.

ANNUAL PROGRAM REPORT June 1,1997 to May 31,1998

Strengthening Private Enterprises in Slavonia and Baranja, Croatia Agreement Number NIS-A-00-97-00026-00

Prepared for

United States Agency for International Development

Prepared by

University of Delaware 4 Kent Way Newark, DE 19716

July 31,1998 TABLE OF CONTENTS

Executive Summary Program Overview A Target 1 1 (15% sales growth in assisted firms) and Target 1 2 (10% employment growth in assisted firms)

B Target 1 3 (30 assisted firms)

C Target 2 1 (150 transactions linking enterprises m formally occupied regions to Croatia and abroad)

D Target 3 1 (8 new cooperatives or associations developed)

E Target 3 2 (10% increase in revenue of assisted cooperatives and associations)

F Target 4 1 (3000 benefiting cooperative or association members in a minimum of 8 organizat~ons)

G Reintegration Outreach Programs and Seminars

H Summary Execut~veSummary

The University of Delaware (UD) has been implementing a program to facilitate development and growth of small and medium companies to generate jobs and sustainable incomes for war affected populations in Slavonia, Croatia The program supports USAID's strategic objective to assist with the reintegration of populations affected by the Erdut Agreement Between June 1997 and May 1998, 18 volunteer US advisors completed technical assistance assignments for business and association clients in the war affected areas of Slavonia The length of volunteer assignments ranged from three to eight weeks UD in-country and local staff provided continuing assistance to 30 private business clients and 12 new farmer managed associations UD also conducted numerous reintegration outreach programs and seminars to facilitate the re~ntegrationof war affected populations into the Croatian tax and regulatory system

Several major events affected UD program performance dur~ngthe first year of activities, including the delayed departure of the United Nations Transitional Administration in Eastern Slavoma (UNTAES) and the introduction of a Value Added Tax (VAT) in January 1998 The Government of Croatia (GoC) assumed full authority of the former UNTAES area on January 15, 1998 The UNTAES pullout from former sector East was delayed by seven months Until the border crossings were opened, sector clients experienced difficulty transporting products to and from the area, access to investment and debt financing was limited, and equally important, business laws and regulations remained in limbo for more than half the first year of the program UD training and technical assistance for clients in the UNTAES area have helped those companies adjust to new regulations and tax that became effective in January 1998 UD assistance has also helped companies in the former UNTAES area adjust to the loss of markets in the FRY as they attempt to penetrate markets in other parts of Croatia and abroad

UD successfully met 5 out of 7 year one program targets

Target 1 1 (15% sales growth in assisted firms) has been met and Target 1 2 (10% employment growth in assisted firms) has not been met Results at this time are 17% and 4 2% respectively Target 1 3 (30 assisted firms) has been met UD has provided technical assistance to more than 30 clients after evaluating 122 potential client companies Target 2 1 (150 transactions linking enterprises in formerly occupied regions to Croatia and abroad) has been met UD completed 235 linkages between companies in the war-affected areas and other parts of Croatia and abroad Target 3 1 (8 new cooperatives or associations developed) has been met UD is worlung with 12 newly organ~zedfarmer managed Associations and Cooperatives in the war affected areas of Slavon~a Target 3 2 (10% increase In revenue of assisted cooperatives and associations) will not be met All 12 assisted cooperatives and associations were established or reregistered in the past year and have not completed one year of operations or one growng season Target 4 1 (3000 benefiting cooperative or association members in a minimum of 8 organizations) has been met as a result of the large membership in the new Federation of Associations In Slavonia However, new independent associations in the war-affected areas of Croatia have lower membership than originally anticipated PROGRAM OVERVIEW

UD's goal is to concentrate SME development activities on fostering more stable reintegration in the Slavonian war affected areas A large majority of companies in the war-affected areas are small, with less than 25 employees UD counseling and assistance has been helping firms focus on strategic goals and to accomplish those goals by implementing marketing assistance, business planrung, and technical assistance in production UD provides mainly strategic counseling, marketing assistance, and management assistance to local client firms

UD locates clients by conducting a diagnostic evaluation of local businesses If a company is determined to be initially eligible and is interested in receiving some form of development assistance, a local UD employee is assigned as an Advocate to conduct a hrther and more detailed diagnostic analysis and prepare a plan for development assistance (intervention plan) The advocate works closely with the company, and monitors the progress and effect of the intervention plan

Since June 1997, UD has designed development intervention plans for more than 30 local firms Most of these firms have less than 25 employees and consistently need basic marketing assistance, strategic counseling, and general business management assistance UD uses its five US based partners to provide on-sight advisory services to clients These partners include the Citizens Democracy Corps (CDC), International Executive Servlce Corps (IESC), Land O'Lakes, Inc , Agricultural Cooperative Development InternationalNolunteers in Overseas Cooperative 4ssistance (AN), and the MBA Enterprise Corps (MBAEC)

A Target 1 1 (15% sales growth In asslsted firms) and Target 12 (10% employment growth In asslsted firms)

