Interview - EBRD says Bosnia’s business spirit spurs economy despite political woes

By bne IntelliNews May 21, 2014

The growing hunger for new investments of Bosnia’s private and public sector has been cheering up the domestic economy, the EBRD head in Sarajevo, Libor Krkoska, revealed, regardless of the fact that the country’s EU accession progress has been blocked for years by the lack of political will to reform.

“I would say that as politics and economy in Bosnia are sufficiently detached, you can make a lot of progress in the economic area despite the political issues,” Krkoska told IntelliNews on the sidelines of the EBRD’s Business Forum held on May 14-15 in Warsaw.

The EBRD has been the largest foreign investor in Bosnia and Herzegovina, helping the country to recover from the devastating ethnic war in the 1990s and rebuild its key infrastructure networks. More recently the Bank focused on promoting investments in the economy’s strongest sectors, encouraging entrepreneurship and the implementation of sound corporate ethics and standards.

Krkoska’s statement that 2013 was a record year for the EBRD in Bosnia in terms of approved projects therefore comes as an encouraging signal to other foreign investors eyeing the Balkan state but concerned about the political stalemate and its impact on regulatory stability.

Bosnia’s complex way of governance and lasting political bickering recently resulted in the IMF holding up its latest loan tranche after the authorities failed to agree on a key legislation reform. In addition, Bosnia still lacks country-wide strategies for the transport, environment, and agriculture and rural development sectors, which blocks its access to the EU’s pre-accession financing for these sectors. The EU has repeatedly stressed the need of political support to benefit from the IPA funding.

Yet, probably the best indicator of the impact of the political instability on the economy is the fact that last year the EBRD also recorded its second largest volume of investments since 1996 and it was the first year when its disbursements exceeded EUR 200mn, Krkoska said. “The political developments did not affect our activities - be it financing infrastructure projects with the public sector or financing the private sector.”

To date, the EBRD has invested more than EUR 1.6bn in some 110 projects in Bosnia, focusing on infrastructure development, SMEs, and strengthening the financial sector. The Bank has said it expects Bosnia's GDP growth to stay closed to 2% this year, driven by rising exports and infrastructure investments. Yet, it has warned in its Regional Economic Prospects published earlier in May that structural reforms have stalled due to the unfavorable political environment, while gross fixed capital formation in the past two years has been almost non-existent, bringing risks to the country’s growth outlook.

Improved cooperation with local beneficiaries

On the other hand, Krkoska said that over the last three years the cooperation with the Bosnian authorities improved and the results are already visible in the road transport sector, where the EBRD has provided more than EUR 200mn. He added that a large number of old projects were implemented in 2013, whose disbursement had been initially very slow in the years after their approval.

The Federation’s motorway operator Autoceste FBiH – the EBRD’s single largest client in the country, accelerated the works on the Bosnian section of the Vc corridor (one of the three major pan-European corridors in the region) and is due to open new 80 km of motorways this summer, bringing the total motorways in function to just over 100 km.

One of the EBRD’s latest large infrastructure projects is also in the sector - the 72km Banja Luka-Doboj motorway project operated by Autoputevi RS - the state-owned motorway firm of Bosnia's smaller entity, the Serb Republic. Krkoska underlined that this project hit a record in terms of speed from its signing to the start of disbursements because the authorities were doing tendering for the construction works parallel with awaiting the EBRD approval. The loan disbursement started some six months after the signing.

In these large projects the EBRD usually participates together with the EIB and other international financial institutions. Towards the Banja Luka-Doboj project, for example, the EBRD has provided EUR 75mn and the EIB further EUR 200mn in loans.

Focusing on the private sector

After the EBRD has done its share in supporting the rehabilitation of war-damaged infrastructure in the past and the construction of new motorways, it is now moving to the standard EBRD focus, which is the private sector, Krkoska underlined. The standard share of EBRD investments in the sector is some 80% of the portfolio and Bosnia is already there in terms of the number of projects - with around 75%. Yet, since the size of these projects is quite small, a lot more work needs to be done to considerably raise this share to some 60-70% in the mid-term and eventually bring it to the 80% level, customary to other countries in the EBRD region, Krkoska said.

He added that via supporting small privately-held companies the EBRD is also working towards tackling the major unemployment and youth unemployment issues in Bosnia, where the jobless rate is among the highest in the region - at close to 45%, according to the labour and employment agency figures.

The areas of the economy, which are of greatest interest to investors, are wood processing and manufacturing, considering that half of the country's territory is covered by forest, and having in mind Bosnia's pre-war traditional links with European industrial producers. Krkoska said that Bosnia can offer big supplies of not just wood but high-quality wood, adding the country has great heritage in this area.

On the other hand, the manufacturing has been in focus since the 1980s when a lot of producers from the region established very strong links with Western Europe states, including Germany and Austria. This industrial tradition is still there, accompanied by a large number of well educated engineers, Krkoska said.

"There are suppliers to the automotive industry and other very successful industries from northern or central Europe – and those suppliers are just too small to be noticed from outside but they are sufficient and actually create a large number of new jobs."

Equity investments in the pipeline

The financial support the EBRD plans for the private sector includes also equity investments via a new enterprise expansion financing facility, designed to provide equity and mezzanine financing for local companies.

"We expect that over the next five years we will have over 25 projects under this facility – the size of the projects will be EUR 5mn to EUR 10mn because the companies on the local market are small," Krkoska said.

"We have a very good pipeline of potential clients," he added, declining to be more specific considering that the due diligence and negotiating stages are still ongoing and it will take some time before the first projects under this facility appear. 

By Iskra Pavlova in Warsaw

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