Report from the Commission to the Council on the preparedness of Bosnia and Herzegovina to negotiate a Stabilisation and Association Agreement with the European Union
Date: 2003-11-18
Institutions: European Commission
Subjects: Bosnia and Herzegovina, association agreement (EU), economic situation, political situation, report

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 18.11.2003
COM(2003) 692 final

REPORT FROM THE COMMISSION TO THE COUNCIL

on the preparedness of Bosnia and Herzegovina to negotiate a Stabilisation
and Association Agreement with the European Union

TABLE OF CONTENTS

A.

1.

2.

B.

1.

1.1

INTRODUCTION ...............................................................................................................5

Objective of the Report......................................................................................................5

Background: Relations between the European Union and Bosnia and Herzegovina ........5

KEY ISSUES IN PREPARING FOR NEGOTIATIONS ON A STABILISATION
AND ASSOCIATION AGREEMENT .................................................................................6

POLITICAL CRITERIA........................................................................................................6

Democracy and the Rule of Law .......................................................................................6

1.1.1

Presidency..........................................................................................................................6

1.1.2.

Legislature .........................................................................................................................7

1.1.3

Executive ...........................................................................................................................8

1.1.4

Public administration .........................................................................................................9

1.1.5

Relations with the international community....................................................................10

1.2

Human Rights ..................................................................................................................12

1.2.1

Civil, political, social and economic rights .....................................................................12

1.2.2 Minority rights and refugees............................................................................................13

1.3.

General Evaluation ..........................................................................................................14

2.

2.1

2.2

2.3

2.4

2.5

3.

3.1

3.2

3.3

ECONOMIC CRITERIA .....................................................................................................14

Economic Situation and Fiscal Sustainability .................................................................14

Price and Trade Liberalisation.........................................................................................15

Privatisation Process........................................................................................................16

Financial Sector Reform ..................................................................................................16

General Evaluation ..........................................................................................................16

ABILITY TO ASSUME THE OBLIGATIONS RESULTING FROM A SAA ..............................17

Political Dialogue ............................................................................................................17

Regional Co-operation.....................................................................................................18

Free Movement of Goods ................................................................................................19

3.3.1

Trade in industrial goods .................................................................................................20

3.3.2

Trade in agricultural goods ..............................................................................................20

2

3.4

Movement of Workers, Establishment, Services, Capital ...............................................21

3.4.1 Movement of workers......................................................................................................21

3.4.2

Establishment...................................................................................................................21

3.4.3

Trade in services ..............................................................................................................22

3.4.4

Current payments and movement of capital ....................................................................22

3.5

Approximation, Implementation and Enforcement of Legislation..................................23

3.5.1

Competition .....................................................................................................................23

3.5.2

Intellectual, industrial and commercial property .............................................................24

3.5.3

Public procurement ..........................................................................................................24

3.5.4

Standardisation and conformity assessment ....................................................................24

3.5.5

Consumer protection........................................................................................................25

3.6

Justice and Home Affairs.................................................................................................25

3.6.1

Reinforcement of institutions and rule of law .................................................................25

3.6.1.1 Police .............................................................................................................................25

3.6.1.2 Judiciary...........................................................................................................................26

3.6.1.3 Prison system ...................................................................................................................27

3.6.2

Visa, border control, asylum and migration ....................................................................27

3.6.3

Combating money laundering..........................................................................................28

3.6.4

Preventing and combating crime, combating illegal trafficking and illicit drugs ...........28

3.7

Co-operation Policies.......................................................................................................30

3.7.1

Economic, monetary and statistical co-operation ............................................................30

3.7.2

Investment promotion and protection, industrial co-operation, small
and medium-sized enterprises, tourism ...........................................................................31

3.7.3

Agriculture and agro-industrial sector .............................................................................31

3.7.4

Customs and taxation.......................................................................................................32

3.7.4.1 Customs ...........................................................................................................................32

3.7.4.2 Taxation ...........................................................................................................................33

3.7.5.  Employment, social policy, education and training, research and technological

development (RTD) .........................................................................................................33

3.7.5.1 Employment and social policy.........................................................................................33

3.7.5.2 Education and training, RTD...........................................................................................34

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3.7.6

Culture, audio-visual, telecommunications and postal services, information society.....35

3.7.6.1 Culture and audio-visual..................................................................................................35

3.7.6.2 Telecommunications, information society, postal services .............................................35

3.7.7

Transport..........................................................................................................................36

3.7.8

Energy .............................................................................................................................37

3.7.9

Environment ....................................................................................................................37

3.8

3.9

C.

Financial Co-operation ....................................................................................................38

General Evaluation ..........................................................................................................38

CONCLUSION .................................................................................................................39

LIST OF ABBREVIATIONS ..........................................................................................................43

4

A.

1.

INTRODUCTION

OBJECTIVE OF THE REPORT

This  report  has  been  compiled  to  assess  progress  made  by  Bosnia  and  Herzegovina  (BiH)
within the Stabilisation and Association process (SAP). In 2000, an EU "Road Map" identified
eighteen initial "Steps to be taken by Bosnia and Herzegovina to prepare for a Feasibility Study
on opening Negotiations on a Stabilisation and Association Agreement". The Road Map steps
were "substantially completed" in September 2002. The European Commission thus herewith
presents  its  study.  The  study  investigates  BiH's  current  situation,  identifies  the  requirements
inherent  in  a  Stabilisation  and  Association  Agreement  (SAA)  and  judges  whether  BiH  has
progressed  sufficiently  to  allow  it  to  negotiate  meaningfully  and  subsequently  implement
successfully such an agreement.

2.

BACKGROUND:  RELATIONS  BETWEEN  THE  EUROPEAN  UNION  AND  BOSNIA  AND
HERZEGOVINA

BiH  is  one  of  the  five  countries  of  south  east  Europe  participating  in  the  SAP.  This  process
supports  national  and  regional  stabilisation  by  integrating  each  of  the  five  participating
countries  progressively  into  European  structures  and  holding  out  the  prospect  of  EU
membership.  In  each  case  progress  on  integration  depends  on  the  merits  of  each  individual
country. This Feasibility Study therefore refers exclusively to BiH.

Relations  between  BiH  and  the  EU  have  greatly  developed  in  recent  years.  From  1996  BiH
benefited  from  PHARE  and  OBNOVA  assistance.  In  1997  the  EU  established  its  Regional
Approach  and  the  Council  of  Ministers  established  political  and  economic  conditionality  for
the  development  of  bilateral  relations.  In  1998  an  EU  Declaration  on  "Special  Relations
between EU and BiH" led to the establishment of the EU - BiH Consultative Task Force (CTF)
to  assist  in  the  preparation  of  contractual  relations.  In  1999  the  SAP  offered  the  prospect  of
integration into EU structures and in 2000 the EU Road Map identified the first concrete steps
on this journey. Initially thought to be a short-term exercise, their “substantial completion” was
achieved  only  in  September  2002.  Meanwhile,  in  2000  the  Community's  Autonomous  Trade
Measures (ATMs) had extended duty-free access to the EU market for most BiH goods and the
CARDS  regulation  foresaw  financial  support  tailored  to  SAP  priorities.  The  2000  Feira
European  Council  stated  that  BiH,  like  its  neighbours,  was  a  potential  candidate  for
membership,  a  message  reinforced  at  subsequent  summits  in  Zagreb  (November  2000)  and
Thessalonica  (June  2003).  Indeed,  Thessalonica  gave  practical  expression  to  this  perspective
by developing for Western Balkan use some of the instruments which proved effective in the
central and southern European candidate countries.

BiH's  relationship  with  the  EU  has  been  short,  but  intense.  From  limited  beginnings  the
relationship  has  intensified  speedily,  to  the  point  where  contacts  are  now  routine  at  both
political and working levels. The objective must now be to create expeditiously the foundation
for contractual relations through a SAA.

5

B.

KEY ISSUES IN PREPARING FOR NEGOTIATIONS ON A STABILISATION AND

ASSOCIATION AGREEMENT

1.

POLITICAL CRITERIA

Respect  for  democratic  principles  and  human  rights  as  proclaimed  in  key  international
documents such as the Universal Declaration of Human Rights, and respect for the principles
of  international  law  and  rule  of  law  in  general  should  form  the  basis  of  the  domestic  and
external  policies  of  parties  to  a  SAA.  The  consolidation  of  international  and  regional  peace
and stability and the development of good neighbourly relations would be the shared objective
of both the EU and BiH in the context of a SAA.

1.1

Democracy and the Rule of Law

The constitution of BiH specifies (article I.2) that BiH is a democratic state operating under the
rule  of  law  with  free  and  democratic  elections.  The  constitution  incorporates  the  European
Convention on Human Rights. Democratic systems have begun to function in BiH. This is a
testimony to progress made since the 1992 - 1995 war which killed thousands, displaced half
the population, ruined public and private infrastructure and poisoned inter-communal relations.
The rule of law has been gradually re-established: the country is generally peaceful;  there is
freedom  of  expression  and  peaceful  assembly.  Freedom  of  movement  is  guaranteed  and  the
right to property has in most cases been enforced. Given recent history, these and other rights
are no small achievement.

The constitutional basis for the establishment of democracy and the rule of law is annex 4 of
the  General  Framework  Agreement  on  Peace  (GFAP)  agreed  at  Dayton  in  December  1995.
Annex 4 of the Agreement, the BiH constitution, created a highly de-centralised state designed
to accommodate the disparate preferences of estranged peoples. In practice, this has meant the
establishment of a large number of governments and related administrations. The constitution
also provides a system of checks and balances; these balance legislative and executive power
and guarantee the rights of each ethnic group. State and Entity constitutions provide blocking
mechanisms  protecting  the  "vital  interests"  of  BiH's  constituent  peoples.  This  blocking
mechanism  may  guarantee  the  rights  of  each  people,  but  may  also  make  legislative  progress
difficult and can lead to deadlock. In terms of European integration, however, it is important
that partner countries are able to function properly; their various institutions must produce the
results expected in a modern democratic country. The complexity of the existing Dayton order
could hinder BiH performance.

The system established at Dayton has frequently been questioned both within and without BiH.
Certainly,  from  a  perspective  of  European  integration  it  is  difficult  to  argue  that  the  current
constitutional  order  is  optimal.  Whatever  the  arguments  for  and  against,  article  X  of  the
constitution provides the possibility of amendment. In fact, some argue that BiH has already
begun  to  address  these  issues  through  the  "constituent  peoples"  case  and  through  reform  of
indirect taxation and defence, etc. These reforms suggest that incremental, issue-based reform
may be a way to progress. At any rate, the constitution is no insuperable obstacle to reform or
to European integration.

1.1.1

Presidency

BiH has a directly elected tri-partite Presidency. The presidency is responsible inter alia for
conducting foreign policy, proposing annual budgets and representing BiH in international and

6

European  organisations.  In  the  Entities,  presidencies  also  exist  and,  since  the  2002  Entity
constitutional changes, are complemented by vice-presidents (although the latter have in some
cases struggled to identify and assert meaningful roles for themselves).

Particularly  in  the  early  post-war  years  the  BiH  presidency  played  an  influential  role  in
comparison with other State-level institutions. However, as the Council of Ministers has grown
in  authority,  the  Presidency  has  concentrated  more  on  its  constitutionally  defined  functions.
Although, it  has  generally  functioned  well,  the  presidency  inevitably  reflects  some  of  BiH's
challenges  and  difficulties.  In  contrast  with  the  Council  of  Ministers,  with  its  fixed
chairmanship,  the  presidency  remains  subject  to  an  eight-month  rotation.  Several  past
presidency  members  have  left  office  because  of  activities  considered  incompatible  with  the
Dayton  agreement,  and  relations  within  the  Presidency  have  sometimes  been  strained  over
different views on BiH's constitutional order and future. Persistent thinking in ethnic categories
is reflected in the  fact  that  the  presidency  at  one  stage  advocated  reintroducing  separate  (i.e.
ethnically  divided)  secretariats,  a  move  contrary  to  Road  Map  recommendations.  Also,  the
presidency's appointment of ambassadors still reflects criteria of ethnic balance.

Finally, it should be noted that despite progressive integration, BiH presidential  elections  are
still based (as mandated by  the  constitution) on  ethnic /  territorial  principles  -  i.e.  Bosniac
and  Croat  members  are  elected  "from  the  territory  of  the  Federation"  and  a  Serb  "from  the
territory of the Republika Srpska" (constitution, article V). This procedure has been criticised
as  anachronistic  and  incompatible  with  the  principle  of  the  "constituent"  identity  of  each
people.

1.1.2.

Legislature

BiH is a parliamentary  democracy.  The powers and  procedures of  the State parliament are
described  in  article  IV  of  the  constitution.  At  Entity,  Brcko  and  cantonal  levels  parliaments
also exist.

Over  the  years  parliamentary  performance  at  State  level  has  improved.  By  contrast  with
the 1996 - 1998  and 1998 - 2000 legislative periods,  three  times more  laws  proposed  by  the
Council of Ministers were adopted in 2000 - 2002. Although seriously hampered by a lack of
technical  resources  and  qualified  personnel,  the  State  parliament  has  gradually  developed
technical  competence.  A  number  of  technical  committees  have  been  formed  to  provide
specialised scrutiny  of  legislation.  Particularly  noteworthy  is  the  creation  of  a  Committee  on
European Integration, the first joint committee of the two State-level houses of parliament. The
gradual emergence of a culture of compromise within parliament, reported by some observers,
would  also  be  welcome.  The  decline  of  the  "zero-sum  politics"  which  characterised  the
immediate  post-war  era  would,  if  confirmed,  benefit  all  BiH  peoples  and  would  constitute  a
welcome step towards more normal European parliamentary practice.

Of course, deficiencies persist. Often parliament meets for less than two days per month and
during  the  ten  months  up  to  September  2003  the  BiH  parliament  adopted  only  19  laws  or
amendments to laws. The pace and quality of legislative output is affected by slow through-put
from  the  Council  of  Ministers  and  by  the  lack  of  an  adequately  qualified  and  organised
parliamentary  administration. Although a  greater  willingness  for  principled  compromise  may
be  developing,  it  is  by  no  means  universal.  Members  of  the  State  Parliament  still  often  vote
along ethnic lines or owe their first allegiance to their Entity, occasionally leading to blockage.
This difficulty is compounded by the existence of sometimes competing centres of legislative
authority  at  Entity  and  cantonal  levels.  Only  recently  did  State  and  Entity  parliamentarians

7

agree in principle to create a permanent inter-parliamentary committee. This will in future need
to ensure better co-ordination of legislative programmes between all levels of authority.

Since the war  BiH  has  held  numerous  elections.  General  elections were last held  in  October
2002  on  the  basis  of  an  Election  Law  adopted  only  in  August  2001  after  considerable
international pressure. In the context of European integration, it is significant that all the major
contending  parties  in  this  election  reportedly  accepted  BiH  as  the  common  state,  supported
"reform" and identified their major political goal as joining the European Union. For the first
time in post-war BiH, the 2002 elections were organised and run not by the OSCE, but by BiH
itself. They were efficiently run, peacefully conducted and unmarred by excessive nationalism.
The successful transfer to BiH of responsibility for the conduct of elections demonstrates latent
BiH capacity and may constitute a model for the transfer of further responsibilities.

On the negative side, voter turn-out at the elections was low: 54% (although electoral fatigue is
understandable  given  that  this  was  the  sixth  major  election  in  six  years).  Significantly,  BiH
was unable to meet the costs of the 2002 elections itself; it depended on international financing
for  around  70%  of  the  total  cost  -  and  the  funding  of  future  elections,  including  the  autumn
2004 municipal elections, remains unsecured. The sustainability of democracy in BiH may be
in question if its financial foundations remain so weak.

1.1.3

Executive

Whatever  the  party-political  composition  of  government,  BiH  needs  an  executive  able  to
deliver  reform  and  give  content  to  the  reformist  policies  proclaimed  in  successive  election
campaigns. Starting from a low base-line, BiH has made some progress.

The first post-war  State-level  administrations  were  characterised by ethnic division and were
generally ineffective in terms of reform. The record has improved, but a number of important
structural  deficiencies  persist.  In  a  country  of  around  four  million  people,  there  are  14
governments:  State  government  co-exists  (and  in  some  cases  competes)  with  two  Entity
governments, a district government in Brcko and ten cantonal governments in FBiH. Despite
the efforts of a high-level Co-ordination Board for Economic Development and EU Integration
and a number of ad hoc and sector-specific committees, co-ordination between these bodies is
far  from  optimal.  Overlapping  functions,  duplication  of  effort  and  uncoordinated  initiatives
remain a problem.

Within  State  government,  the  record  of  adopting  and  advancing  legislation  to  parliamentary
procedure  is  poor.  This  sometimes  reflects  a  lack  of  political  will  and  diverging  national
interests, but also structural weaknesses  such as under-developed legislative drafting  abilities
and  support  structures  that  are  not  yet  fully  functional.  The  Council  of  Ministers  has
consistently  failed  to  produce  an  annual  work  programme  by  the  beginning  of  the  calendar
year as required. New ministries created by the Law on the Council of Ministers remain under-
developed.  In  remedying  these  and  other  shortcomings,  at  least  two  factors  will  be  decisive:
improved institutional capacity and political will.