Target 1 1 has been met and target 1 2 has not been met Results at ths time are 17% and 4 2% Employment figures have been negatively affected by the seven month delayed departure of the UN from Eastern Slavonla and the introduction of significant payroll taxes in that area These taxes increased wage rates by more than 100 percent and caused a drop in employment levels in the short term Some businesses have started recovering from this additional cost of doing business

B Target 1 3 (30 ass~stedfirms)

Target 1 3 has been met UD has developed 30 clients after conducting initial screening interviews with more than 122 firms After initial screening, UD conducted a more extensive diagnostic evaluation on more than 70 of these firms to determine if they meet UD's criteria for assistance All 30 clients have agreed to a comprehensive assistance intervention plan and have s~gneda memorandum of understanding committing themselves to followng through with UD9s recommendations and agreeing to prov~dequarterly financial and employment updates The followng companies are a representative sample of clients that have committed to working wth UD A brief summary of ongoing technical assistance projects, employment changes, and sales performance IS provided for each client

Agro-Zemlya (Eastern Slavon~a)

Agro-Zemlja requested assistance preparing for an agricultural trade fair that took place from October 9 - 13, 1997 (Agro-ZemlJa97)

US partner, AN, ident~fiedand recnuted Steve Cain, an advisor in marketing commulllcations Mr Cain's assignment wth Agro-Zemlja occurred during October 5 - 17, 1997 Volunteer Cain made recommendations to improve their agricultural fair, made recommendations to improve relations wrth local government officials, and provided promotional material and relevant marketing material With proper development, Agro-Zemlya could have 300 plus exhibitors and 200,000 vlsitors annually The direct impact to the economy of greater Osijek could total more than 1 96 million DM annually Volunteer Cain recommended follow-up strategic planning and business management assistance that will be essential if the firm expects to have that level of impact on the local economy As a result of Volunteer Cain's recommendation, Agro-Zemlya has decided to relocate its fall trade show to a location outside Osijek to reduce costs, and increase profit UD has continued to work with Agro-Zemlya to search for mechanisms to reduce overhead costs and to help the firm make strategic plans for the future

On Saturday April 18, 1998, Agro-Zemlja organized a small agricultural trade fair in Vukovar, "Spring fair of agriculture, construction and reconstruction of Vukovar '98 " The fair was free of charge and attended by the large agricultural community in Vukovar This fair was important for the local population in former Sector East that previously attended trade fsurs in Novi Sad, FRY and is essential for the reintegration of producers with suppliers and buyers in greater Croatia

Employment has remained constant during the past year at 12 11 ethnic Croatians and 1 ethnic Serb 8 female and 4 male

Sales have remained constant over the past year However, the company is expecting to have substantial sales growth during the Fall 1998 trade show at which time the full impact of UD techrucal assistance will be evaluated

ALBUM (Eastern Slavonia)

Album is a construction company established in September 1996 They have completed several large projects funded by the international community and have recently been awarded several projects funded by USAID The company plans to establish a new concrete production line near the Vukovar port and recently became distributors for an Austrian building materials supply company UD has provided assistance helping the company obtain licenses for demining activity and to obtain a credit line from Zagrebacka Bank to build the new concrete production facility UD also helped the firm obtain a bank guarantee from the Croatian State Guarantee Agency and locate land and the appropriate permits to lease the land for the new construction facility

Employment fluctuates durlng the year and is hghest in the summer and fall Employment has Increased from 11 in January 1998 to 52 in May 1998 Current employment is 10 percent higher than during the same period last year 100% ethnic Serb 100% male

Annual sales have increased by 20 percent over the same period last year

Blogal (Western Slavonla)

Biogal is a mllk processlng company established in 1995 Today, it employs 7 full-time workers Biogal's maln activities are pasteurization and bottling of milk in plastic and glass, and production of cream, butter, yogurt, and cheese The company requested assistance with improving production and operatlng efficiencies to reduce costs, direct marketing efforts for existing products, and test marketing for possible new products

An AN volunteer, Bob Chnstle, was recruited for a four-week assignment wlth the company in April 1998 Volunteer Christie made recommendations to Improve production and operatlng efficiencies to reduce costs, suggested methods to Improve marketing for existing products, and assisted with introducing cost accounting methods In the manufacturing area, formulas and processlng procedures for a number of products were recommended, drawings for expansion of the dary were prepared and reviewed with the client, and recommendations for additional equipment were made In the marketing area, volunteer Christie recommended developing a new label and emphasizing the word "fresh" In connection with bottled milk to distinguish it from "box" mllk In the accounting area, the use of the computer program Quicken was introduced to help manage the business wth profit and loss statements, cash flows, product cost statements, and balance sheets

As a result of volunteer Chnstle's assistance, the company has decided to expand its processlng capability by purchasing a new, more efficient pasteurizer and equipment to manufacture semi- soft and mozzarella cheese The installation of this equipment wll reduce its costs and improve profits UD's local staff IS following up on volunteer Christie's assignment and is helping Biogal search for equipment and review debt financing options

Employment has remained constant at 7 during UD assistance 4 Croats, 1 Serb, and 2 other mnorities 6 female and 1 male

