzegovina. Regarding the Brcko Final Award, which is one of the objectives[8] set by the Peace Implementation Council Steering Board for the closure of the Office of the High Representative (OHR), progress was made in resolving the electricity issue. Further efforts are needed to meet outstanding objectives and conditions.

The High Representative used Bonn powers[9] on several occasions, including by approving temporary financing of the 2011 budget in the Federation and suspending two decisions enacted by the Central Election Commission concerning the legality of the constitutive session of the Federation's House of Peoples and the election of the President and Vice-presidents. The HR also lifted all ICTY-related sanctions, including bans against a number of persons.

Overall, there has been little progress on addressing the European Partnership priorities, which require measures to achieve more functional and sustainable institutional structures and respect for human rights and fundamental freedoms, including by harmonising the Constitution with the ECHR.

Parliament

On 3 October 2010, general elections were held for the Presidency and the lower chamber of the Parliamentary Assembly of Bosnia and Herzegovina (House of Representatives). The establishment of the State-level legislative authorities was delayed until May for the House of Representatives and until June for the House of Peoples. The formation of parliamentary committees, including the Joint Committee for European Integration, was completed in June. As a result, the adoption of EU-related legislation or appointments have been very limited. The State aid law, which is required for compliance with the Stabilisation and Association Agreement, was adopted by the Council of Ministers in August but adoption by the Parliamentary Assembly is pending. The State-level Law on Household and Population Census, which is required for the country's social and economic development, remains to be adopted. In August, a full-time director and two deputies at the Agency for the Prevention and Coordination of the Fight against Corruption were appointed by the State-level Parliamentary Assembly (see Chapter 2.1- Anti-corruption Policy).

Regarding the harmonisation of legislation with the acquis, many EU-related laws remain to be adopted. The amendments to the rulebook of procedures of the State-level House of Peoples and the House of Representatives, which are intended to introduce a fast track mechanism for EU legislation, are outstanding.

Further steps were taken to improve the functioning of the Parliamentary Assembly of Bosnia and Herzegovina. Allocation of human resources improved. A communication strategy was adopted. A training centre for Members of Parliament and a visitor centre were established.

At Entity level, the overall functioning of the Parliamentary Assemblies has continued to be satisfactory. In the Federation, an EU Integration Committee of the Parliamentary Assembly has been established. In April, the Federation Parliament adopted a Resolution in favour of EU Integration.

The Republika Srpska National Assembly (RSNA) has improved the legislative process. A revised rule of procedure aimed at streamlining decision making was adopted, reducing the quorum needed to pass legislation from 50 percent of the delegates present to one third. A new rulebook of internal organisation was adopted by the RSNA, which reorganised the structure of the parliamentary committees. The EU Integration Committee is in place. Moreover, the Republika Srpska Constitution was amended to increase the number of Deputy Speakers at the RSNA up to four. This allows "others" in addition to the three Constituent People to be elected to this position.

The two Entity Parliaments have continued cooperating with their respective governments but the cooperation between the Council of Ministers and the State-level Parliament requires further strengthening. In September, a joint meeting between the State and Entity level Parliamentary speakers took place in Sarajevo. However, an effective cooperation mechanism is lacking between the Parliament of Bosnia and Herzegovina and the Entity Parliaments, despite the fact that a legal framework for coordination is envisaged in the rulebooks.

Overall, the administrative resources for the Parliamentary Assembly of Bosnia and Herzegovina, the Federation Parliament and the Republika Srpska National Assembly have improved. However, the lengthy process of establishing legislative and executive authorities and the lack of a State-level Government hampered their ability to legislate. Lack of coordination between the State and Entity parliaments and political discord between the Entities has continued to hamper the work of the Parliamentary Assembly.

Government

Following the elections, the Presidency of Bosnia and Herzegovina was established in November 2010 and held a number of sessions since then. The newly elected Presidency has held a number of regular and emergency sessions. The three Presidency members improved efforts at joint policy formulation and implementation but foreign policy coordination remained subject to disagreements on some issues. The chair of the tripartite Presidency rotates every eight months. The Presidency conducts foreign and defence policy and proposes the State budget.

One year after the elections, there is still no agreement between political representatives on the appointment of the State-level Council of Ministers. As a result, the Council of Ministers has continued to function in a caretaker capacity and held several sessions. It adopted a decision on the mechanisms and modalities for harmonisation of the legislation of Bosnia and Herzegovina with the EU acquis. In July, the Council of Ministers issued a recommendation on the establishment of a new working group for the implementation of the ECtHR decision in the Sejdic-Finci case.

The formation of authorities at the Entity level has been a lengthy process, except for the Republika Srpska authorities. Divergent political and ethnic interests adversely affected the governance of the Federation. One year after the general elections, some Cantons in the Federation remain without a Government in place. The deadlines for establishment of authorities as envisaged in the Constitution of Bosnia and Herzegovina were not met.

The Government of the Federation of Bosnia and Herzegovina was formed in March based on a coalition agreement between a number of political parties. The Federation House of Peoples appointed the Federation President and Vice-Presidents. On 24 March, the Central Election Commission (CEC) issued two decisions concluding that the elections of the Federation President and Vice-Presidents were not in line with the Election Law and that the conditions for the formation of the Federation House of Peoples had not been met. The High Representative then issued a decision suspending the CEC decisions. On this basis, the Federation executive and legislative authorities have been operating. A Croat National Assembly, comprising of municipalities and Cantons with a Croat majority, was established, largely reinforcing the ethnic dimension of politics in those areas. The Federation budget for 2011 was adopted following a decision by the HR on temporary financing of the budget.

Regarding coordination on EU matters, the Directorate for European Integration (DEI) has increased its staffing levels but remains without the necessary authority to drive the EU integration process forward. Its role in terms of coordination on EU-related matters between all authorities requires further strengthening.

The government of Republika Srpska transferred the European Integration department from the Prime Minister to the Ministry of Economic Relations and Regional Cooperation. A harmonisation unit in charge of screening Republika Srpska laws with the EU acquis was established, while other units dealing with EU integration and donor coordination were also established within the same ministry. The administrative capacity of Republika Srpska to monitor EU-related laws improved. However, an effective coordination mechanism remains to be established with the State-level authorities on EU matters in order to harmonise the transposition of the EU acquis throughout the country.

The Federation government has established an EU Integration Unit in some ministries. However, the Federation General Secretariat dealing with EU integration lacks the power to monitor the implementation of the EU approximation action plan. The lack of capacity for coordination of EU-related matters within the Federation government and between the Entities and the State-level remains an issue of concern.

In the Brcko District there is a procedure in place for the harmonisation of legislation with the acquis. However, the legislative office following this process requires strengthening in terms of human resources and of specialised training.

As regards policy planning, the country development strategy and the social inclusion strategy were adopted by the Federation government and by Brcko District. However, adoption by the state-level Council of Ministers and by the Republika Srpska government remains pending. Overall policy planning in Bosnia and Herzegovina as a whole remains impeded by the lack of up-to-date census data. The adoption of the Law on the population and household census remains an issue to be addressed as a matter of urgency.

At the Entity level, legislation is largely in line with the European Charter for Local Self-Government. The Governments of the Federation and of the Republika Srpska have prepared a code of relations in order to improve coordination between the different levels of government.

Overall, little progress was made by Bosnia and Herzegovina in improving the functionality and efficiency of all levels of government. One year after the general elections, a State-level Council of Ministers remains to be appointed. The political representatives lack a shared vision on the direction to be taken by the country. An effective coordination mechanism between the State, the Entities and Brcko District remains to be established as a matter of urgency regarding EU matters and the harmonisation of EU related legislation.