With  the  2002  Law  on  the  Council  of  Ministers  important  institutional  innovations  were
introduced.  The  post  of  Chairman  of  the  Council  of  Ministers  is  no  longer  subject  to  eight
month  rotation,  but  may  be  held  for  the  whole  legislative  period.  The  chairman  can  thus
develop  authority,  becoming  effectively  a  prime  minister.  This  should  encourage  long-term
planning and facilitate policy consistency. The law also created a number of auxiliary bodies
such  as  a  General  Secretariat,  a  Legislative  Office,  an  Economic  Committee  and  an  Internal
Policy Committee which should help manage government business more effectively. However,

8

these  are  not  yet  fully  established.  New  State  ministries  were  created,  including  those  for
Justice and Security (important departments under any future SAA). Particularly notable was
the  replacement  of  the  Ministry  of  European  Integration  by  a  Directorate  for  European
Integration (DEI) under the authority of the Chairman of the Council.

In terms of political will, there also seems to be improvement. Admittedly, support for reform
is not universally shared. However, the Council of Ministers has worked to promote consensus.
Governments at both State and Entity levels have taken part in meetings of the Steering Board
of  the  Peace  Implementation  Council  (PIC)  and  have  adopted  strategic  policy  documents
("Reform  Agendas")  covering  issues  such  as  judicial  and  economic  reform,  public
administration,  education  and  defence.  Governments  have  recently  transformed  these
commitments,  and  SAP  reform  requirements,  into  an  Action  Plan  for  the  Implementation  of
Priority  Reforms  from  August  2003  to  March  2004.  This  may  effectively  constitute  a
government  work  plan.  As  such,  it  would  give  direction  over  six  months,  but  medium-term
planning  and  oversight  tools  are  still  needed.  BiH  would  need  to  continue  to  improve  its
executive capacities further if it were to implement a SAA successfully.

1.1.4

Public administration

The  administrative  capacity  required  by  a  SAA  is  less  than  that  expected  of  an  EU  Member
State or a country negotiating membership. Nevertheless, if BiH is to make progress towards a
SAA,  it  must  develop  a  stable  public  administration  based  on  a  clear  legal  framework  and
characterised by efficiency, professionalism and independence.

In  this  respect,  BiH  faces  a  major  challenge.  In  the  March  2003  agenda  for  “Reforming  the
Public Administration”, BiH governments recognised that the BiH public administration does
not  yet  meet  the  expectations  of  all  citizens.  The  administration  is  slow,  unpredictable  and
absorbs too much public money. It is multi-layered, with (sometimes competing) bureaucracies
at State, Entity, cantonal and municipal levels. Its system of remuneration needs to be clarified
and standardised. Staff are poorly trained and ill-equipped to meet the new challenges a SAA
would  imply.  In  administration,  as  in  government,  strategic  planning  and  co-ordination
capacities are limited. These weaknesses are compounded by a history of governments seeing
public administration as a patronage resource. The notion of a professional, non-political civil
service with recruitment and promotion based on experience and merit has had a difficult birth.
At  present,  there  are  still  inadequate  safeguards  against  political  interference  in  public
administration.  Moreover,  independence  needs  to  be  balanced  by  accountability.  Although  a
Law  on  Conflicts  of  Interest  provides  a  first  basis,  a  clear  legal  framework  setting  out
responsibilities  and  establishing  systems  of  accountability  within  the  civil  service  is  still
missing.

Within  BiH,  there  is  now  a  growing  appreciation  of  the  need  to  develop  administrative
capacity. A significant step in this direction was taken with the adoption of Civil Service Laws
at  State  and  Entity  levels,  establishing  a  legal  framework  for  public  administration.  Further,
Civil  Service  Agencies  responsible  for  recruitment,  training,  discipline,  etc.  were  created  at
State  level  and  in  RS;  in  FBiH  the  Agency  has  not  yet  been  fully  established.  A  review  of
State-level civil servants has begun.  Importantly, in March  2003, BiH  governments endorsed
five public administration reform pledges at the PIC. The resulting agenda underlined the need
for structural reform leading to an efficient, non-discriminatory and affordable administration.
Moreover,  the  agenda  acknowledged  the  need  to  pull  together  existing  achievements  with
functional  reviews  in  order  to  produce  a  comprehensive  and  cost-estimated  Action  Plan  for
public  administration  reform  by  autumn  2004  –  a  timetable  which  should  be  maintained.  As

9

follow-up, an inter-governmental Task Force at State and Entity levels was created. So far the
latter has met on a number of occasions, but practical results have been limited.

In  terms  of  European  integration,  particular  needs  appear.  In  general,  there  is  a  low  level  of
understanding of the integration process and of SAA requirements in particular. A SAA would
require the co-ordination of a large number of ministries. Here the leading role has been taken
by  the  new  Directorate  for  European  Integration  which,  though  under-developed,
performed  commendably  well  in  co-ordinating  BiH  responses  to  the  Feasibility  Study
questionnaire. Only in September 2003 did the Directorate receive approval of its Rule Book.
This  should  allow  it  to  reallocate  staff  and  hire  new  personnel,  better  to  address  its
responsibility for strategic analysis, legal harmonisation and aid co-ordination. The DEI must
expeditiously  formulate  overall  policy  on  integration,  communicate  a  strategy  to  other
ministries  and  ensure  a  coherent  national  approach  through  the  adoption  of  a  European
Integration Strategy. The Directorate’s full ability to function is a requirement of considerable
urgency.

1.1.5

Relations with the international community

On the basis of the Dayton mandate, the international community has been deeply involved
in  BiH  since  the  war.  A  NATO-led  Implementation  Force  (IFOR)  and  later  a  Stabilisation
Force  (SFOR)  promoted  military  stabilisation.  OSCE  oversaw  confidence  and  security-
building  measures  and  put  in  place  an  election  programme.  The  UN  agencies  concentrated
inter  alia  on  refugee  returns  and  police  reform.  The  international  financial  institutions
supported  macro-economic  stabilisation  and  development.  Eight  years  from  the  war,  some
international  bodies  have  completed  their  mandates  and  withdrawn.  Those  remaining  have
adapted to changing and generally improving circumstances. In most cases, BiH input has been
positive and has contributed to general improvement.

Of  course,  some  issues  need  further  attention.  The  work  of  the  International  Criminal
Tribunal  for  former  Yugoslavia  (ICTY)  continues.  BiH  co-operation  with  ICTY  has  been
less than satisfactory. In FBiH there are serious inadequacies on the part of the Bosnian Croats.
In RS there has been some, but still inadequate, access to documents and individuals. To date,
RS has not located or arrested one indicted fugitive. Karadzic and others are still at large and
reportedly have large and well organised systems of support.

Police  reform  progressed  well  under  the  UN-led  International  Police  Task  Force  (IPTF)  and
now with good  BiH co-operation is being consolidated through the  work  of  a  three-year  EU
Police Mission (EUPM).

As  BiH  progresses  towards  a  SAA,  it  must  demonstrate  that  the  role  of  the  international
community  within  its  borders  is  moving  towards  one  more  typical  of  other  countries  in
transition. Nowhere is this requirement more relevant than in the case of the Office of the High
Representative  (OHR),  whose  head,  the  "double-hatted"  High  Representative  and  EU
Special  Representative,  plays  a  particular  role  in  BiH.  In  addition  to  his  Dayton-mandated
(annex X) responsibilities, a December 1997 meeting of the PIC gave the High Representative
the  authority  to  impose  legally  binding  decisions  in  BiH.  This  has,  in  practice,  been  used  in
three ways: (i) to enact legislation, (ii) to remove officials from office and (iii) to impose other
binding decisions. Decisions taken in the context of the Bonn Powers have been instrumental
in achieving reform that might otherwise have been delayed or never effected. The number and
nature of  these  decisions reflect  a persistent  BiH unwillingness or inability  to  make  progress
under  domestic  procedure.  They  certainly  raise  justified  questions  about  BiH’s  ability  to
sustain  a  SAA.  Nevertheless,  while  the  "Bonn  Powers"  are  certainly  anomalous  among  EU

10

partner states, their existence in BiH need not automatically exclude that country from moving
towards SAA negotiations. To make this case, BiH needs to give evidence that the powers are
generally declining in relevance and that their use occurs ever less within core SAA areas.

In the period 1997 to late summer 2003 nearly 500 decisions by the High Representative are
recorded. Their number peaked in 2002 with 153 decisions. (Note, however, that the absolute
number  of  decisions  may  not  be  a  reliable  guide  -  one  policy  decision  has  often  required
multiple  implementing  decisions  covering  various  levels  of  governance.)  Interestingly,  while
the period June 2002 to January 2003 saw a total of 101 decisions, the following eight months
(February  to  September  2003)  saw  only  68  -  and  that  without  notably  slowing  the  pace  of
reform.  This  constitutes  a  significant  reduction  on  the  previous  eight  months.  More
importantly, BiH seems to be working increasingly with the High Representative, as opposed
to simply accepting impositions. This is evidenced inter alia by weekly meetings between the
Chairman  of  the  Council  of  Ministers  and  the  High  Representative,  daily  co-ordination
meetings  between  the  two  offices  and  even  by  multi-lateral  meetings  of  concerned  political
leaders  with  the  High  Representative  on  specific  issues  (e.g.  reform  of  the  Council  of
Ministers).  This  co-operation  has  brought  a  gradual  shift  towards  "soft"  decisions,  i.e.
decisions which merely follow up policies already agreed in advance. Further, there is recent
evidence  that  BiH  may  now  be  using  OHR  decisions  to  facilitate  the  domestic  resolution  of
problems. For example, the High Representative's decision to create commissions on indirect
tax policy, on defence and on intelligence has allowed BiH parties to develop draft legislation
enjoying  the  confidence  of  all  sides.  The  timely  adoption  of  this  legislation  by  parliament
would  be  an  important  indication  that  a  culture  of  political  consensus-seeking  may  be
beginning to take hold.

Further, while a SAA clearly requires overall competence in decision-making, it is particularly
important  that  national  decision-making  predominate  in  core  SAA  sectors  such  as  trade,  the
single  market  and  justice  and  home  affairs  (JHA).  Significantly,  the  level  of  imposition  in
economic reform is low. A growing appreciation within BiH of the need for economic reform,
combined with international pressure from the EU, the international financial institutions and
others, appears to have been enough to motivate at least moderate reform. In this, BiH is little
different from many other (pre-) transition countries. Indeed, OHR records indicate that in the
first nine months of 2003, apart from decisions blocking the bank accounts of those suspected
of assisting indicted war criminals, only three decisions were imposed in the field of economic
policy. In the  field of rule of law, the rate of imposition is moderate with 21 decisions taken
between  January  and  early  October  2003,  although  around  a  half  of  these  related  to  the
appointment of international judges and / or prosecutors. Here, it should be noted that reform is
putting in place  a politically  independent  framework  which will in many  cases  adjudicate  on
issues relevant to a SAA. As this structure consolidates, politicians, businessmen and ordinary
citizens should be increasingly constrained by due process and rule of law. The need for OHR
intervention, e.g. in the removal of criminal networks, should therefore also decline.

To  be  a  competent  SAA  partner  BiH  would  need  to  demonstrate  that  the  Bonn  Powers  are
rapidly  becoming  redundant,  permitting  the  High  Representative  to  become  at  most  a
facilitator  and  mediator.  Current  evidence  suggests  that  this  may  be  happening  and  that  the
"push" of the Bonn Powers is gradually being replaced by the "pull" of European (and
euro-Atlantic)  institutions.  BiH  must  now  ensure  that  if  imposition  occurs,  it  is  "soft"  and
that the total number of OHR decisions continues to decline.

11

1.2

Human Rights

Formally,  BiH  citizens  enjoy  all  the  human  rights  and  freedoms  identified  in  the  European
Convention for the Protection of Human Rights and Fundamental Freedoms and its Protocols.
According to the BiH constitution (Art. II.2), these apply directly in BiH and have priority over
all other law. Equal treatment of men and women is guaranteed by law. Also, BiH has ratified
a number of international conventions on human rights (although, its record of reporting to the
international monitoring bodies is poor). In 2002 BiH acceded to the Council of Europe. This
demonstrated progress in establishing democracy and  securing  the  rule  of  law,  but  accession
was accompanied by post-accession requirements on which BiH is still working. It is a concern
that  in  contravention  to  BiH  commitments,  the  RS  constitution  (Art.  11)  allows  the  death
penalty for capital crimes. This is not compatible with EU policy.

1.2.1

Civil, political, social and economic rights

War  in  BiH  led  to  massive  abuse  of  human  rights.  Eight  years  after  the  war,  thousands  of
human  rights  abuses,  including  disappearances,  remain  un-investigated  and  unpunished.
Gradually, however, the return of refugees and the implementation of property legislation have
undone some of the injustices perpetrated in war.

In a landmark decision in summer 2000 the Constitutional Court decided that changes needed
to  be  made  to  Entity  constitutions  in  order  to  protect  the  rights  of  BiH  constituent  peoples.
Subsequently,  constitutional  mechanisms  were  introduced  in  the  Entities  to  equalise  and
protect the rights of each constituent people. Each should now enjoy equality and proportional
representation in political, administrative and judicial institutions. In fact, although legislation
imposing such changes was introduced by the High Representative in 2002, neither Entity has
yet enacted all the required amendments; provisions specifying proportional representation in
public bodies have often been ignored. This can be interpreted as inadequate commitment by
regional government to constitutionally defined civil and political rights.

The  Dayton  agreement,  too,  made  institutional  provision  for  the  protection  of  rights:  an
international Ombudsman, a Human Rights Chamber (HRC) and a Commission for Real
Property Claims (CRPC). According to Ombudsman reports, the most frequent violations of
human rights relate to equality before the law, property rights and right to work. Compliance
with decisions of the human rights institutions remains mixed: FBiH has the best record, while
State and RS authorities still do not execute decisions satisfactorily. Over a protracted period,
the human rights  bodies have had problems  securing domestic funding.  The  mandates  of  the
HRC and CRPC expire at end 2003. The database of the latter will be taken over by the State
Ministry  of  Human  Rights  and  Refugees  and  undecided  claims  will  be  handled  by  domestic
bodies. In the case of the former, responsibilities will be transferred to the Constitutional Court
(which,  it  should  be  noted,  will  need  additional  funding  to  meet  its  new  responsibilities).
Likewise the international Ombudsman should be replaced in 2004 by an institution with three
BiH nationals and funded by the BiH budget. It is expected that the Entity Ombudsmen will be
merged with the State Ombudsman.

The  social  and  economic  rights  of  BiH  citizens  remain  limited  by  continuing  economic
debility. Officially, up to 40% of the  population is unemployed. Around 20% live  below  the
poverty threshold, with a further 30% close to it.  In part this  reflects  a failure of  (admittedly
rudimentary) social security systems to address the needs of the economically most deprived.
The  right  to  belong  to  independent  trade  unions  is  respected,  but  trade  unions  have  been
weakened  by  war,  ethnic  division  and  high  unemployment.  Numerous  strikes  have  been
organised, reflecting mostly  grievances over  unpaid  wages  or  pensions.  The  health  sector  in

12

both Entities remains weak with inadequate funding. Large numbers are not covered by health
insurance,  and  even  for  those  who  are,  coverage  is  unreliable.  Many  rural  areas  are  without
effective medical cover. Parallel health systems persist in FBiH.

BiH  operates  a  law  on  the  freedom  of  information  obliging  governments  to  disclose
information to the public. Despite some isolated incidents, the independence of the media and
freedom  of  expression  are  largely  respected.  The  electronic  media  are  overseen  by  the
independent Communications Regulatory Authority (although the latter has been under threat
from  financial  and  staff  shortages).  The  print  media  are  self-regulated  and  largely  divided
along  ethnic  lines.  Political  influence-peddling  is  limited,  but  can  be  exercised  by  financial
donations to favoured outlets or legal challenges to unfriendly ones. The politically motivated
abuse  of  libel  laws  against  critical  journalists  was  limited  only  through  new  civil  laws  on
defamation.

The  war  and  post-war  economic  weakness  have  disrupted  the  development  of  civil  society.
Following the war, the sector developed mostly on a regional basis, serving local rather  than
BiH-wide needs. Non governmental organisations (NGOs), while numerous, are usually only
locally  active  and  often  dependant  on  international  funding.  Deficiencies  in  their  advocacy
skills constrain their effectiveness and  thus  also  their  influence on  government.  On  the  other
hand,  a  number  of  illiberal  NGOs  of  dubious  provenance  have  been  accused  of  supporting
terrorist  activity.  Improved  inter-NGO  co-operation  was  evidenced  by  participation  in
consultations for the Poverty Reduction Strategy Paper. The role and influence of think-tanks
remains small.

