Document ofThe World Bank

FOR OFFICIAL USE ONLY

Report No. P 7530 BIH

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ONA

rKurOSED BUSINESS ENVIRONMENT ADJUSTMENT CRF,DIT

IN THE AMOUNT OF SDR 35.3 MILLION

(US$44.0 MILLION EQUIVALENT)

TO

BOSNIA AND HERZEGOVINA

April-24, 2002

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents'xiay not otherwise be disclosed without World Bank authorization.

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BOSNIIA AND [ERZEGOVIINA- BUSINESS ENVIRONMENT ADJUSTMENT CRIZDIT

Currencv Equivalents(As of April 14, 2002)

Currency Unit = Konvertible Marka (KM)

I KM = US$0.44457

Weights and Measures

Metric System

Abbreviations and Acronyms

BAC Business Environment Adjustment Credit JCT Joint Coordination TeamBH Bosnia and Herzegovina KM Konvertible MarkaCAFAO Customs and Financial Assistance Office NGO Non Government OrganizationCAS Cotntry Assistance Strategy OED Operations Evaluation DepartmetDM Deutsche Mark OHR Office of the High RepresentativeDFID Department for International Development PFSAC Public Finance Structural Adjustment

CreditEBPAC Enterprise and Bank Privatization PRSP Poverty Reduction Strategy Paper

Adjustment CreditEBRD European Bank for Reconstruction and QER Quality Enhancement Review

DevelopmentEU/EC European Union/European Comnmission RS Republika SrpskaFederation Federation of Bosnia and Herzegovina SBA Stand-by ArrangementFIAS Foreign Investment Advisory Service SEED South East Europe Enterprise

Development ProgramSFRY Socialist Federal Republic of Yugoslavia

GDP Gross Domestic ProductIC Intemational Community SIDA Swedish International Development

AgencyIDA International Development Association SME Small and Medium EnterprisesIFC International Finance Corporation SOSAC Social Sector Adjustment CreditIFI International Financial Institution TA Technical AssistanceIJC Independent Judicial Commission US United StatesIMF International Monetary Fund USAID United States Agency for International

Developmentl-PRSP Interim Poverty Reduction Strategy Paper FRY Federal Republic of Yugoslavia

Government Fiscal Year

January 1 - December 31

Vice President: Johannes F. LinnCountry Director: Christiaan J. Poortman

Sector Director: Paul J. SiegelbaumrTask Team Leader: Vicki Krecic Peterson

FOR OFFICIAL USE ONLY

Bosnia and HerzegovinaBusiness Environment Adjustment Credit

CREDIT SUMMARY

Borrower: Bosnia and Herzegovina (Ministry of Treasury Institutions) withsubsidiary credit agreements with the Federation of Bosnia andHerzegovina and Republika Srpska (the Entities)

Amount: SDR 35.3 million (US$44.0 million equivalent)

Terms: Standard IDA (35-years'matumyy,-iu years grace)

Commitment Fee: Standard IDA

Credit Objectives: The proposed Credit would support the Government's reform program toimprove the investment climate and further development of a singleeconomic space to promote domestic and foreign investment and privatesector growth. Objectives of the reform program are to reduce those'administrative and regulatory barriers that would have the most criticalnear-term impact on the three phases of business development: (i)improving business entry through streamlined and transparentcountrywide approach to business registration and licensing andstrengthened legal framework and capacity for attracting foreigninvestment; (ii) streamlining the environment for business operation byreducing companies' administrative and regulatory compliance coststhrough rationalization of inspections and regulations, strengthening ofjudicial and extra-judicial capacity to resolve commercial disputes;improving enforcement of secured transactions; and leveling the playingfield for private sector participation in public procurement, and (iii)facilitating business exit through improved bankruptcy and liquidationsystems. Underlying these objectives is the need to strengthen theconsultative capacity between the public and private sectors to promotepolicies and legislation that are business-friendly.

While the proposed Credit woulc. iavv; W61UIL%,,CU1L UllULL-MiU1j ,ssults inimproving the business enabling environment and promoting increasedprivate sector activity, sustained efforts to ensure the effectiveimplementation of the reforms will be required to build up long-terminvestor confidence in Bosnia and Herzegovina. The key is to initiatecritical changes that lead to strong momentum toward a self-sustainingprocess of improving the investment climate.

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

Credit Description: The Credit will be lent to the State of Bosnia and Herzegovina (the State),which will in turn on-lend in the amount of US$26.4 million equivalent tothe Federation of Bosnia and Herzegovina (the Federation) and US$17.6million equivalent to Republika Srpska (RS), on the same terms as theIDA Credit. The Entities will transfer US$4 million equivalent of the firsttranche to the State budget through the normal transfer mechanism. TheCredit will be disbursed in two tranches for budgetary and balance ofpayments support to Bosnia and Herzegovina. Releases of the trancheswill be linked to policy conditionality as agreed upon during thenegotiation of the Credit.

Benefits: The main benefits of the proposed Credit include: (i) contributing to thebuilding an investment climate attractive for new entrants and forincreased productivity of existing private businesses to promote economicgrowth and absorb labor and other resources released by the privatizationand downsizing of state-owned enterprises; (ii) strengthening the conceptof a single economic space in BH through greater harmonization ofadministrative and regulatory frameworks, thereby moving the countrycloser to its goal of integrating more fully into the regional economy andthe European Union; and (iii) a more dynamic private sector that willcreate much needed new jobs - this in turn will spur a shift away frominformal sector activity toward formal sector activity and to the paymentof taxes that will help fund vital social services and transfers, which arenow often unavailable or only partially available to the poor.

Risks: Main risks associated with the proposed Credit are: (i) complex andfragmented govemance arrangements in Bosnia and Herzegovina-Entities, Cantons, municipalities and cities-may prove challenging forimplementation of reforms at lower levels of Government; (ii) momentumor Govemrnment commitment could be lost in the lead-up to and aftermathof fall 2002 elections; and (iii) rooted mindsets of the system of theformer Socialist Federal Republic of Yugoslavia (SFRY) as well as invested interests the current system may result in resistance to change anddelays as many continue to view the private sector with suspicion andothers stand to lose opportunities for rent-seeking.

Schedule of Two tranche disbursements: first tranche of USD$19 million equivalentDisbursements: upon effectiveness (Board conditions now having been met); second

tranche of USD$25 million equivalent to be released separately uponachievement of each Entity's specific actions associated with secondtranche conditions, expected by December 2003.

iv

Poverty Category: Not Applicable

Rate of Return: Not Applicable

Project ID Number: P071001

Map BH map IBRD 28578R

The BAC core preparation team comprised Vicki Krecic Peterson (ECSPF), Task Team Leader,Senada Havic (CFABB), Nermina Sljivo (ECCBA) and consultants Ian Newport, Boris Divjak, andZlatko Hurtic. The starting point for preparation was the FIAS report "Commercial LegalFramework and Administrative Barriers to Investment," managed by Margo Thomas (PSAFI). Theteam wishes to thank the Japanese Government for its generous support of project preparationthrough a PHRD grant.

v

REPORT AND RECOMMENDATION OF THE PRESIDENT OF TIREINTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE EXECUTIVE DIRECTORSON A PROPOSED BUSINESS ENVIRONMENT ADJUSTMENT CREDIT

TO BOSNIA AND HERZEGOVINA

Table of Contenti

Page

PART I: THE ECONOMY 1

PART 11: THE BUSINESS ENVIRONMENT ADJUSTMENT PROGRAM 5

A. Core Issues 5

B. Business Entry 8

C. Business Operations 10

D. Business Exit 13

PART m: THE PROPOSED CREDIT 14

A. Rationale for Bank Involvement 14

B. Monitoring and Evaluation 14

C. Benefits and Risks 15

D. Coordination with the IMF 16

E. Board and Second Tranche Conditions 17

F. Implementation 19

G. Financial Arrangements 20

H. Poverty Implications 20

I. Environmental Impact 21

PART IV: RECOMMENDATION 21

ANNEXES:

Annex 1 Key Economic Indicators 22

Annex 2 Timetable of Key Processing Events 24

Annex 3 Letter of Development Policy 25

Annex 4 Policy Reforms Program Matrix 33

Annex 5 Key Component Flows 37

Annex 6 Sampling Methodology 38

Annex 7 Status of Bank Group Operations in Bosnia and Herzegovina 45

Annex 7A Status of IFC Operations in Bosnia and Herzegovina 47

Annex 8 Country at a Glance 48

MAP BH map IBRD 28578R

vi

REPORT AND RECOMMEDATION OF THE PRESIDENT OF THEINTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE EXECUTIVE DIRECTORSON A PROPOSED BUSINESS ENVIRONMENT ADJUSTMENT CREDIT

TO BOSNIA AND HERZEGOVINA

1. I submit for your approval the following Report and Recommendation on a proposed BusinessEnvironment Adjustment Credit (BAC) to Bosnia and Herzegovina (BH) in the amount of SDR35.3 million (US$44 million equivalent) to support the Government's structural reform program.The Credit would be provided on standard IDA terms of 35 years maturity with 10 years graceperiod.

2. This Report should be read in conjunction with the Country Assistance Strategy (CAS) of theWorld Bank Group for Bosnia and Herzegovina, Report No. IDA/R2000-0060, dated May 18,2000 and the CAS Progress Report No. 22863, dated September 24, 2001, which lays out agraduated assistance strategy aimed at helping BH to formulate and implement a comprehensivereform program that would accelerate the country's transition away from dependency on aid towardself-sustaining growth.

I. THE ECONOMY

3. BH has been facing the dual challenge of recovering from war and transforming from acentrally planned to a market economy. The extent of the post-war economic revival in manyrespects has been impressive. Nearly all the pre-war infrastructure has been rebuilt and BH hasmanaged to achieve this without compromising macroeconomic stability. Prudent fiscalmanagement and a strict currency board arrangement have been the main pillars of theGovermnent's macroeconomic policy framework, supported largely by an IMF Stand byArrangement. Successive BH governments have embarked on policy and structural reforms,ranging from trade and price liberalization to tax reforms, institution building, social sector andfinancial market reforms, as well as privatization. The implementation of these structural reforms,supported by substantial assistance from the International Community (IC), has initiated thetransition from economic recovery to growth, though the process has been slower than anticipated.

Table 1: Key Economic Indicators, 1990-2001

.________________ _ 1 1990 1998: 1999 T. 2000 '2e 001ne

GDP (US$ rilion) 10,633 4,74 4,537 4,413 4,587

Real GDP growth 9.9 9.9 5.9 5.6

Per capita GDP in current US$ 2,429 1,042 1,135 1,103 1,146

Price Inflation (average, in %) 1 3 5.5 3

Trade Balance (US$ mnillion) 290 -1,959 -1,852 -1,617 1,442

Exports (US$ million) 1,990 697 649 732 857

ffnports (US$ rnillion) 1,700 2,656 2,502 2,348 2,299

FDI (US$ rnillion) I 100 90 150 130

FDI (% of GDP) 2.3 2.0 3.4 2.8

Current Account Balance (% of GDP) -23.0 -24.6 -21.8 -18.0

ource: Oficial data, World Bank and IMF estimates.

4. Recent Economic Developments. The prevailing macroeconomic situation is satisfactory. AnIMF Stand by Arrangement (SBA) was successfully concluded in May 2001, and a letter of intentfor a new IMF program was signed by the authorities on March 27, 2002. While annual economicgrowth averaged over 29 percent in real terms during the post-war period 1996 to 2000, the rate ofgrowth declined from 10 percent in 1999 to 6 percent for 2000 and about 5.5 percent in 2001.This slowdown is largely explained by diminishing aid flows reflecting both the end of the post-war reconstruction period and the slower than anticipated pace of structural reform in BH. Whilemeasured GDP has more than doubled since the end of the war (i.e., US$4,587 in 2001 comparedto US$1,867 in 1995), it still is only about half its pre-war (1990) level. In 2000, the slowdownwas partly due to the economic effects of a severe drought that affected hydroelectricity generationand agricultural output, which revived in 2001 despite slowed growth overall. According toofficial statistics, unemployment has halved from its high of nearly 80 percent at the end of the war,although anecdotal information suggests that employment and production data are substantiallyunderstated, owing to strong incentives (i.e., high social contributions and taxes) for employers tounder-report employment and wages. Real per capita consumption has increased significantly formost households. Inflation has fallen progressively, and is currently running at an annual rate of 3percent, undoubtedly reflecting the stabilizing effect of the currency board. However, factors suchas war destruction, external setbacks and a loss of momentum of the reform agenda duringGovernment transition in 2000-01, have kept BH the second poorest country in Central and EasternEurope/Southeast Europe (CEE/SEE) on a per capita basis.

5. BH's external accounts remain fragile. The steep growth in imports experienced in the earlypost-Dayton years, due to reconstruction efforts and the slow recovery of exports explain thisfragility. Some decline in the rate of growth of imports is expected in the coming years as thereconstruction phase winds down. For example, sharp reduction in aid-financed importscontributed to a gradual decrease in the external current account deficit to 18 percent of GDP in2001. The State continues its efforts to liberalize trade and open up regional markets to promoteexport-led growth in BH. BH is recognized as one of the more open economies in the region.Trade agreements have been concluded with Slovenia, Croatia, Federal Republic of Yugoslavia(FRY), and Forrner Yugoslav Republic of Macedonia; similar agreements are being negotiatedwith Albania, Bulgaria and Romania; the EU has granted trade concessions to SEE countries,including BH, as part of the Stability Pact, and the country has initiated the process for WorldTrade Organization accession. The export base has slowly expanded to 17 percent of GDP.However, the pace of structural reform needs to be accelerated to promote private sector-leddomestic production and exports and ensure a smooth transition to a sustainable external position.

6. External Financing Needs and Debt-Servicing Capacity. Exceptional levels of externalfinancial assistance have been crucial to sustaining BH's balance of payments. In addition togenerous humnanitarian assistance, the international community made commitments of aroundUS$5.2 billion--mainly grant funds--between 1996 and 1999, in order to meet the externalfinancing requirement of US$5.1 billion outlined in the Priority Reconstruction Program. Byyearend 2000, an estimated US$4.0 billion of external support had been disbursed. The highlyconcessional terms of donor assistance, as well as sizeable post-war reduction in the country's debtburden brought about by rescheduling and reduction of arrears, have helped ensure a relatively

2

comfortable external public debt servicing profile. The external public debt ratio, estimated at 56percent of GDP, declined in 2001, owing to debt cancellation. External debt service, which isalmost all on concessional terms, remains manageable, but is projected to rise in the next few yearsas BH's rescheduled debt, inherited from the former Socialist Federal Republic of Yugoslavia(SFRY) starts amortizing.

7. The key challenge facing BH in the near- to medium-term is the need to stimulate private sectoractivity and investment as a source of new growth, while ensuring fiscal sustainability andprioritized public spending in the face of declining aid flows.

8. Progress on Reforms. The prospect for entering a phase of self-sustained growth is contingenton the successful and accelerated implementation of economic and institutional reforms. In thisrespect, some important steps have already been taken. The proposed Credit will complementother ongoing Government activities that are assisted by donors to restructure the economy,including:

* Accelerating privatization to eliminate the unfair competition of privileged state-owned firms.Several donors, including the Association through the Privatization Technical AssistanceCredit, are assisting with international tenders of selected companies. The Association'sEnterprise and Bank Privatization Adjustment Credit (EBPAC) supported the Government'sinitial phase of privatization.

* Strengthening the banking sector to build capacity of financial intermediaries to supportprivate sector growth. Bilateral donors and IFIs are providing technical assistance (TA) tostrengthen the banking agencies, deposit insurance agencies and private banks. TheAssociation has two operations that support the banking sector: EBPAC and the RS PrivateSector Credit Program that provides a line of credit for commercial bank lending to privateSMEs with companion TA for participating banks and the banking agency.

* Lightening a burdensome tax regime to motivate companies to return from the informal to the

formal sector. An International Advisory Group on Tax Reform coordinates donors' efforts tohelp the Government to rationalize and harmonize the tax system across BH. The IMF leadsthe reform. The Association's Public Finance Structural Adjustment Credit II also supports theGovernment's tax reform program.