Public Administration

Limited progress has been made in the area of public administration reform.

The Public Administration Reform Coordinator's Office (PARCO) has sufficient human and financial resources to perform its task of coordinating and monitoring the implementation of the Public Administration Reform (PAR) Strategy and Action Plan. However, the coordinating structures at Entity and Cantonal levels for implementation of the PAR Strategy remain insufficient. The implementation of the strategy is constrained by PARCO's weak enforcement powers. Both the PARCO and the PAR process lack the necessary political support to bring about reforms.

Bosnia and Herzegovina has made no progress in strengthening the administrative capacity for implementation of the commitments arising from the IA and the SAA. The country's administrative structures need to be strengthened substantially in order to be able to respond effectively to the requirements of the EU accession process. These structures remain cumbersome and fragmented and there is an unclear division of responsibilities across the various levels of government.

Key permanent appointments to State-level bodies, such as to the Indirect Taxation Authority, the Communications Regulatory Agency, the electricity transmission company TRANSCO and the State Electricity Regulatory Commission are still pending. These agencies lack the necessary resources and political support to become fully operational, in line with EU requirements.

No progress has been made towards the development of a professional and de-politicised civil service. State-level institutions have stopped using a single human resources management information system. The strengthening of the civil service has been hampered by the enactment of separate laws on civil service in the Federation, some of them providing for the establishment of civil service agencies at Cantonal level. These developments pose the risk of further fragmentation of the civil service system across the country.

The Ombudsman of Bosnia and Herzegovina has issued several recommendations concerning lengthy administrative and judiciary proceedings, criteria for recruitment and access to information. The Ombudsman also presented special reports on pension rights, the situation of elderly people, persons with disabilities and the rights of children with special needs. However, most of the recommendations have not been implemented by the relevant authorities at State, Entity and Cantonal level, due to weak enforcement capacity and insufficient political will. Only a limited number of cases were lodged regarding anti-discrimination issues. Financial and staffing resources for the functioning of the Ombudsman institution need to be further increased.

Overall, limited progress was made in the area of public administration. The implementation of the public administration strategy has continued, but the coordinating structures at Entity and Cantonal levels remain insufficient. The public administration reform process lacks the necessary political support. Continued fragmentation and politicisation of the civil service system remain issues of concern. The establishment of a professional, accountable, transparent and efficient civil service based on merit and competence requires further attention.

Judicial System

Limited progress has been made in the area of judicial reform.

The political authorities of Bosnia and Herzegovina, as well as representatives from judicial institutions at the various levels, have engaged in a Structured Dialogue on Justice with the EU. This dialogue was launched in June 2011, within the framework of the Stabilisation and Association Process, to facilitate the revision of legislation and functioning of institutions in line with relevant European standards and aiming at ensuring an independent, effective, impartial and accountable judicial system. A first set of preliminary recommendations were issued as a basis for the continuation of the dialogue. In August, replies to the technical information questions, handed over during the inaugural meeting of the dialogue, were submitted.

A general lack of political will and adequate planning continued to hamper the effective implementation of the Justice Sector Reform Strategy (JSRS) 2009-2013. The gaps include insufficient allocation of human and financial resources, together with a generally weak coordination amongst relevant institutions.

Independence of the judicial system is not yet ensured. Political pressure and verbal attacks on the judiciary have intensified. In particular, the legitimacy and role of the High Judicial and Prosecutorial Council (HJPC), the Court and the Prosecutor's Office of Bosnia and Herzegovina have been challenged by political representatives, particularly from Republika Srpska. The attempt to undermine the independence of the judicial system remains an issue of serious concern. The complexities of four separate judicial systems (the State-level, Republika Srpska, the Federation and its ten Cantons, the Brcko District) continued to pose challenges to the proper functioning of the overall judicial system. Harmonisation of budgetary procedures and streamlining of competences amongst the fourteen responsible authorities continues to be an issue seriously affecting the independence of the judiciary. In 2010, the financial resources allocated for Courts and Prosecutors' Offices represented approximately 0.79% of GDP.

As regards to accountability, the work of the Office of the Disciplinary Council for judges and prosecutors improved, and the number of outstanding cases was further reduced. In June, the Chief Prosecutor of Bosnia and Herzegovina was suspended and, in the meantime, an interim Prosecutor appointed. In Republika Srpska, the Chief Prosecutor was appointed following a two-year delay. The Federation Constitutional Court remains short of three judges out of nine.

Concerning efficiency, there has been moderate progress in addressing the backlog of cases. The HJPC continued to support courts across the country to tackle this issue effectively, including through the establishment of a special unit addressing efficiency in the judiciary. The HJPC adopted a Decision regarding regular and reserve judges which increased the number of posts. However, due to the lack of financial resources only few of the positions created by the HJPC have been filled. The HJPC adopted measures to reduce the backlog of cases related to claims for unpaid utility bills and of business registry cases. In the Federation, the backlog was reduced. However, the backlog remains high throughout the country, with approximately 2 million cases still pending, the majority of which are court cases related to unpaid utility bills.

Progress has continued in the consolidation of information technology resources in courts and Prosecutors' offices. Judicial staff in courts and Prosecutors' offices throughout Bosnia and Herzegovina has access to the respective case management systems. The judicial web portal is fully accessible and provides access to a substantial amount of court decisions, in addition to legal opinions issued by the Entities' Supreme Courts. Furthermore, digital access to court cases has improved in most courts and is now used extensively. The Care of Court Users Strategy, which encompasses outreach activities, is in place in most courts throughout the country.

The condition of a number of courts and Prosecutors' offices throughout the country has improved due to renovations. During 2010, despite the different assessment by the HJPC, amendments to the Law on Courts were adopted in the Federation providing for reopening of some municipal courts that were previously closed. However, reopening of those courts has not yet taken place. Training for the judiciary is provided by the Judicial and Prosecutorial Training Centers (JPTCs) of the two Entities.

Limited progress was made in the area of juvenile justice and implementation of the relevant national strategy remained uneven. A revised national strategy for the period 2011-2014 remains to be adopted. In Republika Srpska, a revised Juvenile Justice Law entered into force in January 2011. In the Federation, the adoption of the Juvenile Justice Law is outstanding. The capacities of the social welfare services and of lower level judiciary, which have been given extensive responsibilities for children and juveniles' protection under the new law, require strengthening.

Moderate progress has been made in processing the large backlog of unresolved war crimes cases. Some progress has nevertheless been registered in the implementation of the National War Crimes Strategy, although delays have continued in the referral of cases from the state judiciary to the Entities and Brcko District. Implementation of the strategy requires enhanced cooperation between the courts and Prosecutors' offices, particularly at the State-level.

The processing of war crime cases by the Court of Bosnia and Herzegovina has continued to be satisfactory. However, the processing of war crime cases in the Cantonal and District courts remains limited and uneven. The ability of the Entities and the Brcko District to prosecute war crime cases continues to be hindered by the lack of human resources in the various Prosecutors' offices, as well as by limited facilities and lack of adequate witness protection and support services. Moreover, diverging practices on the applicability of different criminal codes between courts at different levels remains an issue to be addressed in order to guarantee equality of citizens before the law. With a case pending before the European Court of Human Rights, the application of different criminal codes continued to result in uneven sentencing.

The prosecution of war crime cases involving sexual violence remains low. Further efforts are needed to investigate and prosecute these crimes, as well as to enhance the protection and support for victims and witnesses. A comprehensive approach to improving the status of victims of rape and sexual violence remains an issue to be addressed. A State-level strategy for improving the status of victims of war crimes involving sexual violence has yet to be adopted.