1.2.2 Minority rights and refugees

A  peculiar  dynamic  of  BiH  society  results  from  the  fact  that  none  of  its  constituent  peoples
(Bosniacs, Serbs, Croats or Others) makes up more than 50% of the population. To protect the
“vital  interests”  of  Bosniacs,  Serbs  and  Croats,  complex  constitutional  provisions  have  been
established; there is no such provision for “Others”. Among BiH's “Others”, Roma and  Jews
figure prominently. Roma are the largest group. They have long faced hardship and exclusion,
but the 2002 Law on the Rights of National Minorities and the creation of consultative fora
should safeguard their rights, facilitate political participation and protect minority languages.

BiH  is  further  notable  in  having  guaranteed  to  refugees  and  displaced  persons  the  right  to
reclaim and / or return to their property after the war. Although resistance to returnees persists
in some areas, BiH has recorded some of the most impressive successes in refugee returns in
the region. 14% of the population is still displaced and the effects of “ethnic cleansing” persist
in some areas, but around one million refugees and displaced people have returned to their
pre-war  homes.  Of  these,  just  under  half  are  minority  returnees.  The  establishment  of
sustainable economic and social conditions for these returnees is a continuing challenge. Over
90% of all property claims have now been resolved (with RS catching up with FBiH). As a
result, all property claims could be dealt with by end 2003.

In January 2003 BiH presented to the PIC an "Annex VII (GFAP) Strategy" detailing a transfer
of  responsibilities  for  refugee  returns  to  domestic  institutions.  The  realisation  of  the  strategy
and the sustainability of the return process will depend on political will and the availability of
funding.  Worryingly,  a  number  of  legislative  deadlines  have  been  significantly  delayed,
affecting,  for example,  the  establishment of  a BiH  Return  Fund.  A  further  determinant  is  a
regional  dynamic:  refugees  are  still  scattered  throughout  the  region  and  in  some  cases,  the
return of displaced people to homes within BiH is frustrated by the presence of refugees from
other  countries.  It is essential that  BiH  brings  the  return process to a  successful  conclusion -

13

both on moral grounds and for reasons of self-interest. Failure to complete the process would
send a negative signal concerning BiH ability and will to protect property and investment.

1.3.

General Evaluation

BiH’s  political  weaknesses  are  numerous  and  easily  rehearsed.  The  divisions  that  were  so
clearly  and  tragically  demonstrated  during  the  1992  –  1995  war  have  not  yet  been  entirely
overcome.  Dealing  with  these  divisions  and  securing  a  functioning  state  is  important  in  the
context  of  a  SAA,  as  only  coherent,  functioning  states  can  successfully  negotiate  an
agreement  with  the  EU.  SAA  negotiations  would  require  BiH  to  mediate  its  own  internal
options  and  preferences  in  order  to  present  a  single,  coherent  national  position  to  EU
counterparts. This requirement underlines BiH’s need to create internal consensus and pursue
with urgency and determination further reform of government and administration.

If reform has in the past moved slowly, this has been the result of a failure of political will and
lack  of  reform  “ownership”.  While,  it  is  not  clear  that  this  has  been  definitively  overcome,
there  is  some  evidence  that  a  new  dynamic  may  be  emerging  within  the  BiH  body  politic.
BiH’s contribution to the preparation of this Feasibility Study demonstrated a unity of purpose
and  will  which  seemed  earlier  lacking.  Further,  the  work  of  the  reform  commissions  on
indirect taxation and other issues, if successful and crowned with legislative approval may be
evidence  of  an  emerging  culture  of  political  consensus.  This  is  a  prerequisite  for  self–
sustaining, BiH-driven reform.

2.

ECONOMIC CRITERIA

Respect  for  market  economy  principles  should  be  the  basis  for  the  domestic  and  external
policies of the parties to a SAA. This entails a stable macro-economic environment supported
by  reliable  macro-economic  institutions,  a  comprehensive  liberalisation  of  prices  and  trade
and  the  creation  of  a  strong  private  sector  on  the  basis  of  a  stable  legal  and  regulatory
framework.

2.1

Economic Situation and Fiscal Sustainability

After the war, which left BiH GDP at around 20% of its pre-war level, a significant economic
recovery set in. Between 1996 and 1999 real GDP growth,  fuelled by external reconstruction
aid  of  about  €5  billion,  averaged  above  30%.  However,  BiH  has  been  unable  to  mobilise
adequately  domestic  sources  of  growth,  particularly  private  sector  activity,  and  since  2000
annual growth has slowed to around 5%. For 2003 it is estimated at 3.5%, with GDP still at
around 60% of the pre-war level. Even assuming continued average growth of 6%, the pre-
war  GDP  level  would  be  reached  only  in  2011.  BiH  economic  data  should,  however,  be
interpreted  cautiously,  as  statistics  are  unreliable  and  a  large  informal  economy  distorts  the
picture.

On the external sector  side,  BiH  has  always shown large imbalances since the war. Between
1996 and 1999 trade deficits averaged around 50% of GDP and about 34% between 2000 and
2002. During reconstruction such deficits may be justified by imports linked to reconstruction
aid. However, continuing large imbalances may indicate a structural problem, e.g. inadequate
productive and export capacity. Current account deficits also persist: on average above 25% of
GDP in 1996 - 1999, and 16% of GDP in 2000 - 2002 despite large remittances from abroad
(at around 10% of GDP annually). For 2003, owing to some monetary policy tightening agreed
with  the  International  Monetary  Fund  (IMF),  the  current  account  deficit  should  be  around
17.5% of GDP. In the past, BiH has not attracted large flows of foreign direct investment (FDI

14

-  only  around  €100  million  per  year  until  2001);  however  recent  efforts  to  improve  the
investment climate by increasing transparency and reducing administrative barriers led in 2002
to a doubling of FDI (to around €200 million), and this should continue in 2003.

As  foreseen  by  the  Dayton  agreement,  a  currency  board  arrangement  was  established  in
1997. This has moderated inflationary pressures and led to general acceptance of the common
currency, the Convertible Mark (KM) which is pegged to the euro. BiH inflation is estimated at
around  zero  in  2003.  An  earlier  significant  inflation  differential  between  the  Entities  has
converged at a low level: in FBiH inflation has been below 2% for the past three years and has
consistently decelerated in RS owing to increased economic integration between the Entities.
In line with the current IMF programme the Currency Board will remain in place.

Fiscal  policy  has  evolved  positively.  From  high  government  deficits,  poor  revenue
performance, large off-budget expenditures, payment arrears and high military spending, BiH
(essentially the Entities) has achieved significant fiscal consolidation. The consolidated fiscal
deficit  (including  grants)  fell  from  7.8%  of  GDP  in  1998  to  2.2%  in  2002,  and  should  be
almost  balanced  in  2003.  Foreign  financing  of  the  budget,  mostly  through  grants  or
concessional  loans thus  fell from  17%  to  9%  of  GDP  over  the  same  period  (still  the  highest
share in the Western Balkans). Public spending as a percentage of GDP remained very large
at  51%  in  2002,  although  declining.  The  revenue  base  of  the  Entities  is  narrow,  deriving
mostly from indirect taxes (sales and customs). The tax burden is one of the highest in Europe.
The State budget, lacking own revenues, has depended largely on Entity transfers to meet its
main responsibility, foreign debt service.

As for public finances, the reform of tax and customs administrations with assistance from the
Customs  and  Fiscal  Assistance  Office  (CAFAO),  has  improved  collection  and  led  to  the
harmonisation of indirect tax rates. Some effort has been made to  fight  corruption, but  much
more  needs  to  be  done.  The  management  of  public  expenditure  has  improved.  In  1999  a
Medium  Term  Expenditure  Framework  system  was  introduced  (although  this  highlighted
under-developed programming capacities). The closure of the Payment Bureaux in 2001 paved
the  way  for  the  gradual  introduction  of  a  Treasury  system,  currently  being  implemented  and
extended to sub-Entity administrations, while the Supreme Audit Institutions (SAI) established
in  2000  at  all  levels  have  gradually  improved  the  transparency  of  operations  in  budgetary
institutions. Nevertheless, the fiscal situation remains fragile and needs further attention. Off-
budget  fiscal  resources  and  expenditures  persist,  especially  in  cantons  and  municipalities.
Payment  arrears  still  occur,  and  the  extremely  decentralised  administrative  structure  is  both
cumbersome  and  costly.  The  SAI  reports  recently  revealed  weaknesses  with  some  of  the
internal  control  functions  of  the  budgetary  process;  these  have  to  be  addressed.  The
institutional  capacity  for  medium-term  (multi-annual)  budgetary  planning  needs  to  be
reinforced.

2.2

Price and Trade Liberalisation

Price  liberalisation,  an  Entity  responsibility,  has  progressed.  Most  prices,  including  interest
rates  but  excepting  some  selected  public  services  and  primary  products  (such  as  wheat  and
medicines),  have  been  liberalised.  More  than  95%  of  prices  for  goods  and  services  are
apparently set by the market. Full exchange rate convertibility was achieved in 1998 with the
creation of the Currency Board.

Trade liberalisation has progressed. BiH applied for WTO membership in May 1999 and this
process is ongoing. It has also concluded bilateral Free Trade Agreements (FTAs) with all the
western Balkan countries, plus Slovenia, Rumania, Bulgaria and Moldova (while talks with the

15

UN  Mission  in  Kosovo  are  under  consideration).  The  EU  is  the  main  trading  partner,
accounting for more than 50% of BiH's external trade.

2.3

Privatisation Process

large  strategic  enterprises 

The  institutional  and  legislative  framework  for  privatisation,  managed  at  Entity  level,  was
completed  as  early  as  May  1998.  However,  privatisation  gathered  momentum  only  in  2000,
with most progress limited to small-scale enterprises. As of 2002, 70% of FBiH companies had
been sold and 47% in RS. In terms of method, voucher privatisation has now been completed.
For  large  enterprises  (with  more  than  50  employees  or  around  €260,000),  privatisation  has
been slower: at end 2002 only 24% in FBiH and 42% in RS. The greater difficulty has  been
with 
tobacco  plants,  car  parts).
Notwithstanding international support, at end 2002 only 17 of 56 strategic companies had been
sold in FBiH and 4 out of 52 (80 if holding companies are counted) in RS.  Lack of political
will, social concerns, large enterprise debt,  problems of corporate  governance and  corruption
have  all  discouraged  potential  foreign  investors  (who  have  been  more  attracted  by  potential
privatisation in Croatia or Serbia and Montenegro). As a result, in 2001 only 40% of GDP was
in private hands, well below the 53% average for the western Balkans. This helps explain the
lack of domestically generated growth in BiH.

refineries, 

(mining, 

2.4

Financial Sector Reform

Banking sector reform was initially slow, but has  recently progressed  faster.  Legislation  on
privatisation and liquidation of insolvent banks has been in place since 1998, but due mostly to
political resistance and limited interest from foreign investors, the target of privatising all (63)
banks by  August 2000  was missed  (but  extended to end 2002  and  again  until  August  2003).
The Payment Bureaux were abolished in January 2001. Bank privatisation is now complete in
RS, while the six remaining state-owned banks in FBiH are currently in resolution procedures.
Due to consolidation and increased  competition, the banking sector now  comprises 37 banks
(27 in FBiH and 10 in RS). It has a large foreign presence (around two thirds of total private
capital in FBiH), notably from Austria, Croatia and Slovenia. Starting in 2001 with a gradual
increase  in  minimum  capital  requirements  to  ensure  viability  and  subsequently  with  the
creation  of  a  State  Deposit  Insurance  Agency  operational  from  August  2002,  the  banking
sector's legal, regulatory and supervisory framework has improved.

Despite this encouraging record, long-term lending to the private sector remains very low
in  part  due  to  the  short-term  nature  of  deposits.  Thus,  banks  still  have  an  under-developed
inter-mediation role, although their potential is considerable. Moreover, although interest rates
have  fallen,  they  remain  high  by  European  standards  and  the  spread  between  deposit  and
lending  rates  is  large  (around  four times  EU  figures  and  twice  those  of  candidate  countries).
High  bank  commissions  reflect  a  strong  risk  perception  and  indicate  that  banking  sector
efficiency  could  be  improved.  In  early  2002  stock  exchanges  opened  in  both  Entities,  but
market capitalisation remains insignificant.

2.5

General Evaluation

In general, BiH has developed sound macroeconomic policies and made some progress with
structural  reform.  Nevertheless,  risks  to  macro-economic  stability  remain.  Against  the
background of declining foreign assistance, high current account deficits and a persistent lack
of  self-sustaining  domestic  growth  (hampered  by  weak  corporate  governance  and  labour
market rigidities) could endanger currency stability with potential effects on inflation and the
sustainability  of  debt  servicing.  On  the  fiscal  front,  public  expenditure  still  concentrates  on

16

current rather than investment spending. Also, external public debt is on a downward trend, but
domestic public debt, which includes arrears, war damages and frozen currency deposits, has
not yet been fully quantified.

Eight years after the end of the war BiH has not reached its pre-war level of GDP. With around
€1,300  per  capita,  GDP  is  still  one  of  the  lowest  of  the  region  after  Kosovo.  The  major
challenge in the coming years is to achieve self-sustaining economic development based on
strong  private  sector  growth,  increased  exports  and  further  fiscal  consolidation,  especially  as
foreign  assistance  declines.  Economic  growth  coupled  with  the  reduction  of  wasteful
expenditure would provide the resources for the institutional reform BiH needs. Although BiH
is  still  not  a  fully  functioning  market-economy,  it  has  taken  important  steps  in  economic
reform and gone some way to meeting the prerequisites for starting SAA negotiations.

3.

ABILITY TO ASSUME THE OBLIGATIONS RESULTING FROM A SAA

The SAP  has  been in  operation  in BiH  since  1999.  BiH's  initial  response  to  the  process  was
slow  and  low-key.  BiH  had  difficulty  even  in  completing  the  relatively  undemanding  Road
Map. In some cases, legislation when adopted was not properly implemented. Recently, fresh
determination  seems  to  be  in  evidence.  BiH  seems  to  have  taken  seriously  the  annual  SAP
reports  and  their  recommendations  concerning  priority  areas  needing  attention.  Progress  has
been made in meeting these recommendations.

3.1

Political Dialogue

Political dialogue in the context of a SAA would aim to increase convergence between EU and
BiH foreign policies and promote common views on security and stability in Europe.

In many foreign policy areas EU  and BiH  positions  are already  comparable  and  compatible.
On major contemporary issues such as regional security and development, anti-terrorism, etc.
BiH  and  EU  positions  converge.  Further  convergence  seems  probable  given  ongoing
parliamentary contacts and the June 2003 Thessalonica decision to establish a high-level EU-
Western  Balkans  Forum  and  the  invitation  to  BiH  and  others  to  align  themselves  with  EU
demarches,  declarations  and  Common  Positions.  In  September  2003,  as  follow  up  to
Thessalonica proposals, a Joint Declaration on Political Dialogue between the EU and BiH was
also  adopted.  Its  implementation  will  intensify  political  relations  and  should  reinforce  the
convergence of positions. There will be a number of substantive issues to discuss.

Recently,  differences  have  arisen  over  policy  vis-à-vis  the  International  Criminal  Court
(ICC).  BiH  is  a  party  to  the  agreement  on  the  Court,  but  in  June  2003  it  also  acceded  to  a
bilateral agreement with the US granting all US citizens and all serving and former US military
personnel  in  BiH  (including  non-US  citizens)  immunity  from  extradition  to  the  ICC.  The
agreement failed to meet the terms of the relevant September 2002 EU Common Position. A
pattern of policy choices such  as  this  which  do  not  follow  established  EU  policies  would  be
difficult to reconcile with the privileged position implied by a SAA.

Other developments will in future figure in dialogue. In 2002 the RS military were found to be
maintaining illegal surveillance on SFOR; similar activities are suspected on the part of FBiH
intelligence services. During 2002 and 2003 it became clear that RS, in contravention of a UN
weapons  embargo,  had  commercial  contacts  with  the  Ba'athist  regime  in  Iraq.  These  actions
were  both  in  contravention  of  existing  commitments  and  incompatible  with  BiH's  wider
political and diplomatic policies. They suggest that BiH's undoubted official will to converge

17

with EU positions still needs to be reinforced by structural and systemic  adjustment.  It is the
convergence  of  individual  positions  rather  than  simple  declarations  which  will  indicate  the
extent to which BiH is committed to alignment with the EU CFSP.

3.2

Regional Co-operation

Under the SAA Bosnia and Herzegovina would commit  itself to  active  promotion  of regional
co-operation.  It  would  be  required  within  two  years  of  signature  to  conclude  with  all  other
SAA signatories bilateral conventions with provisions on free trade, political dialogue, mutual
concessions  on  the  movement  of  workers  and  supply  of  services,  co-operation  in  justice  and
home affairs, etc.

As  a  small  state  surrounded  by  neighbours  which  have  in  the  past  had  pretensions  on  its
territory  and  with  whom  its  shares  ethnically  identical  populations,  BiH's  domestic  politics
remain  unusually  sensitive  to  regional  attitudes  and  developments.  Arguably,  more  than  in
other states, BiH profits from a benevolent regional environment  and suffers from a negative
one.  Certainly,  the  demise  of  the  Milosevic  and  Tudjman  regimes  has  created  a  more
favourable  macro-environment  for  BiH.  "Active  and  constructive  development  of  relations
with  neighbouring  countries",  with  a  focus  on  Serbia  and  Montenegro  and  Croatia,  is
unsurprisingly one of BiH's foreign policy priorities. In this context, BiH can justifiably claim
progress: there is a clear trend towards normalisation. In July 2002 the first summit of heads
of state of  BiH,  Croatia and the  Federal Republic of Yugoslavia took place in Sarajevo. The
meeting  resulted  in  a  joint  declaration  reaffirming  the  inalterability  of  borders  and  further
efforts to develop regional co-operation.