Annual sales have increased by 5 percent CETERA (Eastern Slavonla)

Cetera is a formerly state-owned company, privatized in 1986 (100%) and today employs 200 people The company produces roof tiles and bricks for fagade and structural applications and accounts for seven percent of total brick production in Croatia Cetera requested technical ass~stanceto conduct a feasibility evaluation for the purchase and installation of a cogeneration plant at their facility near Djakovo

AIV advisor, Mike Smith, completed the feasibility evaluation for Cetera in September 1997 Cetera was provided a translated copy of the feasibility evaluation to help it make an informed decision about pursuing the cogeneration plant Cetera management has decided not to proceed with the installation of the cogeneration plant after UD's advisor recommended that the cogeneration project was not feasible

Employment has remained constant at around 200 during the past year 195 Croats and 5 Serbs 170 male and 30 female

Annual sales have increased by 10 percent during the past year

KLAS (Eastern Slavonla)

KLAS requested a volunteer who could help them with strategic planning and management appraisal The UD project focused on expansion opportunities and evaluation of the procedures in place relating to management's role in all phases of planning and controlling a business

A/V volunteer advisor, Harlan Ackland, spent four weeks providing technical assistance to the management of KLAS Volunteer Ackland focused the project around the need to assist management in forecasting operations and cash flow, along with building pro forrna balance sheets that can be used as a management tool whenever decisions regarding finance or other risks are to be made A full program for proposed budgets, cash flow projecting, and comparative operating statements has been customized and installed in a KLAS computer As a small part of the management overview, Volunteer Ackland recommended an organizational chart to illustrate how responsibility and certain levels of decision making might be spread out wthin the company

Employment has increased by 37 percent (from 30 to 41) 100% ethn~cCroats 1 female

Annual sales have increased by 35 percent over the past year

EccoTherrn (Western Slavon~a) EccoTherm was established in 1990 The company's main activity is designing and installing heating and cooling systems in addition to gas and water installations Eccotherm also has a small retail store that sells parts and other equipment for HVAC (heating, ventilation, and air conditioning) systems An IESC volunteer executive, Nicholas Eassa, was recruited and completed an assignment between February 23, 1998 and March 27, 1998 The focus of the project was to review management organization and suggest improved methods of job scheduling on a daily, weekly and monthly basis to increase the efficiency of the installation teams, assist in evaluating specific business opportunities in the context of the company's capabilities, the activity's profitability and their developing strategic plan, instruct management in the basics of effective contract negotiations, competitive bidding, and order closing with an emphasis on securing payment, and to provide suggestions to improve human resource management, especially concerning compensation, incentives, and motivation

Volunteer Eassa provided assistance in arranging pricing and contract selection to gain premium price advantages on selective jobs dunng specific times of the year A personnel bonus plan was proposed and service contract forms were designed Service will provide the cash flow to the business as well as keep track of potential projects by the users Volunteer Eassa recommended placing a new sales shop in the current Eccotherm building, under closer supervision of the owners, and with better inventory control A resale plan amed at securing local dealers and contractors with advantageous purchasing prices will be introduced as well

The manager, Mr Osmanovic is scheduled to participate in a World Learning EMED program in the United States to be introduced to products, equipment and systems used by the HVAC industry m the United States

Employment has declined by 17 percent (from 18 to 15) 10 Croats, 2 Serbs, 3 other minorities 1 female

Annual sales have declined by 2 percent

Hidrolng (Eastern Slavonia)

Hidroing was established in 1990 and employs 11 people The company is mainly involved in the design, engineering, and construction supervision of waste water and sewage systems The firm is expected to play a critical role in rebuilding infrastructure in Eastern Slavonia

An IFSC Volunteer Executive, David Lantz, was recmted for a six-week assignment wth H~droing in May 1998 The volunteer project included providing the owner, Mr Tadic, wth recent information related to sewage system an$ pumping stahon designs, mathemahcal modeling, and best management practices The volunteer evaluated current projects and made recommendations to improve the efficiency of sewer and pumping station designs, mamtenance, and repars

In Croatian villages and small cities there are no sewage and storm dramage systems, whch causes problems during rainy days The problem was mag~ufiedover the past five years because the Croatian government encouraged the expansion of public water supply to many villages and small towns In the occupied areas of Eastern Slavorua, existing storm dramage and pumplng systems were neglected over the past seven years The need for sewage and waste water systems has rapidly increased in the region The owner wanted to learn more about the best management practices and mathematical modeling for sewers (samtary and combined) and pumplng stations

Volunteer Lantz also made recommendations to Improve management practices by hnng another engineer to assume daily control of the engineering output, so the owner can devote full-time to marketmg, sales, and business admullstration VE Lantz also recommended a time keeping record system to more accurately keep daily and weekly tune slips to record hours expended on each project or activity In the past, proposals to clients were prepared based on monthly salary costs only There was therefore no hstorical record available as to actual hours spent on a project to determe its profitability Mr Tadic is scheduled to participate m an EMED program later in the year

Employment has increased by 33 percent in the past year (from 6 to 8) 7 Croats and 1 Muslim 4 male and 4 female

