VZCZCXYZ0000
RR RUEHWEB

DE RUEHBW #0793/01 2181308
ZNR UUUUU ZZH
R 051308Z AUG 08
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC 0255
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHDC

UNCLAS BELGRADE 000793 
 
SENSITIVE 
SIPDIS 
 
USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH 
 
E.O. 12958: N/A 
TAGS: ECON EINV EFIN SR MW
SUBJECT: SERBIA: OBSTACLES TO FOREIGN DIRECT INVESTMENT 
 
REF: a) STATE 0460 
 
SUMMARY 
------- 
 
¶1.  During a series of meetings, business representatives, local 
analysts, and government officials told us significant impediments 
remained to foreign direct investment (FDI) in Serbia.  All 
observers highlighted political instability and the difficulty in 
obtaining permits for construction on urban land as major concerns 
for domestic and foreign investors alike.  Corruption, especially 
regarding permits and licenses, is problematic.  Overall, our 
contacts believe Serbia views U.S. firms positively and there is 
strong interest for more direct investment from the United States. 
End Summary. 
 
 
INVESTORS FOCUSING ON POLITICAL RISK... 
--------------------------------------- 
 
¶2.  The Serbia Investment and Export Promotion Agency (SIEPA), 
Foreign Investors Council (FIC), and business executives during a 
series of meetings the week of July 28 through August 1 commented to 
us on the importance of political stability to foreign investors and 
on recent political developments that were raising confidence in the 
country's investment climate.  Bozidar Laganin, special advisor to 
the SIEPA Director, and Ana Vlajic, Executive Director at FIC, said 
that political risk has been the biggest problem for foreign 
investors in Serbia over the last few years. Vlajic emphasized the 
uncertainty stemming from "too many elections" within the last two 
years as having had a negative impact on the development of business 
strategies for FIC members, rendering the business climate unstable 
and unpredictable.  The elections also exacerbated the government's 
lack of capacity in implementing and enforcing existing laws 
adequately. 
 
¶3.  Aside from obstacles, Laganin also spoke of the new government's 
prospects for attracting FDI, particularly in greenfield projects, 
noting that only 25% of Serbia's total FDI stock was greenfield 
investment at best (Comment: the government adopted a plan on July 
21 to refund 25% of funds to greenfield investors who invested at 
least 200 million euros and created a minimum of 1000 jobs in the 
automotive, IT, electronics, or telecommunication sectors). Also, 
the deal signed in April between Zastava and Italian auto 
manufacturer Fiat on establishing a joint venture (reftel A) in 
Kragujevac had sparked investor interest in Serbia, according to 
Laganin. 
 
¶4.  Regarding the new government, all individuals with whom we met 
were cautiously optimistic that the coalition would stay together 
and push through needed reforms.  Marko Micanovic of Altis Capital, 
a financial advisory firm, said that the Democratic Party (DS) "has 
to show something now" by pushing through business-friendly reforms 
in the country's regulatory framework, noting that former Prime 
Minister Kostunica's party achieved more during its first term than 
last year's DS-led coalition. 
 
...AND LAND PERMITS 
------------------- 
 
¶5.  Zoran Skopljak, regulatory affairs advisor at the American 
Chamber of Commerce (AmCham), told us that problems related to land 
titles and permits were a key obstacle for foreign investors in 
Serbia, a view shared by FIC.  The 2006 Constitution ended the 
state's monopoly on owning urban land, but many laws had yet to be 
changed to correspond to the constitution, effectively perpetuating 
state ownership of urban property.  As a result, companies 
experience major difficulties in obtaining building and construction 
permits, which at times range from "two months to two years."  The 
uncertainty surrounding urban land ownership has led to companies 
being able to own a building, but not the land the building 
occupies.  The situation hinders investment and capital expenditures 
by compelling businesses to operate in a legal grey zone. 
Executives at the engineering and construction firm Energoprojekt 
reinforced this view, commenting on the inability to buy or sell 
urban land and how land permits and paperwork for licenses were not 
properly regulated. 
 
SHALLOW CAPITAL MARKETS, POOR INFRASTRUCTURE 
-------------------------------------------- 
 
¶6.  Observers also mentioned capital market issues and poor 
infrastructure as additional impediments to FDI.  Skopljak stated 
that restrictions on capital outflows and money transfers deter some 
holding companies from doing business in Serbia.  This makes "cash 
pulling" more difficult, where companies move funds among 
subsidiaries, leading some Serbian companies to move their 
activities abroad.  Also, low liquidity on the Belgrade stock 
exchanges and the lack of deep markets for municipal bonds restrict 
access to a larger pool of funding and keep foreign investors away, 
according to local investment consultant Milan Kovacevic.  Regarding 
infrastructure shortcomings, SIEPA and local economic journalist 
Misa Brkic said that poor roads, railways, and airports constrained 
investor projects.  The low quality of public services delivered 
kept business costs high (even in relatively well-off places in 
Vojvodina), hurting FDI and keeping investors away, according to 
Vlajic. 
 
 
CORRUPTION REMAINS A MURKY ISSUE 
-------------------------------- 
 
¶7.  All agreed that corruption was a concern, but no one emphasized 
it as among the most pressing problems or put forward any specific 
examples.  The difficulties in obtaining construction permits create 
an environment where those looking to build or expand facilities 
depend on the goodwill of municipal authorities, therefore leading 
to opportunities for bribe solicitation.  FIC spoke in terms of 
seeking a level playing field for all participants and that rules 
needed to apply to everyone equally, suggesting that clientelism was 
present in some forms at both the central government and municipal 
level. Investment consultant Kovacevic said outright that the 
perception of corruption was bigger than the actual level because 
government clerks and institutions did not function transparently. 
Contacts at U.S. firms in Serbia have spoken to Embassy about 
kickbacks and shady practices regarding licenses and permits in the 
"third level of government," i.e., among administrators and 
regulators. These contacts state that they in no way participate in 
such practices, and once they have established their position, are 
rarely re-approached in such a manner. Nevertheless, they must still 
navigate the quagmire that such an environment creates to get 
business done. 
 
COMMENT 
------- 
 
¶8. Everyone the Embassy spoke with last week echoed the same 
concerns: political stability, corruption, infrastructure, 
efficiency and transparency.  All observers, however, were 
optimistic about the new Prime Minister Mirko Cvetkovic.  They 
considered Cvetkovic was a pragmatic former Minister of Finance in 
the last government and a proponent of western investment.  However, 
fiscally imprudent coalition concessions such as the anticipated 10% 
increase in pensions may impact the investment climate with higher 
inflation and further macroeconomic instability.  Both the public 
and private sectors remain highly interested U.S. FDI, placing 
political differences behind commercial interests.  In fact, as 
AmCham mentioned, U.S. investment has been viewed positively in some 
regions such as in Smederevo (approximately 30 miles east of 
Belgrade) where US Steel's presence raised average salaries there 
and stimulated other commercial activity.  We are skeptical of 
assertions that corruption plays a tertiary role in discouraging 
foreign investment.  Our contacts more likely were reluctant to 
discuss corruption's saturation of Serbian society.  Certainly 
greater transparency in business transactions and expectations of 
political stability will help to address the root causes of 
corruption in Serbia.  End Comment. 
 
 
BRUSH