Regime change in Serbia and Montenegro has facilitated improved relations with Belgrade.
Both countries now meet regularly in an Inter-State Co-operation Council. They have reached
agreement on issues such as economic co-operation, infrastructure, the  protection of citizens'
rights  and  double  citizenship.  A  free  trade  agreement  is  in  force,  consolidating  Serbia  and
Montenegro's position as a leading trade partner. Unsurprisingly, some tensions persist: a case
against the Federal Republic of Yugoslavia (now Serbia and Montenegro) for alleged genocide
continues at the International Court of Justice, and leading Serbian politicians have (despite the
2002 Sarajevo summit) occasionally questioned  BiH's territorial integrity. A  “special  parallel
relationship"  between  RS  and  Serbia  continues,  but  does  not  seem  to  hinder  inter-state
relations.  Following  the  murder  of  Serbian  Prime  Minister  Djindjic  in  2003,  tensions  arose
between  Belgrade  and  Banja  Luka  over  follow-up.  This  contributed  to  a  growing  realisation
that the interests of Belgrade and Banja Luka are not identical.

Relations with  Croatia  are  no  less  important.  An  indication  of  connection,  inter-dependence
and regional dynamics  can be seen  in the fact that some 21,000 Croatian  Serbs  with  refugee
status  still  reside  in  BiH,  occupying  property  in  RS.  The  return  of  these  refugees  to  Croatia
would facilitate a  resolution of  the  problems  of  remaining  internally  displaced  people  within
BiH. In general, relations with Croatia have stabilised and gradually improved. The latter has
renounced all territorial claims on BiH (including any "special parallel relationship") and has
discouraged  BiH  Croat  separatism.  Croatia  has  taken  a  robust  and  supportive  attitude  to  the
prosecution of corruption (cf. Hercegovacka Banka). A FTA with Croatia, which accounts for
25% of BiH exports, became effective in January 2001. An outstanding issue relates to the port
of Ploce and transit through Neum.

Similar improvements have been noted in relations with other countries of ex-Yugoslavia. BiH
has met its Stability  Pact commitment  to negotiate free trade agreements with  all  its western
Balkan  neighbours  by  December  2002  -  thus  already  meeting  a  future  SAA  requirement

18

(although  technical  incapacities  could  yet  cause  difficulties  –  cf.  section  3.3.)  Other  SAA
requirements in relation to bilateral conventions, particularly the requirement for regional co-
operation,  should  not  pose  great  difficulties,  as  BiH  has  assiduously  promoted  co-operation
within  the  region.  In  2003  BiH  assumed  the  chair  of  the  South  East  Europe  Co-operation
Process (SEECP) and has placed particular emphasis on issues of justice and rule of law. BiH
also participates in the Southeast Europe Co-operation Initiative (SECI), the Central European
Initiative (CEI) and other regional initiatives.

3.3

Free Movement of Goods

Ensuring  free  movement  of  goods  is  one  of  the  main  objectives  of  an  association  agreement
with the EU. In the framework of a future SAA, BiH would need gradually to establish a free
trade  area  with  the  Community  within  a  transitional  period  to  be  determined  during
negotiations.  The  free  trade  area  would  have  to  be  in  conformity  with  relevant  WTO
provisions. In particular, BiH would have to abolish any quantitative restrictions or measures
having  equivalent  effect  and  progressively  dismantle  tariffs  on  essentially  all  trade  with  the
EU. BiH customs would need to be able to police and safeguard the trade regime.

BiH would forego the introduction of any new duties, restrictions or measures with equivalent
effect  in  trade  with  the  Community.  Under  the  EC’s  autonomous  commercial  preferences
currently  granted  to  BiH,  the  latter  is  already  subject  to  a  standstill  obligation  on  import
duties  and  measures  having  equivalent  effect.  BiH  would  also  be  required  to  abolish  any
domestic  tax  measure  or  practice  discriminating  directly  or  indirectly  against  EU  products.
Moreover, BiH's trade arrangements with third parties would have to be conducted in such a
way that they did not result in discrimination against the EU.

The free movement of goods has at least two dimensions for BiH - one internal and the other
external.  It  is  significant  that  while  almost  all  BiH  political  leaders  favour  access  to  the  EU
market, some have been less enthusiastic about advancing the integration of BiH's own internal
market. "Removal of all trade barriers between the Entities" was a Road Map requirement, but
an  integrated  BiH  market  has  evolved  only  slowly.  While  the  most  egregious  physical
barriers to trade have been eliminated, further effort is needed to deal with constraints such as
multiple  customs  regimes,  differing  technical  requirements,  double  registration  requirements
and differing technical specifications.

Trading  relations  with  the  EU  are  currently  defined  by  the  Community's  September  2000
Autonomous Trade Measures (ATMs - Council Regulation (EC) No. 2007/2000). This allows
more than 95% of all imports (including agricultural produce) originating in BiH to enter the
EU duty- and quota-free. In some ways, BiH is well positioned to accommodate a FTA with
the  EU:  a  unified  customs  tariff  has  applied  since  1999;  most  quantitative  restrictions  have
been eliminated and the BiH nomenclature of goods is fully harmonised with that of the EU.
The tariff structure consists of four tariff categories (from 0% to 15%) with a simple average of
6.4%.  Given  the  FTAs  which  BiH  has  already  concluded  and  the  fact  that  a  SAA  would  be
concluded with an enlarged EU, 90% of BiH trade would in fact be free at the end of a SAA
transition  period.  (Customs  revenues  would  consequently  be  significantly  reduced  unless
measures  were  taken  to  differentiate  the  revenue  basis.)  Despite  the  above,  available  data
suggest that trade with the EU over 2001 - 2002 remained fairly static: BiH exports to the EU
were  worth  around  €0.6  billion  and  EU  exports  to  BiH  around  €1.3  billion.  In  other  words,
over these years BiH was unable to take full advantage of the EU's liberalised trading regime
to increase exports.

19

Technical  capacities  are  part  of  the  problem.  BiH  cannot  yet  adequately  certify  potential
exports as meeting Community minimum standards. Even in the case of the FTAs which it has
already  signed,  BiH  may  have  difficulties.  In  some  cases  these  agreements  specify  WTO
standards  and  state-level  certification  capacities  which  BiH  does  not  yet  possess.  Other
technical adjustments are required: BiH needs to complete customs reform (cf. section 3.7.4.1)
and  improve  its  ability  to  ensure  the  authenticity  of  its  certificates  of  origin.  It  needs  to
implement the TIR agreement which it signed in the mid 1990s. Further, inconsistencies in the
formulation  and  operation  of  legislation  need  to  be  addressed:  the  sometimes  mutually
contradictory provisions of the laws on Foreign Trade Policy, on Customs Policy and on Free
Zones need to be tackled. BiH must ensure that free zones no longer provide unregulated back-
door  entry  to  the  BiH  market,  potentially  undermining  any  preferential  access  that  would  be
granted to the Community.

More  generally,  BiH  still  lacks  a  clear  and  comprehensive  trade  policy.  There  is  a  lack  of
proper analysis because of the absence of reliable data on domestic production, supply needs,
etc. There also appears to be little appreciation of the implications of WTO membership. The
Ministry  of  Trade  and  Foreign  Economic  Relations  (MOFTER)  lacks  human  and  material
resources.  Co-ordination  of  trade  policy  with  the  Entities  is  inadequate.  BiH  would  have  to
make significant further progress to meet the exacting standards implied by a SAA.

3.3.1

Trade in industrial goods

BiH  has  a  trade  deficit  with  the  EU.  Declining  manufacturing  has  meant  falling  export
capacity  even  in  traditional  products  such  as  clothing,  textiles,  leather  and  wood  products.
Since BiH exports tend  to  have  lower  value-added  and  concentrate  mostly  on  raw  materials,
BiH  is  exposed  to  global  commodity  price  changes  over  which  it  has  little  or  no  control.
Conversely, the trade deficit is made worse by limited and poor quality domestic production.
This, combined with strong domestic demand, has driven up import volumes.

The fact that, even with the asymmetrical ATMs, BiH has not been able to take full advantage
of  liberalised  trade  with  the  EU,  indicates  the  extent  of  the  challenge  BiH  faces.  Beyond
remedying  the  technical  weaknesses  mentioned  above,  BiH  needs  to  improve  industrial
competitiveness through better corporate governance, better access to finance and better skills.
It needs infrastructure providing information and support services to potential exporters. Also,
like other countries in transition, it needs to effect a  structural change towards an  economy
with  higher  value-added  in  export  goods  and  services,  especially  in  intra-industry  trade  with
EU companies.

3.3.2

Trade in agricultural goods

Agriculture is an important component of the BiH economy, accounting for roughly 12% of
GDP.  With  favourable  climatic  conditions  and  fertile  soil,  BiH  should  be  able  to  develop
significant  export  potential.  Unfortunately,  however,  agricultural  infrastructure  is  weak,  the
quality  of  many  BiH  products  low  and  marketing  capacities  limited.  These  difficulties  were,
until  recently,  compounded  by  the  absence  of  a  State  Veterinary  Office;  this  has  now  been
created but is not yet fully operational. The framework and system for implementing sanitary
and phyto-sanitary standards is weak. Since BiH has been unable to comply with EC Food and
Veterinary Office recommendations, it has been unable to export animals or animal products to
the EU.

20

To accommodate the challenges of a SAA in the agricultural sector, BiH needs a programme
of  structural  adjustment  based  on  a  coherent  agricultural  policy  which  identifies  and
prioritises reform. To realise its export potential and exploit the EU’s open market, BiH needs
to  align  its  veterinary  and  phyto-sanitary  legislation  rapidly  on  that  of  the  EU.  It  needs
laboratories  and  certificate  bodies  able  to  certify  compliance  of  agricultural  goods  with  EU
acquis in this domain. Also, given ongoing WTO accession preparations, BiH must ensure that
it can live with minimum duty levels on sensitive agricultural imports in line with WTO rules,
while at the same time developing its own agricultural sector.

3.4

Movement of Workers, Establishment, Services, Capital

3.4.1 Movement of workers

A SAA would require both the EU and BiH to ensure non-discrimination as regards working
conditions,  remuneration  and  dismissal  of  workers  who  are  legally  established  in  their
respective territories. The legally resident spouse and children of a worker legally employed in
the  EU  or  BiH  would  have  access  to  the  labour  market  during  the  period  of  the  worker's
authorised  stay.  Furthermore,  the  EU  would  be  required  to  apply  rules  on  co-ordination  of
social security systems to BiH nationals legally employed in the EU and to members of their
family  legally  residing  with  them.  For  certain  rules,  BiH  would  also  have  to  grant  similar
treatment to EU nationals legally employed in BiH and to their family members residing with
them.

Under  separate  Entity  laws,  foreign  nationals  legally  residing  in  BiH  may  have  access  to
employment. Nevertheless, such access may be subject to the granting of a work permit and in
most  cases  preference  is  given  to  nationals.  Thus,  BiH  does  not  yet  ensure  complete  non-
discrimination for EU workers legally residing in BiH. Moreover, the requirement to apply co-
ordinated  rules  on  social  security  for  EU  workers  could  be  a  challenge,  insofar  as  the  BiH
social security system remains rudimentary and fragmented.

3.4.2

Establishment

Under a SAA BiH would be required to grant EU companies the right of establishment. This
right would be reciprocal. EU companies established in BiH should be granted either national
treatment or MFN treatment, whichever is more favourable. Following a transition period, the
issue of extending these rights to EU or BiH nationals wishing to establish themselves as self-
employed  persons  would  be  examined.  Notwithstanding  the  provisions  governing  the  free
movement  of  workers  under  the  agreement,  special  establishment  provisions  could  be
introduced for “key personnel”.

Formally,  BiH  operates  a  liberal  regime  on  establishment.  EU  companies  may  already
establish themselves and operate within BiH on the basis of national treatment. They have the
right  to  acquire  land  and  property  on  the  same  basis  as  BiH  nationals.  That  more  EU
companies have not established reflects lingering  concerns  over  stability,  a  perceived lack of
business  opportunity  and  the  fact  that  business  registration  is  complicated  -  for  everybody.
Under  the  "Jobs  and  Justice"  reform  agenda,  BiH  pledged  to  cut  business  registration  to  15
days by establishing a single business registry system. This reform needs to be complemented
by further reforms such as the introduction of harmonised land registry systems which would
build confidence in ownership.

21

A  SAA  could  include  provisions  allowing  a  future  Stabilisation  and  Association  Council  to
establish modalities extending the right of establishment to nationals of both Parties, including
the taking up of economic activities as self-employed persons. The eventual negotiation of this
right would have to take account of migratory pressures.

3.4.3

Trade in services

A  future  SAA  would  provide  for  the  progressive  and  reciprocal  liberalisation  of  trade  in
services, consistent with relevant WTO rules, in particular Article V of GATS. Companies not
established  in  the  territory  of  the  other  party  would  gradually  acquire  the  right  to  provide
services,  in  accordance  with  the  GATS  provisions  and  taking  account,  in  particular,  of
progress in legal approximation in the various fields. The implementation of this liberalisation
would be monitored under the agreement, notably as regards financial services.

The  BiH  Law  on  Foreign  Trade  Policy  specifies  national  treatment  for  foreign  service
providers on the BiH market, although this may be subject to  the requirement  to establish a
legal entity within the country. Established foreign service providers  are, however, subject to
the  same  regulation  and  tax  regime  as  BiH  nationals.  The  only  other  formal  constraint  on
foreign investment in services relates to media (where foreign ownership is restricted to 49%).
BiH's relatively liberal approach to service provision is demonstrated by the extent of foreign
banking within BiH and the presence of foreign companies in the transport and courier services
sector.

While  service  provision  is  in  theory  liberalised,  in  practice  service  provision  has  been
complicated  by  an  economy  still  divided,  in  some  sectors,  along  Entity  lines.  For  example,
while  there  is  a  supervisory  banking  agency  at  State-level  and  a  BiH  independent  deposit
insurance  agency,  there  is  no  unified  capital  market.  Further,  the  insurance  market  is
fragmented: FBiH has an independent Insurance Office with supervisory function, while in RS
supervision  is  conducted  by  the  Ministry  of  Finance.  BiH  would  need  to  address  these
limitations if a SAA is to become fully operational.

3.4.4

Current payments and movement of capital

In  the  framework  of  a  SAA,  BiH  would  commit  itself  to  progressive  liberalisation  of  both
inward  and  outward  movement  of  capital,  in  particular  for  direct  investments.  Protection  of
investors as regards liquidation and repatriation of investments and profits would also need to
be covered. After a transition period the Stabilisation and Association Council could determine
modalities for the full application of Community rules on the movement of capital.

Foreign investment in BiH is governed by a Law on Foreign Direct Investment Policy. This
eliminates  barriers  to  most  investment  in  BiH,  the  exception  being  a  limit  of  49%  of  share
capital for foreign investment in military-related companies or the media sector. These residual
restrictions  would  not  be  a  problem  in  an  SAA  context  (and  the  former  is  a  legitimate
exception to  the  respective  freedom  within  the  EU).  Moreover,  foreign  investment  in  BiH  is
governed  by  a  "Stability  Clause"  which  allows  investors  to  select  the  legal  regime  that  will
apply in the event of amendments to laws or regulations on foreign investment. This ensures
that investor rights cannot be abolished, only enhanced.

The clearing system in BiH has advanced to a point where it is comparable to that of modern
international  banking.  Domestic  payment  transactions  within  BiH  are  effected  through
commercial  banks  and  the  Central  Bank  as  the  settlements  agent.  Foreign  transactions  are
conducted through commercial banks. While there are some constraints on foreign transactions

22

by  individuals  and  non-residents,  legal  entities  may  effect  transfers  abroad  and  may  transfer
funds  following  the  partial  or  complete  liquidation  of  investments  in  BiH  –  although  this  is
subject  to  "the  necessary  documentation".  In  addition,  it  appears  inconsistent  that  exchange
rate  policy  is  set  by  the  Central  Bank,  while  exchange  control  authorisation  operates  at  the
Entity  level.  In  SAA  negotiations  this  would  complicate  the  task  of  identifying  which
operations are free and which not.

3.5

Approximation, Implementation and Enforcement of Legislation

A  SAA  would  include  provisions  on  the  gradual  approximation  of  existing  and  future  BiH
legislation  to  that  of  the  Community.  BiH  would  have  to  ensure  that  from  the  date  of  SAA
signature,  approximation  would  begin  to  extend  to  all  elements  of  the  Community  acquis
referred  to  in  the  agreement.  This  would  apply  particularly  to  key  areas  of  internal  market
legislation  and  trade.  BiH  would  thus  have  to  agree  binding  deadlines  for  harmonisation  in
areas  such  as:  competition,  intellectual,  industrial  and  commercial  property,  public
procurement, standards and certification and consumer protection.