Annual sales have declined by almost 50 percent from the previous year

Laba (Vukovar, Eastern Slavon~a)

IESC began recruiting a volunteer to work with Laba, a contract sewmg company located in Vukovar Laba was established in 1989 and was 100 percent privately owned Laba wanted to become a successful contract sewing company for medium to high quality garments and has requested assistance developing its marketing plan and long-range strategic vision The company sought advice about a strategic focus for the company and about a marketing plan The company requested a volunteer to provide information about the current international market for contract sewing and to help contact potentla1 partners in Europe and the US after the volunteer returned to the United States The client was very unsure about hs competitiveness and current market realit~esand would like input about the followng questions (1) should the company concentrate on local (Croaban) market or foreign markets? (2) what is the company's current position compared to similar US or European companies - in terms of production efficiency, equipment and labor standards? (3) does the company have a competitive potential in the contract sewmg sector?

Regretfully, the company closed in Apnl 1998 and does not intend to reopen The man cause of the company's falure was the introduction of wage taxes and the Value Added Tax The company was only marginally profitable before the departure of UNTAES and the additional cost of operating m Croatia forced the management to close the business permanently The company does not plan to search for more profitable sewmg contracts because the owner believes that he cannot compete wth lower cost regional competitors

Employment has declined by 100 percent in the past year (from 60 to 0) 100% ethnic Serbs 50 female and 10 male Annual sales have obviously also declined by 100 percent

Maturus (Eastern Slavonia)

Maturus was established in 1992 and currently employs 13 full-time workers Its main activity is the manufacturing of custom-made doors and windows Before the war, the owners, Mr and Mrs Lukic, both worked for more than 20 years in a local state-owned shoe factory, Borovo Mr Lukic was an engineer for designing shoes In 1991, the factory was destroyed and Mr Lukic established his own business for wood processing and designing/production of windows, doors and furniture He had no prior expenence in wood processing or production All of his products were made for individual customers on the local market in the former UNTAES area For the past few years, he has participated in the reconstruction of large residential apartment blocks in Vukovar

The company has the potential for growth considering the need for reconstruction of private houslng The client needs to expand hs current facility to include space for spraying and drying wooden products IESC recmted Sydney Lebrun to work wth the company between May 6 and June 6, 1998 VE Lebrun was expected to determine the feasibility of the client's strategic decision to transition hs production to custom designed furmture, and, if feasible, to complete a marketing plan for the company's custom designed products

VE Lebrun provided a finishmg room layout and a materials handling prototype was designed The layout for a warehouse was also drawn and the operation of an efficient warehouse was discussed wth the client and plant personnel The desiglvng assistance also included laying out the entlre factory product flow from lumber yard to delivery vehcle, malung all of ths possible ulth a minlmum expenditure of money and not lntermpting ongoing factory production Separately, a green lumberyard, dry luln, and a dry lumber storage area were lad out to service the factory

As previously noted, the client also requested assistance expanding hs current facility to include space for spraying and drying wooden products and plmng to purchase dry luln equipment for sawn spruce and fir lumber UD recmted CDC volunteer ED Davis to evaluate the client's current plans to purchase a dehurmdification dry luln from an Italian supplier and make recommendations about alternative luln systems based on the projected needs of the client Volunteer Davis is permanently assigned with CDC in BiH and completed the piggyback assignment in late May 1998

Employment declined by 52 percent (from 27 to 13) in January 1998 and has remsuned at 13 the past 5 months 100% Serbs 1 female

Annual sales have increased by 150 percent in the past year MPD (Western Slavonia)

MPD was established in 1959 and was privatized in 1992-1993 The company is now 100 percent privately owned MPD designs, engineers, and produces pumps and filters for use primarily in the shpbuilding, oil refining, and power generation industries It also produces strainers and valves An IESC Volunteer Executive was recruited to ass~stthe company develop a marketing strategy and plan for its products as well as providing contacts to new customers in the international marketplace The second priority of the VE assignment was an evaluation of the marketability of MPD's product line and to help the company reduce production costs through improved operating efficiencies

IESC recruited Volunteer Executive (VE) Rudolph Hohenberg who worked wth MPD from February 25 to March 21, 1998 During his assignment, VE Hohenberg initiated and completed several changes for the company

Mr Hohenberg helped develop an accurate product cost model with the finance department and recommended that the company keep the model current after he departed The cost model can provide the correct standard cost for every product and monitor deviation for each production lot

The production manager was indoctrinated with the function and benefit of Just in Time (JiT) production JiT avoids work in process inventory by reducing lot size and scheduling for moving products through the factory The process of implementing JiT was documented and the first product for trial implementation was selected

Mr Hohenberg recommended that MPD reduce its inventory and he worked with the Finance Department to understand inventory content by analysis of usage and then helped plan the reduction

Mr Hohenberg worked w~ththe production and quality managers to implement Statistical Process Control (SPC) SPC reduces scrap and improves quality, reduces work in progress and speeds up the production process The initial trial was completed successfully