The drafting of a new State-level law on Witness Protection Programme has started. The current legal framework on witness protection remains fragmented and provisions for the protection of witnesses during and after the criminal proceedings are limited and largely inadequate. The lack of human and financial resources is an issue to be addressed.

Overall, the development of an impartial, independent, effective and accountable judiciary in line with European standards remains at an early stage. The implementation of the Justice Sector Reform Strategy and of the National War Crimes Strategy needs to be stepped up. The fragmented legal framework across all jurisdictions places significant legislative and financial burdens on the judiciary. The lack of streamlined budgetary responsibilities continues to affect the independence and effectiveness of the judiciary. The frequent political attacks on the judiciary and the backlog of cases remain causes for serious concern.

Anti-corruption policy

Bosnia and Herzegovina has made very limited progress in tackling corruption, which remains widespread throughout the public and private sector. The legal framework for fighting corruption is largely in place. However, implementation of existing legislation is insufficient and remains to be fully aligned to ensure harmonisation of sanctions across the country. Corruption continues to negatively impact all spheres of life, economic development and the rule of law.

Very limited steps have been taken in the implementation of the 2009-2014 anticorruption strategy and action plan. Awareness raising campaigns have been launched. Awareness among institutions about the strategy and their respective roles in its implementation remained low. The implementation of the action plan is not monitored because the Agency for the Prevention of Corruption and Coordination of the Fight against Corruption is not yet operational. The Director and two deputies of the Agency were appointed but the allocation of permanent premises and staff is outstanding.

The Law on Conflicts of Interest is in place. The Central Election Commission (CEC) has continued to perform its duties and has monitored asset declarations and conflicts of interest. However, the implementation of the law remains uneven. No steps have been taken to harmonize the legislative provisions at State and Entity level and to ensure a uniform application of the law in the country. The CEC competence to deal with conflict of interest covers the State-level and the Federation while Republika Srpska has its own Commission.

The 3rd evaluation report of the Group of States against Corruption (GRECO) highlighted a number of deficiencies in the legal framework to fight corruption. The relevant legal provisions continue to be dispersed in different legislative texts and at different levels across the country. As regards political party financing, infringements of political finance rules need to be clearly defined and sanctions need to be more effective. Asset declarations by political parties remain voluntary. The institutional independence of the CEC is largely ensured and it has kept an active role but its financial and human resources need further reinforcement. The country does not fulfil the requirements for participation in the OSCE working group on bribery in international business transactions, which is a precondition for accession to the OECD Anti-Bribery Convention. According to the addendum to the 2nd evaluation report of GRECO, only 7 of the 16 recommendations issued have been implemented or dealt with in a satisfactory manner, while nine are still only partially implemented.

Effective investigation, prosecution and conviction of corruption cases remained low. Some law enforcement operations led to the arrest of a number of civil servants suspected of various forms of corruption including favouring smuggling and customs fraud. However, the prosecution of corruption focused too often on minor cases, while a number of high level corruption cases have ended in the dropping of the charges, acquittals, or suspended sentences. A number of training events for police and prosecutors have taken place. However, further specialisation of prosecutors and improved coordination with the police is needed.

Overall, Bosnia and Herzegovina is still at an early stage in the fight against corruption. Corruption remains prevalent in many areas and is a serious problem throughout the public and private sectors. A legal framework to tackle corruption is in place, but political will to tackle the issue and improve institutional capacity remain weak. The implementation of the strategy and action plan needs to be stepped up. More decisive efforts are needed in order to establish a convincing track record in investigating and prosecuting of high level corruption cases.

2.2. Human rights and the protection of minorities

Observance of International Human Rights Law

As regards ratification of international human rights instruments, Bosnia and Herzegovina has ratified all major UN and international human rights conventions. However, in a number of cases, the decisions of the Constitutional Court of Bosnia and Herzegovina have not been enforced, which led to cases being lodged before the European Court of Human Rights (ECtHR). During the reporting period, the ECtHR delivered 2 judgements finding that Bosnia and Herzegovina had violated rights guaranteed by the European Convention on Human Rights (ECHR). A total of 507 new applications were filed with the ECtHR since October 2010. In September 2011, 1350 allocated applications regarding Bosnia and Herzegovina were pending before the Court.

Little progress has been made in the promotion and enforcement of human rights. Despite the fact that the Constitutional Court of Bosnia and Herzegovina has been confirmed as the competent body to review the proper implementation of the outstanding decisions of the Human Rights Chamber (HRCh) and the Human Rights Commission (HRCom), the enforcement of pending decisions remains an issue to be addressed.[10]

Overall, the legal and institutional framework for the observance of human rights is in place. However, Bosnia and Herzegovina made little progress in improving the enforcement of international human rights legislation. Credible efforts towards the implementation of the ECtHR decision in the Sejdic-Finci case in order to comply with the ECHR remains essential (see Chapter 2.1-Democracy and the Rule of Law-Constitution)

Civil and political rights

The death penalty is prohibited by the Constitution of Bosnia and Herzegovina and by the Constitution of the Federation. The death penalty provision in the Constitution of Republika Srpska is not applied, but needs to be repealed.

With regard to torture and ill-treatment and the fight against impunity, the legal framework is in place and is generally respected. Little progress has been made to address the ill-treatment of detainees highlighted by the Council of Europe Committee on the Prevention of Torture (CPT). Bosnia and Herzegovina has still not appointed a representative to the CPT. Ill-treatment and poor health services, particularly as regards vulnerable prisoners, have continued. Despite some progress to improve the procedures for investigating cases of alleged ill-treatment, in particular in the Zenica and Doboj prisons, further efforts are needed in this regard.

Little progress was made regarding the prison system. A Law on Execution of Criminal Sanctions was adopted in the Federation and is in place at State-level and in Republika Srpska. Bosnia and Herzegovina's prison system is fragmented and lacks a uniform legislative framework for implementing criminal sanctions.

There has been some further improvement in prison conditions. In both Entities, prison accommodation was further expanded with new or upgraded buildings. Efforts to introduce a system of electronic bracelets for house arrests continued. However, overcrowding remains an issue to be addressed. The situation remains problematic, in particular in the Federation where, on average, there is a gap of five years between a final conviction and actual imprisonment. Alternative sanctions are still not widely applied. There have been further delays in the construction of a high-security State prison which has not yet started. This continues to affect the country's capacity to deal with high-security prisoners.

Limited progress was made in improving the conditions of vulnerable prisoners. Construction of a new psychiatric facility in Sokolac is contributing to improving specialised facilities for psychiatric prisoners. However, psychiatric inmates continue to lack facilities in the prisons of both the Federation and the Republika Srpska. Greater efforts are needed to reinforce prison inspections. There is no effective coordination between the fifteen prison administrations in the country.

Limited progress was made in the area of access to justice in civil and administrative trials. The legal framework formally guarantees equality before the law. However, there have been some cases when the presumption of innocence and equal treatment have not been ensured during legal proceedings. The system of free legal aid in Bosnia and Herzegovina remains fragmented. The framework Law on Free Legal Aid has yet to be adopted. Free legal aid in civil cases continues to be mainly provided by privately funded NGOs.

Bosnia and Herzegovina's Constitution provides for freedom of expression. However, threats and violence against journalists have continued. Follow up by police and the judiciary remains insufficient. Political pressure on all media continued. The media continue to be highly fragmented and polarised along political and ethnic lines. The statute of the Public Broadcaster BHRT was amended in order to increase the control of the Steering Board over the editorial management, thus affecting editorial independence. Political pressures affecting the financial and political independence of the Communication Regulatory Agency (CRA) have continued. Amendments to the Law on Ministries and Other Bodies of Administration in Bosnia and Herzegovina remain to be adopted in order to ensure the CRA's independence. The appointment of a Director General and two Board Members of the CRA and of the CRA Council remains pending.