* Liberalizing trade, modernizing customs administration and strengthening competition policyto improve the competitive environment for the private sector. Customs and trade liberalizationare supported as part of the EU Roadmap, associated with the Stabilization and Association(SAA) process, and Stability Pact. The IMIF supports harmonization of tariffs and customsrevenues. The Association's Trade and Transport Facilitation in Southeast Europe projecthelps build border crossings. Competition policy is supported as part of the EU Roadmap andStability Pact.

3

* Improving property rights and access to land create the foundation for an active land marketand productive use of land. As a critical first step, a bilateral donor has worked with Entities todraft harmonized Laws on Land Registry and is committed to assisting the Entities to createnew land registry books as a pre-requisite to building an automated countrywide land registrysystem.

* Reducing corruption. Several measures under the proposed Credit will reduce rent-seekingopportunities, as will EC-supported modernization of customs administration. The Associationrecently conducted an Anti-Corruption Diagnostic that served as the foundation for theGovernment's draft Anti-Corruption Action Plan. Fighting corruption is also a key element ofthe Government's Interim-Poverty Reduction Strategy Paper.

* Increasing the independence and capacity of the judiciary. In Spring 2001, an IndependentJudicial Commission was established as an arm of the Office of the High Representative to leadreform of the judiciary. In February 2002, the Peace Implementation Council decided toimplement sweeping reforms of the judicial system. Several donors support the work of theIJC in implementing its mandate.

9. As well, many of the basic political and economic institutions required for the country'seffective functioning have been established, including the establishment of the central bank, Stateand Entity treasuries, and issuance of the national currency. Significant progress has been achievedin removing barriers to the movements of goods and people within the country, and a common,countrywide customs tariff regime and trade policy were introduced.

10. Reform of the public finance system has begun, with a focus on strengthening accountabilityand control over management of public resources. Both Entities have made significant progress inreforming and harmonizing tax policies and in establishing intra-Entity revenue and expendituremechanisms and in introducing external audit functions. The legal and institutional frameworks forprivatization and restitution have been adopted. Although with considerable delay due todifficulties of achieving consensus on privatization methodology and institutional frameworkamong constituent groups, privatization of small-scale enterprises is well advanced, public offeringof shares nearly completed, and the privatization of large enterprises is underway.

11. Key elements of the legal and regulatory frameworks for the banking sector have beenintroduced and supervisory capacity has been strengthened, with several banks now under controlof the banking agencies. In 2001, BH became the first country in the region to close its paymentsbureaus inherited from the system of the former Socialist Federal Republic of Yugoslavia andtransfer clearing functions to commercial banks. Banking reform has taken a dramatic, positive turnin recent months, with 80 percent of assets now in private banks, and more than 60 percent inforeign-owned banks, including international banks and regional investors. Dramatic increase incitizen savings from KM650 million at end-September 2001 to more than KM1.3 billion at end-December 2001 has been spurred by the arrival of foreign international banks, introduction ofdeposit insurance, and the need for currency conversion at commercial banks as the Euro replacedthe DM, which previously had been used interchangeably with the local currency. With increased

4

liquidity and competition, banks are beginning to increase lending to retail and business customersand interest rates are dropping (e.g., from low 20s to about 13 percent, and some banks offeringrates as low as 10 percent). Still, bankable projects are few in this high-risk environment wherelenders' rights are not easily enforced.

II. THE BUSINESS ENVIRONMENT ADJUSTMENT PROGRAM

A. Core Issues

12. Despite these positive developments in market-based economic reforms, a substantial reformagenda lies ahead and further economic development depends on the acceleration of reforms. Insupport of this process, State and Entity governments in 2000 started drafting their firstcountrywide economic strategy since Dayton entitled Economic Development Strategy: A GlobalFramework for Bosnia and Herzegovina. The framework was prepared with the support of localacademics and in consultation with a wide range of stakeholders from government, productivesectors, civil society and the donor community, and was approved by Parliament in June 2001. Thestrategy's main focus is on private sector growth to reduce unemployment and poverty, whilerestructuring the social safety net to protect the poorest in a cost-effective way. The strategyrecognizes that the sustainability and efficiency of the economy and strengthened competitivenessis predicated on attracting long-term investors, and that attracting such investors requires apredictable and coherent policy environment countrywide. The strategy, combined with a fullPRSP preparation and participation plan and a more detailed poverty profile, formed the basis of anInterim Poverty Reduction Strategy Paper (I-PRSP). The I-PRSP was submitted to the Bank andJIMF in December 2001 for information, not linked to any Bank or IMF operation. The I-PRSPspecifically envisions acceleration of privatization, strengthening of the financial sector, andestablishment of an enabling environment for domestic and foreign investment, and furtherrecognizes that a key element of a good enabling environment for business is establishment of asingle economic space in BH. The I-PRSP is expected to be followed in 2002 by a full PRSP,currently under active preparation (see Paragraph 13 below).

13. An inter-Government Coordination Board for Economic Transition and European Integration(Coordination Board), comprised of State and Entity Prime Ministers and key members of theircabinets, was established in late 2001 to strengthen ownership of economic reforms and to movetoward more cohesive and concerted policy action at the State and Entity levels. Among itsprimary responsibilities, the Coordination Board oversees implementation of the I-PRSP,preparation of the PRSP and anti-corruption action plan, and implementation of businessenvironment reforms, which is an integral component of the PRSP. A special task force tofacilitate the economic transition and improve the trade and investment climate has been set upunder the PRSP preparation process. Under the leadership of this task force, an action plan toeliminate barriers to investment was developed and is the foundation for actions supported by theBAC. The plan was accepted by the Coordination Board in January 2002 and subsequentlyadopted by both Entity Governments and the State Council of Ministers.

14. The progress and impetus of structural reforms has to be maintained to create an environrmentconducive to private sector activity. The low share of the private sector in the economy reflects

5

slow progress in privatization and the still weak investment climate. FDI inflows have remainedfairly low, albeit with some encouraging signs of increased interest from neighboring countries,such as Croatia, FRY, and Slovenia, and a resurgence of traditional ties with Italy, Germany andAustria. Bosnia and Herzegovina, with FDI at an estimated 2.8 percent of GDP in 2001, is a poorperformer in comparison to other countries of similar per capita income.

15. Several studies agree that overly complex and costly government structures and regulations,coupled with a lack of transparency, unpredictability and high costs have led many prospectiveinvestors to consider the risk of doing business in BH as too high'. A 1999 Wall Street Journalsurvey of leading economists ranked BH's investment climate 1 9th among 27 countries; l8th forbusiness ethics; 21st for integration into the world economy; and 2 1St for rule of law. BH's ownassessmene ranked the country lowest among 59 countries on most measures of competitiveness,such as openness, government, finance, infrastructure, technology, management, labor and civilinstitutions. The study ranks BH at the bottom on nearly 80 percent of the 184 indicatorsmeasured.

16. Committed to reducing regulatory and administrative barriers in order to attract privatedomestic and foreign investment, the authorities commissioned a Foreign Investment AdvisoryServices (FIAS) study, "Bosnia and Herzegovina: Commercial Legal Framework andAdministrative Barriers to Investment." Despite previous attempts at reducing obstacles tobusiness entry, operations and exit, the 2001 report confirmed that an unfriendly and complexbusiness environment continues to impede investment (see Box 1).

The World Bank and European Commission's Bosnia and Herzegovina: Review of the Priority Reconstruction Program and Looking AheadToward Sustainable Economic Development, May 1999; The Wall Street Joumal's Central European Economic Review, November 1999;The World Bank Group's World Business Environment Survey, Spring 2000; Foreign Investment Advisory Service (FIAS) report Bosnia andHerzegovina: Commercial Legal Framework and Administrative Barriers to Investment, March 2001; Intemational Crisis Group's (ICG)report Why No One Will Invest in Bosnia and Herzegovina, 1999; ICG's draft report Still Not Open /or Business: Bosnia's PrecariousEconomy, July 2001.

2Bosnia and Herzegovina Competitive Report, May 2001, a study by a team of local economic experts on the basis of the methodology of theWorld Economic Forum for 1999, was the first of its kind since the country proclaimed independence from the former Socialist FederalRepublic of Yugoslavia in 1992.

6

Box 1: Administrative Barriers to Investment - FIAS Report Highlights

* Absence of a seamless, transparent and predictable legal and regulatory framework is a major impediment tosetting up and operating businesses in BH's relatively small market

* Lack of consistent and transparent business and administrative regulations and procedures opens the door to abuseof power at various levels of government - compounded by the absence of effective and independent appealsmechanisms, significantly raises the cost of doing business

* Lack of effective, efficient and adequately resourced judicial systems negatively affects the cost of doing business

* The study goes on to detail business barriers in the commercial legal and institutional framework, businessregistration, land titling, employment generation and business operation. Some notable findings:

= The lack of effective laws, regulations and mechanisms for securing and enforcing collateral severely restrictsaccess to much needed working capital from banks

=' Courts are weak, deficient and, in many instances, subject to political direction and corruption causing longdelays in the resolution of commercial disputes

=> The 14-step business registration process is overloaded with unnecessary but mandatory approvals resulting ina process that can take months to complete and is yet another reason for the perpetuation of the gray economy

=> Once registered, businesses faces a multitude of inspections from numerous inspectorates with unclear andoften overlapping mandates, leading to excessive administrative costs for compliance

17. Based on the report's findings, the authorities have adopted a countrywide action plan to

implement recommendations to address impediments to private investment in BH. The plan

constitutes a key element in the country's Poverty Reduction Strategy Paper (PRSP) process and is

the foundation for the Government's business environment reform program to be supported by the

proposed Business Environment Adjustment Credit (BAC).

18. This reform program complements a number of ongoing Government programs (noted in

Paragraph 8) to help accelerate the transition to a self-sustaining economy. The Credit, itself,

supporting the business environment reform program focuses on administrative and regulatory

reforms that would have the most critical, near-term impact on the three phases of business

development:

* Inproving business entry through a streamlined and transparent countrywide

approach to business registration and licensing and strengthened legal framework

and capacity for attracting foreign investment;

* Streamlining the environment for business operations by reducing companies'

administrative and regulatory compliance costs through rationalization of

inspections and regulations, strengthening of judicial and extra-judicial capacity to

resolve commercial disputes; improving the system for secured transactions; and

leveling the playing field for private sector participation in public procurement, and

* Facilitating business exit through improved bankruptcy and liquidation system.

19. Underlying these objectives is the need to strengthen the consultative capacity between the

public and private sectors to ensure that policies and legislation are business-friendly.

7

20. It will be the relatively small regulatory and administrative improvements, such asrationalizing costly inspections that will be immediately helpful to business development. Suchimprovements are vital not only to expedite the whole investment process but also to denote achange of direction and pro-business attitude in the Government and bureaucracy. Unless someimmediate impact is felt at the ground level, many well-intentioned legal reforms that have alreadybeen undertaken will not be fully appreciated by the investor community. In the absence ofsignificant reforrms, the common problems, perceptions and anecdotes of existing investors willcontinue to be some of the most potent deterrents to incoming investors.

B. Business Entry

21. Current Situation. Investors view theprocess for establishing and registering a Average Company Registration (Days)

business as one of the top barriers to investmentin BH. Each of the 14-15 formal steps can take Poland I 2 L

days or weeks. Furthermore, the process is not Li0iuania = = =clear and is loaded with sequential approvals Hungary ___ _

and unnecessary or redundant steps resulting in U"in

a time-consuming, costly process from the LaWia

preparatory phase until the business can legally US/L=K

begin operations. During this time, valuable Aua

resources are idle, business plans become 0 10 20 4 I 50 60 70

obsolete, business partners and contacts turnaway -- opportunities are lost.

22. Efficiency of the business registration process in BH falls behind most transition countries inthe region3. A baseline survey of administrative and regulatory costs of doing business conducted

as part of preparation of the BAC in 2002 showed that the process for registering a business in BHin 2000-2001 took an average of 64 days (i.e., 80 days in the Federation; 31 days in RS), but rangedfrom one to 730 days. Although certain courts have taken steps to streamline the proceduresconnected with the registration of a company and to make the process more transparent, this type ofpiecemeal reform is insufficient and courts remain the main bottleneck in the process.

23. The entire system needs to be re-examined and overhauled. An inter-Entity working grouphas completed an assessment and adopted an action plan to streamline business registration on thebasis of FIAS' recommendations. Their efforts are supported by donor-funded technical assistanceto help re-engineer the process and to build the countrywide registry. The Entities' have committedto common procedures for registration and a single database.

24. Historically ineffective and overly influenced by political structures, the Foreign InvestmentPromotion Agency (FIPA) has made significant progress over the past year in re-asserting its

Source: FIAS data.

8

mission, sharpening its vision and initiating investment promotion activities. In order to functionas an effective investment promotion agency representing the interests of the entire country, theGovernment has undertaken efforts to increase the capacity and professionalism of the FIPAthrough amending the decree on the foundation of FIPA and its statute to abolish the ethnicallybased system for the rotation of General Managers; to formalize a Steering Board comprised of amajority of private sector representatives, and to establish a financing base to carry out itsactivities.

25. In fulfilling its mandate as the State investment promotion agency, FIPA will need to expandits operations and collaborate closely with State, Entity, Canton and local governments to provideinvestors with the best information about investment opportunities and to promote furtherinvestment across BH. This will enhance the credibility of FIPA, while enabling it to leverage itslimited resources through local partners and representative offices within both Entities for greaterimpact.

26. The State Law on Policy of Foreign Direct Investment, drafted with assistance from FIAS andadopted by the State Parliament in 1998, obligates the Entities to adopt imnplementing legislationaligned with the Policy law. The Entities together have drafted and each has adopted suchlegislation harmonized with the State law.

27. Reform Agenda. The Government will reduce barriers to business entry by:

* Creating common streamlined business registration and licensing procedures and a singleregistry countrywide. Changes will include introducing a single business registration formand eliminating superfluous forms, contact points and approvals; simplifying and increasingthe transparency of the process; reducing the number of events that require re-registration;enforcing the "deemed approved" system, as allowed in existing laws, when aGovernmental body does not meet a required deadline; and using private sectorprofessionals and lower level court personnel to assist judges in the administrative tasks ofbusiness registration. Both Entities will reduce the number of steps to register a businessfrom the current 14-15 for foreign firms, for example, to 7 or less. The FIAS Report on theAdministrative Barriers to Investment and the Government's action plan lays out a robustproposal for improving the registration of business in BH, including elimination of separateapprovals for foreign investment.

* Harmonizing Entitv-level laws, such as the company laws that define the allowed forms ofcompany registration and the Laws on Entry into the Court Register that define registrationrequirements; strengthening the capacity of the courts, especially clerks whoseadministrative role will increase as the judicial role in registration is reduced; andrationalizing the requirements and process for permits and licensing. In order to assessimpact of the reforms, the Entities will carry out independent surveys to measure progressagainst key results indicators, such as reduction in the average elapsed time to register abusiness from 80 to 30 days or less in the Federation and from 31 to 23 days or less in theRS.

9

C. Business Operations

28. Current Situation. In addition to the obstacles investors face to successfully beginoperations, they are then faced with complying with a large number of regulations that are ofteninconsistent and outdated, with very considerable reporting requirements, and with inspections bynumerous inspectorates with unclear and often overlapping mandates. This provides a fertileground for rent-seeking behavior by Entity- and local-level inspectors and is noted by virtually allbusinesses as a top complaint and cost of doing business in BH. Anecdotally, domestic investorsestimated that as much as 20 percent of administrative time is spent on compliance issues; oneforeign investor reported that the ratio of administrative costs to production costs was an alarming1:1. The 2002 baseline survey of administrative and regulatory costs of doing business showed thatduring 2001 the four inspectorates with mandates across all businesses (i.e., Market, Labor,Financial Police and Revenue (Tax) Administration) together spent an average of 28 on-siteinspector days per business inspected in the RS and 18 days in the Federation. The authorities haveinitiated actions to reduce the burden on business by: eliminating the overlap between FinancialPolice and Revenue Administration; setting up cross-inspectorate working groups to resolve issuesof overlapping inspectorates and obsolete regulations, and setting targets to reduce the on-siteinspector days for the four mentioned inspectorates from 28 to 15 days or less per year in the RSand from 18 to 12 days or less in the Federation. The European Commission, recognizing that adifficult regulatory environment can discourage business activity, has recommended that the EUMember States review their regulatory environments with a view toward streamlining 4 .