A format for controlling product development projects was determined with the Technology Manager and implemented as a computer program Product development must be under control and schedule disc~plineto make effective use of personnel and achieve timely completion

VE Hohenberg recognized that an unsat~sfactorysupplier of a critical part had been causing significant production delays and cost deviat~ons The VE stressed the importance of developing supplier partnerships to control the quality and scheduling of purchased components The deficiencies caused by the supplier were quantified, an agenda for a meeting with the supplier was developed, and the meeting was scheduled for after the VE's departure

The VE also reviewed the client's marketing strategy, whch was basically to be the lowest pnce provider MPD has undertaken a product that requires d~fferentmarketing than their industrial pumps and filters This product is a residential well water pump sold through distributors and plumbing retsulers The strategy of belng the lowest price provlder limits the profits of MPD and it is not an appropriate strategy for the new water pump Discussions with the Sales Department resulted in alternate strategies that will be put into use

Employment has declined by less than 1 percent (from 120 to 1 19) 60% Croats, 25% Czech, 10 % Serb, 5% other 20 females

Annual sales have increased by 0 3 percent

Nes~c- BB (Eastern Slavonla)

Nesic BB IS a livestock-feed production company established in 1992 and currently employs 22 workers The owner, Slobodan NeSic, requested assistance msuntsunmg hs current market in Slavoma, Baranja and Western Sirrnium The company is building a new production facility that wll increase its production capacity and lmprove efficiency However, the company lost its entire FRY market in January 1998, and the loss of sales needed to be recovered by increasmg sales in the iecently remtegrated Croatian market The company has requested techcal assistance, whch will improve its distribution and sales techques

The company also requested techcal assistance improving customer service, which is one of its current advantages over the large, less flexible Croatian compames currently entenng the market m the former UN adrmmstered area UD recnuted AN volunteer Ted Stultz to work wth the company in Apnl 1998 The assistance Involved customer service, sales and marketing techmques, advertising and product techcal bulletms, and improving feed and manufacturing efficiencies In the area of marketmg and sales volunteer Shltz designed the company's first branded feed bag It is the first one in the Slavoman area to use imprinting on the side panels and a dealer custom impnnt on the reverse side of the bag Shltz also prepared a matnx for a product techcal manual and constructed Neslc-BB's first product techcal page Volunteer Stultz also made recommendations to develop a wholesale and retail pnce list for Nesic's and reviewed several sales and marketing techques that it can use m the company newsletter as a dealer trmng ad In the area of producbon, volunteer Stultz recommended the installation of a bulk unloading pit and conveyor This would allow one person to unload bulk ingredients in reduced time and would ellmlnate the need for bagging ingredients for storage Stultz also recommended an alternative producbon setup to elirmnate bottlenecks in production

Nesic BB also has a problem obtailmg high quality, consistent supply of soybean meal Volunteer Stultz recommended the company rase its own soybeans and install a dry roasting machne to produce full fat soybeans to replace soybean meal To lmprove cash flow, Stultz recommended adding products tnth hgh profit margins to improve the bottom line and to level out sales periods

Employment declined by 38 percent (8 to 5) In January 1998, but has increased by 440 percent (5 to 22) in the past 5 months 100% Serb 1 female

Annual sales have increased by 85 percent in the past year NOA - Stedno Kredltna Zadruga (Eastern and Western Slavonla)

NOA, a local NGO working wth Opportunity International, has been operating a micro credit program for small businesses in Slavonia since September 1996 NOA requested assistance determining the feasibility and, if feasible, assistance developing criteria and management gmdelines for a group lending program for its clients in Slavorua NOA is considenng the introduction of a group-lending product that would not require collateral currently necessary to obtain a loan from NOA

A/V Volunteer, Donna Kerner, implemented a techmcal assistance project in July 1997 Volunteer Kerner assessed the feasibility of a group-lending program for the region Ms Kerner proceeded with developing loan criteria and management guidelines and established loan parameters for the program NOA management ~nitiatedthe group-lending program in the Fall of 1997 and has made 37 group loans in the war affected areas of Eastern and Western Slavonia

POD (Western Slavonla)

POD was established as a private company in 1967 and employs 30 workers The company manufactures springs for agricultural and industrial purposes UD plans to provide assistance in the areas of production management and marketing The company's technical director, Mr Tomo Kovac, visited the US on an EMED traimg program designed by World Learning The training was from March 22 to April 10, 1998 The objectives of the EMED training program are organization and control of spring production, general marketing with and emphasis on procedures and strategies for entering new markets, business and strategic planing, potential joint venture partners, and IS0 9000 standards

UD is recnuting a volunteer to help the company improve internal and organizational management, improve purchasing and sales methods, assist in reducing costs and increasing efficiency, and implementing new product production based on the US EMED visit

Employment has increased by 27 percent (from 30 to 38) 20 Czech, 10 Croats, 3 Serbs, and 5 other 8 female and 30 male

Annual sales have increased by 7 percent

Proteln (Eastern Slavonla)