The Press Council of Bosnia and Herzegovina is functioning and cooperates with judiciary institutions. It reported an increase in the number of complaints filed by citizens regarding violations of the Press Code, indicating increased awareness among citizens of their legal right to react to unfair or inaccurate reporting, including hate speech. However, the lack of financial and human resources continues to hamper the efforts of the Press Council to enforce professional standards.

Implementation of the Freedom of Access of Information Act remains uneven among the public institutions subject to the law. Reporting to the Ombudsman Institution as stipulated by the law and compliance with Ombudsman's opinions and recommendations in related cases remained weak. (See Chapter 4.2.6. – Information Society and Media)

Freedom of assembly and freedom of association are enshrined in the country's Constitution and are broadly respected. However, cases of intimidation and violence against human rights advocates and civil society organisations continued, mostly involving activists investigating alleged corruption. An institutional mechanism for cooperation with civil society organisations is in place in the Brcko District but remains to be established at State-level and in both Entities. The administrative capacity for cooperation with NGOs and the development of Civil Society remained weak. The consultation process with civil society during the legislative drafting process is not fully enforced. Resources for the Civil Society Board and funds allocated to civil society organisations dealing with environment and human rights issues remain inadequate. The development of civil society in Bosnia and Herzegovina requires further support and greater transparency in the criteria used for funding allocations.

The constitutional and legal guarantees of freedom of thought, conscience and religion are generally respected. Cases of discrimination on religious grounds continued. Incidents aimed at religious symbols, clerics, believers and property affected in particular those who constitute a religious minority in certain communities.

Overall, civil and political rights in Bosnia and Herzegovina are broadly respected. Some progress has been made in improving prison conditions, but a comprehensive reform of the prison system has not started. Access to justice and equality before the law remain hampered by the fragmented legal and institutional framework in the country. Very little progress was made as regards freedom of expression, freedom of assembly, association and freedom of religion. Political pressure on the media has continued. The continuing challenges to the independence of the Communication Regulatory Agency and of the Public Broadcaster remain issues of concern. Further efforts are needed in order to support the development and funding of the civil society sector.

Economic and social rights (see also Chapter 4.1.8 – Social policies, employment and public health)

Legal provisions guaranteeing women's rights and gender equality are in place. Bosnia and Herzegovina adopted an Action Plan on the implementation of the UN Security Council Resolution 1325 regarding Women, Peace and Security. Political participation of women has further increased, but remains low. Despite an increase of female members in Parliamentary Assemblies established following the 2010 elections, the 40% quota for women within the public administration, as stipulated in the Gender Equality Law, has not been reached. Limited progress was made to increase female participation in the labour market.

Harmonisation of the Entity and Cantonal laws with the State-level Law on Gender Equality made very slow progress. In spite of increased funding, the administrative capacity for ensuring gender equality at State and Entity levels remains weak. This hampers adequate monitoring and implementation of the Gender Equality Law and the Gender Action Plan. Very limited progress has been made as regards awareness raising campaigns and in promoting specialised training for civil servants.

As regards domestic violence, some progress was registered in Republika Srpska with the adoption of a new Strategy for combating domestic violence. Progress in implementing the State-level Strategy to prevent and combat domestic violence remains slow, in particular with regard to harmonisation of legislation and data collection. Further specialised training for law enforcement officers and the judiciary is needed.

Some progress has been made in the area of children's rights. Early childhood development policies have been adopted in both Entities. A revised State-level Action Plan for Children for 2010-2014 was adopted. Implementation of the child protection strategy for children without parental care in Republika Srspka has started. Monitoring of children's rights by civil society has been strengthened. A revised Strategy to Combat Violence against Children remains to be adopted. Disparities remain between the child allowances of the Entities and Cantons and the allowances do not correspond to the needs of children and families. Children continued to suffer from domestic violence and trafficking.

Some progress has been made in improving the general framework for education. The Council of Ministers adopted an initial Baseline Qualifications Framework for life-long learning. (See Chapter 4.1.9 - Education and Research) However, the Conference of Education Ministers, which was established to improve coordination amongst the 14 ministries of education, has not met since mid 2010. Little progress was achieved in making schools more inclusive. Some municipalities throughout the country started applying the Index for Inclusion, which is a self-assessment tool allowing schools to improve inclusion, with the support of the community. In the Federation, a coordination body for Cantonal Education Ministers was established in order to consider the issue of divided schools. However, much more needs to be done to effectively address the number of divided schools (or '2 schools under 1 roof'). Separation of children within schools along ethnic lines and the existence of '2 schools under 1 roof' in three Cantons and mono-ethnic schools continued. De facto ethnic-based separation and discrimination in public schools remain a serious concern. Ethnically based and divided education systems remain an obstacle to sustainable returns.

Little progress was made in improving conditions for the socially vulnerable and people with disabilities. In the Federation, the Strategy for people with disabilities has been adopted. In Republika Srpska, the Strategy for persons with disabilities is being implemented. The entitlement to rights and benefits for disabled persons is not based on needs. As a result, certain categories of persons with disabilities do not receive adequate financial benefits. The lack of harmonisation between the social protection systems of the Entities and Cantons remained. The Social Inclusion Strategy in Republika Srpska and at State-level have yet to be adopted. The Council of Disabled Persons has still not been established.

With regard to anti-discrimination policies, an anti-discrimination law is in place. However, it does not include age and disability and allows for a broad range of exceptions. Little progress was made in harmonising other laws with the anti-discrimination law. Implementation of the anti-discrimination law remained weak. Very few complaints about discrimination have been registered. Awareness among citizens of the legal remedies that are available in case of discrimination needs to be strengthened.

Discrimination against lesbian, gay, bisexual and transgender (LGBT) people remains widespread. LGBT activists have been subjected to threats and harassment. Hate speech and intolerance towards LGBT persons by media and politicians remain issues of concern.

As regards labour and trade unions rights, legislation was amended to ensure that employees in the Federation obtain social benefits during maternity leave. However, the overall legal framework remains to be harmonised across the country. The fragmentation of the legislative framework for social benefits and pensions remains an issue to be addressed. The establishment of a State-level Economic and Social Council is still outstanding. Criteria and legal framework for the recognition of social partners at State-level are outstanding.

With regard to property rights, the vast majority of cases of property repossession requests have been resolved. However, some repossession requests remain outstanding since the mandate of the Commission for Real Property Claims of Displaced Persons and Refugees ended. There is no database regarding outstanding claims and funding is insufficient. Property registers are largely unreliable.

Overall, economic and social rights are broadly respected. Bosnia and Herzegovina adopted an Action Plan on the implementation of UN Security Council Resolution 1325. However, more efforts are needed in order to ensure implementation of the Gender Equality Law and the Gender Action Plan, to address domestic violence against women and children and to make schools more inclusive. Implementation of the anti-discrimination law remained weak. Greater efforts are needed to improve conditions for the socially vulnerable and people with disabilities, and to strengthen labour rights and social dialogue, as well as the role of trade unions.

Respect for and protection of minorities, cultural rights

The legal framework for the protection of minorities[11] is largely in place. Little progress has been made in implementing the laws on national minorities. The National Minority Councils' influence over policy making remains limited, in part due to the lack of political and financial support. The cultural rights of national minorities, including their participation in public life, need to be strengthened.