Although BiH has already expressed a willingness to approximate to, implement and enforce
EU  legislation,  its  ability  to  do  so  is  complicated  by  the  division  of  powers  between  State,
Entities and cantons. To  implement  properly  a  SAA,  BiH  would  need  to  ensure  an  adequate
mechanism for co-operation and  co-ordination between the  Entities  in  areas  of  responsibility
not vested in the State. In each case there would need to be a unified position vis-à-vis the EU.
In  terms  of  implementation  and  enforcement,  this  would  need  to  be  both  effective  and
consistent in all parts of BiH.

3.5.1

Competition

Under a SAA,  BiH  would  refrain  from  any  measures  adversely  affecting  fair  competition.  In
particular, it would prohibit: (i) all agreements between undertakings and concerted practices
which  prevent,  restrict  or  distort  competition;  (ii)  abuse  by  one  or  more  undertakings  of  a
dominant  position,  (iii)  any  public  aid  which  distorts  or  threatens  to  distort  competition  by
favouring  certain  undertakings  or  certain  products.  BiH  would  commit  itself  to  ensure
transparency  in  the  area  of  state  (i.e.  public)  aid  inter  alia  by  establishing  a  comprehensive
inventory of aid schemes and by reporting annually on the total amount and the distribution of
the aid given. It would also provide, upon request, information on particular cases.

The implementation of competition legislation has been on the BiH agenda since at least early
2000  when  the  Road  Map  advocated  the  adoption  of  a  Competition  Law.  The  law,  now
compatible  with  Community  models,  was  finally  enacted  in  December  2001.  Since  then  the
law  has,  however,  remained  inoperative  because  a  Competition  Council  and  related  units  at
Entity level have not yet been established.

In  the  area  of  state  (public)  aids,  BiH  falls  significantly  short  of  future  SAA  requirements.
The existing competition law contains no provisions on state aid - and indeed no aid is given at
State level. Nevertheless, the Entities provide public assistance either to enterprises or sectors
(e.g.  mining  in  FBiH  and  agriculture  in  RS).  So  far  there  is  no  authority  overseeing  this
assistance, no inventory of aid and no systematic reporting. Under a SAA this would need to
be rectified.

23

3.5.2

Intellectual, industrial and commercial property

Before  the  end  of  a  transition  period,  BiH  would  need  to  ensure  effective  protection  and
enforcement  of  intellectual,  industrial  and  commercial  property  rights,  including  protection
against counterfeiting and pirating. BiH would need to guarantee a level of protection similar
to  that  existing  in  the  Community.  It  would  also  need  to  accede  to  a  number  of  multilateral
conventions to which EU Member States are party or which are applied in the Community de
facto.

Although  BiH  has  already  acceded  to  a  number  of  international  conventions  (e.g.  the  World
Intellectual Property Organisation), it is currently poorly placed to meet the requirements of a
future SAA. Laws on industrial property and on copyright and related rights exist and an
Institute for Standards, Metrology and Intellectual Property is partly operational. Nevertheless,
forgery and piracy are widespread. Unhelpful popular attitudes toward piracy, imprecision in
existing laws, a lack of qualified institutional staff (nobody currently covers copyright issues),
limited  technical  resources,  a  lack  of  specialised  courts  and  poor  co-ordination  with
enforcement  agencies  mean  that  BiH  is  currently  unable  to  provide  acceptable  protection  in
this  area.  This  weakness  already  contributes  to  BiH's  persistent  failure  to  attract  foreign
investment. On current form, BiH would find it difficult to meet this SAA requirement.

3.5.3

Public procurement

Under  a  SAA,  BiH  would  be  required  to  ensure  that  EU  companies  could  bid  for  public
contracts  on  the  same  basis  as  those  from  BiH.  BiH  would  need  progressively  to  align  its
public procurement legislation on that of the EU. It would also need to strengthen the relevant
institutions  and  judiciary  in  order  that  public  procurement  procedures  are  properly
implemented.

BiH still lacks State-level  public procurement legislation. Currently, procurement  is carried
out  on  the  basis  of  separate  State,  Entity  and  Brcko  District  legislation.  Separate  legal
instruments  with  differing  legal  status  mean  that  BiH’s  public  procurement  framework  is
insufficiently  robust  to  provide  for  a  clear,  rules-based  environment  compatible  with  EU
acquis. However, a State-level Public Procurement  Law  compatible with  EU  legislation  is in
preparation.  The  law  foresees  a  new  public  procurement  agency  and  a  procurement  review
body.  In  this  area  BiH  would  need  to  ensure  that  legislation  is  complemented  by  adequate
financial and technical resources that can ensure effective implementation. Trained personnel
would  be  required  for  both  the  agency  and  the  review  body.  An  adequately  trained  and
specialised judiciary would also be necessary.

3.5.4

Standardisation and conformity assessment

To comply with a SAA, BiH would need gradually to achieve conformity of its legislation with
EU  technical  regulations  and  with  practices  of  European  standardisation,  metrology,
accreditation and conformity assessment. In particular, it would be required to: (i) foster the
development  of  a  standards,  certification  and  quality  infrastructure,  (ii)  promote  the  use  of
technical regulations and conformity assessment procedures compatible with Community rules
and  procedures,  (iii)  promote  BiH  participation  in  the  work  of  relevant  European  and
international organisations, (iv) when appropriate, conclude agreements with the EC and the
European Economic Area (EEA) on conformity assessment and the acceptance of products.

BiH  inherited  legislation  from  the  former  Yugoslavia,  but  after  independence  the  Entities
initially developed laws and regulations and established new institutions independently of each

24

other. Now, BiH has a Metrology Law based on European models; a State Law on Measuring
Units has been introduced and a legal basis for standards has been created through a State Law
on  Standardisation.  Under  these  laws  a  new  BiH  Institute  for  Standards,  Metrology  and
Intellectual Property was established. While the institute handles certification and conformity
assessment,  it  has  neither  the  facilities  nor  the  power  to  conduct  market  surveillance  and  it
remains under-developed in terms of organisation. It still has no permanent director and in all
sectors, resources  are limited and staff few.  A  State-wide  law  on  conformity  assessment  and
related regulations is required.

Reportedly,  only  four  BiH  companies  currently  have  the  capacity  to  attach  the  CE  marking
necessary for industrial exports to the EU. Others use original EU directives and conformity
assessment  infrastructure  within  the  EU  Member  States.  BiH  needs  to  develop  technical
capacity in this field.

3.5.5

Consumer protection

Effective consumer protection is needed to ensure that the market economy functions properly
and  that  its  benefits  are  maximised  for  consumers.  This  depends  on  the  development  of  an
administrative  infrastructure  which  can  ensure  market  surveillance  and  law  enforcement.  In
order  to  meet  obligations  under  an  SAA,  BiH  would  need  to:  (i)  develop  active  consumer
protection  policies,  in  accordance  with  Community  law,  (ii)  harmonise  legislation  on
consumer  protection,  (iii)  establish  independent  and  effective  administrative  structures  and
enforcement  powers  to  ensure  essential  health  and  safety  requirements,  and  (iv)  ensure
consumer representation, information and education.

State-level consumer protection legislation has existed in BiH since 2002 - this was a Road
Map requirement. Nevertheless, effective consumer protection remains more an aspiration than
a  reality  as  the  requisite  organisational  and  administrative  infrastructure  remains  incomplete.
The  Council  required  under  the  2002  legislation  has  not  yet  been  established.  Consumer
associations are, however, beginning to emerge.

3.6

Justice and Home Affairs

With significant international input and support, BiH has begun to address the weaknesses of
its  various  system(s)  of  justice  and  home  affairs.  For  too  long,  ethnicity,  geography  and
personal  contacts  were  the  major  determinants  of  justice  in  a  fractured  legal  system.  Crime,
both  opportunist  and  organised,  became  widespread,  and  corruption  put  deep  roots  into  the
social,  economic  and  political  fabric  of  society.  The  full  implementation  of  the  legal  and
judicial reforms currently underway will determine whether BiH can establish rule of law and
due process. The guarantee of a reliable and predictable legal space is a pre-condition for the
operation of an effective SAA.

3.6.1

Reinforcement of institutions and rule of law

Under a SAA the contracting parties would attach particular importance to the consolidation
of  the  rule  of  law  and  the  reinforcement  of  institutions  at  all  levels  in  the  areas  of
administration in general and law enforcement and the machinery of justice in particular.

3.6.1.1 Police

Police forces in BiH are organised on a number of  levels: there are 10  FBiH cantonal police
forces,  one  Brcko,  one  FBiH  and  one  RS  police  force,  the  SBS,  the  State  Information  and
Protection Agency (SIPA), judicial police and financial police. Thus, in a country of under four

25

million inhabitants, police forces consist of around 17,000 staff, costing around €180 million
per year. Obviously, the complexity of the existing multiple police forces increases costs and
complicates co-ordination and effectiveness. Police co-operation has improved (e.g. RS police
co-operation  in  bringing  an  important  trafficking  case  to  the  State  Court  was  good),  but
numerous  operational  difficulties  persist:  police  forces  in  one  Entity  have  no  right  of  "hot
pursuit"  into  another;  there  is  no  central  data  base,  different  Entity  forces  use  different
information  systems.  Costs  are  high  because  of  duplication  in  areas  such  as  training  and
equipment. Financial and technical constraints limit crime fighting abilities.

In  both  Entities  and  Brcko  District,  police  reform  is  ongoing.  Since  January  2003  an  EU
Police  Mission  (EUPM)  has  worked  to  establish  and  consolidate  sustainable  policing
arrangements  under  BiH  ownership  in  accordance  with  best  European  and  international
practice.  The  EUPM  mentors,  monitors  and  inspects  with  the  aim  of  enhancing  police
managerial  and  operational  capacities.  The  exercise  of  appropriate  political  control  over  the
police is monitored.  In  operational terms,  EUPM  priorities are to  develop  an  intelligence-led
approach  to  fighting  organised  crime  and  to  reinforce  returnee  security.  As  a  result,  BiH
policing  has  improved:  professionalism  has  increased,  management  capacity  has  grown  and
co-operation  between  police  services  and  other  enforcement  agencies  (e.g.  SBS  and  customs
authorities) has  developed.  The  creation in 2003 of  a new State-level  Ministry  of  Security  is
also welcome. Though still in its infancy, the ministry will have responsibility for State-level
concerns  such  as  border  control  and  counter-terrorism  (i.e.  SBS,  SIPA  and  Interpol).  The
ministry  should  facilitate  inter-Entity  co-operation;  its  full  operational  capacity  must  be
quickly ensured.

However,  to  fight  crime,  further  reform  and  enhanced  State-level  enforcement  capacity
are needed. Intelligence gathering needs to be improved, for example by quickly making SIPA
fully  operational.  Also,  BiH  must  now  consider  further  restructuring  and  rationalising  police
services in order to enhance efficiency and improve crime fighting capabilities.

A reform leading to the creation of a State-level intelligence and security service is underway.

3.6.1.2 Judiciary

The judicial system in BiH was long sub-standard. In contrast with Brcko District where the
entire  legal  and  judicial  system  was  relatively  quickly  overhauled,  both  FBiH  and  RS
persistently  accommodated  incompetence  and  corruption  within  their  legal  and  judicial
systems. Judges and prosecutors were subject to pressure both from political leaders and from
criminals. Basic judicial infrastructure was poor, lacking proper equipment, records and access
to  information  and  modern  legal  practice.  Moreover,  since  the  BiH  legal  space  was  split
between Entities and  Brcko, justice was  easily  avoided;  judicial  decisions  in  one  jurisdiction
were seldom enforced in another.

Reform  has  begun.  In  February  2002  a  comprehensive  judicial  reform  strategy  was
inaugurated.  Despite  a  constitutional  challenge  by  the  RS  National  Assembly,  High  Judicial
and Prosecutorial Councils (HJPCs) at State and Entity levels with both national and  foreign
members  were  established  with  the  task  of  overseeing  the  appointment  of  judicial  staff.
Simultaneously,  a  reform  of  the  court  structure  and  of  prosecutors’  offices  was  inaugurated,
cutting  the  number  of  courts  and  judges.  If  it  wishes  to  demonstrate  full  ownership  of  this
reform,  BiH  must  proceed  with  the  establishment  of  a  single  BiH  HJPC  and  must  properly
support the centres for judicial and prosecutorial training.

26

A  further  important  reform  was  the  creation  of  a  BiH  State  Court  and  State  Prosecutor
(again  initially  challenged  by  the  RS).  The  State  Court  has  criminal,  administrative  and
appellate  divisions  and  a  number  of  Special  Panels,  including  those  for  Organised  Crime,
Economic Crime and Corruption.  It is staffed by both national and international judges. First
cases have already been transferred to the Court. The Court will fill a legal lacuna by dealing
with issues (e.g. asylum and immigration cases) which are within the competence of the State.
Also, it should  create a  further bridge between  the  judicial  and legal systems  of  the  Entities.
The  2003  creation  of  the  State  Ministry  of  Justice  charged  with  ensuring  international  and
inter-Entity co-operation on legal matters is also significant, although this ministry also faces
personnel and resource shortages.

The  highest  level  of  judicial  authority  is  the  BiH  Constitutional  Court.  Despite  Road  Map
recommendations,  the  Constitutional  Court  has  been  persistently  short  of  resources  and  for
more  than  a  year  it  was  reduced  to  inactivity  because  of  the  failure  of  RS  to  appoint  Serb
members.  Despite  these  difficulties,  the  Court  enjoys  authority  and  has  become  a  respected
arbiter.

Since the EU is a community governed by  rule  of  law,  it  is  essential  that  in  the  context  of a
SAA BiH be able to guarantee the operation and effectiveness of an impartial judicial system.
The  currently  ongoing  reform  must  therefore  be  adequately  resourced  and  quickly  and
successfully completed.

3.6.1.3 Prison system

The rule of law can be guaranteed only if BiH has a reliable system of sanctions. Imprisonment
is  currently  the  only  real  sanction  foreseen  in  BiH,  although  alternatives  such  as  community
service are under consideration. Despite the introduction of a State Court  dealing  with  State-
level crime, no prison arrangement exists at State level.

3.6.2

Visa, border control, asylum and migration

Both  bilaterally  and  at  regional  level,  BiH  would  need  a  framework  for  co-operation  in  the
fields of visa, border control, asylum and  migration  (legal  and  illegal).  A  central  element  of
co-operation  in  the  area  of  preventing  and  controlling  illegal  immigration  would  be  the
inclusion of provisions on readmission.

In summer 2003 BiH adopted a new Law on the Movement and Stay of Aliens and Asylum,
replacing an unclear 1999 Law on Immigration and Asylum. Effective implementation of the
legislation requires the establishment of a responsible unit or sector dealing with these issues
under the Ministry of  Security. The  current visa regime determines  countries whose citizens
need / do not need visas for entry. Currently, the nationals of 38 countries may enter BiH with
only  ordinary  passports.  Other  nationalities  may  enjoy  temporary  visa-free  regimes,  for
example to promote tourism during the summer months. In general, BiH visa policy has been
gradually aligned on the Community visa list (e.g. introduction of visa  requirements for  Iran
and  Saudi  Arabia),  although  some  important  differences  remain  (e.g.  nationals  of  Russia,
Qatar,  Kuwait  and  others  may  still  enter  visa-free).  Further,  the  operation  of  the  BiH  visa
regime faces important administrative challenges: it is not clear that the technical infrastructure
for checking visa applications is foolproof.

The enforcement of a visa regime is impossible without effective border control. Here,  BiH
has  made  progress,  notably  since  the  creation  of  the  SBS.  In  September  2002  SBS  assumed
control  of  all  BiH's  official  international  border  crossing  points.  SBS  has  co-operated  with

27

interior  ministries  and  police  and  with  customs  administrations 
improve  border
management.  It  has  addressed  and,  reportedly,  significantly  reduced  human  trafficking  and
illegal  migration  through  BiH.  The  comparative  effectiveness  and  efficiency  of  the  SBS
distinguishes BiH favourably from some of its regional partners.

to 

Asylum  is  a  new  challenge  for  BiH;  until  recently,  the  focus  was  almost  exclusively  on
refugee returns and their reintegration into BiH society. The country is by succession a party to
the 1951 Convention relating to the Status of Refugees and its 1967 Protocol. Asylum issues
are now governed by the new Law on the Movement and Stay of Aliens and Asylum. The unit
dealing with asylum issues within the BiH Ministry of Security foreseen by the law is not yet
operational.  BiH  therefore  does  not  yet  have  a  functioning  asylum  system.  It  is  the  United
Nations  Refugee  Agency  (UNHCR)  which  conducts  refugee  status  determination.  UNHCR
hopes to hand over this responsibility to BiH by the end of 2004.