29. Limited access to working and investment capital from banks is, in part, a reflection of a weaksystem of secured transactions on movables: a commercial legal framework that does not grantnon-possessory proprietary security; weak enforcement mechanisms, and lack of a central registry,all contributing to the possibility of duplicate pledges of collateral without proper establishment ofpriority of lien and, therefore, difficulty in enforcing creditors' rights. Both Entities have adoptedlaws on Pledges on Movables, drafted with international assistance, and a bilateral donor isassisting in the design and implementation of a countrywide registry.

30. Resolution of commercial disputes through the courts is slow. The courts are known to beweak, deficient and, in many instances, subject to political direction and corruption.5 Enforcementof laws, contracts and court decisions is exceptionally poor and reflect the inadequacies of thewhole legal system. Both Entities recently introduced new laws (the Law on Judicial andProsecutorial Service (Federation), the Law on Prosecutors (RS) and the Law on Courts and CourtServices (RS)) that are designed to de-politicize the judiciary. These laws also establishindependent judicial commissions to conduct a review of the judiciary and prosecutors-an effortoverseen by the Office of the High Representative's (OHR) Independent Judicial Commission(UJC), which oversees all judicial reform activities for BH. Judicial reform is being acceleratedunder a February 2002 decision by the Steering Board of the Peace Implementation Council to

'European Commission Recommendation on Improving and Simplifying the Business Environmentfor Business Start-Ups, article 11, C(97) 1161(April 22, 1997).

Intemational Crisis Group reports. Denied Justice: Individuals Lost in a Legal Maze, February 2000; Rule of Law in Public Administration:

Confusion and Discrimination in a Post-Communist Bureaucracy, December 1999; and Rule Over Law: Obstacles to the Development ofan Independent Judiciary in Bosnia and Herzegovina, July 1999; and World Bank's Anti-Corruption Diagnostic, March 2001.

10

remove all judges and prosecutors and replace them by the end of 2003 on the basis ofqualifications and merit, rather than political appointment.

31. Weak and disparate public procurement legislation and practice limits the opportunity forprivate sector participation in public tenders, impedes competition and creates rent-seekingopportunities. While the RS recently enacted a Law on Public Procurement, both the law and itsimplementation need to be strengthened to eliminate abuses (e.g., reducing procurements in small-value lots to avoid open bidding; short bidding periods to favor preferred bidders; excessive publicofficial discretion to award contracts; inadequate advertising requirements that limit competition).In the Federation, the enforceability of public procurement rules is severely weakened by the factsthat rules are mandated by decree rather than law and that there is little awareness of the decree.No public procurement legislation exists at the State level. The Government recognizes thatharmonized procurement legislation is important to promoting competition and strengthening of asingle economic space in BH, and it is included in the Government's draft anti-corruption actionplan that is in the process of public consultation. A Bank-led Country Procurement AssessmentReport is nearing finalization.

32. Regular consultation between the public and private sector in the formnulation of laws,regulations and policies affecting business, essential to creating an effective business environment,is lacking in BH. Discussions between Government and the private sector occur irregularly andinfrequently. Furthermore, meetings often have been one-on-one with Government officials andmanagers and/or owners of the largest and most influential firms, which commonly are the loss-making state-owned enterprises. This has resulted in the perception that mostly "connected"persons have a voice with Government and that this voice rarely and poorly represents the interestsof the broader business community. The authorities have established a forum for formalconsultation with stakeholders as a part of the PRSP process. This is a first step toward regularconsultations on business environment issues.

33. Mandatory membership in Chambers of Commerce and laws that prevent businesses fromforming alternative associations effectively create a Government-sanctioned monopoly for theChambers and crowd out viable alternatives that may better serve the needs and represent the viewsof the emerging private sector. Although some Chambers have begun to restructure theiroperations to better serve the needs of the private sector, most new private businesses expressdissatisfaction with what is effectively a "tax," as they perceive little value from the Chambers inreturn. As a result, many private businesses do not interact with the Chambers and see them asrelics of the past.

34. In response, some private business owners in both Entities have established organizationsunder laws allowing creation of citizens' associations; others have affiliated with the Chambers inorder to associate as businesses rather than individuals. Private business associations that havebeen established, however, are struggling. Fees derived from membership and services are limitedby a small membership base and make it difficult to compete with the monolithic, monopolisticChambers. Although still developing their capacity for effective public-private sector dialogue,these new private business associations are now beginning to lobby the Government on behalf of

11

their constituents. As a first step, the RS recently adopted legislation that sets the stage forelimination of mandatory membership by establishing a new basis for fee generation and retainingthe mandatory structure as an interim measure only. The Federation is drafting legislation toeliminate mandatory fees in 2002. This will provide incentive for the Chambers to reform intoservice-oriented organizations that will compete with private associations for their membership.The State has adopted legislation to allow individuals and businesses to associate across thecountry.

35. Reform Agenda. The Government will reduce impediments to business operations by:

* Preparing an inventory of legal and extra-legal inspectorates at all levels of government as afirst step toward minimizing redundancies that are costly to both government andbusinesses. The activities of the inspectorates will be coordinated, eliminating duplicationand overlap, and initiatives for joint training and information sharing will be implemented;the mandate of each inspectorate, authority of inspectors and the process for appealinginspectors' decisions will be clarified and publicized; rational, planned inspection scheduleswith appropriate notification to the business will be initiated; standard inspection forms andguidelines for, and review of, penalties imposed by inspectors will be established; a Code ofConduct for inspectors will be developed; time limits for different inspection activities andperformance standards for inspectors will be set, against which performance will bemonitored; and regulations will be reviewed and rationalized and those that are deemedoutdated or unnecessary will be repealed. In order to assess impact of the reforms,independent surveys will be conducted periodically to measure progress against key resultsindicators, such as reduction in the average amount of time inspectors spend on-site perinspected business per year in aggregate for Market, Labor, Financial Police and Revenue(Tax) Administration inspectorates (i.e., from 28 to 15 days or less in the RS and from 18days to 12 days or less in the Federation).

* Improving access to capital by protecting creditors' collateral rights in secured transactionsthrough creation of a countrywide registry of pledges on movables and increasing capacityof judges, clerks, lawyers and banks to implement the new system.

* Improving enforcement and commercial dispute resolution by supporting the furtherdevelopment of alternative dispute resolution mechanisms and utilizing progressive courtsto formally pilot specialized commercial sections of the court with jurisdiction overbusiness registration, collateral registration and enforcement of secured transactions, andbankruptcy and liquidation proceedings. Such specialization would be combined withselection, qualification and training programs for commercial judges and expert associates.

* Adopting and implementing strong, harmonized public procurement legislation at State andEntity levels to promote a fair, transparent and competitive environment for private sectorgrowth.

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* Strengthening capacity for regular consultations between the Government and the businesscommunitv to promote business-friendly reforms.

* Ending the mandatory membership fees for businesses to join the Chambers of Commerceand encouraging them to compete on a commercial basis with other business associations.

D. Business Exit

36. Current Situation. A well-functioning system of bankruptcy and liquidation is an essentialelement of a market economy. Bankruptcy serves many important functions: it relieves debtors ofthe burden of debts; it frees up non- or under-performing assets to be channeled into more efficientuses; it encourages entrepreneurial activity by facilitating risk-taking behavior and it promoteslending by preventing debtors from delaying and squandering resources and allowing creditors torecover some portion of debts owed. As a transition economy, the bankruptcy and liquidationsystem is extremely important for BH. It will facilitate exit of numerous loss-making state-ownedenterprises that will not find buyers in the privatization process and which must make way for new,private businesses.

37. In 1998, the Federation adopted a modem bankruptcy law, while former SFRY bankruptcylegislation is still in effect in the RS. An inter-Entity working group, comprised of local andinternational experts, is finalizing its draft of this important legislation to ensure that it iscoordinated with other core business legislation (i.e., the Law on Enterprises and the Law on Entryinto the Court Register) and is in line with relevant EU directives.

38. Reform Agenda. The Government will facilitate business exit by:

* Modernizing bkrupitc and liquidation laws and procedures so they are consistent withEU standards; reducing high up-front fees needed to initiate bankruptcy proceedings; andinitiating the creation of a better system through which capable trustees, liquidators andspecialized judges are trained, certified and engaged to implement modem exit proceduresfor enterprises.

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III. THE PROPOSED CREDIT

A. Rationale for Bank Involvement

39. The Business Environment Adjustment Credit (BAC) is proposed as the next in a series ofadjustment operations that IDA has extended to Bosnia and Herzegovina following the DaytonAccord. Previously approved adjustment operations include the Enterprise and Bank PrivatizationAdjustment Credit (EBPAC), Public Finance Structural Adjustment Credits I and 1I (PFSAC), anda Social Sector Adjustment Credit (SOSAC). A second Social Sector Adjustment Credit (SOSACII) is under preparation. An IMF Stand-by Arrangement (SBA) was successfully concluded in May2001; a letter of intent for a new Stand-by Arrangement was signed by the BH authorities on March27, 2002.

40. The proposed Credit is an integral part of the Government's Interim Poverty ReductionStrategy Paper submitted to the Bank and the IMF in December 2001, to be followed by a fullPRSP in 2002. The I-PRSP envisions acceleration of privatization, strengthening of the financialsector, and establishment of an enabling environment for domestic and foreign investment. The I-PRSP further recognizes that a key element of a good enabling environment for business isstrengthening of a single economic space in BH, following the EU example. The BAC also isconsistent with the Country Assistance Strategy (CAS) dated May 18, 2000 and the CAS ProgressReport, dated September 24, 2001, which lays out a graduated assistance strategy aimed at helpingBH to formulate and implement a comprehensive reform program that would accelerate thecountry's transition away from dependency on aid toward self-sustaining growth.

B. Monitoring and Evaluation

41. Recognizing that previous experience in BH has shown that changes to laws and regulationsalone are not always effective in achieving results on the ground, the Credit incorporatesperformance-based results indicators as second tranche conditions. These performance-basedactions will help ensure that key reforms are effectively implemented and result in tangibleimprovements in the business environment. In particular, the authorities have agreed to specificresults to decrease the amount of time and number of steps to register a business and to reduce thecompliance burden on businesses as measured by the on-site inspector time spent by thoseinspectorates common to all businesses. An independent system for monitoring results anddetermining compliance for tranche release has been established.

42. A baseline survey of administrative and regulatory costs of doing business in BH wasconducted by a local NGO, and overseen by the Association and FIAS, among 302 randomlyselected majority private companies representative of the country's economic activity. The surveyinstrument, sample size and methodology for the baseline survey were established in cooperationwith FIAS to allow comparison with other countries that have undertaken similar surveys. Theresulting baseline indicators set the starting point for each Entity. Every six months throughout the

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term of the reform program, an abbreviated survey to assess progress against the baseline indicatorswill be carried out according to specific methodology described in Annex 6. The method forcalculating results of the surveys and determining compliance with the conditions are also detailedin the annex.

43. The surveys will be carried out under the auspices of the Ministry of Foreign Trade andEconomic Relations, in conjunction with FIAS and the Association. Each of the Entities, the Stateand the Association may appoint a monitor to observe that the sample selection and survey processare being carried out according to agreed terms to ensure independence and reliable results. Thenames of the firms, however, will remain anonymous to the monitors in order to maintain integrityof the sample.

44. In addition to the semi-annual surveys, a full survey will be carried out with donor assistanceevery 18 months for at least three years and results widely publicized to increase transparency andaccountability for the reform program and to encourage continued progress of BH's efforts toimprove the business environment.

45. In addition to results of the surveys, regular monitoring of the program will be carried out by afield-based Task Team Leader (TTL) supported by periodic supervision missions. The TTL willcoordinate closely with other donors, particularly those providing critical technical assistancenecessary for the implementation of the reform program. The Government's implementation andmonitoring arrangements are further described in Section F, "Implementation," Paragraphs 55-58.

C. Benefits and Risks

46. The main benefits of the proposed Credit include: (i) contributing to the building aninvestment climate attractive for new entrants and for increased productivity of existing privatebusinesses to promote economic growth and absorb labor and other resources released by theprivatization and downsizing of the state-owned enterprises; (ii) strengthening the concept of asingle economic space through greater harmonization of administrative and regulatory frameworks,thereby moving the country closer to its goal of integrating more fully into the regional economyand the European Union; and (iii) building a more dynamic private sector that will create muchneeded new jobs-this in turn will spur a shift away from informal sector activity toward formalsector activity and to the payment of taxes resulting in more funds for vital social services andtransfers, which are now often unavailable or only partially available to the poor

47. Main risks associated with the proposed Credit are: (i) complex and fragmented govemancearrangements in Bosnia and Herzegovina-Entities, Cantons, municipalities and cities-may provechallenging for implementation of reforms at lower levels of Government; (ii) momentum orcommitment could be lost in the lead-up to and aftermath of fall 2002 elections; and (iii) rootedmindsets of the system of the former Socialist Federal Republic of Yugoslavia as well as in vestedinterests the current system may result in resistance to change and delays as many continue to viewthe private sector with suspicion and others stand to lose opportunities for rent-seeking.

15

48. In order to mitigate the risk of complex and fragmented governance arrangements in Bosniaand Herzegovina, the task team consulted with local governments, NGOs and donors to seekalternatives to minimize this risk. For registration of businesses and pledges, the risk is minimal asthe Cantonal and regional courts, where this activity takes place, are involved in the design of thenew system and will receive equipment and training to facilitate implementation of the registries.Most local level administrative functions, such as certain inspections and registration of soleproprietorships, are delegated by the Entities or, in the Federation, by the Cantons. While thislimits the risk by giving some accountability to the Entities, it does not eliminate it. As part of themonitoring arrangements, surveys will be conducted periodically to measure administrative andregulatory costs of doing business. As previously noted (see Paragraphs 42-44), progress will bemeasured against selected baseline indicators that will be linked to release of the second tranche.This is expected to help motivate the Entities to impact change at sub-Entity levels. In addition, thetask team has identified a number of donor-funded local economic development (LED) programsthat are expected to form the basis of a partnership to coordinate reforms under the BAC at thelocal level. In particular, implementation of the BAC is closely coordinated with IFC's SoutheastEurope Enterprise Development (SEED), which is working with selected municipalities to designLED.

49. While current State and Entity Governments together have demonstrated commitment to andownership of reforms, this is a relatively recent development; previous Governments, especially inthe RS, have been resistant to collaborate toward the strengthening of a single economic space.The recently established Coordination Board for Economic Transition and European Integration tomove the Government's reform agenda forward on a cohesive and accelerated basis is expected totranscend the elections and provide continued support for the reform program. This will helpmitigate, but cannot eliminate, the risk that momentum or commitment could be lost in the lead-upto and aftermath offall 2002 elections. It will be important that key actions aimed at strengtheningthe single economic space establish strong momentum before the fall elections.

50. The Govermments' anti-corruption programs, supported by the Bank, and many of the laws,regulations and structures subject to the BAC reform program, will significantly reduceopportunities for rent-seeking behavior and will help mitigate the risk that vested interests thecurrent system may result in resistance to change and delays. Changing mindsets will be a long-term process, which poses a risk that cannot be fully eliminated.

D. Coordination with the IMF

51. There has been close coordination with the IMF to assure the BAC supports and complementsthe IMF program. As well, the IMF participated in Government workshops sponsored by FIAS tosolicit feedback on the recommendations on which the BAC is based. Consultations on the newIMF Stand by Arrangement have emphasized the need to remove structural barriers to SME growthand employment as an important factor contributing to poverty reduction.

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E. Board and Second Tranche Conditions

52. The overall program to be supported by the proposed Credit is outlined in the Letter ofDevelopment Policy (Annex 3) and the Policy Reform Matrix (Annex 4).

(i) Board Conditions

53. Conditions of Board presentation demonstrate Government actions taken to date to improvethe business environment, including the adoption of a single time-bound action plan forimplementation of business environment reforms by State (Bosnia and Herzegovina) and Entity(Federation and Republika Srpska) Governments.