Because national minorities do not belong to the three constituent peoples, they have continued to be excluded from representation in the State-level House of Peoples and the tripartite Presidency (see Chapter 2.1– Constitution). No progress has been made in implementing the European Charter for Regional or Minority Languages. Representation of minorities in the media continued to be weak. The nomination of the members from Bosnia and Herzegovina to the Council of Europe Advisory Committee under the Framework Convention for Protection of National Minorities remains outstanding.

Some progress was achieved as regards the Roma minority. Four action plans under the Roma Strategy are in place. Progress was made in the implementation of the Roma action plans on housing and employment. However, there is only little progress to report in implementing the action plan on health. Efforts to ensure effective implementation of the action plan on the educational needs of Roma and other minorities need to be stepped up, and adequate financial resources for implementation need to be ensured. Sustainability in implementing all four action plans should be further addressed. Coordination among authorities at State and Entity level and with lower levels needs to be reinforced in order to ensure that the Roma Action Plans are implemented in a transparent and efficient manner. Bosnia and Herzegovina is participating in the Roma Decade of Inclusion. However, there is still no established mechanism for monitoring the implementation of the action plans and the allocation of funds at all levels. Limited steps have been taken by Cantons and municipalities to adopt, analyse and revise by-laws and introduce provisions to protect the Roma in the areas of employment, health, housing and education.

The State-level social inclusion strategy for 2008-13, which targets the Roma population as a priority group, has not yet been adopted. Greater efforts are needed on birth registration and on the provision of free legal aid for civil registration. Measures need to be taken to address the situation of the Roma, mainly women, who are at risk of statelessness. Participation of Roma representatives in the decision-making process remains very low. The situation of Roma women and children is particularly difficult. Many Roma children are not registered at birth and therefore cannot enrol in school, have no health insurance and are subject to trafficking and exploitation. The Roma continue to be the most vulnerable minority.

As regards refugees and internally displaced persons, at the end of 2010, 113,365 internally displaced persons, including 7,492 in collective centres, and 7,000 refugees were living in Bosnia and Herzegovina. Some steps have been taken to implement the revised Strategy for implementation of Annex 7 to the Dayton/Paris Peace Agreement, particularly regarding funding for vulnerable groups living in collective centres. Some progress was made in the allocation of the budget for sustainability measures under the revised Strategy. However, procedures for allocating return assistance are not fully in place. Discrimination in access to employment, health care, pension rights and the slow pace of demining, remain barriers to the sustainable return and local integration of internally displaced persons.

With regard to landmines from the 1992-1995 conflict, some progress was made in the implementation of the Mine Action Strategy, but some areas have still not been cleared. As of August 2011, 3 persons were killed and 4 injured in 6 landmine accidents. The Law on anti-mine actions has yet to be adopted. In order to meet the goal of clearing the country of mines by 2019, the law needs to adequately address fundraising responsibilities, administrative and management capacity and coordination of demining measures.

Overall, the framework for the protection of minority rights is in place and minority rights are broadly respected. Despite good progress in implementing the action plans on housing and employment, Roma continue to face very difficult living conditions and discrimination. More efforts are required in order to implement the action plans on health and education and as regards registration of births. Access to pension rights, health care and social protection for refugees needs to improve. Limited steps have been taken to implement the revised strategy for implementation of Annex 7 to the Dayton/Paris Peace Agreement. Difficulties with economic reintegration, access to health care, social protection, pensions and employment of minority returnees remain major obstacles to sustainable return and local integration.

2.3. Regional issues and international obligations

Implementation of the Dayton/Paris Peace Agreement continued but political representatives in Republika Srpska frequently challenged the territorial integrity of the country. (See Chapter 2.1 – Constitution).

Cooperation with the International Criminal Tribunal for the former Yugoslavia (ICTY) has continued to be satisfactory. At the operational level, cooperation between the ICTY and the State-level and Entity authorities was adequate, and access to witnesses and archives remained good. The local prosecution of war crimes cases has continued. All the cases transferred by the ICTY to the Special War Crimes Chamber of the State Court under the 11-bis rule[12] have now been completed. During the reporting period the State Court and Prosecutor's Office have continued to perform their duties well. A significant number of war crimes cases and indictments have been launched by the prosecutors' offices in Bosnia and Herzegovina. Some progress has been made in implementing the National War Crimes Strategy. (See Chapter 2.1-Judicial System)

Cooperation between the courts and the Prosecutors' offices from Bosnia and Herzegovina, Croatia and Serbia is ongoing. Implementation of their bilateral agreements on the mutual execution of sentences in criminal matters and enforcement of court rulings is underway. Efforts to prosecute war crimes cases continued to be hampered by legal obstacles to extradition in the Criminal Procedure Code, but some practical steps have been taken to overcome them. The first cases have been pursued under an agreement with Croatia whereby persons sentenced for war crimes in Croatia who fled to Bosnia and Herzegovina can serve their sentences there.

Bosnia and Herzegovina has aligned with the Council Decision advancing universal support for the International Criminal Court and promoting the widest possible participation[13]. However, it still maintains the 2003 bilateral immunity agreement with the United States granting exemptions from the jurisdiction of the International Criminal Court. This does not comply with the EU Common Positions on the integrity of the Rome Statute or the related EU guiding principles on bilateral immunity agreements. Bosnia and Herzegovina needs to align with the EU position.

The Parliamentary Assembly of the Council of Europe (CoE) monitors the progress made by Bosnia and Herzegovina in fulfilling the obligations and commitments relating to its membership of the CoE. Bosnia and Herzegovina has appointed members to the CoE Parliamentary Assembly, but not to the advisory bodies. The implementation of the requirements stemming from the CoE Conventions remains insufficient.

Significant progress was made with regard to the Sarajevo Declaration Process, launched through the Sarajevo Declaration of 31 January 2005. Bosnia and Herzegovina, Croatia, Montenegro and Serbia cooperate within this process to find solutions for refugees who were displaced as a result of the armed conflicts in ex-Yugoslavia between 1991 and 1995. Countries have continued to progress on a number of outstanding issues such as data exchange, civil documentation, public information, pensions and trust fund mechanisms, in the framework of the established regional working groups. Following the meetings of June and September 2011, Bosnia and Herzegovina, Croatia, Montenegro and Serbia agreed on a number of issues, including on the text of a joint declaration to be signed at a ministerial conference in November 2011 in Belgrade. A regional multi-year programme aimed at addressing the needs of the most vulnerable refugees, has also been agreed, together with a donors' conference to be held in the first half of 2012 in Sarajevo.

As regards missing persons, as of September 2011, there were still approximately 14,000 people missing from the conflicts in the region. Of these, some 10,000 were related to the conflict in Bosnia and Herzegovina, 2,000 to the conflict in Croatia and over 1,800 to the conflict in Kosovo. In January 2011, the State Prosecutor's Office took over responsibility from local prosecutors for conducting exhumations of mass graves. Limited progress was made in the implementation of the Law on Missing Persons. The International Commission on missing persons (ICMP) and the State-level Missing Persons Institute (MPI) launched the database of the Central Records on Missing Persons (CEN). Adequate funds were allocated by the Council of Ministers to support the work of the MPI. However, political pressures and attempts to undermine the work of the MPI have continued. The existence of secondary mass grave sites continues to pose a challenge for the identification of missing persons in Bosnia and Herzegovina.

Regional cooperation and good neighbourly relations form an essential part of Bosnia and Herzegovina's process of moving towards the European Union. Bosnia and Herzegovina continued to be an active participant in regional initiatives, including the South East European Cooperation Process (SEECP), the Regional Cooperation Council (RCC), the Central European Free Trade Agreement (CEFTA), the Energy Community Treaty, the European Common Aviation Area Agreement and the EU Strategy for the Danube region. In March, within the framework of the SEECP, Bosnia and Herzegovina endorsed the Regional Strategic Document and Action Plan on Justice and Home Affairs 2011-2013. Many regional activities organised by the RCC Secretariat, which is based in Sarajevo, have been carried out. Bosnia and Herzegovina adopted a decision to recognise the Kosovo customs stamps, which is important for CEFTA implementation. Bosnia and Herzegovina continues to actively support the Igman initiative on reconciliation, which brings together NGOs from Bosnia and Herzegovina, Croatia, Serbia and Montenegro and the RECOM initiative.