Under a SAA contracting parties would agree to co-operate to prevent illegal immigration. To
that  end  BiH  would  have  to  agree  to  re-admit  any  of  its  nationals  illegally  present  on  the
territory of an EU Member State and conclude an agreement as regards third country nationals
and  stateless  persons.  EU  Member  States  would  accept  similar  obligations.  Readmission
negotiations  have  been  completed  with  Italy  and  opened  with  Sweden,  Denmark,  Slovenia,
Rumania and Serbia and Montenegro.

3.6.3

Combating money laundering

BiH would need to establish a framework for co-operation aimed at preventing the use of its
financial systems for laundering the proceeds of criminal activities. Co-operation in this area
would  include  administrative  and  technical  assistance  aimed  at  establishing  appropriate
standards  to  counter  money  laundering  equivalent  to  those  adopted  by  the  Community  and
other international bodies in this field, in particular the Financial Action Task Force (FATF).

Money laundering is a serious problem, but one which BiH is only beginning to address. BiH
figures suggest that €1.5 billion may be  laundered  annually  through fictitious companies and
dedicated bank accounts. The BiH Criminal Code identifies money laundering as a crime (but
only recently has FBiH begun to treat it as more than an administrative offence). Currently, a
number  of  bodies  deal  with  money  laundering  concerns:  SBS,  the  Entity  Banking  Agencies,
the  revenue  police,  the  FBiH  Tax  Authority  and  the  RS  money  laundering  division  of  the
Finance Ministry - but the work of these bodies needs to be better co-ordinated.

In both Entities and Brcko District, laws now oblige bank and financial institution employees
to report suspicious transactions; every transaction over KM30,000 (around €15,000) must be
reported to the revenue police who check its legitimacy. A former favourite method of money
laundering  was  through  the  establishment  of  fictitious  companies.  New  registration
procedures have made this more difficult, and the recent identification in the Official Gazette
of unused accounts has also had a discouraging effect on launderers. While these are welcome
developments, other businesses providing a money or value transfer service (e.g. gambling and
casinos, foreign currency exchange, insurance, real estate, etc.) should arguably also be subject
to licensing, registration and monitoring. These issues are addressed by an Action Plan against
money laundering which all relevant agencies now need to implement.

3.6.4

Preventing and combating crime, combating illegal trafficking and illicit drugs

BiH should develop a framework  for co-operation aimed at  fighting and preventing criminal
and illegal activities, notably organised crime. BiH should devote particular attention to issues

28

such  as  trafficking  in  human  beings,  illegal  economic  activities  (i.a.  corruption,  illegal
transactions, illicit arms trafficking and terrorism. BiH would also need to be able to cope with
the health and social consequences of different forms of drug abuse, preventing the diversion
of  chemical  precursors  and  introducing  and  /  or  reinforcing  structures  for  combating  illicit
drug trafficking

BiH  has  begun  to  address  crime  in  general  and  corruption  in  particular.  Parliament  passed  a
Law on Conflict of Interest within the institutions of government; the Civil Service Law details
actions that could pose conflicts of interest and within the new Ministry of Security work has
begun on drafting an anti-corruption strategy. The State Prosecutor's Office has begun work on
a  number  of  high-level  criminal  cases,  bringing  several  to  successful  conviction.  Also,  the
Special Panels in the State Court are about to begin work, including a trial of the biggest case
in human trafficking BiH has yet seen.

The  fight  against  crime  will,  however,  be  long  because  of  a  symbiotic  relationship  between
crime,  business  and  politics.  Corruption  has  both  seriously  affected  BiH's  economic
performance  and  brought  its  politics  into  disrepute.  Recent  examples  include  Hercegovacka
Banka in FBiH which reportedly embezzled millions, and the electricity generating companies
(Elektroprivreda)  where  audits  revealed,  particularly  in  RS,  misappropriation,  conflicts  of
interest and mismanagement on a grand scale.

Organised  crime  is  a  major  problem.  Smuggling  of  high-tariff  goods  such  as  cigarettes,
alcohol,  petroleum  products  is  widespread.  BiH  figures  put  losses  due  to  customs  fraud  and
smuggling at €150 - €300 million per year, roughly equivalent to the annual state budget. Drug
traffickers  have  exploited  BiH's  (now  less)  porous  borders,  divided  legal  jurisdictions  and
weak customs controls. They have used BiH mainly as a country of transit to western Europe.
Drug smuggling persists. The smuggling of migrants through BiH has diminished thanks to the
work of the SBS. However, sophisticated people trafficking networks, dealing also in women
for  sexual  exploitation,  continue  to  push  victims  both  to  and  through  the  country.  In  this
connection,  the  2003  US  "Trafficking  Persons  Report"  bracketed  BiH  among  the  worst
offenders.  Nevertheless,  BiH  subsequently  avoided  sanctions  because,  the  US  noted,  it  had
taken  "quick  action  to  address  problems".  Symptomatically,  however,  as  follow-up  to  the
November  2002  London  conference  on  organised  crime,  BiH  presented  two  separate  and
apparently  uncoordinated  records  of  achievement  by  two  different  State  ministries.  The
Ministry of Security co-ordinated the drafting of an action plan to deal with organised crime;
the latter was adopted in October 2003.

Within BiH, terrorism has mostly been targeted at returnees or politically undesired minorities
in  particular  regions.  Probably,  attacks  on  individuals  or  families  are  the  result  of  localised
grievances  rather  than  co-ordinated  actions.  Also,  the  number  of  localised  attacks  has  been
declining.  In  terms  of  "international  terrorism",  there  is  evidence  that  some  "charities"
operating  in  BiH  have  had  connections  with  terrorist  organisations,  but  when  identified  they
have  been  closed  down.  To  date  no  attacks  on  international  interests  in  BiH  have  been
registered.  Following  the  events  of  11  September  2001  an  anti-terrorism  co-ordination  team
was  established.  It  worked  efficiently,  but  was  not  immediately  re-established  under  the
current Council of Ministers.  BiH, like others, is challenged  to  see that  the rights  of  terrorist
suspects are respected.

In all areas related to justice and rule of law BiH is challenged to improve inter-agency and
inter-Entity  co-ordination  and  co-operation.  Within  BiH  there  is  still  no  common
information system either for the police or the judicial and prosecutorial systems. Since SIPA
is not yet operational there is no formal agency at State level to process criminal information;

29

intelligence sharing depends on the good will of the agencies involved. In issues of justice and
home affairs, as in others, improved co-ordination within BiH is needed to act effectively and
to make co-operation in a SAA context meaningful.

3.7

Co-operation Policies

A future SAA  would  mean the establishment  of close co-operation  in a wide range of  areas.
Co-operation would be designed to provide EU policy guidance and assistance and to promote
economic and social development within BiH. It would not be limited to bilateral EU - BiH co-
operation,  but  would  also  take  place  within  a  regional  framework.  Thus,  special  attention
would be devoted to measures which foster co-operation between BiH and its neighbours and
promote regional stability.

3.7.1

Economic, monetary and statistical co-operation

BiH should foster reform and economic integration into European structures by improving the
formulation and application of market-based economic policies. It should improve its capacity
to provide information on macroeconomic performance and forecasts, to formulate economic
policy  and  to  develop  the  instruments  necessary  for  its  application.  It  should  also  take
appropriate account in its policy development of the EU’s economic and monetary union. BiH
should  develop  a  statistical  system,  capable  of  providing  the  timely,  reliable,  objective  and
accurate data needed to plan and monitor transition and reform.

In the context of its over-arching policy objective of integrating into EU structures, BiH needs
to formulate a coherent medium- to long-term economic strategy. Here, it has already taken
some  steps  by  identifying  policy  priorities.  In  co-operation  with  the  World  Bank,  a  Co-
ordination Board for Economic Development and EU Integration, made up of the BiH Council
of Ministers and Entity representatives, has overseen the formulation of a Poverty Reduction
Strategy  Paper  (PRSP)  which  is  based  on  wide  consultation.  This  effort  has,  however,
underlined BiH’s need to develop further sound analytical capacities both within  and  outside
government; BiH needs an improved ability to analyse and predict the implications of policy
decisions both within and across sectors. This is arguably an area where BiH government could
co-operate  fruitfully  both  with  its  own  academic  community  and  with  EU  experts  in  the
context of a SAA.

A number of difficulties will however constrain effective co-operation. First, the prevalence of
the grey economy is a distorting factor. Admittedly, the grey economy has functioned as social
safety net for the otherwise unprotected in a dysfunctional  economy. Further, it demonstrates
hidden  economic  vitality  and  growth  potential.  Nevertheless,  the  grey  sector  (estimated  by
some  at  about  40%  of  total  BiH  economic  activity)  renders  effective  policy  formulation
difficult and distorts regional and international economic co-operation by undermining a level
playing field.

Secondly, the chronic and persistent weakness of BiH statistics cannot be ignored. In October
2002 the High Representative imposed a Law on Statistics, assigning greater authority to the
State  statistical  office  (BHAS)  and  obliging  Entity  statistical  institutes  to  align  their
methodology,  standards  and  practice  with  those  of  BHAS.  The  latter  should  produce  State-
level  statistical  indicators.  However,  progress  has  been  worryingly  slow.  Currently  poor  (or
non-existent)  State-level  statistics  make  both  coherent  policy-making  within  BiH  and  the
proper  conduct  of  trade  relations  impossible.  Full  implementation  of  this  law  would  be
essential for a SAA.

30

3.7.2

Investment  promotion  and  protection,  industrial  co-operation,  small  and  medium-
sized enterprises, tourism

BiH  should  aim  to  create  a  favourable  climate  for  private  investment,  both  domestic  and
foreign, in order to promote economic and industrial revitalisation. In the fields of industrial
co-operation,  SMEs  and  tourism,  BiH  should  develop  policies  aimed  at  promoting  the
modernisation  and  restructuring  of  industry,  the  reinforcement  of  the  SME  sector  and  the
development of tourism.

Given  its  low  levels  of  domestic  investment  and  declining  foreign  assistance,  BiH  acutely
needs  foreign  direct  investment  (FDI).  Admittedly,  legal  impediments  to  FDI  are  few.
However,  to  improve  further  the  business  environment  and  support  industrial  co-operation,
disincentives  and  structural  impediments  need  to  be  removed:  lack  of  commitment  to
privatisation,  complicated  company  registration  procedures,  high  enterprise  debt,  labour
rigidities,  an  unclear  fiscal  framework,  poor  corporate  governance,  the  high  cost  of  utility
services,  etc.  Important  progress  was  made  with  the  OHR-led  "Bulldozer  Initiative"  which
dismantled  barriers  to  enterprise  through  a  bottom-up  approach.  The  initiative,  which  is
continuing under a BiH lead, should evolve into a form of business advocacy.

Obviously,  modernisation  of  the  BiH  economy  must  focus  not  only  on  FDI  and  on
restructuring  large  public  enterprises,  but  also  on  freeing  the  growth  potential  of  indigenous
small  and  medium-sized  enterprises  (SMEs).  BiH  has  committed  itself  to  implement  the
European Charter for Small Enterprises. However, BiH still needs a common SME definition
and harmonised registration procedures at the lowest possible level. Further, company taxation
should arguably be such as to encourage start-ups. Business advocacy needs to  be  improved,
giving  SME  stakeholders  a  voice  on  proposed  legislation.  The  BiH  financial  sector,  though
much  improved,  needs  to  become  more  responsive  to  business  needs  by  developing  suitable
financial  instruments  (e.g.  guarantee  schemes).  Finally,  the  EU  needs  a  central  interlocutor
with  whom  to  discuss  SME  policy  and  possible  future  integration  into  relevant  Community
programmes.

Tourism  has  growth  potential  in  BiH,  but  would  require  investment  in  advertising  and
infrastructure  development.  The  definitive  elimination  of  all  land  mines  is  essential.  Know-
how transfer and the study of possible joint operations could be developed under a SAA.

3.7.3

Agriculture and agro-industrial sector

BiH  should  aim  to  modernise  and  restructure  its  agriculture  and  agro-industrial  sector.  In
particular,  co-operation  could  include:  (i)  development  of  private  farms  and  distribution
channels,  methods  of  storage  and  marketing,  (ii)  modernisation  of  rural  infrastructure
(transport,  water  supply,  telecommunications),(iii)  improvement  of  productivity  and  quality
using  appropriate  methods  and  products;  (iv)  training  and  monitoring  in  the  use  of  anti-
pollution methods in connection with inputs, (v) development and modernisation of processing
firms and their marketing methods, promotion of industrial co-operation in agriculture and the
exchange of know-how, and (vi) development of co-operation on animal and plant health in the
form  of  assistance  for  training  and  the  organisation  of  controls  with  a  view  to  gradual
harmonisation with Community standards.

As  indicated  in  section  3.3.2,  agriculture  contributes  about  12%  of  BiH  GDP.  It  employs
around  18%  of  the  total  BiH  population.  Given  its  liberal  trade  regime,  BiH  is  a  significant
importer  of  agricultural  and  agro-industrial  products.  This  is  because  the  agricultural  sector
suffers  from  an  outdated  and  disconnected  structure  and  is,  moreover,  constrained  by

31

uncertainties  over  land  ownership.  Productivity  is  very  low  and  little  is  produced  for  non-
domestic  consumption.  Capacity  utilisation  is  low;  the  proportion  of  unused  land  is  high
(reportedly,  50%  of  arable  land  in  FBiH  and  around  30%  in  RS.)  Livestock  farming  is
reportedly  also  in  decline.  Laboratory  cover  and  certification  arrangements  are  patchy  and
below international  standards.  For  BiH  agriculture to  realise  its  potential,  reform  is  required.
For example, a coherent and complete land registry  system is a priority in order  to  eliminate
doubts about ownership and thus improve the investment climate.

Unfortunately,  the  agricultural  sector  provides  a  good  example  of  the  pernicious  effect  of
BiH’s poor statistical base: inadequate and un-coordinated data collection hamper analysis and
thus  the  formulation  of  policy  options.  It  is,  for  example,  not  clear  that  existing  Entity
agricultural policies  in favour  of subsidies designed  to  achieve  self-sufficiency  in  agriculture
and food production are justified in the long term. Under a SAA, BiH would need to maintain a
policy dialogue on these issues. Especially, in the light of the EU’s 2003 decisions to begin de-
coupling agricultural subsidies from production, the BiH Entities would need to present policy
positions based on a more transparent analysis and a clear economic rationale.

3.7.4

Customs and taxation

3.7.4.1 Customs

BiH needs to ensure that it has a customs service able to meet the demands resulting from the
liberalised,  preferential  trade  implied  by  a  SAA.  In  particular,  BiH  would  need  a  unified
customs  service  with  efficient  management  and  investigation  methods.  It  would  need  to
establish  relevant  cross-border  infrastructure,  develop  interconnections  with  the  transit
systems  of  the  Community,  ensure  proper  revenue  collection,  simplify  inspections  and
formalities  in  respect  of  the  carriage  of  goods,  and  introduce  modern  customs  information
systems.

The  BiH  constitution  identifies  customs  policy  as  a  state  responsibility  (art.  III.1.c).  In
practice, however, administrative authority and revenue collection were with the Entities. BiH
thus  developed  several  occasionally  competing  customs  services.  With  assistance  from
CAFAO,  separate  but  co-operative  Entity  customs  services  were  established.  Identical  tariff
rates  were  established,  enforcement  capabilities  developed,  compatible  communications  and
computer  systems  introduced  and  detection  and  collection  rates  improved.  Over  time  this
resulted  in  improved  revenue  collection,  despite  the  gradual  introduction  of  free  trading
agreements.

Despite these achievements, political interference and a lack of management will to enforce the
law allowed fraud and customs evasion to persist, undermining the putative BiH single market
and  BiH's  ability  to  police  effectively  a  preferential  trading  regime.  In  response  to  these
weaknesses and to international pressure, an Indirect Tax Policy Commission developed a draft
law  on  an  indirect  tax  system  covering  customs  revenue  and  VAT.  The  law,  when
implemented will mean the collection of indirect taxes at State level through an Indirect Tax
Authority  (ITA).  Agreement  was  found  among  State  and  Entity  representatives  even  on
contentious  issues  such  as  the  location  of  ITA  headquarters  (Banja  Luka),  the  ITA  regional
structure,  etc.  The  law  has  been  approved  by  the  Council  of  Ministers,  but  awaits
parliamentary  adoption.  The  implication  of  the  legislation  is  groundbreaking  insofar  as  BiH
public finances would no longer depend exclusively on Entity transfers and the BiH Ministry
of  Finance  would  have  a  role  in  policy  formulation.  The  law  would  thus  constitute  a  major
advance  towards  EU  practice;  it  would  improve  fiscal  sustainability,  help  combat  fraud,

32

support the internal BiH market and significantly upgrade BiH's ability to sustain a future SAA
with the EU.

3.7.4.2 Taxation

Co-operation with the EU should facilitate reform of the BiH fiscal system and  help develop
the tax administration in order to ensure effective tax collection. The fight against fiscal fraud
in BiH should remain a priority.