* State Council of Ministers adopted amendments to the Decision on Foundation of ForeignInvestment Promotion Agency, satisfactory to the Association, and allocated funding for itsoperations.

* Entities adopted Foreign Investment Laws, satisfactory to the Association and fullyharmonized with the State Law on Policy of Foreign Direct Investment.

* State and Entities established a formal mechanism, satisfactory to the Association, for regularconsultation with the private sector to consider their views in the formulation of policies andlegislation affecting business.

* Entities formally adopted the concept of common procedures and single database for each ofbusiness registration and registration of pledges on movables (i.e., collateral registry).

* Entities adopted Laws on Registered Pledges on Movables, satisfactory to the Association.

* Entities conducted an independent baseline survey of administrative and regulatory costs ofbusiness.

* State and Entities drafted an anti-corruption action plan, incorporating public procurement,and initiated the public consultation process.

* Entities eliminated the overlapping authorities of the Financial Police and the Revenue (Tax)Administration.

* State adopted the Law on Associations and Foundations of BH, satisfactory to the Association,allowing associations to cooperate across BH.

* Entities established a working group to draft new harmonized bankruptcy laws. The workinggroup has already produced a draft that is in the process of being finalized.

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(ii) Second Tranche Conditions

54. Second tranche conditions continue the process of reform not only through: (a) prescriptivelegal and regulatory reform measures to be taken by both Entities, requiring harmonized actions topromote strengthening of a single economic space; but also by: (b) performance-based actions,which ensure that reforms are effectively implemented and result in tangible improvements in thebusiness environment, as measured by selected results indicators. While the substance of theresults indicators is the same for both Entities, the targets established take into account the differentstarting points in each Entity and, consequently distinct sets of achievable goals. As the onus is oneach Entity to achieve these goals, disbursement of the second tranche will be made independentlyto each Entity upon fulfillment of its second tranche conditions.

* FIPA representative offices are staffed and operating in both Entities.

* Pilot of the business registry system embodying common procedures, common forms, andsingle database has been tested in selected courts across both Entities, and a plan for fullimplementation, satisfactory to the Association, has been adopted.

* Entities reduce the average number of days to register a business from 80 to 30 days or less inthe Federation and from 31 to 23 days or less in the RS, as measured by independent surveyson a semi-annual basis.

* Entities reduce the number of steps required to register an enterprise to 7 or less.

* Pilot of the collateral registry system embodying common procedures, common forms, singledatabase and trained participants (judges, clerks, banks) has been tested in selected courtsacross both Entities, and a plan for full implementation, satisfactory to the Association, hasbeen adopted.

* Entities have established a business inspection system, satisfactory to the Association, thatprovides for: the review and rationalization of the mandates of inspectorates operating at Entityand sub-Entity levels; clarification and publication of the mandates of the inspectorates and theinspectors; rational, planned inspection schedules, standard forms and guidelines; amendmentsto legislation as necessary to implement rationalization of the inspectorates, and regulatoryassessment with the goal of appealing obsolete or unnecessary regulations.

* The average number of aggregate on-site inspector days per inspected business per annum forthe Market, Labor, Financial Police and Revenue Administration combined will be reducedfrom 28 days to 15 days or less in the RS and from 18 days to 12 days or less in theFederation.

* Entities adopt amendments to the Laws on Chambers of Commerce, satisfactory to theAssociation, to eliminate mandatory membership.

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* Entities adopt strengthened and harmonized Laws on Bankruptcy and Liquidation, satisfactoryto the Association.

F. Implementation

55. As previously noted, the Council of Ministers and Entity Governments have adopted a

countrywide action plan to implement recommendations of the FIAS study on Commercial Legal

Frarnework and Administrative Barriers to Investment. A working group, or secretariat, comprisedof State and Entity technical experts across relevant ministries were appointed by Entity PrimeMinisters and the State Minister of Foreign Trade and Economic Relations (MFTER) to draft the

time-bound action plan based on the FIAS study and in consultation with the private sector, andwill continue to act as the technical monitoring group for implementation of the reforms. The plan

also notes parties responsible for the actions. The action plan will be the Government's keyinstrument for monitoring progress against the business environment reforms.

56. The high-level cross-Governmental Coordination Board for Economic Transition and

European Integration, that is providing leadership to the country's economic reform agenda, willhave overall responsibility for ensuring progress under the BAC. More specific responsibility for

implementation matters has been delegated to MFTER in coordination with the Entity PrimeMinisters. Each Entity and the State has appointed a "champion" in the Prime Minister's cabinet

(in METER at the State level) to oversee implementation of the business environment reforms at

the Entity level, and serve as the Association's primary counterpart for the BAC. The BAC task

team has worked effectively with each "champion". A bilateral donor has committed financial and

technical assistance to State and Entities to assure access to local and international experts as

needed to move the agenda forward, and to fund activities of FIAS in supporting the Government'simplementation of surveys and self-assessment tools to monitor progress against results and tohelp build capacity for public-private sector dialogue.

57. As noted earlier (Paragraphs 41-44), baseline surveys to assess administrative and regulatorycosts of doing business in BH, in each Entity and in a cross-section of municipalities, have been

completed. Bilateral funding is available to conduct the full survey twice in a three-year period andtargeted surveys to measure progress against agreed indicators every six months during that time,

after which point the Government is expected to continue the surveys with its own resources.Methodology for the surveys is included in Annex 6. Results will be widely publicized both toincrease transparency and accountability and to encourage continued progress under the reform

program.

58. Another important factor for successful implementation of the reform program is availabilityof technical assistance. Bilateral technical assistance has been arranged for implementation of mostof the reform areas supported by the BAC. Those that are not yet committed, such as support forrationalizing inspections and regulations, are under discussion with interested donors and the task

19

team is confident that grant funding will be secured for all remaining areas. A "map" ofadministrative responsibilities in the Government and technical assistance in place is included inAnnex 5.

G. Financial Arrangements

59. The Credit would be disbursed in two tranches, with the second tranche disbursed separatelyto the Entities. In terms of financial monitoring, the Bank will complement its increased emphasison borrower public financial management in its analytic work and lending program with strongerreporting and auditing arrangements over the disbursements of adjustment credit proceeds. Thesecontrols are not intended to restrict or prescribe the uses to which adjustment credit proceeds fundsmay be applied by the Borrower. They are rather intended to provide assurance that Bank fundshave arrived at their intended destination, have been used in the first instance for their intendedpurpose of providing balance of payments and fiscal support, and will be subject to the Borrowerprocesses for managing public resources which are known to and can be reviewed by both the Bankand the IMEF.

60. Fiduciary arrangements have been agreed with authorities at the State (Borrower) and Entitylevels. Disbursement would be made in SDR's and sold to the Central Bank in exchange for KMs.The KMs will be deposited into a dedicated Deposit Account of the State at the Central Bank ofBH. The entire amount of all disbursements would be transferred from the State Deposit Accountto the budgetary accounts of the Entities in the Central Bank and then transferred to budgetaryaccounts of the Entities in commercial banks. The Entities have agreed that they will transfer $4million equivalent of the first tranche to the State budget through the normal transfer mechanism.Tranche release would be contingent upon satisfactory review by IDA of the implementation of theadjustment program as a whole and the fulfillment of specific actions required for each tranche.Proceeds of the Credit will be used for approved uses, such as foreign debt service. The Borrowerwill comply with standard reporting requirements of adjustment credits. The Association willexercise its right to receive audit reports on the Deposit Account after each disbursement.

61. In recognition that studies continue to indicate weak financial accountability and controls, theupcoming PRSP will include measures to strengthen accountability. The country recognizes thatcorruption is a critical impediment and has drafted an anti-corruption action plan for which publiccomments are being sought. The anti-corruption action plan, together with many of the measurescarried out under the BAC and related reforms, will further help reduce the corruption in BH andimprove accountability.

H. Poverty Implications

62. The reform program supported by the proposed Credit is an integral component of theGovernment's Interim Poverty Reduction Strategy Paper (see Paragraphs 12-13). Strong privatesector growth, a key objective of the BAC, is seen as the principal vehicle for poverty reductionthrough employment creation in an environment of high unemployment.

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I. Environmental Impact

63. The proposed Credit will have no direct impact on the environment. For the purposes ofOperational Directive 4.01, it has been rated Category C, and therefore does not require anenvironmental assessment.

IV. RECOMMENDATION

64. I am satisfied that the proposed Credit complies with the Articles of Agreement of theAssociation and I recommend that the Executive Directors approve the Credit.

James D. WolfensohnPresident

by Shengman Zhang

Washington D.C.April 24, 2002

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ANNEX 1: KEY ECONOMIC INDICATORSTABLE 1

Bosnia and Herzegovina - Key Economic Indicators

Actual Estimate ProjectedIndicator 1996 1997 1998 1999 2000 2001 2002 2003 2004

National accounts (as % of GDP)

Gross domestic product' 100 100 100 100 100 100 100 100 100

Agriculture 20.5 16.9 15.3 13.8 12.4 ..

Industry 25.7 25.3 26.7 25.2 26.3 ..

Services 53.8 57.8 58.0 61.0 61.3 ..

Total Consumption 117.2 104.2 100.9 113.0 110.1 106.7 102.9 100.6 97.9Gross domestic fixed investment 34.6 35.6 32.2 20.6 20.7 20.5 20.6 19.7 19.5

Government investment .. .. .. 17.6 15.9 14.0 12.0 1 1.8 11.0Private investment .. .. .. 3.0 4.8 6.5 8.6 7.9 8.5

Exports (GNFS)b 24.0 28.4 30.2 26.5 27.1 26.6 26.5 26.6 27.2Imports (GNFS) 83.1 73.9 6S.1 60.1 57.9 53.3 49.9 46.9 44.6

Gross domestic savings -17.2 -4.2 -0.9 -13.0 -10.1 -6.7 -2.9 -.6 2.1

Gross national savings' 14.6 11.2 18.0 -0.8 0.1 2.3 5.2 6.6 7.8

Memorandum itemsGrossdomesticproduct 2741 3527 4169 4540 4394 4808 5232 5749 6303(USS mrillion at current prices)GNPPpcrcapita(USS, AtlasmethOa) .. 1010 1140 1200 1310 1310 1330 1450 1600

Real annual growth rates (%. calculated from 19.. prices)Gross domestic product at market prices 79.2 36.6 10.2 10.0 5.9 6.0 6.0 6.0 6.0Gross Domestic [ncome .. .. .. .. .. ..

Real annual per capita growth rates (%, calculated from 19.. prices)Gross domestic product at market prices 73.1 32.3 6.8 6.8 4.8 5.0 5.0 5.1 7.5Total consumption 56.1 17.7 3.5 6.8 3.5 1.4 1.2 2.5 4.3Private consumption .. .. .. .. .. ..

Balance of Payments (USS millions)

Exports(GNFS) 658 1002 1260 1201 1192 1278 1386 1532 1712Merchandise FOB 336 575 697 649 732 834 968 1123 1303

Imports (GNFS)b 2278 2606 2840 2728 2543 2588 2612 2696 2813Merchandise FOB 1882 2333 2656 2502 2348 2346 2378 2457 2561

Resourccbalance -1620 *1604 -1580 -1527 -1351 -1310 -1227 -1164 -1101Netcurrenttransfers 1094 772 461 284 217 172 169 176 178Current account balance -748 -1060 -789 -971 -909 -875 -804 -750 -738

Net private foreign direct investment 0 0 100 90 150 200 200 200 250Long-term loans (net) 514 19 251 -55 227 236 199 83 101

Official .. .. .. .. 247 203 181 143 90Private .. .. .. .. -19 33 IS -60 11

Othercapital(net.u nl.enoms&ounissions) 477 1132 499 1198 575 498 452 516 408

Change in reserVesd -243 -91 -61 -262 -43 -60 -47 -48 -21

Memorandum itemsResource balance (% of GDP) -59.1 -45.5 -37.9 -33.6 -30.7 -30.5 -26.9 -23.2 -20.0Real annual growth rates ( .. prices)

Merchandise exports (FOB) .. .. .. .. .. ..

Primary .. .. .. .. ..

Manufactures .. .. .. .. ..

Merchandise imports (CIF) .. .. .. .. .. ..

Continued

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TABLE 2

Bosnia and Herzegovina - Key Economic Indicators(Continued)

Actual Etsimale Pro"actedhInicator 1996 1997 199S IM99 2000 2001 2002 2003 2004

PubUc ftinance (as % of CDP at market prices)Currentr te 37.2 28.2 30.5 31.7 31.0 31.6 30. 30.2 29.8Curren expenditurcs 41.0 26.9 31.0 32.6 32.2 31.4 30.0 28.6 27.4Cunt account splus (+) or deficit(.) -3.9 1.3 40.5 -0.9 -1.2 0.2 0.6 1.6 2.4Capital cxpenditure 0.6 18.2 16.2 16.5 14.7 14.0 12.0 I 1.8 11.6Foreign financing 0.0 16.9 16.S 17A 16.1 13.8 ll.4 10.2 9.2

Meontary IndicatorsM2IGDP 18.8 19.3 21.1 26.0 27.3 28.2 29.2 30.1 31.1GrowthofM2( ) 96.2 52.0 31.3 39.9 16.1 14.2 12.3 13.4 13.2Privacesectorcreditgrmwthl 191.6 119A 102.3 -229.6 198.6 312.1 77.2 103.2 10.5total cedit growth (%)

Price Indees( - -100)Merchandise export price ine .. .. _ . .. . . .Merchandise import price index .. .. _ .. ..Mac di tmnm of trade index .. .. .. .. ..

Real exchag rate (USSILCU)t. . _ . . . . .

Real interm atesCauusmrprke Index (%change) 7.7 13.6 1.0 3.2 5A 5.0 3.6 3.6 3.3GDP dator (% change) -14.0 8.5 S8 3.1 4.6 5.3 2.7 3.7 3.7

a. GDP atb. IGNFS, denotes goods and non1ctor services."c. nCludes net unrequited tnfas excilding official capital grants.d. Includes use of lMF resourcs*. Consolidated cetal govenmict.t. LCUI drenotes loal currency units." An increase in USS1LCU denote appreciation.

23

ANNEX 2

TIMETABLE OF KEY PROCESSING EVENTS

1. Preparation mission: March 5, 2001

2. Pre-appraisal mission: September 10, 2001

3. Appraisal mission: February 25, 2002

4. Negotiations: April 03, 2002

5. Planned Board presentation: May 21, 2002

6. Planned date of effectiveness: August 19, 2002

7. Expected program completion: December 31, 2003

24

ANNEX 3: LETTER OF DEVELOPMENT POLICY

Business Environment Adjustment Credit to Bosnia and Herzegovina

April 9, 2002

Mr. James D. WolfensohnPresidentWorld Bank1818 H Street, NWWashington, DC 20433

LETTER OF DEVELOPMENT POLICY

Dear Mr. Wolfensohn:

As you are aware, Bosnia and Herzegovina (BH) has experienced strong economicrecovery since the signing of the Dayton Peace Agreement in December 1995. Much of thisrecovery-reflected in average GDP growth of 29 percent in real terms during 1996-2000--camefrom large inflows of concessional funds from the Priority Reconstruction and Recovery Program(PRRP), which was successful in helping the country to rebuild its basic infrastructure and torestart economic activity.

Macroeconomic stabilization is now by and large intact. We successfully concluded anIMF Stand by Arrangement (SBA) in May 2001, and a letter of intent for a new SBA was signedon March 27, 2002. Unemployment has halved from its high of nearly 80 percent at the end ofthe war. Real per capita consumption has increased significantly for most households. Inflationhas fallen progressively, and is currently running at an annual rate of 5 percent. The strongeconomic recovery has allowed post-war output to more than double, from US$1,867 million in1995 to US$4,372 million in 2000.