Prote~nproduces livestock feed and hogs The company was established in 1963 and employs 13 people Protein requested assistance to improve feed mixes, develop premixes, improve the organization of feed production and expand hog production As a result of assistance, the company expects to lower production costs, improve feed efficiency and improve hog production profitability AIV recnuted volunteer Jim Andrews to work wth Protein fiom April 11 to May 3, 1998 Volunteer Andrews made more than 22 recommendations for the company to implement after his departure The owner is scheduled for an EMED trip later in the year

Employment has remaned constant at 16 during the past year 100% Serb 100% male

Annual sales have remained constant over the past year, but are expected to increase when Protein introduces new premix feed products that were developed wth the assistance of volunteer Andrews

SAB (Western Slavon~a)

SAB is a family-owned business formed in 1990 SAB has eight employees that produce machine parts under contract for a German company SAB is also a dealer for a German manufacturer (Kramer Allrad) of light industrial equipment In the next three months, it is planning to build a new facility and to increase its production capacity After that is completed SAB would like technical assistance directed towards the production process In the short term, before the facility is completed, UD has designed an intervention assignment to recut a marketing specialist

IESC Volunteer Executive, Donald Benson worked wth SAB on a two-week piggyback assignment from March 7 to March 19, 1998 During hs assignment, VE Benson identified four main problems limiting the company's growth VE Benson recommended strategies to address all four problems and the company is implementing the recommended strategies The four factors limiting growth were (1) the current size of the facilities, (2) equipment was being used at 100 percent capacity, (3) the company needed additional workers, (4) and it needed to expand sales To resolve these factors limiting growth, SAB has purchased land and will begin constr~~ctinga 350 square meter factory as soon as financially possible (late 1998) It is currently negotiating to purchase production equipment and personnel are attending trade shows and developing a small tool catalog to help contact potential distributors VE Benson has also agreed to assist in trying to find a US partner

Employment has remained the same during the past year at 8 6 Croats and 2 others 2 females

Annual sales have increased by 100 percent in the past year

Slavonia Milk (Eastern Slavonia)

Slavonia Milk was established in early 1996 and has 8 full-time employees The company produces milk and sells its entire output to one local company in Osijek, IPK Osjecka mljekara Slavoma Milk has requested technical assistance to improve management and to assist with managing the firm's expected growth The firm has also expressed a desire for technical assistance to improve productivity and increase sales Slavonia Milk intends to expand production into Baranja and to expand the business to include providing inputs to contract producers and to purchase raw milk from these producers

Mr Dubravko Skare, the owner and general manager of the company, visited the US as an EMED participant on another USAID funded project managed by World Learning The EMED program was completed during February and March 1998 The training objectives of his visit were to learn about consulting services to learn how to achieve technical support for further development and expansion of products offered to learn how to cooperate wth foreign companies in joint ventures, licensing agreements and franchising to learn how to establish a business based on economic and market principles to learn how to organize an investment fund to observe, discuss and learn about the milk production cycle to visit a large dairy and milk processing factory to observe production phases to explore opportumties for importing/purchasing used agricultural machinery

Slavonia Milk has made an offer to buy raw milk from several groups of Dairy farmers in Baranja, who have not been fully compensated by a large Agrokombinat (Belje) for the past six months UD has been working in cooperation wth the Baranja Democratic Forum (BDF) to search for Dairy farmers that have not been compensated for their raw milk Slavonia Milk and several groups of Baranja dairy farmers are still negotiating price and payment procedures The large Agrokombinat, Belje, dominated agricultural production, processing and providing input supplies to farmers in Baranja before the 1991 conflict and during the UNTAES period Belje is currently suffering from cash flow problems, over employment and other challenges as a result of the recent transition from Serb to Croatian management Small farmers in Baranja have limited alternative marketing channels for their products and suppliers for inputs UD is linking the dairy farmers with alternative markets for their products through its work with Slavonia Mllk

Employment has increased by 33 percent (6 to 8) during the past year, 100% Croats 100% male

Sales have remained the same over the past year

St1 ojoremont (Eastern Slavonla)

IESC has recruited a Volunteer Executive to work wth Strojoremont in August 1998 The company is located in Borovo Naselje (Eastern Slavonia) and was established in 1989 The company was one of the first privately owned companies in the County The owner, Mr Ratko Njezic, is a mechamcal engineer and worked as a machinist for 20 years at a large socially owned company, Borovo

From 1989 to 1991, Strojoremont employed six people and the main activity of the business was rebuilding used rubber processing equipment (extruders, mills, presses, calendars and mixers) and reselling the rebuilt machines to private and socially owned companies in the former Yugoslavia At the end of the 1991 conflict, Eastern Slavonia was generally isolated from the rest of Europe, including periodic international embargoes The company is now in the process of transforming back to its previous concentration of rebuilding rubber equipment One of the company's requests is to obtain updated information about the current market for rebuilt rubber processing equipment in Eastern and Western Europe The IESC volunteer wll evaluate the client's capabilities and make recommendations about targeting a specific market, as well as design a marketing strategy and initiate contact with potential buyers

Employment has declined by 17 percent (from 6 to 5) over the past year 100% Serb 100% male