Taxation too has been an Entity  competence.  Like  customs  duties,  taxes  have  been  variably
collected and widely avoided. At present, the tax base throughout BiH is narrow, meaning high
rates  for  those  who  pay  (often  driving  legitimate  business  into  the  grey  sector).  Revenue,
however, is weak and based on consumption and imports. There is only limited use of direct or
property tax. Further, the division of responsibility for  taxation among  the Entities  led to the
setting  of  different  taxes  and  different  rates  (corporate  tax  at  30%  in  FBiH  and  10%  in  RS;
sales  tax  varying  between  20%  and  8%  depending  on  location  and  type  of  good  or  service).
While tax differences may be justified by competition, the existence of Entity jurisdictions has
often led to double reporting requirements and some double tax imposition.

The fiscal system thus has a number of weaknesses: it has provided disincentives to investors,
facilitated  evasion  and  undermined  the  single  market.  It  has  also  meant  that  there  is  no
overview  of  the  fiscal  stance,  there  is  no  consolidated  government  account  and  only  partial
accounting. Revenue has been too weak to ensure the smooth functioning of public services or
to allow capital investment.

In  part,  to  address  these  weaknesses,  the  introduction  of  value-added  tax  (VAT)  has  been
proposed and adopted as government policy. VAT will be introduced at State level to minimise
evasion, maximise  revenue  and  meet  EU  acquis.  The  plan  is  for  VAT  receipts,  like  customs
revenue,  to  be  paid  into  one  account  from  which  disbursement  will  go  first  to  the  State  and
subsequently to the Entities. This would reverse the current order of call and should guarantee
adequate revenue for the State. The aim is to introduce VAT in 2005. Final approval of the law
on the ITA needs to be given quickly by parliament and planning needs to advance to meet the
2005 deadline.

3.7.5.  Employment,  social  policy,  education  and  training,  research  and  technological

development (RTD)

3.7.5.1 Employment and social policy

Co-operation  in  this  area  should  aim  at  supporting  BiH  in  reform  of  employment  policy,
labour  law  and  social  security.  The  focus  would  be  on  upgrading  job-finding  and  career
advice and promoting local development. Back-up measures would be provided to encourage a
functioning social dialogue at all levels. Labour law should facilitate industrial restructuring
and improve the level of health and safety protection for workers. Regarding social  security,
BiH would need to adapt its social security systems to the evolving economic situation and new
social requirements.

Based  on  the  number  of  people  registered  at  employment  offices,  the  unemployment  rate  in
BiH is around 40%. However, data from a Living Standards Survey indicate much lower levels
of  unemployment  and  suggest  that  it  is  highest  among  young  people.  The  reason  for  this
discrepancy in figures probably lies in the large number of people who are active in the "grey",
i.e.  unregistered  sector.  Entity  level  legislation  governs  working  conditions,  but  the  effect  of

33

existing norms is limited by economic debility and  the prevalence of activity in the informal
and thus unregulated sector. In practice, BiH employment standards thus diverge significantly
from  those  of  the  EU.  Social  policy  and  social  assistance  are  also  fragmented  and  in  both
Entities constrained by limited resources.

EU  -  BiH  co-operation  in  this  area  would  aim  to  improve  the  level  of  health  and  safety
protection for BiH workers, using as a reference the level of protection existing within the EU.
A  further  important  reference  tool  will  be  BiH’s  Poverty  Reduction  Strategy  Paper.  While  a
number of actions have been undertaken, future co-operation could concentrate on creating the
conditions which would encourage the incorporation of currently unregulated activity into the
formal  and  registered  sector.  Gradual  regularisation  of  employment  would  allow  the
collection of taxes (providing  funds  for  social  programmes)  and  the  enforcement  of  minimal
social  norms.  It  would  also  provide  a  coherent  overview  of  BiH  employment  situation  and
would allow BiH’s (still rudimentary) job-finding and  careers  services to concentrate  limited
resources on the most important issues.

3.7.5.2 Education and training, RTD

In education, training and RTD, co-operation could aim to help BiH raise the level of general
education,  higher  education  and  vocational  training.  It  would  aim  to  promote  youth  co-
operation. It could also encourage the development of an environment conducive to research,
notably through joint RTD ventures and the transfer of technology and know-how.

In 2000 / 2001 97% of BiH primary school age children were enrolled in school, but only 56%
in secondary education. The overall quality of education was negatively affected by the war
through  the  destruction  of  infrastructure  and  the  collapse  of  the  economy.  World  Bank
estimates  suggest  that  spending  on  primary  education  is  around  2.7%  and  on  secondary
education around 1.4% of GDP. BiH figures suggest that almost 90% of the FBiH  education
budget  goes  on  teacher  salaries,  leaving  almost  nothing  for  investment  in  infrastructure,
training,  etc.  Unsatisfactory  funding  means  low  social  status  for  teachers  and  general
dissatisfaction in the  education  sector.  This  has  been  compounded  by  ethnic  divisions  (some
schools have provided segregated teaching under one roof), by outdated teaching methods and
by text books containing ethnically offensive language. Vocational training is also known to
be inadequately tailored to labour market needs. Because of the war and economic weakness,
RTD  capacity  is  extremely  limited  in  BiH.  Researchers  and  academics  have  left  in  large
numbers. Nevertheless, BiH has been active in the field of international scientific co-operation,
including co-operation with the EU. In 2003 BiH submitted a number of proposals under the
6th Framework Programme for RTD.

Reform of the education sector has been complicated by the absence of a co-ordinating State-
level ministry of education. Nevertheless, important reform, including the de-politicisation of
education,  has  begun.  In  November  2002  education  authorities  at  Entity  level  agreed  five
pledges  on  “Education  Reform”  with  the  PIC.  An  important  element  of  this  agenda  was  the
adoption  in  June  2003  by  the  BiH  parliament  of  a  Framework  Law  on  Primary  and
Secondary Education. The law creates a single system of certificates and diplomas and allows
the transfer of pupils throughout BiH. It established a common core curriculum for all schools
and  introduced  it  for  the  2003  –  2004  academic  year.  In  September  2003  BiH  signed  the
Bologna Declaration. This is an important development since participation requires structural
reform of university governance, management and finance. The TEMPUS programme assists
BiH  higher  education  in  the  process  of  reform  through  co-operation  with  higher  education
institutions in EU Member States.

34

3.7.6

Culture, audio-visual, telecommunications and postal services, information society

3.7.6.1 Culture and audio-visual

An  SAA  could  promote  cultural  co-operation,  notably  with  EU  Member  States  and  with
neighbouring countries, with the overall objective of increasing mutual understanding. In the
field of audio-visual, BiH should take steps to promote the European audio-visual industry and
encourage co-production in the fields of cinema and television. It would also need gradually to
align  its  policies  and  legislation  with  those  of  the  EC,  including  on  matters  of  cross-border
broadcasting  and  the  acquisition  of  intellectual  property  rights  for  programmes  and
broadcasts by satellite or cable.

BiH has not yet ratified the Council of Europe Convention on Trans-frontier Television, but,
reportedly,  adheres  to  its  provisions.  BiH  has  also  accepted  the  need  to  align  with  the  EU’s
Television without  Frontiers  directive.  In  terms  of  regulatory  bodies,  BiH  is  comparatively
advanced in that it has an independent Communications Regulatory Agency (CRA) responsible
for issuing  licences  to the electronic media and  overseeing  respect  for rules and standards in
broadcasting.  The  CRA  is  financially  and  organisationally  distinct  from  the  Ministry  of
Communications, but BiH needs to ensure that the independence of the CRA is maintained.

Proper co-operation in this area will also depend on a number of further reforms. Intellectual
rights  are  governed  by  a  BiH  Law  on  Copyrights  and  Related  Rights,  legislation  which  was
drafted  in  line  with  European  practice.  However,  enforcement  is  poor.  The  Public
Broadcasting System (PBS) largely respects the provisions of the law, but the same cannot be
said  of  all  commercial  broadcasters.  A  further  concern  relates  to  the  realisation  of  public
broadcasting itself. Although this was a Road Map requirement, the viability of PBS remains
under  acute  threat  from  financial  weakness  and  an  inadequate  legislative  basis.  BiH  must
urgently accompany legislative change with significant PBS restructuring if it is to ensure the
survival of the public broadcasting system.

3.7.6.2 Telecommunications, information society, postal services

(i) 

in  particular: 

the  development  of 

Co-operation  under  an  SAA  could  be  used  to  expand  and  strengthen  co-operation  in
telecommunications  and  postal  services  and  gradual  alignment  with  the  acquis.  This  would
legal  and  regulatory  aspects  of
involve, 
telecommunications and postal services, (ii) if necessary. the progressive liberalisation of the
sector,  (iii)  the  promotion  of  an  investor-friendly  environment  for  the  modernisation  of  the
telecommunications  network  and  integration  into  European  and  world  networks,  (iv)
institutional reforms suitable for a liberalised environment and (v) the promotion of European
standards and regulatory approaches. BiH should also aim at the progressive development of
the  information  society,  including  co-operation  in  the  area  of  electronic  communications
infrastructure.

The  current  legal  framework  for  telecommunications  is  set  by  a  Communications  Law  of
September 2003. The law is reportedly compatible with European standards. An independent
regulatory body exists, and a new State ministry dealing with communications (and transport)
was established in 2003. There are three Entity-based telecom service providers (Telecom RS,
Telecom BiH and HPT Mostar) which have de facto monopolies of fixed network operations
on  their  own  territory.  Recent  audits  of  the  three  companies  revealed  alarming  patters  of
mismanagement and incompetence, leading to great financial losses. In RS there are 20 fixed
line and 19 mobile telephones per 100 inhabitants. In FBiH the  corresponding  figures  are  26
for the fixed network and 20 for mobiles. There is some competition within the mobile sector

35

(where each operator  is  required  to  provide state-wide coverage within  three  years),  and  this
provides some competition to the fixed network monopolies. Although pricing remains under
Entity government control, there are no formal restrictions on foreign investment or ownership.
While  the  process  of  liberalisation  has  thus  begun,  the  Council  of  Ministers  has  stressed  the
need for further measures leading to more competitive service provision. Further liberalisation
would  help  BiH  accelerate  the  availability  of  good  quality  communication  services  and  the
take-up of information and communication technologies. A SAA would imply alignment with
the European approach to regulation of the sector and promotion of its use. Compliance with
this part of a SAA should not impose insuperable problems, but would require a readiness to
address  identified  weaknesses  and  a  willingness  to  participate  (perhaps  as  observer)  in  the
EU’s existing mechanisms for this sector.

E-business  still  plays  a  minimal  role  in  BiH.  The  country  urgently  needs  a  common  e-
signature law to facilitate such business. Internet access has grown from a low base. Estimates
suggest that few citizens have direct, but increasing numbers have indirect access. Access by
government bodies remains low.

Postal services in BiH are currently delivered by three operators which are restricted to their
respective geographical areas. Legislation on a BiH Post Office has been drafted, but not  yet
approved. Privatisation of the RS Post Office has begun.

3.7.7

Transport

In transport, co-operation should contribute to the restructuring and modernisation of the BiH
transport  system  and  improving  related  infrastructures,  improving  the  free  movement  of
passengers and goods, achieving standards comparable to those prevailing in the Community,
aligning BiH transport legislation with that of the EC, and allowing progressive mutual access
to the EU and BiH transport markets and facilities.

Much of BiH’s transport infrastructure has been repaired since the war. However, if BiH is
eventually  to  reach  operating  standards  comparable  to  those  in  the  EU  and  to  survive  in  an
increasingly  competitive  environment,  further  substantial  upgrading  is  required.  Structural
improvements are needed in roads, railways, river transport, and aviation. An example: due to
administrative  complications  a  rail  journey  across  BiH  still  requires  railway  engines  to  be
changed. Improvements will require both co-ordination of the various actors involved through
a long-term transport strategy (currently lacking) and investment (at a time when international
donor funds are declining).

BiH has begun to address some of the challenges, including those associated with a SAA. Road
transport services prices are set freely and there is market competition. As regards air transport,
a  Civil  Aviation  Law  has  been  passed.  BiH  is  now  a  member  of  the  International  Civil
Aviation  Organisation  (ICAO)  and  a  Directorate-General  for  Civil  Aviation  exists  at  State
level. (A Director-General was appointed in October 2003 after lengthy delays.) To minimise
safety risks in the sector, clear and simple administrative structures are required. Further, BiH
has begun to upgrade its border crossing  infrastructure and  related  roads  in order  to promote
access  to  European  transport  networks.  The  concern  for  transport  integration  is  further
reflected in a current project to construct within BiH a motorway linking BiH to Corridor Vc
(Budapest–Osijek–Sarajevo–Ploce) and other strategic routes. It is essential that in this major
project  BiH  already  now  reflect  best  European  standards  in  terms  of  public  procurement,
environmental  impact  assessment  and  transparent  decision-making.  Furthermore,  in  October
2003  BiH  formally  undertook  to  sign  a  Memorandum  of  Understanding  on  developing  a
regional core transport infrastructure network.

36

3.7.8

Energy

Co-operation between the EU and BiH in the field of energy would need to take into account
the  principles  of  the  market  economy  and  the  European  Energy  Charter.  BiH  energy  policy
should  be  developed  with  a  view  to  gradual  integration  with  EU  policies  and  networks.  Co-
operation  could  focus  in  particular  on  the  formulation  and  planning  of  energy  policy,
modernisation  of  infrastructure,  improvement  and  diversification  of  supply,  development  of
energy  resources  and  renewable  energy,  and  promotion  of  energy  saving  and  energy
efficiency.

BiH has significant energy reserves, particularly hydro-electrical potential.  In part because of
industrial collapse, electricity generation is greater than domestic demand and BiH thus exports
energy (although oil and gas are imported). BiH has ratified the European Energy Charter and
signed  the  Athens  Memorandum  of  Understanding  on  Regional  Electricity  Markets  in  South
East Europe. BiH’s limited electricity surplus and export capacity cannot however disguise the
need  for  substantial  modernisation  and  reform  within  this  sector.  Recent  audits  of  electricity
generating  companies  revealed  widespread  mismanagement  and  fraud.  Prices  remain
administratively fixed and there is no internal energy market. Moreover, while medium-term
energy sector requirements are currently under review in the context of the BiH Development
Strategy  /  Poverty  Reduction  Strategy  Paper,  BiH  still  lacks  a  coherent  energy  development
strategy taking account of diverse issues such as energy efficiency, diversification, security of
supply, environment and international commitments.

With international assistance but against significant resistance from vested interests, reform of
the important, but poorly managed, electricity sector has slowly begun. The strategic POWER
III  project  aims  to  improve  efficiency  by  dismantling  the  three  existing  vertical  electricity
monopolies and creating a unified energy system throughout BiH. “Unbundling” of generation,
transmission and distribution, when implemented, would allow the creation of new distribution
and  generating  companies  (which  could  eventually  be  privatised  given  favourable  market
conditions, investor interest and political support). Action Plans to address  restructuring have
been agreed by both  Entity  governments.  Not  least  because  SAA  co-operation  in  this  sphere
will reflect the principles of the market economy and because this project is key for regional
co-operation in the energy market (cf. the Athens Process), it is essential that BiH take this
reform forward decisively. The commitments taken by BiH at the June 2003 PIC (“adopt laws
on the transmission company and independent system operator, appoint regulators at state and
entity  levels  and  adopt  a  harmonised  action  plan  for  energy  sector  reform”)  must  be  fully
realised. Legislation should be in line with Community acquis.

3.7.9

Environment

In  the  framework  of  a  SAA,  BiH  could  strengthen  co-operation  with  the  EU  in  combating
environmental  degradation,  in  particular  as  regards  air  and  water  quality,  pollution
monitoring,  promotion  of  energy  efficiency  and  safety  at  industrial  plants,  classification  and
safe handling of chemicals, urban planning, waste management and protection of forest, flora
and fauna.

In BiH the state of the environment is poor, but (with the exception of specific conflict-related
problems  such  as  unexploded  ordinance)  probably  no  worse  that  in  some  central  European
candidate countries at a similar stage of their development. A gap may be developing between
the  two  Entities,  with  FBiH  slightly  more  advanced  but  with  both  Entities  in  considerable
environmental  distress.  Implementation  and  enforcement  of  existing  law  is  poor  and  public
environmental  awareness  low.  Whilst  there  is  some  monitoring  of  environmental  data,  it  is

37

unclear how such data are used. No mechanisms are yet in place to ensure that environmental
protection is consistently integrated into the formulation of other policies.

A  SAA  would  require  the  parties  to  develop  co-operation  in  combating  environmental
degradation.  In the case of  BiH, co-operation  may have to overcome  a  number of important,
not  least  institutional  hurdles.  International  assistance  has  helped  develop  a  framework  of
environmental  law,  but  the  framework  remains  incomplete.  There  is  no  national  strategy  for
the  environment  and  no  agency  to  monitor,  implement  or  enforce  policy.  Responsibility  for
environmental  issues  is  set  at  Entity  level,  but  even  with  an  Inter-Entity  Environment  Co-
ordinating Committee set up in 1998, co-ordination between the players remains sub-optimal.
In  fact,  BiH  is  party  to  a  number  of  international  conventions  and  protocols,  but  their
implementation, monitoring and enforcement at Entity level is not secured. In at least one case,
a  bilateral  agreement  involving  substantial  assistance  is  apparently  under  threat  because
inadequate structures and poor human and financial resources make adequate implementation
impossible. A future SAA could concentrate first on addressing these weaknesses.