However, we are aware that the prospect for entering a phase of self-sustained growth willrequire successful and accelerated implementation of economic and institutional reforms. In thisrespect, we have taken some important steps that contribute to improving the investment climatefor private sector growth. Reforms are ongoing in areas of:

* Accelerating privatization to eliminate the unfair competition of privileged state-ownedfirms and to free up resources for use by the private sector

* Strengthening the banking sector to build capacity of financial intermediaries to supportprivate sector growth

* Lightening a burdensome tax regime to motivate companies to return from the informal tothe formal sector

25

* Liberalizing trade, modernizing customs administration and strengthening competitionpolicy to improve the competitive environment for the private sector

* Improving property rights and access to land create the foundation for an active land

market and productive use of land* Fighting corruption and increasing the independence and capacity of the judiciary.

Among the most successful economic achievements over the past few years has been

the establishment of the Central Bank, introduction and widespread acceptance of the

Konvertible Marka (KM) and, just last year, elimination of the old Yugoslav-era paymentbureaus and transfer of clearing functions to commercial banks. BH was the first in the region

to achieve this difficult task, and both banks and businesses are the beneficiaries. Dramaticimprovements in the banking sector have occurred in recent months, with 80 percent of banking

sector assets now controlled by privately owned banks and more than 60 percent now in

foreign-owned banks. The conversion of the Deutsche Mark to the Euro fueled an "explosion"in consumer deposits, which doubled to KM 1.3 billion during the quarter ended December 31,

2001. The introduction of deposit insurance, soon to be moved to the state level, has boostedconfidence in the banking sector and participating banks are the largest beneficiaries of thesedeposits.

As BH continues in the transition from recovery and reconstruction to economic growthand sustainability, it has become clear to us that we still have a difficult road ahead. Already,

external debt service requirements are growing at a faster pace than public revenues, at the

same time that concessional aid flows are diminishing. Despite our best efforts to attract

foreign investment, which we view as essential to fill the gap and to bring much needed

technology and management expertise, we continue to lag behind our neighbors. In 2000,

foreign investment was only 3.4 percent of GDP.

We wanted to know why BH is not an attractive location for investment and what wecould do about it. We commissioned the Foreign Investment Advisory Service (FIAS) tofollow its previous work with the Foreign Investment Promotion Agency (FIPA) and help in

drafting our FDI laws by carrying out a study of the Commercial Legal Framework andAdministrative Barriers to Investment in BH. The FIAS study confirmed much of what has

been clear to businesses here--that despite improvements, investors continue to face a difficult

business environment with:

26

* Absence of a seamless, transparent and predictable legal and regulatory frameworkthat proves to be a major impediment to setting up and operating a business.

* Inconsistent and unclear business and administrative regulations and procedures opensthe door to abuse of power at various levels of government-which is compounded bythe absence of effective and independent appeals mechanisms-significantly raises thecost of doing business.

* The lack of effective laws, regulations and mechanisms for securing and enforcingcollateral severely restricts availability of much needed working and investment capitalfrom banks.

* Courts are weak, deficient, and, in many instances, subject to political direction andcorruption causing long delays in the resolution of commercial disputes.

* The 14-step business registration process is overloaded with unnecessary butmandatory approvals resulting in a sequential process that can take months tocomplete and is yet another reason for perpetuation of the gray economy.

* Once registered, businesses face a multitude of inspections from numerousinspectorates with unclear and often overlapping mandates, leading to excessiveadministrative costs for compliance.

With the assistance of FIAS, we consulted with the private sector, NGOs and otherstakeholders to help us prioritize actions that would have significant impact over the next twoyears for improving the business environment and attracting private investment-both foreignand domestic. This process became an important part of our deliberations and preparation for theInterim Poverty Reduction Strategy Paper, which envisions growth of the private sector as one ofthe key contributing factors to the alleviation of poverty in BH.

Business Environment Reforms

On the basis of these efforts, we have entered into a new reform program to improve thebusiness environment. Objectives of the reform program are to reduce those administrative andregulatory barriers that would have the most critical near-term impact on the three phases ofbusiness development:

* Improving business entry through streamlined and transparent countrywide approachto business registration and licensing and strengthened legal framework and capacityfor attracting foreign investment

* Streamlining the environment for business operation by reducing companies'administrative and regulatory compliance costs through rationalization of inspectionsand regulations, strengthening of judicial and extra-judicial capacity to resolvecommercial disputes; improving enforcement of secured transactions; and leveling theplaying field for private sector participation in public procurement

* Facilitating business exit through improved bankruptcy and liquidation systems.Underlying these objectives is the need to strengthen the consultative capacity betweenthe public and private sectors to promote policies and legislation that are business-friendly.

27

While the proposed credit would have significant short-term results in improving the

business environment and increasing the momentum, we expect that full impact of reforms of

administrative and regulatory barriers to investment will be longer term. The key is to initiate

critical changes that lead to strong momentum toward a self-sustaining process of improving the

investment climate. We expect that the emerging private sector will find its voice and be maj or

players in pushing priority reforms in the future, as we work in partnership with them to improve

the investment climate.

Business Entry

When compared with other countries in Central and Eastern Europe as well as in the

European Union, efficiency of the business registration process in BH ranks at the bottom.

Although certain courts have taken steps to streamline the processes connected with the

registration of a company and to make the process more transparent, we know that this type of

piecemeal reform is insufficient. Therefore, we intend to creating common streamlined business

registration and licensing procedures and a single registry countrywide.

Changes would include introducing a single business registration form and eliminating

superfluous forms, contact points and approvals; simplifying and increasing the transparency of

the process; reducing the number of events that require re-registration; enforcing the "deemed

approved" system, as allowed in existing laws, when a Governmental body does not meet a

required deadline; and using private sector professionals and lower level court personnel to assist

judges in the administrative tasks of business registration. The business registration process

could be re-engineered by summer 2002 and new system designed and ready for pilot testing by

yearend 2002. Certain laws, such as Laws on Entry into the Court Register and Company laws,

would require change to support the new system. The company laws regulate all aspects of

corporate formation in BH. The FIAS study indicates that it is essential that these laws

incorporate the best practices of business organization and corporate governance and that they be

mutually consistent in order to create a consistent and harmonized regime for business in BH. It

is our intention, therefore, to modernize and harnonize the company laws of both Entities and to

bring them in line with EU standards.

We expect to see results of an improved process even sooner and will use independent

surveys to measure the reduction of time for registering a business. A baseline survey has been

conducted against which we set measurable, verifiable indicators. The full survey will be

conducted every 18 months; targeted surveys to measure progress against the indicators will be

carried out every six months. Results of the surveys will be publicized.

Simplifying the business registration process will be an important element in attracting

foreign investors. More important, however, will be assurance that their rights are protected and

that they are treated equally with domestic investors. Therefore, both Entities have harmonized

new Foreign Investment Laws with the State Law on Foreign Investment Policy and are

committed to implementing these laws. In order to promote and facilitate foreign investment

28

across BH, the Foreign Investment Promotion Agency (FIPA) will be strengthened. Changes toits founding decree and statute that will help to de-politicize the organization and assure that thenew Steering Board has majority of representatives from private domestic and foreign investors.The State will allocate adequate funding to ensure that FIPA can operate efficiently across BHwith representative offices staffed and operating in both Entities.

FIPA will build its capacity to represent local investment opportunities by creating stronglinks with progressive local governments. The agency will increase visibility of BH by carryingout a public relations campaign, including promotion of the Government's action plan toimprove the business environment for the benefit of private investors. We believe that the moretransparent we make our plans and achievements, the more attractive an environment we will befor new investors.

Business Operations

The FIAS study reports that once investors have surmounted the administrative maze tosuccessfully begin operations, they are then faced with complying with a multitude of regulationsthat are often inconsistent and outdated, with massive reporting requirements, and withinspections by numerous inspectorates with unclear and often overlapping mandates. This wasnoted by virtually all businesses as a top complaint and cost of doing business in BH. Bosniaand Herzegovina is not alone. The European Commission, recognizing that a difficult regulatoryenvironment can discourage business activity, has recommended that the EU Member Statesreview their regulatory environments with a view toward streamlining.

We believe that this is one area where we can make significant near-term changes thatwill dramatically reduce the costs of doing business. We will start with an inventory of legal--and extra-legal--inspectorates at all levels of government as a first step toward minimizingredundancies. The activities of the inspectorates will be coordinated, eliminating duplicationand overlap, and initiatives for joint training and information sharing will be implemented; themandate of each inspectorate, authority of inspectors and the process for appealing inspectors'decisions will be clarified and publicized; rational, planned inspection schedules with appropriatenotification to the business will be initiated; standard inspection forms and guidelines for, andreview of, penalties imposed by inspectors will be established; a Code of Conduct for allGovernment employees will be developed; time limits for different inspection activities andperformance standards for inspectors will be set, against which performance will be monitored;and regulations will be reviewed and rationalized and those that are deemed outdated orunnecessary will be repealed.

Because businesses report that inspections and regulations are among the top constraintsto doing business in BH, and because we think we can make dramatic improvements in a shorthorizon, we will measure progress against the average number of inspector days spent on site inbusiness premises by those inspectorates that have mandates across all businesses: Market,Labor, Financial Police and Revenue (Tax) Administration. And we will minimize the impact on

29

business operations by setting targets for the average time spent on-site by these fourinspectorates during a year.

Another area that severely limits the availability of financing to grow a business is theweak system of securing and enforcing creditors' rights in collateral. We intend to improvingaccess to capital by protecting creditors' rights in secured transactions through adoption of asatisfactory Law on Pledges on Movables and Shares in the Federation; creating a central registryof pledges on movables, and increasing capacity of judges, clerks, lawyers and banks toimplement the new system. It is expected that the new system could be ready for to be pilottested in spring 2003.

In order to improving enforcement and commercial dispute resolution we will supportdevelopment of altemative dispute resolution mechanisms and use progressive courts to pilotspecialized commercial sections of the court with jurisdiction over business registration,collateral registration and enforcement of secured transactions, and bankruptcy and liquidationproceedings. Such specialization would be combined with selection, qualification and trainingprograms for commercial judges and expert associates.

Weak and disparate public procurement legislation and practice limits the opportunityfor private sector participation in public tenders, impedes competition and creates rent-seekingopportunities. While the RS recently enacted a Law on Public Procurement, both the law and itsimplementation need to be strengthened to eliminate potential for abuse (e.g., reducingprocurements in small-value lots to avoid open bidding; short bidding periods to favor preferredbidders; excessive public official discretion to award contracts; inadequate advertisingrequirements that limit competition). In the Federation, the enforceability of public procurementrules is severely weak because they are enacted by decree rather than law and that there is littleawareness of the decree. No public procurement legislation exists at the State level. Werecognize that harmonized procurement legislation at all levels of public institutions is importantto promoting competition and strengthening of a single economic space in BH.

Therefore, we intend to adopt strong, harmonized public procurement legislation at alllevels of government for all public institutions. This is a vital part of our anti-corruptionprogram and an important element of the EU Roadmap.

We are aware that regular consultation between the public and private sector in theformulation of laws, regulations and policies affecting business, are essential to creating aneffective business environment. Until now, we have relied heavily on the Chambers ofCommerce as the focal point of our consultations, but the private sector has clearly stated that itis not adequately represented by the Chambers and wants to have a choice of representation.Therefore, both Entities will pass legislation to eliminate the mandatory membership fees for theChamber and Government at State and Entity levels will institute a formal mechanism for regularconsultation with the private sector. In order to assure that our consultations are successful and

30

sustainable for the long-term, we will launch a series of workshops with the dual aim ofeducating and advocating change to the business environment.

Business Exit

A well-functioning system of bankruptcy and liquidation is an essential element of amarket economy. Bankruptcy serves many important functions: it relieves debtors of the burdenof debts; it frees up non- or under-performing assets to be channeled into more efficient uses; it

encourages entrepreneurial activity by facilitating risk-taking behavior and it promotes lendingby preventing debtors from delaying and squandering resources and allowing creditors to recoversome portion of debts owed. As a transition economy, the bankruptcy and liquidation system isextremely important for BH. It will facilitate exit of numerous loss-making state-ownedenterprises that will not find buyers in the privatization process and which must make way fornew, private businesses. In 1998, the Federation adopted a modem bankruptcy law, drafted withinternational assistance. Former Yugoslav bankruptcy legislation is still in effect in the RS.

We plan to build upon lessons learned from years of transition in the region thatindicate that it is equally important to balance encouragement of new business activity with thediscipline to remove old, loss-making state-owned companies. It is also important that privatebusinesses have clear possibility of exit that allows productive parts of the business to survive.Therefore, we plan to modernize bankruptcy and liquidation laws and procedures so they areconsistent with EU standards; reduce high up-front fees needed to initiate bankruptcyproceedings; and initiate the creation of a better system through which capable trustees,liquidators and specialized judges are trained, certified and engaged to implement modem exitprocedures for enterprises. New bankruptcy legislation could be in place by fall 2002.

Lastly, we have established a high-level cross-Governmental Coordination Board forEconomic Transition and European Integration to lead to the country's overall economic reformagenda, including the business environment reform program. More specific responsibility forimplementation of the reform rests with the State Minister of Foreign Trade and EconomicRelations (MIFTER) in coordination with the Entity Prime Ministers. Each Entity has appointeda "champion" in the Prime Minister's cabinet to oversee implementation of the businessenvironment reforms at the Entity level. A bilateral donor has committed financial and technicalassistance to State and Entities to assure that we have access to local and intemational experts as

needed to move the agenda forward. The donor also has committed to fund activities of FIAS tosupport our monitoring activities related to implementation of surveys and self-assessment toolsand to help us build capacity for public-private sector dialogue. As noted before, we plan topublicize the results of the surveys to promote transparency, accountability and further progressof the reforms.

31

We hope that the above elaboration of our program for business environment reformhas clearly expressed our commitment. As noted earlier, improvement of the businessenvironment is an integral part of our Interim Poverty Reduction Strategy Paper, which envisionsgrowth of the private sector as one of the key contributing factors to the alleviation of poverty inBH. The proposed BAC agenda will firmly launch the reform program and build momentumthat can be sustained by a stronger private sector in the medium term. The continuedcontribution of the World Bank and the rest of the International Community is an essential partof this challenging task.