Sales have remained constant during the past year

Blanum (Vukovar, Eastern Slavon~a)

Planum was established in 1987 in Vukovar and the owner, Djuro Bamburac, successfully increased employment at the small construction company to 22 hll-time workers in 1997 Planum has requested assistance completing a feasibility study of a new hotel the company started constructing in 1995 The company also requested assistance preparing a busmess plan to obtan fiulding to complete the hotel In addition, the owner requested assistance designing the hotel's second floor The company is currently not moving forward with the project because of delays wth registering the land title in the Vukovar Municipal Court The Court must recognize the property title before the owner can obtain a license to rase the roof of the current building and to complete construction on the project The owner has been wsuting for more than six months to receive official confirmation that the land title has been approved and registered at the Vukovar Court

Employment has remained the same over the past year 100% Serb 100% male

Annual sales remained the same dmng the past year

PILE (Eastern Slavonla)

PILE was established by two brothers in 1997 and is 100 percent privately owned They produce and sell one-day old chicks through 20 retail outlets in the former UNTAES area The company was registered through the ADF Business Registration Project and received a NOA loan to purchase the original layers The company is interested in doubling production and UD is helping the company prepare a business plan to determine the feasibility of the client's project and to obtain financing for the expansion project UD is also helping the firm locate incubator and candling equipment

Employment and sales have remained constant over the past year, but employment will increase by 5 or 6 if the expansion project is funded

PLEPER - Metaflex (Western Slavonla)

IESC has recruited a Volunteer Executive to begin an assignment with Metaflex in August 1998 Metaflex was originally established in 1952 as part of Zeljezara Sisak, a large socially owned iron kombznat It was privatized in 1997 when the new owner, Mr Petar PleS, purchased the bankrupt company from the kombznat

The new owner has increased sales by more than 100 percent since taking over the company in June 1997 He has employed 42 additional workers in order to expand production and has increased production from 60 tons per month (June 1997) to 115 tons a month (March 1998)

The company is the only producer of seamless elbows in Croatia and is using dated production technology and equipment to produce the elbows and reducers UD w11 provide technical assistance in the form of a VA who will make recommendations to help lower production costs and improve efficiency in the production process, review the existing marketing and sales efforts, and make recommendations about expanding sales abroad

Employment has increased by 43 percent (fiom 98 to 140) 100% Croat 25 female

Annual sales have increased by more than 100 percent over the past year

TrkaE (Eastern Slavon~a)

Trkae is owned by Mr ieljko Radic, a displaced person from Tenja (a small town near Osijek) Mr Radic was displaced by the conflict in 1991 and was not able to return in the past 6 years because the town was located in a Serbian held enclave in Eastern Croatia Currently, the company's office is located at Mr Radic's apartment in Osijek, and he rents space for a small product~online m Osijek Mr Radic is planning to return and relocate his production in Tenja (Tenja was returned to Croatian authorities on January 15, 1998)

The company was started in April 1996 and produces custom designed overalls for the construction industry and uniforms for the hospitality industry, bakeries, banks, and other specialty stores The company also provides commercial embroidering services for the uniforms and for other garments (hats, tablecloths, bed sheets, T-shirts, and jerseys) The company custoin designs patterns in cooperation with the customer It uses computer software to design and scan logos (GMI GENIUS software)

Currently, TrkaC has 5 employees Mr Radic's son, Bojan, is responsible for designing the embroidering patterns He is currently enrolled at a graphic design school and is creating all of the designs with computer software Mrs Radic is responsible for embroidering One female employee is sewing umforms and another employee is cutting material and also sewing The company used to have an employee responsible for sales and marketing However, that employee left the company and Mr Radic is currently responsible for sales and marketing He has limited sales and marketing experience and has requested assistance marketing his services and products

TrltaC rents real estate for the production site, but he has a house in Tenja that was heavily damaged and wll be repaired Mr Radic plans to move the production line to Tenja after the house is repaired, but is currently using hs apartment as an office The company's short-term goals include moving the production line to Tenja and opemng a small retail store in Osijek Mr Radic's long-term goals include purchasing more equipment and introducing new products

TrkaC has requested assistance evaluating expenses and profit on each product and recommendations to lmprove productivity and profitability The company has also requested assistance marketing its umforrn products and embroidering services

Employment has increased by 25 percent over the past year (from 4 to 5) 3 Croats and 2 others 2 females

Sales have declined by 10 percent over the same period last year

Werba (Baranja)

Two brothers from Darda established Werba in 1990 The owners are DPs from Baranja and they produce basic graphic designs (logos, redesign of existing logos, anniversaries, product brands, mascots), provide printing services (memos, envelopes, business cards, certificates, invitations, ID cards, catalogs, calendars, greeting cards), and provide design and advertising for companies in the region

Employment has increased by 50 percent over the past year (from 2 to 3) 100% Croat 100% male

Annual sales have increased by 25 percent from the same period the previous Year Zimena (Eastern Slavon~a)