3.8

Financial Co-operation

A SAA with BiH would foresee the continuation of EC financial support in order to help BiH
achieve  the  objectives  of  the  Agreement.  Financial  co-operation  could  support  democratic,
economic and institutional reforms in line with the Stabilisation and Association Process. Such
assistance  could  focus  on  different  areas  of  approximation  of  legislation  and  co-operation
policies covered by the SAA. BiH should develop the capacity to co-ordinate comprehensively
the funds from the EU and other donors in order to ensure optimal use.

Under  a  variety  of  EC  programmes,  BiH  has  benefited  from  assistance  totalling  over  €2
billion  since  1991.  Currently,  the  main  EC  aid  instruments  are  CARDS  and  budget  support
through macro-financial assistance. Other programmes such as TEMPUS are also operational.
In addition to EC assistance, considerable bilateral support has been given by partner countries
and the international financial institutions. Four separate institutions are currently responsible
for handling this aid on the BiH side: Treasury, MOFTER, Ministry of Foreign Affairs and the
DEI. In addition, the Entities have assistance management institutions. Worryingly, there is not
yet  an  established  mechanism  to  co-ordinate  these  different  ministries  and  not  even  all
assistance is yet recorded in a consolidated national account.

As CARDS assistance continues under a SAA, the need for adequate co-ordination capacity
within  the  DEI  will  become  ever  more  evident.  DEI  already  contributes  to  annual  CARDS
programming exercises, but this role needs to be significantly upgraded. The aim must be for
BiH  to  take  progressively  more  responsibility  for  the  management  of  EC  aid.  With  its  Rule
Book  now  in  place,  DEI  must  proceed  to  establish  a  full  Aid  Co-ordination  Section.  The
planned formation of a Co-ordination Committee within the DEI to monitor overall aid would,
if realised, facilitate analysis, the determination of priorities and thus overall implementation.

3.9

General Evaluation

Although BiH has reiterated its desire to proceed to a SAA and has articulated its belief that it
could handle the challenges involved, there can be no doubt that SAA implementation would
be a major challenge. This section, dealing  with the technical challenges implied by a SAA
has indicated  a  pattern  of  intermittent  progress,  interspersed  with  areas  where  crucial  reform
has not been completed, or in some cases even begun.

38

Section 1 of this report identified the political challenges BiH faces. Section 2 concentrated on
(macro-)  economic  perspectives  and  this  third  section  highlighted  sectoral  issues.  In  effect,
however, no issue can be addressed in isolation. For example, weaknesses in the formulation
and  implementation  of  trade  policy  require  not  only  technical  adjustment,  but  resources  to
address them. This, in turn, demands political will to ensure that resources  are not wasted or
misappropriated elsewhere. In short, preparation for and implementation of a SAA is a holistic
exercise involving all elements of the BiH body politic. If BiH brings political determination
and marshals its resources effectively, it could address the sectoral challenges of a SAA within
a reasonable time frame.

C.

CONCLUSION

The goal of integration into EU structures,  and  eventual EU  membership,  enjoys  widespread
support in BiH. To achieve this goal, however, the country will first need to demonstrate that it
shares certain fundamental EU values and that it has the capacity to meet the obligations of a
Stabilisation and Association Agreement (SAA).

This Feasibility Study, which has been prepared taking account of BiH responses to a detailed
questionnaire,  assesses  whether  BiH  has  made  sufficient  progress  to  permit  the  opening  of
negotiations for a SAA. Accordingly, its conclusions focus especially on key priorities which
are  of  particular  relevance  to  the  start  of  such  negotiations.  As  in  all  similar  studies,  this
Feasibility Study focuses on the particular merits and specific conditions of the country itself.
The pace at which a country draws closer to the EU depends essentially on the pace at which it
adopts and implements the necessary reforms.

The new  European  Partnership,  which  the  Commission  will  propose  in  2004,  will  present  in
greater detail the short and  medium  term  priorities which the  country  will need to meet  as it
advances towards closer integration with the EU.

This study confirms that BiH has made considerable progress in stabilisation since the conflicts
of the 1990’s were brought to an end. The country is a member of the Council of Europe and
has  established  normal  relations  with  its  neighbours.  It  is  a  strong  supporter  of  regional  co-
operation.

Many refugees have returned, and most property claims have been settled. Dialogue among the
communities  has  been  resumed  and  a  measure  of  confidence  re-established.  Democratic
elections have been held, political succession has occurred peacefully, and new laws have been
adopted. Steps have been taken to strengthen the independence of the judiciary. On the whole,
the State Border Service works well.

The country’s infrastructure has been largely  restored,  the currency is stable, inflation  is low
and  fiscal  discipline  introduced.  Customs  and  taxation  reform  has  been  initiated.  Agreement
within the Indirect Tax Policy Commission and approval by the Council of Ministers of related
draft  legislation  demonstrates  growing  consensus  on  key  policies.  Initiatives  promoting  an
economic climate favourable to business are underway and have resulted in a recent increase in
FDI.

Nonetheless,  any  assessment  needs  to  recall  that  the  country  is  still  in  the  process  of
establishing  a  self-sustaining  state,  and  that  many  fundamental  reforms  still  need  to  be
undertaken,  including  further  progress  towards  the  creation  of  a  fully  functioning  single
economic  space,  as  provided  in  article  I.4  of  the  BiH  Constitution  and  in  the  Road  Map
recommendations.

39

BiH has not yet assumed full responsibility for government. It still needs to show through its
own efforts that the High Representative's "Bonn Powers" are no longer needed, particularly in
areas to be covered by a SAA. The powers, functionality and co-ordinating capacity of central
government  must  be  strengthened.  An  appropriate  balance  of  responsibility  between  Entities
and State needs to be found. Moreover, BiH’s administrative base remains weak. It still needs
to develop a professional, merit-based core of politically independent public servants. Some of
BiH’s governmental institutions, notably in Republika Srpska, have not  yet demonstrated full
co-operation with ICTY.

BiH’s  economy  remains  weak.  The  persistent  lack  of  self-sustaining  domestic  growth  raises
concerns,  especially  given  the  high  current  account  deficits  and  declining  foreign  assistance.
The country remains dependent on foreign aid and, with 50% of the populations at or near the
poverty  line,  is  still  vulnerable  to  systemic  shocks.  Despite  the  recent  increase  in  FDI,  more
needs to be done to ensure a predictable flow of foreign capital. The financial basis of the State
still  needs  to  be  reinforced.  The  funding  mechanism  provided  by  the  Indirect  Tax  Authority
needs to be consolidated, while, on the expenditure side, BiH has yet to ensure the optimal use
of its limited resources.

Finally,  BiH’s  technical  ability  to  implement  a  future  SAA  remains  under-developed.  Core
sectors  such  as  trade  do  not  yet  function  properly.  Weaknesses  in  areas  such  as  free  zones,
certification, competition, copyright, and statistics need to be effectively addressed. As noted
in  the  2003  SAP  Report,  BiH’s  core  challenge  of  building  a  self-sustaining  state  able  to
integrate into EU structures remains.

Work will need to continue – indeed be stepped up – to meet all these challenges.

The  European  Commission  has  identified  the  following  priorities  for  action  in  the  course  of
2004:

•

•

•

Comply with existing  conditionality and international obligations – Fully co-operate
with ICTY, particularly on the part of RS, notably in bringing indicted war criminals
to  justice  before  the  international  tribunal.  (The  April  1997  EU  General  Affairs
Council identified this as a specific condition for proceeding to contractual relations.)
Complete outstanding Road Map steps. Comply with the Dayton-Paris Peace Accords.
Take steps to implement BiH’s Council of Europe post-accession criteria,  especially
in areas of democracy and human rights.

More effective governance – Implement the Law on the Council of Ministers and the
Law on Ministries. Convene meetings of the Council of Ministers  and of Parliament
with  sufficient  regularity  to  tackle  government  business  expeditiously.  Ensure  that
new  State  ministries  and  institutions  created  by  the  2002  Law  on  the  Council  of
Ministers become properly operational. Implement fully the 2003 – 2004 “Action Plan
for  Priority  Reforms”  and  establish  for  2004  (and  following  years)  a  consolidated
State-level  government  work  plan  matching  policy  priorities  with  budgetary
resources.

More  effective  public  administration  –  Make  further  effort  towards  creating  an
effective  public  administration,  including  developing  a  comprehensive  and  cost-
estimated  Action  Plan  for  public  administration  reform  with  a  clear  distribution  of
competences (for example in the areas of police and health). Fund and co-operate with
the Civil Service Agencies at State and Entity levels.

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•

•

•

•

•

•

•

•

•

•

•

European integration – Ensure the proper and full functioning of the Directorate for
European Integration, including its aid co-ordination capacities.

Effective human rights provisions – Adopt and bring into force outstanding legislation
supporting  refugee  returns.  In  particular,  introduce,  adopt  and  implement  legislation
on the BiH Refugee Return Fund. Complete the transfer of the human rights bodies to
BiH  control.  Ensure  that  unresolved  cases  of  the  Human  Rights  Chamber  are  dealt
with  and  that  the  Chamber’s  responsibilities  are  transferred  to  the  Constitutional
Court. Provide adequate funding for the Court. Assume full national responsibility for
the  State  Ombudsman  and  make  progress  on  the  merger  of  the  State  and  Entity
Ombudsmen.

Effective  judiciary  –  Adopt  legislation  establishing  a  single  High  Judicial  and
Prosecutorial  Council  for  BiH  with  the  aim  of  consolidating  appointment  authority
over  the  Entity  judiciaries  and  strengthening  the  independence  of  the  judiciary
throughout BiH. Provide appropriate staff and funding for the State Court.

Tackling crime, especially organised crime – Build up a State-level law enforcement
capacity  by  allocating  the  necessary  resources  and  facilities  to  ensure  the  full
functioning of the State Information and Protection Agency and the BiH Ministry of
Security.  Proceed  with  structural  police  reform  with  a  view  to  rationalising  police
services.

Managing asylum and migration - Ensure the  establishment and operation of proper
structures dealing with asylum and migration

Customs and taxation reform – Proceed with implementation of the recommendations
of the Indirect Tax Policy Commission. Ensure parliamentary adoption of the Law on
the Indirect Tax Authority, including the adoption of the related enabling legislation.
Ensure implementation, including the appointment of a Director for the Indirect Tax
Authority and the functioning of the new customs authority. Demonstrate progress in
preparing the introduction of VAT with a view to beginning on schedule.

Budget legislation – Adopt and start to implement a budget law covering multi-annual
budget  planning  and  forecasting  and  start  to  elaborate  a  consolidated  government
account.

Budget  practice  –  Take  steps  to  record  all  income  accruing  to  public  authorities  at
different  levels  of  government,  including  grants  and  other  forms  of  international
assistance.

Reliable  statistics  –  Implement  the  Law  on  Statistics,  aiming  at  the  creation  of  a
functioning  system  of  statistics  with  clear  lines  of  responsibility  and  co-ordination
mechanisms.

Consistent  trade  policy  –  Establish  a  coherent  and  comprehensive  trade  policy  and
revise  existing  legislation  to  ensure  a  consistent  policy  on  free  zones.  Establish  at
State-level certification and other procedures for the export of animal products and a
phyto-sanitary office  that  are  EC-compatible,  with  a  view  to  promoting  exports,  but
also enhancing standards and the single economic space.

Integrated energy market – Implement Entity Action Plans for the restructuring of the
electricity market.

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•

•

Develop  the  BiH  single  economic  space  -  Establish  the  Competition  Council.
Introduce provisions on the mutual recognition of products in the legal order of BiH
and  implement  a  consistent  and  effective  public  procurement  regime  throughout  the
country.  Remove  all  duplicate 
licences,  permits  and  similar  authorisation
requirements  to  allow  service  providers  (including  financial  institutions)  to  operate
throughout  BiH  without  having  to  fulfil  unnecessary  administrative  requirements.
Create a single business registration system that is recognised throughout BiH.

Public  broadcasting  –  adopt  legislation  in  line  with  European  standards  and  the
Dayton  –  Paris  Peace  Accords  and  take  steps  to  ensure  the  long-term  viability  of  a
financially  and  editorially  independent  single  state-wide  public  broadcasting  system
for  Bosnia  and  Herzegovina,  whose  constituent  broadcasters  share  a  common
infrastructure.

Recommendations

The European Commission considers that BiH should be able to address these priorities in the
course  of  2004,  provided  that  further  sustained  efforts  are  made.  The  European  Commission
will decide on a recommendation for a Council decision to open negotiations for a SAA with
BiH as soon as it ascertains that significant progress has been made in meeting the priorities set
out above. The Commission hopes that this will be possible in the latter part of 2004, but this
will  depend  on  BiH’s  own  efforts  and  progress  achieved.  If  progress  is  insufficient,  the
Commission will not be in a position to recommend proceeding with negotiations on a SAA.

While the pace of progress towards a SAA is largely in BiH hands and will be determined by
BiH success in addressing the priorities identified in this Study, the European Commission will
continue to support BiH reform efforts. The Commission proposes to intensify policy dialogue
with  BiH,  in  particular  through  reinforced  meetings  of  the  Consultative  Task  Force.  In
addition,  Annual  Reports,  accompanied  by  the  European  Partnership,  will  indicate  progress
and identify overall priorities for action. Other new instruments identified at the Thessalonica
European  Council  will  be  employed.  The  CARDS  programme  will  continue  to  provide
targeted  support.  In  addition,  BiH  will  continue  to  be  considered  for  financing  under  other
Community  instruments  such  as  loans  from  the  EIB  and,  on  an  exceptional  basis,  macro-
financial assistance.

BiH is also engaged in a number of other crucial reforms essential to the stabilisation of peace
under the Dayton – Paris Peace Accords. These lie outside the immediate scope of this study
and  include  areas  such  as  defence,  the  intelligence  services  and  reform  of  the  Mostar  city
administration. All these have a fundamental bearing on BiH’s ability to function as a modern
democratic  state  and  as  a  potential  candidate  for  membership  of  the  European  Union.  The
European  Commission  strongly  supports  these  efforts  as  evidence  of  BiH’s  willingness  to
make  the  reform  needed  to  integrate  into  European  structures,  and  will  expect  the  BiH
authorities to implement them on schedule during the course of 2004. Similarly, as a member
of  the  PIC  Steering  Board,  the  European  Commission  strongly  supports  the  reform  agenda
being  pursued  by  the  High  Representative  /  EU  Special  Representative,  and  will  expect  the
BiH authorities to co-operate fully in this process in the coming  year so as to provide further
evidence of their commitment to the reforms required for BiH to make progress on the road to
Europe.  These  aspects  will  also  be  taken  into  account  in  the  Commission’s  assessment  of
whether the necessary conditions are in place for the launch of the SAA.

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ATM

BHAS

BiH

CAFAO

CARDS

CEI

CFSP

CRA

CRPC

CTF

DEI

EC

EEA

EU

EUPM

FATF

FBiH

FDI

FTA

GATS

GATT

GFAP

HJPC

HRC

ICAO

List of Abbreviations

Autonomous Trade Measure

BiH Statistical Office

Bosnia and Herzegovina

Customs and Fiscal Assistance Office

(programme  of)  Community  Assistance  for  Reconstruction,
Development and Stabilisation

Central European Initiative

Common Foreign and Security Policy

Communications Regulatory Authority

Commission for Real Property Claims

Consultative Task Force

Directorate for European Integration

European Community

European Economic Area

European Union

European Union Police Mission

Financial Action Task Force

Federation of Bosnia and Herzegovina

Foreign direct investment

Free trade agreement

General Agreement on Trade in Services

General Agreement on Tariffs and Trade

General Framework Agreement on Peace (Dayton Agreement)

High Judicial and Prosecutorial Council

Human Rights Chamber

International Civil Aviation Organisation

43

ICC

ICTY

IFOR

IMF

IPTF

ITA

JHA

MFN

International Criminal Court

International Criminal Tribunal on former Yugoslavia

Implementation Force

International Monetary Fund

International Police Task Force

Indirect Tax Authority

Justice and home affairs

Most Favoured Nation

MOFTER

Ministry of Foreign Trade and Economic Relations

NATO

NGO

OHR

OSCE

PBS

PIC

PRSP

RS

RTD

SAA

SAI

SAP

SBS

SECI

SEECP

SFOR

SIPA

SME

North Atlantic Treaty Organisation

Non governmental organisation

Office of the High Representative

Organisation for Security and Cooperation in Europe

Public Broadcasting System

Peace Implementation Council

Poverty Reduction Strategy Paper

Republika Srpska

Research, Technology and Development

Stabilisation and Association Agreement

Supreme Audit Institution

Stabilisation and Association Process

State Border Service

Southeast Europe Co-operation Initiative

South East Europe Co-operation Process

Stabilisation Force

State Information and Protection Agency

Small or medium-sized enterprise

44

TAIEX

Technical Assistance Information Exchange Office

TIR

UN

Transport International Rapide

United Nations

UNHCR

United Nations High Commissioner for Refugees

VAT

WTO

Value Added Tax

World Trade Organisation

45