Bilateral relations with other enlargement countries remained stable. As a follow up to bilateral agreements on police cooperation between Bosnia and Herzegovina and countries in the region, a decision was adopted to establish a network of police officers of Bosnia and Herzegovina in the countries in the region, EUROPOL and certain EU countries. In April, the Presidents of Bosnia and Herzegovina, Turkey and Serbia met in Belgrade. This format was repeated in other meetings at different ministerial levels.

Relations with Albania have remained good. The implementation of existing bilateral agreements and protocols has continued to proceed smoothly.

Relations with Croatia have intensified. The Presidency of Bosnia and Herzegovina visited Croatia on several occasions during the reporting period. Croatia has expressed its support for the European integration of Bosnia and Herzegovina. Limited progress was achieved in resolving outstanding issues, including on the use of the port of Ploce, border demarcation, property issues, dual citizenship and refugee return. The inter-state Commission for Borders continued to meet but failed to agree on the outstanding border demarcation issues. The countries signed two agreements linked to the Sava river. A readmission agreement with shortened procedure and a police cooperation agreement on fighting trans-border crime, which provides for the exchange of information on investigations and the appointment of police liaison officers, were signed. The first meeting of a joint working group was held in April in Sarajevo to discuss the revision of the Local Border Traffic Agreement and the Agreement on free transit through the port of Ploce and Neum in Bosnia and Herzegovina. The President of Croatia attended the July commemorations in Srebrenica.

Relations with the former Yugoslav Republic of Macedonia continued to be good. Negotiations started on agreements on cooperation in the field of health and medical sciences, mutual enforcement of court decisions in criminal matters and in legal aid in civil and criminal matters.

Relations with Montenegro have continued to improve. Three agreements were signed in the area of border crossings for local transport, border crossings for international transport and defence. Agreements on cooperation in the field of tourism and exchange of data with regard to social insurance entered into force. The delimitation of the border remains pending.

Relations with Serbia have improved further. An agreement in the field of education, culture and sport entered into force. Five agreements were signed in the field of tourism, protection from natural and other disasters, veterinarian cooperation, police cooperation and exchange of data with regard to social insurance. An agreement on the temporary employment of Bosnia and Herzegovina citizens in Serbia was signed. In July, President Tadic paid an official visit to Sarajevo and met with Presidency members. However, the border demarcation remains an open issue.

In the framework of the Special Parallel Relations Agreement between the Republika Srpska and Serbia, the Republika Srpska Ministry of Economic Affairs and Regional Cooperation and the Ministry of Foreign Affairs of Serbia signed Memoranda of Understanding in several areas of cooperation. The government of Republika Srpska and the government of Serbia held a joint government session in Banja Luka.

There are no official relations with Kosovo[14], as Bosnia and Herzegovina has not recognised Kosovo as an independent state. The country does not recognise Kosovo passports and no steps have been taken to set up procedures for citizens of Kosovo to obtain visas comparable to those issued by the EU Member States that have not recognised Kosovo.

Relations with Turkey intensified. A cooperation agreement in the field of health entered into force. Negotiations to amend the bilateral Free Trade Agreement began. The text of a first readmission agreement was initialled. In October 2010 and in September 2011, the Turkish Foreign Minister visited Bosnia and Herzegovina to encourage bilateral economic co-operation and foreign direct investment.

Overall, Bosnia and Herzegovina's cooperation with the ICTY has continued to be satisfactory and a number of significant steps have been taken to process war crimes and to find the missing persons from the 1992-1995 conflict. The country has continued to participate actively in regional cooperation and to maintain good neighbourly relations. More decisive efforts are needed in order to settle the remaining border and property issues and to remove legal obstacles to extradition with neighbouring countries.

3. Economic criteria

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

3.1. The existence of a functioning market economy

Economic policy essentials

Difficulties with forming governments at State and Federation levels after the general elections in October 2010 and the failure of the Fiscal Council to adopt the Global Framework for Fiscal Policies for 2011-13 had a bearing on economic and fiscal policy. In a situation of increased uncertainty over the short- and medium-term path of fiscal policy, the authorities submitted their fifth Economic and Fiscal Programme for 2011-13 in January 2011. The programme is thus fragmented and does not reflect a coherent formulation of economic and fiscal policies. It is not fully integrated into budgetary procedures and its objectives are not adequately quantified or backed by concrete policy measures. The performance under the International Monetary Fund (IMF) Stand-By Arrangement remained broadly satisfactory until October 2010 when the IMF Board approved the second and third reviews. However, due to the difficulty of forming a government at State-level, further programme discussions were delayed. The first World Bank Development Loan was disbursed in October 2010. Overall, the consensus on economic and fiscal policy essentials has weakened.

Macroeconomic stability

After the recession in 2009 with a drop in real GDP of 2.9%, the country moderately recovered in 2010. It recorded a positive real growth rate of 0.7%, driven by external demand. Domestic demand picked up, supported by a relatively stable inflow of remittances. Industrial production increased slightly in 2010 led by export-oriented industries, but unemployment remained very high. Per capita income, measured in purchasing power standards (PPS), fell to 30% of the EU-27 average in 2010 from 31% in 2009. As a result of fiscal adjustment measures implemented under the IMF programme and increased revenues, the budgetary situation eased. Due to improvements in the trade and current account deficits and the comfortable level of foreign reserves, the external financing needs decreased in 2010. The indicators available for 2011 suggest that the economic recovery is gaining strength as industrial production increased by 8.1% year-on-year in the first seven months of the year. Overall, the economy is slowly gaining steam after the 2009 recession, but the recovery is fragile.

The current account deficit fell further from 6.2% of GDP in 2009 to 5.6% in 2010. The trade deficit fell by 4.8%, shrinking from 27.8% of GDP in 2009 to 25.9% in 2010, which contributed to the improvement of the current account. Exports rose by 27.7% nominally, and imports by 10.2%. Surpluses in the services and income accounts decreased by 8.6% and 23.2%, respectively, while that of the current transfer account increased by 3.1%, supported by the relatively stable flow of remittances. The current account deficit was financed mainly by new loans from abroad. However, the trend of an improving trade balance was reversed in the second half of 2010 when the nominal increase of imports exceeded that of exports. This deterioration continued in the first half of 2011 when the trade gap increased by 18.3% year-on-year. Imports and exports increased both by 18.3%, mining and manufacturing being the main sectors recording export growth. Bosnia and Herzegovina's external public debt increased by 20.2% in 2010, from 21.8% of GDP in 2009 to 25.7% in 2010, mainly due to the disbursements made in the context of the IMF and World Bank programmes. In the first half of 2011, the external public debt decreased slightly by 1.5%. Public international creditors account for 89% of the country's external public debt. The largest creditor remains the World Bank group. Official foreign exchange reserves decreased by 5.7% in the first half of 2011 from end-2010, though still covering around five months of imports. Overall, external imbalances have slowly started to rise after the sharp contraction experienced in 2009 and the first half of 2010, although the current account deficit is still much lower than before the crisis.