,,-, ,2S" 5> t_,*, |Ministerv , - ~: > ',9im4s,6Tiegn Trade and Economic Relations

; '""'. .;r ... ' 8,Sriand HerzegovulaDCR

'JOO ~ ~ ~ ~~~~~~~1

Alija Behi Mid M la

F002fiono3

32

AINI 'NIA 4

,~~~ ~~~ flA T £^L ERAIO ITAN HE Ifl PS K Ennwortn. enrlh3p~%*Y tditJ~flI1 ND O..-*

.~~Ibi .-DE TTIO RANCHK ~~~~~~~~~~~~~~~~~~~~~ -~~~~~~~~~~~~~~~~~~~SLare and Ennti (Ge,ernnmenL axe ru lI.- \ c,r,rumtid to the promotio, c,l i rirgn

1^ |. direct r.%e.rm-.cnt -.d to proiecung rhci*- ->P ; Enuties h3ve adopted Fdigre inieit n rdto protcctang theI:, Invsr em- L n enU , L atsfictotr to rnte rqabk*h buDmnsses u. BH Fhe Entit

Association and fuIl hrrnonxzedSrrer.gthen FDI Leg-al rrimework wdii uimplement Ere Sute he S-on^;. ,y, ~~~~~~~~~~~~wnh rne Smie Liv ,:,r P.: lc-, oi mn ohvOc

* 'Ira fl~ ~ ~ ~~~~~~~~~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~F:rcp r~f

'J. <,! FDi treaTrdlned regEsirauunr process is

e§tablished, Enuti Foreign InietnentLius i lU eliminrate any exr-a teps for

foreign imesaton, which currendt i-ste to

______________________________ _r 1lregister with Entity mnu rcmes. ,. I Thle CouncT e oo f Minsters (StateJ ir

commnicped tc a de-polncized Fl PA ind

en:.ureadequate mgtU interue FdI ing 1cand tor b Ld

.i. Lin -: brenFP andlocalState Concl oi uziers has _. and

Jnvur% pubh~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~efctrr capenpugtion Lncpremse iarnesofa BaHn od ord the re-nnent;bins

t-1 $ adopted amnendmencs i, the lnc*nmer re programf . j;8, | Increase ropenoonir cap-3ry oi dh.e Decsion on Foundir.- of Fl PA, IFIPA represer.EaDC ,iffice 1: mufed FIPA represenutive ,ffice L *tafTed FhIPA bud peusoe 3n d: .reach priogme to

un 1 |FregnIveamn Pomon gn sf3ctory to the . nand ir0nS m dhe Fedenomon ind operating Lr. Republilu '~rpu ma n-cipalloe, and Canton;i FederSitona

Xl,0 t'FI PA5) allocared adeq3te ar.dirng ro unc re iz e FD I av% arenuss Etid re btn dd-'. .,; ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~LmLn.kp,g beme en FIPAt and lc:Hx3

; i ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~gznvenmer, FlPA vwdl carr n, i

pbrocis campugn to boncrth E itire n ll. ) e Pilot of the .:.inei RegHHrn serve BH ired e the reiG inrient'. bustot

btl5 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~enm-tortmenr reform progmrin

.gtuii Pilot ot tl-e Eltaines Registry dome budndfome ind ccdv prxesr ic.rS l>, tsur.eSs ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~reigzarLnUon v6di be ,iyruficanuiv

9 m~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~rphfied ior all c.ompartt-. TFhe Statet;ti ,~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~nd Enoite/si gree Lhat 3 SUr. UrJILned

" -. systt'n, en'bodyrne common r., t^ v ll

.wW5v~ ~~~~~~~~~~~~~~~~~~~~~~~~~Po cu> if Ehe BusLnez: Repi un Pilot .M d.e BLines: Rei.L;" dmse ic and I m ortrteig Lner. tosnrreli

'.4 ,-stw;ihoenroacmr n vmebozdving c,mrr.:,n ;epirnte proces:wncrbeulshcEntities have fomiulv adopted the procedures. comm.or. iomrnim and ad cm: sente proeswlr be eibrshed

StresTnitne and esubltsh er-aetparent corrcp oihairmonLzrd pr--cedurt; ungle J :itatve hr been tested i pioLedureh.. commor. -teen, and i ior foreign tnverce:s and InV ebera step;.

counrn-vwde approach to bwiLnes 3nd single ditabue for tuines, .elected cc,urr in the Federation, inledatbs be re-red i for tnrer vestorr will be eLimi ateregi.traeaon registi-ation and pLin tot full implernerrarion has s~~eleccted courts in Republiks ~mpU. Entities % ll adopt ha-rmniuzed L; i n

i ;.:regpsLnnon reppLsonoon ind pLLr. io-.r full implementatio h-i a. lr 0 1urpscu.- i Eu-Ll h U>u e;E,a-Jl;L.. been adopted by the Federjation ar-Jd pLan to: full imrple-nenution h-ias Enus inTC- the Coun Rkegister. satisfactory

been idopred by Repubirka Srp-.skna to the X-sctnuon and fuliv suppo:lrtingthe re-rdimned busuines registrboun

.i. t pr,cess Nec essary suppornting lgtplspO-n

and bsl ar s wall be adopted without delay

tW cnn:rc qu.ick tnplemernatt.n Entities

I all * )Jd.:.pt h ±rnonized Lu,! Jr

I ' '. Enterprie .x iact.:rr t: the

BOSNIA AND HERZEGOVINA:Business Environment Adjustment Credit

33 Proposed Prog-ram of Policy ReformsPage 1 of 4

ANNEX 4

X P-OCRAS&M : | TRANCHE; ! ; ;SECONDC LETTER OFIEVELOPMENT-TRANCRE" :~~~~~RLEPUBLIKA SRPSKAA. A~~~~~~~~~~~~~~~~~~~~~~~~(or) FEDERATION TRANCI-rE T&~~H *POLIY

Entities have conducted an The Federation reduces: (a) the Republika Srpska reduces: (a) theindependent baseline survey of average number of days required to average number of days required to

i Ensure effectiveness of the business administrative and regulatory costs comp ete e registration process complete the registration process Results wiDl be monitored every sixregistration system of business. an tee numses to commence for enterprises to commence months through an independent survey

' registration system ~~~~~~~~~~~~~~~oper-ations from 80 days to 30 days; operations from 31 to 23; and (b) and findings will be publicized.and (b) the number of steps the number of seeps required torequired to register an enterprise to register an enterprise to 7 or less.7 or less.

Entities wiDl ensure that a streamlinedand effective pledge registry isimplemented with training for judges,clerks and banks. Necessary supportinglegislation and by-laws will be adoptedwithout delay. In parallel with

Entities have adopted the Law on establishing the pledge and businessRegistered Pledges on Movables, Pilot of the Pledge Registry system Pilot of the Pledge Registry system registries, the Entities will initiate a pilotsatisfactory to the Association, embodying com on procedures, embodying com on procedures, program to estabish speciazed sections

ebdi c.common forms, single database and common fos, single database andon of comeral mattersOudge,cleks, on resluctergionaof commrtsa mhatterfocs,g-,i cmpredtor accesstollate al by protecang have formaDy adopted the tcrained participants (Judges, clerks, traimned participants (judges, clerks, including contract disputes, creditors'

Improve access to capital by protecting ontep harmallyedoptedute banks) has been tested in selected banks) has been tested in selected rights, bankruptcy and liquidation,concepi of harmnonized procedurescorsiReuM Spkaana

and sngledataase fr reistrtion courts in the Federation and a plan cut nRpbiaSpk n including training for judges, clerks andfand sngle database fog regnstvateon for full implementation has been plan for ful implementation has lud crating a ces,fcan

t of pledges on movables. adopted by the Federation. been adopted by Republika Srpska. lrsgan creatig A cericationprogram for judges. As well, authoritieswill encourage businesses to use AltemateDispute Resolution as an optionalsettlement method, in order to speed upthe process and reduce the burden on thecourts, thus freeing them to handle morecomplex miatters.

State and Entity Govemments wiD adopttr"W ....,State and Entities have drafted an and implement strong harmonized public

.tw, ~~~~~~~~~anti-corruption action plan procurement legislation for all public. Level dhe playing field for pnvate incororatng public procurement institutions. This is a vital part of the

X sector parecipat in public tenders and initiated the public and Govemment's anti-corruption campaignLevel pathcplationg il o rvtn consutiationth pro hcs and is crucial to a fair, transparent andsetrpriiaini ufc edr oslainpoes competitive environment for private

sector development. It is also a condition_____ ______________________________of________________dhe_________ __________E U________________R oadm ap._____________________ ofo theh E UU R ooa m ap

BOSNIA AND HERZEGOVINA:Business Environment Adjustment Credit

34 Proposed Program of Policy ReformsPaze 2 of 4

ANNEX 4

|iLtiinaLia burden on bwsneb ciLued b)The Fedlertion etatbh,he..3 Republik.; 'TtC etaEhshe, ' st%i eUn2 dipchn h

- . . ~~~~~~~~~~~~~~~~~~~~~~~~bwine... rLp-ecu,)n iymtenr, buimcs; Ln z -; .msc:lv em..n dupecuon; ;Lhcm u-hne ecorrunirted rc*. Lseirnhrung- r- _ secepsble :; the .\SI cYIIOn. to acceprabl to tphe AbLc.Cteo on. ') I he npe r: prcth runcn.;r sl ol be

Enti.ies have eluT.iaated iLn%ertion re',e-a ir.d rind lne the snsen.rv. remheei snod ra;onahze the raonahzed, ipector. trained, a Code of.Ennncs ha%e elirywriateci ri-Lnard.ite o1 inspecronrea operanng rmnd,te, -,I ripectorite- .-periatm1 Cridupc adoped

businest overlipping 3uLhonues Fninacil it Enun nred :ub-Enurv leve;. at Eniurv and ub- Enntn level. h ,.d bee] -

Reduce regulriore complnce burden Police end Re-ence Tat clantied and publiczed the clnhe.d ind pobiiczed the goEnesr,eOr sailon bu;ne AdmntiLrnu,un mandaute ol Lhe inspectorates end mandites or the inspectcrirte, nd -stult a iti pn' are bueu se to

i-.pecton.. ii'irinuted rnional. inspectors. enztiuitr! rational. pno.-ntizc al-itch regulstroca temsplane impection scheduler, prE cl anned hdtepee-ctn costl Cherl burdcn.ome reguldtions