The average unemployment rate in 2010 stood at a very high 27.2%. Registered unemployment reached 43.1% in June 2011, while according to the Labour Force Survey (LFS) following the International Labour Organisation (ILO) methodology conducted annually in April/May, unemployment increased to 27.6 % in 2011 from 27.2% in 2010. It was particularly high among the young population (57.9% for people aged between 15 and 24, according to the LFS). In the first half of 2011 the highest year-on-year growth in employment was registered in education, real estate and health, while employment fell in agriculture, mining and manufacturing industries, as well as in trade and construction. Despite the already large size of the public sector in Bosnia and Herzegovina, the number of employees in the public administration increased further, by 2.1% year-on-year in the first six months of 2011. Average monthly nominal gross wages increased by 1.8% in 2010 and remained relatively stable in the first seven months of 2011. Structural rigidities such as the high rates of social contributions, poorly targeted social transfers and low labour mobility, are continuing to hamper job creation and the propensity to work. Overall, labour market conditions remained poor and were not supported by the weak growth dynamics.

Annual inflation reached 2.1% in 2010, up from -0.4% in 2009. The inflationary trend was mainly driven by the rise in food and transport prices towards the end of the year. Inflation continued to rise in the first seven months of 2011, reaching 3.9% in July, pushing the 12-month moving average inflation rate up to 3.1%. The monetary policy of the Central Bank continued to be conducted under a currency board arrangement, with the euro as the anchor currency, enjoying a high level of confidence and credibility. Monetary policy settings remained unchanged throughout 2010. As of February 2011 the minimum reserve requirement for short-term deposits was lowered from 14% to 10%. Nevertheless, the banking system's reserves with the Central Bank remain significantly above the minimum required level. The M2 monetary aggregate increased by 6% year-on-year in July. Overall, monetary and financial stability have been preserved while inflation is picking up.

The fiscal performance in 2010 benefitted from the recovering economic activity, which resulted in increasing revenues, and from the adjustment measures implemented under the IMF programme. The consolidated budget deficit fell to 2.5% of GDP, which is well below the 2009 outcome of 4.5%. However, the share of general government in GDP remains high, with 2010 revenues at 44.4% of GDP. Adjustment measures on the expenditure side included cuts in wages and benefits in the public sector, which resulted in only a marginal 0.5% rise of the consolidated wage bill in nominal terms. Consolidated revenues increased by 5% in 2010. 44% of the revenues originated from indirect taxes which increased by 6.7%, driven by the recovering economic activity, the development of imports and import prices and the increase of excise duties on tobacco and oil derivatives which counteracted the continuous reduction of duties and tariffs as set out in the Interim Agreement on trade, in force since mid-2008. Expenses increased by 1.6% year-on-year in 2010. Current spending dominates the budget with wages accounting for 29.2% of overall expenditure and subsidies and transfers (mainly social benefits) for 39.2%. The balance of the collected social contributions against the paid out social benefits returned on the positive side due to the simultaneous rise of the contributions and drop of the benefits. The flat income tax rate in Republika Srpska was raised from 8% to 10% as of 2011 and the non-taxable income threshold was abolished. Following amendments to the Law on Social Contributions in Republika Srpska, the overall social contribution rate increased from 30.6% to 33% of the gross salary as of January 2011. Excise duties on tobacco were raised as of 2011.

Budget planning for 2011 and beyond, as well as the sustainability and credibility of fiscal policy in Bosnia and Herzegovina, were seriously hampered by the non-adoption of the Global Framework for Fiscal Policies for the periods 2011-2013 and 2012-2014. The Parliament of Republika Srpska adopted the Entity's 2011 budget in December 2010. It planned the same nominal expenditure as the budget for 2010. In the Federation, a temporary budget was in place in the first quarter. The Federation 2011 budget was adopted in March and showed a total amount of expenditure planned 9% lower than in 2010, with high uncertainties surrounding its financing. At the State-level, temporary budgets were in place during the first three quarters of 2011. The 2011 State-level budget was adopted by the Presidency in April, showing an increase in volume by 2% compared to 2010. However, it remains to be adopted by the Parliament. All budgets were established in the absence of a medium-term budgetary strategy. The Federation revised in July its 2011 budget to allow for some increase of specific social benefits, partly compensated by cuts in investment and the wage bill. Republika Srpska is planning to rebalance its 2011 budget in October. In May 2011, the distribution coefficients for the allocation of indirect revenues from the Single Account of the Indirect Taxation Authority were corrected for the first time since 2008. The share for the Federation was lowered slightly from 64.39% to 63.98% in the benefit of Republika Srpska's share which went up slightly from 32.06% to 32.47%. The share for Brcko District remained at 3.55%. The shares are based on final consumption data. Overall, the reliability and predictability of fiscal policy in Bosnia and Herzegovina suffered from the failure to agree on Global Fiscal Frameworks which is a serious obstacle for medium-term budgetary planning and sustainability.

General government debt, both domestic and foreign, stood at 38.8% of GDP in 2010, up from 34.5% in 2009. External debt accounts for 25.7% of GDP and domestic debt for 13.1%. Domestic public debt is managed and served by the Entities (49.5% Federation, 49% Republika Srpska, 1.5% Brcko District). Verification of claims related to old foreign currency savings has advanced. Both Republika Srpska and the Federation continued issuing bonds in 2010 and 2011 to service the debt. In addition, Republika Srpska issued for the first time short-term T-bills in May and June 2011 serving as temporary financing to Republika Srpska cash-based budget deficit. The offers were met by high demand and achieved relatively favourable conditions. Overall, even though the debt-to-GDP ratio is still relatively moderate, its upward trend needs to be monitored carefully.

Although there is evidence of an ongoing trend of economic recovery, the incomplete reform process acts as an impediment to laying the foundations for solid and more domestic-driven growth in Bosnia and Herzegovina. The growing trade gap and increasing current account deficit suggest that external imbalances are again taking shape. The productive capacity and competitiveness of the economy remain weak, as domestic sources of growth are not adequately exploited and national savings remain low. The currency board arrangement enjoys a high level of confidence and credibility, while the failure to agree on a Global Framework for Fiscal Policies for 2011-2013 and 2012-2014 severely threatens the transparency, reliability and sustainability of public finances and is a serious impediment for short- and medium-term budgetary and general economic planning. Overall, the worsening quality of budgetary processes is putting a strain on the viability of macroeconomic policies, even though financial and monetary stability has been preserved.

Interplay of market forces

The private sector's share in GDP is estimated to have remained stable at around 60% of GDP in 2010. In Republika Srpska there has been no further progress in the privatisation agenda. Following a government decision not to initiate their privatisation, strategic companies such as the power utility, Banja Luka airport and the postal company remain public. Around 69% of the initial stock of State-owned capital intended for privatisation had been sold by September 2011, unchanged from a year earlier. In the Federation, only one out of nine companies included in the revised privatisation plan has been partly privatised by stock exchange transactions with the achieved price being less than half of the company's estimated value. Attempts to privatise the remaining eight companies were unsuccessful, in some cases in spite of repeated offerings. None of the companies considered "strategic" such as the power utility and a tobacco factory were subject to privatisation. The planned restructuring and liquidation of socially-owned enterprises has made slow progress. Most prices are liberalised, even though a number of administered prices remain (e.g. for utilities, including electricity and gas). Overall, the planned privatisation process did not advance for the third consecutive year.

Market entry and exit

Following the economic crisis, the number of newly registered companies dropped by around 50% in 2010. Property registration procedures were significantly shortened during 2010 in some courts, for example from 84 to 33 days in the Sarajevo Court. The time needed to start a business was reduced from 60 to 55 days, on average, over 2010. Court registration timelines and costs are harmonised between the Entities, including the notary fees. However, the process for obtaining all the necessary documents and permits remains lengthy and companies must still register in both Entities if they want to do business in the whole country. Under the second stage of the "legislative guillotine" project in the Federation, seven bylaws have been adopted in various ministries to streamline 109 business-related administrative procedures, and some administrative improvements have also been implemented at Canton and municipal levels. Labour tax procedures have been streamlined. Overall, some improvements can be reported, particularly in registration procedures.

The legal system

The legal system in Bosnia and Herzegovina remains complex. Even though the standard of legislation is relatively high in some areas, implementation and application of laws in practice is often poor due to the weak enforcement capacity of key institutions. The average time to resolve a dispute before court in order to enforce a contract remains high at 595 days. The rule of law is weak and the judicial system often does not function efficiently, is subject to obstruction by the parties and does not cover commercial activities adequately. Overall, weak rule of law, corruption and unreliable contract enforcement continue to hamper the business environment.

Financial sector development

The financial sector is dominated by banks that are engaged mainly in traditional credit and savings activities. The share of claims on the private sector in relation to GDP decreased to around 55% in early 2011, from 58% a year earlier. Twenty-nine banks are operating in the country, one less than in the previous year as one bank in the Federation is undergoing a liquidation procedure. Two banks are under provisional administration. Twenty-one banks are under foreign ownership, seven under domestic private ownership and one is majority State-owned. Despite losing some 2.4% of their share, the five largest still account for more than half of the total assets of the banking sector. Banks with foreign ownership accounted for approximately 90% of the total banking system assets in 2010. Banking sector assets remained relatively stable between the third quarter of 2010 and the second quarter of 2011. The capital adequacy ratio decreased slightly from 15.6% in the third quarter of 2010 to 15.5% in the second quarter of 2011, comfortably above the legal minimum of 12%, which itself is significantly higher than the 8% required in the Basel II Accord.

After an aggregate net profit of some € 12.6 million in 2009, the banking sector finished 2010 with an aggregate net loss of € 63.6 million. The quality of the loan portfolio continued to deteriorate. The share of non-performing loans to total loans reached 11.8% in the second quarter of 2011, the highest level since 2001, up from 9.2% in the third quarter of 2010, while the volume of loans increased. Nevertheless, banking profitability indicators showed a remarkable upward trend in the second quarter of 2011. The return on average equity increased from -3.5% in the third quarter of 2010 to 3.5%, while the return on average assets rose from -0.4% to 0.4%. Liquidity indicators deteriorated slightly during the same period with the rates of liquid to total assets falling from 29.3% to 26.2% and of liquid assets to short-term financial liabilities from 50.3% to 46.2%. Twenty-five banks are participating in the deposit guarantee scheme. Its coverage level remained unchanged at around € 18,000. In March 2011, Republika Srpska amended the Law on the Banking Agency, establishing a banking system ombudsman and widening the Agency's responsibilities for supervision and protection against money laundering and financing of terrorism. The amendment also assigns the Agency customer protection functions. Overall, despite the increasing non-performing loan ratio, financial stability was safeguarded.

Annual credit growth continued its upward trend and reached 6.7% in July 2011, though from a low base. Loans to households grew slightly by 2.8%, while those to private enterprises increased by 7.7%. The recovery of deposits has lost pace in an annual comparison, growing by 2.2% in July. Households remained the main contributors to this development, increasing their savings by 10.7%, while the corporate sector reduced its deposits by 6.6%. As a consequence of these developments, the loans-to-deposits ratio climbed from 113.5% in October 2010 to 120% in July 2011. The spread between average loan and deposit interest rates of commercial banks decreased by 18 base points in the fourth quarter of 2010 compared to the previous quarter, reaching 7.87 percentage points, mainly due to reduced lending rates. This level points to still high intermediation costs. Overall, after the sharp correction experienced during the financial and economic crisis, credit activities are gaining strength again.

In the first half of 2011, local stock markets regained some previously lost ground, recording an upswing of 4% and 7.2% for the main indices of the Sarajevo and the Banja Luka stock exchanges, respectively. Their combined market capitalisation recovered somewhat to around 47% of GDP in the first seven months of 2011, up from 44% in mid-2010. The cumulative turnover almost doubled year-on-year in January-July 2011, mainly influenced by two T-bills issues of Republika Srpska (May-June 2011). The insurance sector remained small and relatively weak, accounting for 1.9% of GDP in 2010, representing marginal increase. The annual growth of premiums picked up slightly to 2.9%, as compared to 1.4% annual rise in 2009. The market was dominated by the non-life insurance segment, which accounted for 84.2% of the total. The number of companies active on the market decreased to 25 at the end of 2010, after the Federation's Insurance Supervisory Agency revoked the licence of Hercegovina Osiguranje. Overall, financial intermediation by the non-banking sector remained shallow.

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

Existence of a functioning market economy

External imbalances have been increasing and fiscal imbalances remain high, even though adjustment measures made under the international support programmes contributed to some fiscal consolidation. The failure to adopt the Global Framework for Fiscal Policies for 2011-2013 and the delays in forming governments at State and Federation levels weakened not only the soundness, transparency, sustainability and reliability of public finances and of economic policies, but also the planning and decision-making of economic agents. The sluggish progress in the reform of the social benefits system, the still slow pace of economic restructuring, especially in the Federation, prevailing obstacles to private sector development and the composition of budgetary expenditures, increasingly dominated by current spending, at the expense of growth-enhancing activities, continue to undermine a more growth-oriented allocation of resources and a strengthening of domestic sources of growth. Unemployment remains very high. Progress towards creating a single economic space within the country has been limited. Overall, the functioning of market mechanisms remained hampered by distortions, the excessive role of the State and lack of competition, not allowing efficient allocation of resources.

Human and physical capital

Progress in the field of education and training has been limited. The Council of Ministers adopted the concept of the Qualifications Framework (Baseline Qualifications Framework) in Bosnia and Herzegovina. However, the mismatch between the qualification needs of the labour market and the profile and number of graduates coming out of the vocational and educational training system adds to other structural weaknesses, such as low labour mobility, and remains a concern. Cooperation between the education sector and employers is still weak and information on human capital endowment remains scarce. Overall, the proper functioning of the labour market continues to be hampered by structural rigidities and the weak performance of the education and training system.

Activities to improve the railway infrastructure in pan-European corridor Vc progressed during 2010. The Railways Regulatory Body introduced a set of regulations in compliance with the EU railway directives. Maintenance and upgrading of roads continued, but progress was slow, as some of the construction planned did not take place due to financial difficulties on the part of some of the contractors. Both Republika Srpska and the Federation governments terminated contracts with Slovenian companies at end-2010 after several months of inactivity on important highway projects. Net foreign direct investment (FDI) flows dropped further by more than 70% in 2010, falling to a mere 0.4% of GDP. Outflows were recorded in financial intermediation and wholesale trade, while the manufacturing sector was the main source of inflows. FDI outflows were nevertheless reversed in the third quarter of 2010 and there are indications that net FDI was slowly recovering in the first half of 2011. Overall, in an admittedly difficult market environment, domestic and foreign investors became more hesitant. Infrastructure improved slightly, but continues to require repairs and modernisation.

Sector and enterprise structure

Electricity and gas utilities continue to be public stock companies. Market liberalisation remains insufficient as most utility providers still do not apply market prices. Although the market was opened for non-household consumers, they have little incentive to change suppliers, as regulated tariffs remain below market prices. Progress towards a competitive telecommunications market has been limited. The incumbent operators continue to act as de facto monopolies in their fixed-line market segments and as oligopolies in the mobile segment. The incumbent operators published their reference unbundling offers, however, and four contracts were signed with alternative operators over the last two years. New l