fomts and pudelis. nd £e- ndironri ind oderLe and Well 4 anged or elined!uLndird fooTL, ~~~nd gwdehnes. ind i-~~he Entities aidi uork uaith C artot-s

* ~~~~~~~~~~~~~~~~~~~~~~~~~iiopled3 nect-siin smendmenu to i. dopud.: nece, irv irnendurnenn to iFdrhon and ntluesbz toI url e-Le xa,nz

law;. ind bV l1u . .13US ind bv bc;Fden.n imuncpl ;zrve and rsrionilizc requirements tor perrmitslicensing iendoher reiruJidnns.

uenece-;san reg.itions %di be repealed

Ennties hi%e c ,nJucted an. The Federeumn reduce. the sert-gec Republik SrpsLa reduces ti-eindependent bLaeirine neN ot number ft or-sate Ln:pecror dayv a -erage number .:1 *nste irnpectOr Results ' ad be monsied ere six

Entsite effecnsenes; of iLnpecuon adn-aruunte and reist.:r elr.c:sr-. per inspected bu;ine.s per annut-, dies per inspecied brssne;: Pei Re-nih t. LLI e indepede, eunlC5

s91 iystems of>1 bu iness treinrn 1tl dI t d i; r 1 t e 3annumr fr.rc 2h dv; 1 ,.. I" div: i i r n ftndirjg wil11 be pubocut.IMarket, Lab-ir, Fna-ncsi Police ind ulirket Libor. Fin-ncial P.-sice end

Resenuc \Ndmirusrtaions Re%enue \dmanuisr3tioni

BOSNIA AND HERZEGOVINA:Business Environment Adjustment Credit

Proposed Program of Policy ReformsPage 3 of 4

35

ANNEX 4

- -- . . |' . r . .-.E 9 --I *-C . -.

:-;;~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~-

7.E0 . ._ _

f.-. R. S

4 j; *. ~~~~~~Stair and Entites h.a.Ce¶taCbLahed a State ard Entities are c.:mrmined t;.ni J.- t-)rrru mechain,m. saoalicr:,n .;tc 'tv ipro;vingri-c egi9lau'c Irarnenark tc

ti ?tzfj .tAs:cianor. fo:r regular c:.rvulraur-,s laciliLite the iSCCaticn. n ' pc-t Fx3e0; ° it h pm are sector to- conaider thenr businesie: and merribership mn the

.,t J4 .; ie-u in the tc.miuluion ci policies md C:hambEers CF.Dmmerce LOM be NTde" '-i , . lepalir ion afI'e;tnng busmn-as Fedtr3o ad-rped3 arrendnreinr ReubWtka Srsk 3d e t oluntars Stair and Entnnes v.ill

[2 i j2 tnance the co:nrultanse role the La*.n; 3nk,.. 3mnV et u- telawl actively consl'I with pm are secorl irs armita O pneaie sector in tomxnTuiri *:2 (C.:nrec tuic- :he (CF.ben ol I ;.mec anar d tni ranapaenri A^ if t: seek the

RI jJ, public policies and conmmercial State has idopited th,e U-A o n A , i ~iu. eliminat rerandatn:r-s sasfactu.rs' to tht s cl3c ~urC. s * ial atbusiness pnor to efflecting malorri. si.. liws' *\ssociem3onl and Fo:undtionsn .t BH. - merabrsiup elimiunate nr3ndaton membership theirg in:.pleresr Ta1 fura-ici buildeunXt4t-it. sautacr.:-rv lathe %.sacicsiaicn alloirng c hngesE d *ntities ireI rIialetmnIdE'4 ' usoetoro to. coorperate actresa BH cchn"Pirtante capacar't of both pubic and

x: ti''ate omdw e d ualLam ofu ucin andheld

It 4 f2~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~avcatLin chng- t he busijc- O nesse

lCg ba,in modemn banjupinad liquidanton

on a ffecung b-sLn- hmt unrngof amarketrec:nomy In

I'- t3 transition nwvnchen Laie -o:iv ned co .:mpaiesrr

!. . - Entitues hat e es tabitsh rd aaoika . hr.g Th' F ederani-lr. aJ. *pLusruer*re ned Rubpeik hendmnEi id-e:-c i rs pled are undeLgng InvState zu r a rn d Ennn tIe:i - -t * hinanrm,ue and ,trennr.er . gt -up to daitre3 hni*:rned La orbukep and ti.nuth:ed Li * :.n B43rinnpi- tha ai- ndr 1bl ru d,r-c [uer n.s . .

"lzJr t mnka-nupicy arid liquidrinn bankruptc, 1la-a tistaicr*r r*,. thc \:- :o:au-r ar.iL s cCn.;at1cin su e stablish a c Itreera ' tirm--.ni.ed

pubfic policies aLnd C0MMe`IClAI Lhe L,- .-. t- himb,, .:,I' imendmenu I.m. Lhe I-aws ' aveliLn on.innin %.-ihhpn%tate mect-ut. more

State haz )J-)pted die La-, on Conuncme. 'ALlSf3Ctl)r LhC orgaudg Isd-er and r Itrsepe A. p A r-net-r

* r* tiar a { 1|ur, ird ccmn) Aht kes plmeera *dc F_!.~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~ ~~~~~~~~~~~~~~~~~~~~~~~e . cie. :pt-i m.i Is unre. Irutmared

BOSNIA AND HERZEGOVINA:Business Environment Adjustment Credit

Proposed ProCpram of Policy ReformsPage 4 of 4

36

ANNEX 5 BOSNIA AND HERZEGOVINA: BUSINESS ENVIRONMENT ADJUSTMENT CREDIT (BAC)Key Component Flows with Responsibility/Technical Assistance Mapping

., . B USI N ESS i ADMINI STRATIVE! ' | - I NUIMPLEMENTING MONITORINENVIRONMtENT- , LEGAL/REGULATORV I RESPONSmIUf'r( J TECHNICAL TASlS I AUTHORIn' INDICATORS . G

(TA) (7AJ

Strengthen FDI Legal Adoption of Entity FoIeig,n i

Franmeork and Increase Investment Laws fully .opeational capacity of the harmonized with State FDI law Entity Padiaments (FlA,S

.. BA, Foreign Investment Adoption of amended derision EC) R BH, promote inward invesment, increase Entity GovermentsI Promotion Agency on foundation of FIPA, allocates State: COM -MFIER awareness within and outside BH. (FLAS/EC)

(FIPA) fundinag fConkd i

Develop and test common procedures Entities/regional/

, Adoption of harmonized Laws Enity Industry Ministries and single database for business canronal courtsZ~~~~~ t ~ ~ ~ ~ ~ Aonptsion andhaParliamentsw registration (DFID) Reduction in nuosber of days to

on Enterptses and Paiatnt Entities/regional/ required to complete the State andSbamlime and establish (G7Z) Strengthen capacity of Commercial cantonal courts registraion process for enterprses Entities:

t' cn;' transparent countrywide sections in courts (gJC/DFI D/BilakmrlDonori to commence operations (BH METER andWAi aroah bue Adopton of to 5 average is 64 days) as measured by Entity

- tegi Tra i rit aLawts o o onized independent survey of private Sec/SrIa)aamendents tL Entry Entities/regional/ binto Coutt Register to (GT/DrD .M t and buinsss and in of of s (strelAmlined, ol EntityJustice Ministriesand Train judges, decksandayca acourtsarequiredstclerksreit lawyer aak bu sinens/rt

h, ps ;nsuns sni~~~~~~~~~~~Prhrrn'Ptsf onDFD relobis rnd Lto i'rireLSrergithe...sp fCmerca rmoal coustinesZ ;.;llater.l nprs bh~ueam e,(-v,J conywd (DFDIBlakis u.o;nrr.j5

approachI

Entities/regional/Deselop nd F esi Alcomon procedures cantonal courtsand ingle dactabse for Registry of pledges (EBRD/USAID)c,n moo-able':

ic. ral ri I Sa- Tran judLe': clerks, laTwye, bake Entities/regional!I mprc-e accets .c.cpirl Adoption of tUwn Regisered EniPrimn atnlcut

-b, pacrecocng creditrsrs Pledge': on Mcacambles and Entiq Padaacr.okComeriaML(ICaruhtonl courts

coltrlrghsSae Cwk4iu'Entities/regional!

*O- La th.e playing field (ol , Ecourag a-er Altemnate Dispute cantonal tours

CL ~ ~ ~ ~ ~~~~~~~~~~~~~~~~~IState Treat .l,n, u:tur mi' fi rm pen-ate sertcl \Adopronl ':tnrengrhenel I Prlauer.1 p>n-.lhsh ran o and tasparen of tState/Enties/Cantons

taarmtrnnued La-as on Pabhc Emits Fnncpc-errioss at aulevlso. | parnoip:iaon m public PrILmrn end P,dk:rrcnu gofemeri (EC)

I,S. wnder. a P,un,i

1 ' i | Federation: Govemment, Reduction in the average number

F; x . ! Pederation C_.n.emrr,mnt Can:.nslseun:pector kRS:rGovernmerot ofn-ste inspector days per State and* Reduce regutv*~n lUnunalanng ci tswur.g a:sr.,rn: t--nicipritn Rkancn du,'e in: pectorare function RS oenetinspected business per~ annum for IEntities:

Reouce regulbmrn Rkri,nn nng ;.l c%.:nury L prrr.n nr.unll Market, Labor, Financial Police MFTER anduc:rnphince burden on uregtli' framelork and repal ,S tF!iti R>n:niuc ieq.lwment forpemits, Federation: Government, and Revenue (rar) Administration Entity

cmbu:pane nnrdnegulco! irm reulsrk an repeal S i.eme Ratnric edalementsfor prt cantons, municipalities as measured by independent survey SecretariatsI t lRe'egadohe euain-~S: Government, of private businesses (BH average j(FLAS/SIDA)

municipalities 21 days_____________________ _____________________________ (DFID/Bilalenol Donors) i 1dy)

in l-. e pmiEr seci-:i m u tl..n:r.;iarendmer.t: ...... lna. i . ulsi puateb ri:i in AJ.:pn f h *r. c-t,er .-. i C.:-mdnre i Ennn IS: ernrr,tr:l .ir*.i F.-.rmaiŽ. J ec h nism for consuitation State COM and EntityI )err.au 4 pLic ic.:,''at rsn-,bJr -.i ro, ire Eis .treet -d Lrhc pri-are :ector and regular IGovernments

. ,c.-lbe . and] ct ,Lom ierl I. elcrrin-ie mid: it .r, ,Prlirr -'l' i r : ai , n-going. jFLAS, SEED, GZ, SIDA),iI - m rnem be rship ,________________________________ __________nt G c m t rg n

-Establish a comprehensie approach to ' Entity Govrrnrntr, rrgionalan * ~, bankruptcy and liquidation, starting with and cantonal courts

Ill_ l iirrr,-.r ,ze nd -pn.-.n :A irnFi:.-I n J Enimn 1t.,.kr-, Inc. -,. laws and beginning to build capaciy of fC7)Z v Irer.irthc, binkr.ptc, l-rn--c.ni;edL-a .r,tl.rkr.p'cs PF ideni: judges, lawyers and trustees.'J1 i.13 a;rrp * .I i 5.Z.anc-r, Entities and regional/

M 1l: Strengthen capacity of Commercial i castonal courtssections in courts I i7JCTZ)

37

ANNEX 6

Bosnia and Herzegovina: Survey of Administrative and Regulatory Costs of Business

SAMPLE METHODOLOGY

A survey was conducted of 300 majority private firms throughout Bosnia and Herzegovina (BH) inorder to assess the situation at the start of the Business Environment Adjustment Credit and toestablish baseline indicators against which to set targets and measure results of the Government'sefforts to streamline the process for registering a business and rationalizing inspections by Market,Labor, Financial Police and Revenue (Tax) Administration inspectors. The survey instrument, samplesize and methodology were established in cooperation with FIAS to allow comparison with othercountries in which FIAS has conducted the surveys. Abbreviated surveys to assess progress againstthe indicators established for tranche release under the BAC will be carried out every six months andthe full survey will be conducted twice more at 18 month intervals to provide feedback to theGovernment and to the public regarding progress against the reform program. The methodology forthe baseline survey and additional factors for future surveys follow.

Baseline Survey

The baseline survey sample followed three principle criteria: (1) sectoral composition representativeof BH's distribution of enterprises between Manufacturing/Mining, Services and Commerce(including wholesale and retail trade) as indicated by relative contribution to GDP, (2) representativedistribution of small, medium and large firms, subject to a minimum of 15 percent small and 30percent large firms; and (3) multiple BH cities representative of the diversity of possible conditions forbusiness operation.

Sub-samples of 200 foreign and domestic firms in the Federation and 100 in Republika Srpska (RS)were selected. In each Entity, a panel of municipalities representing over 90 percent of total economicactivity is contained within the sample. Eight sectors were included: (1) agriculture, hunting, forestryand fishing; (2) manufacturing and mining; (3) construction; (4) wholesale and retail trade; (5)catering trade; (6) transport, storage and communication; (7) financial intermediation; and (8) otherservices. Note that some sectors were merged for practical considerations, although some datapresented below are disaggregated. Also, the manufacturing sector was overweighted by 10 percent toprovide better insight into its further development as BH seeks to increase productive capacity anddecrease the overall proportion of trade. The sample included 55 percent small, 15 percent mediumand 30 percent large majority private enterprises, in accordance with EU definition of size (i.e., 0-9employees=small; 10-50 employees=medium; greater than 50 employees=large).

38

Table 1: Baseline Survey Sample Distribution

Si S2 S3 S5 S6 S7 S9S4

hun .fict. Manufactur+Min Construction Wholesale and Catering trade Transport in . Other serviceshunt. for, fish, retail trade intermediat.

S M L S M L S M L S M L S M L S M L S M L S M L

BanjaLuka I 1 1 12 3 3 3 12 1 1 11 2 1 3 2 1 041Priedor 1 3 1 1 1 3 1 1 1 2 1 __ _

Pmjavor I 1 2 1 3

Bijelina 113 11 2 1 1 4 1 1 1

DoboG I 1 2 2 1 4 11 1

Trebinj I I X 2 -

S 8' S2 29rli, 53 7 ~ 42 Si 5i ' 56 8 7 6. S8 'i

Bihac I I 2 I I 3 I I 1 113-

TuzS a 1 5 2 2 I 1 6 1 2 2 1 2 2 128

rcnia1 12 2I - - 1 t

Zenica 2 6 3 21 4 2 1 2 2 1 I

Zavidovici 11 2 2 1 2

Bugojno 2 1 3 I

Mostar 4 1 1 1 6 112 1 1 1 2

Sarajevo 1 1 9 6 10 123 14 4 6 1 4 221 2 6 52 13

SI ~~~S2 317- 4 S7 S6j0 S7 S 1

The sample was derived through simulation of the following criteria.

Distribution between Entities. The ratio of firms selected within the two Entities is 2:1 (Federation,200 : Republika Srpska, 100). This ratio is consistent with similar surveys conducted throughout BHand was derived on the basis of the following statistics from the RS and Federation statistics institutes:

Table 2: BH Statistical Information _

__________________ _ |RS Federation RatioPopulation (2000) 1.4 million 2.8 million 1: 1.9GDP (KM in 2000) 2.6 billion 6.7 billion 1: 2.6Per Capita GDP 1,793 KM 2,392 KM 1 1.3Employees (06/2001) 221,326 406,185 1: 1.8

Distribution by Sector. The Entities' statistics institutes do not track contribution of private firms toGDP, the preferred criterion. Therefore, the sample considered the distribution of GDP by sector;distribution of private and majority private companies per sector; and number of employees in privateand majority private firns per sector. Proposed sample distribution among the 300 subjects accordingto these criteria is detailed in the following three tables and aggregated in Table 6.

39

Table 3: GDP Distribution by SectorGDP structure Firms in Sample

Sector _____________________________________________RS Federation RS Federation

1. Agriculture, hunting and forestry 24.0 8.8 24 182. Fishing 0.1 0.0 0 0

3. Mining 1.3 2.8 l 64. Manufacturing 10.4 _ _ 13.6 L 10 275. Electricity gas and water supply 9.5 7.4 9 15

6. Construction 6.7 5.6 7 11

7. Wholesale and retail trade, repair of motor vehicles, 7.6 10.6 8 217.motorcycles and personal and household goods

8. Catering trade 2.7 2.1 3 49. Transport, storage and communication 8.6 11.0 9 2210. Financial intermediation 3.6 4.6 4_9

11. Real estate, renting and business activities 1.7 2.7 2 5

12. Public administration, defense compulsory socialsecurityI.I 15.7 11 31

13. Education 5.5 6.7 6 13

14. Health and social welfare 5.4 5.9 5 1215. Other community, social and personal service

activities 1.9 2.4 _ _ 2 5

TOTAL 100% 100% I 100 200

Table 4: Sector Distribution by Share of Private or Majority Private Companies

Sector Share of Privateor Majority Private Firms in SampleCompanies*RS Federation RS Federation

I - Agriculture, hunting and forestry 2.9 1.7 3 3

2. Fishing 0.1 0.1 0 03. Mining 0.7 0.4 1 I

4. Manufacturing 19.1 14.4 19 29

5. Electricity gas and water supply 0.0 0.0 0 0

6. Construction 7.1 9.4 7 19

7. Wholesale and retail trade, repair of motor vehicles, 53.4 54.1 53 108motorcycles and personal and household goods

8. Catering trade 1.5 2.7 2 59. Transport, storage and communication 7.6 8.4 8 1710. Financial intermediation 0.5 0.3 I I

11. Real estate, renting and business activities 5.5 6.6 6 13

12. Public administration, defense compulsory socialsecurity 0.0 0.0 0 0

13. Education 0.2 0.5 014. Health and social welfare 0.2 0.1 0 0

15. Other conmmunity, social and personal serviceactivities 1.1 1.2 1 2

TOTAL 100% 100% 100 200

*Note: In the absence of reliable data for proportion of GDP attributable to private sector, the distribution assumes

40 percent, except electricity, gas and water supply and public administration, defense and compulsory social security,which are all state controlled. This is in line with World Bank estimates.

40

Table 5: Sector Distribution by Share of Employment in Private Firms*

Sector Employee Distribution Firms in SampleRS Federation RS Federation

1. Agriculture, hunting and forestry 0.4 2.4 0 52. Fishing 0.2 0.0 0 03. Mining 2.9 4.1 3 84. Manufacturing 17.1 25.3 17 515. Electricity gas and water supply 0.2 3.8 0 86. Construction 5.1 6.1 5 127. Wholesale and retail trade, repair of motor vehicles, 46.4 11.9 46 24

motorcycles and personal and household goods

8. Catering trade 12.7 3.6 13 7

9. Transport, storage and communication 6.5 7.4 6 15

10. Financial internediation 4.1 1.9 4 4

11. Real estate, renting and business activities 2.2 2.7 2 5

12. Public administration, defense compulsory socialsecurity 0.0 14.5 0 29

13. Education 0.0 7.5 0 15

14. Health and social welfare 1.8 6.3 2 13

15. Other community, social and personal service activities 0.4 2.3 0 5

TOTAL 100% 100% 100 200*Note: In the absence of reliable data for proportion of GDP attributable to private sector, the distribution assumes 40 percent,except electricity, gas and water supply and public administration, defense and compulsory social security, which are all statecontrolled. This is in line with World Bank estimates.

Table 6: Final Sector Distribution in SampleFirms in Sample

Sector RS Federation

Si Agriculture, hunting. forestry and fishing 8 8

S2 Manufacturing+mnining 29 (19) 62 (42)

S3 Construction 7 17

S4 Wholesale and retail trade 32 (42) 53 (73)

S5 Catering trade 5 7

S6 Transport, storage and conmunication 8 20

S7 Financial intermediation 6 14

S8 Other services 5 19

TOTAL 100 200Note: Figures in parentheses represent the sample distribution before overweighting the manufacturingsector by 10 percent as agreed between the World Bank, FIAS and the survey firm

Distribution by Size. Statistics for size of frms are not available from the statistics institutes. Therefore, anestimate of the distribution by size of firm is extrapolated from a year 2000 survey of nearly 8,000 privateenterprises in the Republika Srpska, which showed distribution of 83 percent small, 10 percent medium and7 percent large. It is fair to assume that similar distribution exists in the Federation due to status of businessconditions, privatization and economy.

41

However, these numbers should be adjusted to accommodate the known practice of firms to understate

employment to avoid taxes and social contributions. Thus a more realistic distribution by size of private

companies within the country is 70/20/10. In accordance with FLAS' request, the final sample, therefore,

overweights large companies (i.e., 30 percent vs. 10 percent) and underweights small companies (i.e., 55

percent vs. 70 percent).

Table 7: Final Distribution by SizeFirt size Sahnple structure (%) RS Federation

1i. r nall 55.0 55 1102. Medium 15.0 1 5 30

3. Large 30.0 30 60

TOTAL 100.0 100 200

Distribution by Foreign Capital. Of 13,027 enterpn'ses in the RS, 80 percent are domestic, 2.9 percent

foreign and 2.3 percent mixed foreign and domestic ownership. Assurning similar distribution of the

Federation, the S percent of the firrns in the sample have foreign capital (i.e., 5 companies in the RS; 10 in

the Federation).

Distribution by Location. Due to lack of information regarding level of development of regions/cantons and

municipalities, sample distribution by location was determined on the basis of population.

Table 8: RS Regional Distribution (2000)

Region % of Population

1. Banja Luka 44.4

2. Bijeljina 22.2

3. Doboj 17.2

4. Srpsko Sarajevo 8.85. Trebinje 7.4TOTAL 100%

Table 9: RS Distribution by Municipality in Final Sample

Municipality Population % of Total Population Structure in sarnple Number of firms

1. Banja Luka 220,466 15.0 37.9 38

2. Prijedor 95,502 6.5 16.4 16

3. Pmjavor 48,889 3.3 8.4 8

4. Bijeljina 107,040 7.3 18.4 18

5. Doboj 78,537 5.3 13.5 14

6. Trebinje 30,673 2.1 5.3 6

TOTAL 581,107 39.5% 100% 100

Three regions cover 83.3 percent of the population. In addition to these three regions, Trebinje is included

in the sample to provide broader territorial coverage. Six municipalities from within these regions are

included in the sample (see Table 9).

42

Table 10: Federation Cantonal Distr ibution (2000)Canton % of Population

1. Unsko-Sanski 13.22. Posavski 1.93. Tuzlanski 21.94. Zenicko-Dobojski 17.15. Bosansko-Podrinjski 1.56. Srednjebosanski 10.47. Hercegovacko-Neretvanski 9.48. Zapadno Hrecegovacki 3.59. Sarajevo 17.310. Hercegbosanski 3.6TOTAL 100%

Eight municipalities from among the six cantons that represent 89.4 percent of the Federation'spopulation (i.e., Una-Sana, Tuzla, Zenica-Doboj, Central Bosnia, and Herzegovina-Neretva cantons)were selected for the sample as noted in Table 11.

Table 11: Federation Distribution by Municipality in Final Sample

Municipality Population % of Total Structure in sample Number of firms~~~~~~~~~~Population1. Bihac 60,113 2.6 6.3 132. Tuzla 135,510 5.9 14.2 283. Gracanica 52,902 2.3 5.5 114. Zenica 127,972 5.5 13.4 275. Zavidovici 37,942 1.6 4.0 86. Bugojno 37,107 1.6 3.9 87. Mostar 104,997 4.6 11.0 228. Sarajevo 400,219 17.3 41.8 83TOTAL 1,135,120 49.2% 100% 200

Semi-Annual Monitoring Surveys

Monitoring surveys will be carried out semi-annually to measure progress against results indicatorsfor release of the second tranche. At a minimum, the following questions from the baseline surveywill be included in the surveys:

A. How long did the most recent registration/re-registration process last (from the moment youstarted the process through the moment you got all the necessary documents)?

B. Did you register or re-register your business in [Court Register, Statistics, RevenueAdministration, Municipality, Health and Pension Fund, Customs Administration, TrademarkRegistration, Other]? How many calendar days did it take (for each)?

43

C. How many times during the last 6 months was your business inspected by [Market, Labor,

Financial Police, Revenue Administration] and how many inspectors visited your business? How

many days did the [Market, Labor, Financial Police, Revenue Administration] inspection last?

Sample Frame

Business Registration (QA/QB). All companies that have completed the registration process in thefollowing municipalities (those from the baseline sample frame) during the six-month reporting

period will be included in the survey: Banja Luka, Prijedor, Prnjavor, Bijelina, Doboj, Trebinje,Bihac, Tuzla, Gracanica, Zenica, Zavidovici, Bugojno, Mostar and Sarajevo.

Inspections (QC). The sample frame methodology used in the baseline survey will be applied torandomly select the stratified sample to monitor progress against the inspections indicator. While the

panel will be used when the full survey is conducted again, the sample for monitoring surveys will be

fresh each time. The number of companies in the monitoring survey will be based on data reliabilityand cost considerations, but will not be less than 100 companies in the Federation and 50 companies

in the RS.

Calculation of Results

The geometric, rather than arithmetic, mean will be used to compute the average length of theregistration process and number of days of inspections. The aggregate number of days of inspections

will be the result of multiplying the number of inspections times the number of days the inspectionlasted times the number of inspectors for Market, Labor, Financial Police and Revenue

Administration during the six-month reporting period.

Determining Compliance with BAC Conditions

Only Question A will be used to assess status against the second tranche condition related to the

length of the registration process. Question B will provide the Entities detailed data regarding whichsteps remain problems. Question C will be used to assess status against the second tranche conditionrelated to inspections.

In determining compliance with the BAC conditions for the number of days to register/re-register a

business and number of days of inspections, the condition will be deemed to be met if the target value

lies within a 95 percent confidence interval for the estimated mean value.

Survey Monitors

Each of the Entities, the State and the Association may appoint a monitor to observe that the sample

selection and survey process is being carried out according to agreed terms to assure independenceand reliable results. The names of the firms, however, will remain anonymous to the monitors in

order to maintain integrity of the sample.

44

ANNEX 7:STATUS OF BANK GROUP OPERATIONS IN BOSNIA AND HERZEGOVINA

STATUS OF BANK GROUP OPERATIONS IN BOSNIA AND HERZEGOVINA

STATEMENT OF BANK LOANS

(As of March 31, 2002)

US$ Million

(Less CancellationsFiscal

Loan No. Year Borrower Project Loan Undisbursed

Loan/Credits/ Grants

4038-BOS 1996 Bosnia and Herzegovina Consolidation Loan A 28.6 0.0

4039-BOS 1996 Bosnia and Herzegovina Consolidation Loan B 284.9 0.0

4040-BOS 1996 Bosnia and Herzegovina Consolidation Loan C 307.1 0.0

Total 620.6 0.0

__________ __ _ Of whicb: Repaid 24.9

Total Now Held by the Bank 595.7 0.0TFBHc/ (UnderUDisburs

TF-024030 1996 Bosnia and Herzegovina Emergency Recovery Credit 45.0 0.0

TF-024031 1996 Bosnia and Herzegovina Emergency Farm Reconstruction 20.0 0.0

TF-024032 1996 Bosnia and Herzegovina Emergency Water Supply 20.0 0.0

TF-024033 1996 Bosnia and Herzegovina Emergency Transport 35.0 0.0

TF-024034 1996 Bosnia and Herzegovina Emergency District Heating 20.0 0.0

TF-024035 1996 Bosnia and Herzegovina Emergency War Victms Rehabilitation 5.0 0.0

TF-024040 1996 Bosnia and Herzegovina Emergency Education Reconstruction 5.0 0.0

Total 150.0 0.0ll2A2897-BOS 1996 Bosnia and Herzegovina Emergency Education Reconstruction 5.0 0.02896-BOS 1996 Bosnia and Herzegovina Emergency War Victims Rehabilitation 5.0 0.0

2902-BOS 1997 Bosnia and Herzegovina Emergency Housing Repair 15.0 0.0

2903-BOS 1997 Bosnia and Herzegovina Emergency Power Reconstruction 35.6 0.0

2904-BOS 1997 Bosnia and Herzegovina Emergency Public Works and Employment 10.0 0.0

2905-BOS 1997 Bosnia and Herzegovina EmnergencyLandmines Cearance 7.5 0.0

2906-BOS 1997 Bosnia and Herzegovina Emergency Demobilization and Reintegration 7.5 0.0

2914-BOS 1997 Bosnia and Herzegovina Transition Assistance Credit 90.0 0.0

NOOI-BOS 1997 Bosnia and Herzegovina Emergency Industry Re-Start Guarantee 10.0 0.0

N002-BOS 1997 Bosnia and Herzegovina Emergency Microenterprise/Local Initiatives 7.0 0.0

N003-BOS 1997 Bosnia and Herzegovina Essential Hospital Services 15.0 0.0

N032-BOS 1998 Bosnia and Herzegovina Transport Reconstuction II 39.0 0.0

N035-BOS 1998 Bosnia and Herzegovina Education Reconstruction II 11.0 0.0

3028-BOS 1998 Bosnia and Herzegovina Reconstuction Assistance Project 17.0 0.0

3029-BOS 1998 Bosnia and Herzegovina EmergencyNatural Gas 10.0 0.0

3070-BOS 1998 Bosnia and Herzegovina EEmergencyPilot Credit (RS) 5.0 0.0

3071-BOS 1998 Bosnia and Herzegovina Power II 25.0 0.0

45

NC40-BOS 1998 Bosnia and Herzegovina Forestry 7.0 1.2

3090-BOS 1998 Bosnia and Herzegovina Public Finance I (Strucal Adjustment) 63.0 0.0

3191-BOS 1999 Bosnia and Herzegovina Local Development 15.0 12.3

3202-BOS 1999 Bosnia and Herzegovina Basic Health 10.0 6.4

3262-BOS 1999 Bosnia and Herzegovina Enterprise and Bank Privatization Project 50.0 14.0

3257-BOS 1999 Bosnia and Herewgovina Enterprise Export Facility Project 12.0 4.9

3269-BOS 1999 Bosnia and Herewgovina Pilot Culkual Heritage Project (IUL) 4.0 2.2

3258-BOS 1999 Bosnia and Herzegovina Second Public Finance (Strucral Adjustment) 72.0 18.4

3351-BOS 2000 Bosnia and Herzegovina Education Development Project III 10.6 7.5

3400-BOS 2000 Bosnia and Herzegovina Mostar Water and Sanitation 12.0 8.8

3385-BOS 2000 Bosnia and Herzegovina Emergency Labor Redeployment 15.0 13.2

3439-BOS 2000 Bosnia and Herzegovina Social Sector Structural Adjustmnent Gredit - TA 3.55 3.2

Q2370-BOS 2001 Bosnia and Herzegovina Trade and Transport Facilitation in SEE 11.0 10.7

34650-BOS 2001 Bosnia and Herzegovina Social Sector SAC(SOSAC I) 20.0 O.C

35330-BOS 2001 Bosnia and Herzegovina Local Initiative II 20.0 19.7

35340-BOS 2001 Bosnia and Herzegovina Electric Power 3 35.0 32.8

35380-BOS 2001 Bosnia and Herzegovina CommunityDevelopment 15.0 14.7

3531-BOS 2001 Bosnia and Herzegovina Privatization TA 19.8 19.5

36080.BOS 2002 Bosnia and Herzegovina Private Sector Credit 10.0 9.9

36260-BOS 2002 Bosnia and Herzegovina Road Mnagement Safety 30.0 30.

Total 749.6 229.4

I_Grand Total 899.6 229.4

a/ The status of these projects is described in a separate report on all Bank/IDA financed projects in execution,

which is updated twice yearly and circulated to the Executive Directors on April 30 and Otober 31.

b/ Consolidation Loans A, B, and C were approved on June 13, 1996 and became effective on June 14, 1996.

c/ Trust Fund for Bosnia and Herzegovina.

46

ANNEX 7A: STATUS OF IFC OPERATIONS

Bosnia and HerzegovinaSTATEMENT OF IFC Held and Disbursed Portfolio As of r 18, 2002 For Febniar , FY2002

_ _ _ _ _ _ _ _ _ _ _ _I I I - _ II --------------- IFC ield . _ IFC Disbursed

FY institutionShortNme Loan Equity Quasi Partic Loan Equity Quasi Partic

1997/99/01 Bosnia Micm 0 1,229,746 0 0 0 1,229,746 0 01985 Energoinvest 7,131,729 0 0 0 7,131,729 0 0 01997 Enterprise Fund 0 1,684,388 0 0 0 1,056,073 0 02001 PBS Group 8,429,797 260 887,347 0 8,429,797 0 887,347 01997 Sarajevska 1,718,227 0 0 0 1,718,227 0 0 01998 SEF Akova 1,404,670 0 0 0 1,404,670 0 0 01999/01 SEF Bosnalijek 2,012,457 1,841,848 0 0 2,012,457 1,841,848 0 01999 SEF Kopex 1,212,230 0 0 0 1,212,231 0 0 01998 SEF Lignosper 1,841,245 0 0 0 1,597,225 0 0 01999 SEF Lijanovici 1,697,051 0 0 0 1,697,051 0 0 01977 TKA Gazin 2,954,866 0 0 0 2,954,866 0 0 01998 Wood AgenryAL 3,962,231 0 0 0 0 0 0 01999 Wood Inza 1,397,581 0 0 0 279,516 0 0 01999 Wood Konjuh 1,987,283 0 0 0 1,765,446 0 0 01999 Wood Kozara 1,397,572 0 0 0 1,175,735 0 0 01999 Wood Podgradci 957,226 0 0 0 779,756 0 0 01999 Wood Vrbas 1,397,581 0 0 0 279,516 0 0 0

Total Portfolio 39,501,745 4,756,243 887,347 0 32,438,222 4,127,666 887,347 0

__ __ _ __ _ _ _App rovals Pending Commnitmnt _t

FY InstitutionShortNne Loan Equity Quasi Partic

2001 PBS Pre-Priv. [ 0 0 3,087,819 0

Total Pending | 0 0 J 3,087,819 0 _

47

ANNEX 8:COUNTRY AT A GLANCE

Bosnia and Herzegovina at a glance 1/01

Bosnia Europe & Lower-

POVERTY and SOCIAL and Central middle-Herzegovina Aeia income Develepment diamond'

2000Population. mid-year (millions) 3.9 475 2,046 i Life expectancy

GN per capita (Atlas method, USS) 2,010 1,140

GNI (AtWas melthoc USS billions) 956 2.327 7

Average annual growth, 1994-00

Population %) 1.3 0.1 1.0 Gr

Labor force (%) 1.6 0.6 1.3 pNI GrossIper primary

Most recent estimate (latest year available, 1994-00) cepita I enrollment

Poverty (% of'population below nationaf poverty lineJ)Urban population (. of total populatiaon) 43 67 42

ULie expectancy at birth (years) 73 69 69tntant mortality (per 1,000 live births) 13 21 32

Child mainutrition (% o/ children under 5) II. 1 ' Access to improved water source

Accss to an improved water source (% o/population) go90 s0

lDiteracy (% of population age 15+) 3 15Gross primary enrollment (%, ofscliool-age population) 100 114 Bosnia and Herzegovina

Mate 101 116 Lower-middle-incore group

Female 99 114 __

KEY ECONOMIC RATIOS and LONG-TERM TRENOS

1980 1990 1999 2000IEconomic ratios-

GOP (US$ billtons) .45 4.4

Gross domestic investmentiGOP 20.6 20.4 T

Exports of goods and services/GDP 26.5 27.1 Trade

Gross domeslic savings/GDP .13.0 -10.3

Gross nalional savings/GDP -0.6 8 0.2

Current account balarrceGDP . . 21.4 -20.7 o I

Inlerest paymentsiGOP 1.1 1.3 Investment

Total debtUGDP 48.1 46.7 savingsTotal debt semicelexporis 10.9 19.7

Present value of debt/GDP ..

Present value of debt/exportsIndebtedness

1980-90 1990-00 1999 20D0 2000-04

(average annual growth)GDP 27.3 10.0 58 60 Bosnia and Herzegovina

GDP per capita 24.8 6.8 4.7 5.5 Lower-midde-irncome group

Exports ot goods and services . 41 8 -3.9 4.2 6 6

STRUCTURE of the ECONOMY1980 1990 1t99 2000 Growth of Investment and GDP (%)

(°0 ol GDP)Agriculture 13.8 12.2

Indusiry 252 26.0Manufacturing 15.4 15.8

Services 61.0 61.8 C

Private consumption Qs . 96 9Z 5r 9Y. e

General government consurnption , GDI -0--GOP

Imporos ot goods and services 60.1 57.9

1980-90 1990-00 1999 2000 Growth of exports and imports ()

(avwefage anniual gromh)Agriculture 8.1 -3.0 -8.3 1l

Industry 26.2 11.2 5.7 ,oA

Manufacturing .. 17.1 0.1 72Services 37.9 17.5 7.9

Private consumption ° .. .. .4

General government consumption o.

Gross domestic investment 35.6 9.9 4.4 .E1pOis rirmpofis

Imports of gcods and services 21.6 -3.1 -5,9

Note: 2000 data are preliminary estimates.

The diamonds show tour key indicators in the couolry (in bold) compared with its income-group average. If data are missing, the diarnond vaIl

be incomplete.

48

ANNEX 8: COUNTRY AT A GLANCE (CONTINUED)

Bosniai anid Herzegov'ina

PRICES and GOVERNMENT FINANCE

i2omestic ~~~~~~~~~~1980 1990 1999 2000 IInflation (%f

Consumer prics .. .. 0.9 5.3 oImplicif GDP deflator . .. 3.1 4.7 0*se xi c

Government finance(%of GDP, inclutdes cu,wenl grants)

Current revenue . . 31.7 31.0Currenrl budget balance .. .. 0.9 .-l 2 GOP deflator -O--CPIOverall surplusfdoficll .. . 17.4 *15.9 ___________________

TRADE ~~~~~ ~~~~~ ~~1980 1990 1999 200 Export anid Import levels (USS mill.)(US$ rinllions)Total expofts (fob) 649 732 ao

n.a.n.a.Manufactures

Total Imporls (Oil)02 2,4Food .)Fuel and energyCapital goods

Export price index (1995= 100).. .

Imnport price index (1995=-100) jEot aImrsTermns of tfade (1995=-100) _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

BALANCE of PAYMENTS

(US$ ~~~~~ ~~~~~ ~~1980 1990 1999 2000 CuFrent account balance to GOP(%E Voris of goods and services . .. 1,201 1,192 0rImpors of goods and services . .. 2,728 2.543 ~

Resource balance .. . 151 135 r

Net incorne . .. 272 225 ENet cutrerenransfers , . 284 217 2

Current account balance .. .. 971 -909

1980 1990 1999 2000 ~ ~ ~ ~ K~~ILT3Financing items (net) . .. 1.233 935Changes In niel reserves . . -262 -28

FReserves including gold (UJS$t million) . .. 455 508Converaion rate (DEC. 1o"11VSS) 1. . .e 2.1EXTERNAL DEBT arid RESOURCE FLOWS(LJSS million) i Compositioni of2000 debt (USS mill.)Total debt oLdtallndintg anid disbursed . .. 2,183 2,052

lSOR . . 578 562 G49IDA 33 38F 3

Trofal debt service . .. 170 297 W18110 . 34 33IDA . .. 2 3 (7:s52

Composition of nel reowurce fto%sOfficial grants . .

O11 icia creditors16 4Privae crediotos .. 4 .. 09Foreigrr direct irwveltnentaPortfolio equity .

World Bank progrmsComnmilmenerts . 163 41 A -IMO E -BflateralDisbursements . . 68 44 8.- IDA 0 -Other multitrlwarel F -PrivatePrincipal repayrnents . .. 0 0 C -IMF G -Shorit-trmNet flows . .. 68 44 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _Interest paypnenls . 36 36Net Iranslers . . 32 8

The World Bank Group: htlpJ/w%vw.worIdbank.org1dala/ 0110

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