Zimena was established in 1982 as a sole proprietorship The company employs 78 full-time workers and produces leather products for markets in Croatia and Europe Zimena has idle equipment, available facilities, and expertise to expand production and sales The firm lacks exposure or the experience in penetrating such a hghly competitive market and has requested assistance with marketing and distribution The firm intends to target the niche market in Western Europe for high quality leather products The firm currently operates on a contract production basis with four German companies, which provide the raw materials and design patterns

Employment has not changed over the past year 100% Croat 100% male

Annual sales have not changed during over the past year

C Target 2 1 (150 transact~onsIlnk~ng enterprises in formally occupled regions to Croatla and abroad)

Target 2 1 has been met UD completed 235 linkages between companies in the war-affected areas and other parts of Croatia and abroad The seven-month delayed pullout of the Umted Nat~onsTransitional Admimstration meant that many businesses had difficulty doing business outside of former Sector East until after January 1998 UD reached this target by helping firms obtain information about registered bookkeepers and accountants, procedures for opemng bank accounts, and information to help register in the national payment system (registration is required to do business in Croatia) In addition, UD worked with individual clients to obtain used equipment, raw materials, and encouraged firms to participate in Croatian trade shows to meet potential business partners UD has worked with several commercial attaches to seek foreign companies interested in investing in Croatia UD has registered clients with the Italian Chamber of Commerce in Milan, and worked closely with a parallel program in BiH providing technical assistance to small companies in BiH

Several success stories are worth noting UD Eastern Slavoman client Maturus, which manufactures wooden doors, windows and cabinets, was suddenly cut off from its timber supplier in FRY after January 15, 1998 The owner needed dry sawn fir and spruce timber to continue producing products for a large residential reconstruction project in Vukovar UD's local advocate contacted more than 30 businesses in the region before the owner decided to accept an offer from a supplier in Orasje, BiH UD obtaned the name of the Bosnian supplier from the Bosnian Business Consulting project, which is also funded by USAID This linkage took almost one month to complete from the initial request to UD and the subsequent purchase of the dry timber in Orasje, BiH

Werba, a small company in Baranja, approached UD to help search for equipment suppliers for printing equipment The owner was unable to locate the equipment in Croatia and requested assistance contacting equipment dealers in other parts of Europe UD's local advocate located two dealers in Italy that offered the pnnting equipment As a result, the owner plans to purchase the printing equipment from one of the two Italian equpment dealers

UD's small da~ryclient in Western Slavoma, Biogal, requested assistance locating used pasteurizatioii equipment With the assistance from UD's local staff in Vukovar, the UD Daruvar Satellite Office contacted several used equipment dealers in Italy and obtained offers for the pasteurization equipment Subsequently, one of the Italian companies sent a representative to meet with the owner to make an offer for the equipment Biogal's goal is to increase production capacity by purchasing the new equipment As a result, they will hre one additional employee and begin purchasing raw milk from up to 20-30 additional small dairy farmers

UD arranged a meeting and accompanied the owner of Nesic BB to the Osijek Veterinary Service to obtain information about obtaimg permits to comply with Croatian regulations that apply to feed mills The Vet Service provided Nesic a grace period to comply wth the regulations and he obtained the necessary permits within the grace period

D Tai get 3 1 (8 new cooperatives or associations developed)

Target 3 1 will be met In fact, UD is working with 12 newly organized farmer managed Associations and Cooperatives in the war affected areas of Slavonia

The Federation of Assoc~ationsin Slavonia is an umbrella organization wth more than 50 Farmer Associations from Slavonia The Federation was established in May 1998 and represents the interests of more than 3 750 members in Slavonia Its primary goal is to assist with regulatory issues that affect small farmers in Slavonla One of the first issues being addressed by the Association is the government regulation that requires all small farmers to register and license tractors that are not used for road transportation The cost of registration is prohibitive for many small farmers

Bilje Farmer's Association in Baranja was registered in December 1997 and has 109 farmer members The majorlty of members in this Association are returnees whose propertv was destroyed during the war The Association organized the purchase of inputs to cultivate 1000 hectares of private land in Baranja in the spring of 1998

Lovas Farmer s Association was registered in October 1997 and has 45 farmer members All members of the Associat~onare returnees and the majority of their property was damaged during the war The Association helped its members obtain credits to cultivate in the spring of 1998

Nase Selo Cooperative in Baranja was reregistered in October 1997, but was previously established in 1984 The Cooperative has 25 current members and wants to transform into a western style production credit association

Milena Cooperative in Osijek was registered in May 1998 and has 30 members Milena purchases honey from its members and local producers in Eastern Slavonia and Baranja and also provide credits for small producers to purchase additional hives The Cooperative is also plmng to provide technical assistance to small producers in the area

Badljevina Farmers Association in Western Slavonia is in the process of registering and has 15 founding members The association members raise sows and feeder pigs One imtial goal of the association is to obtain a feed mill to begin preparing quality livestock feed

Prekopakra Farmers Association in Western Slavonia is in the process of registering with 10 founding members The farmers in this organization all grow fnut (mainly apples) for local markets The main goal of the association is to provide technical assistance to its members about pruning and pesticide use, and to obtain credit to expand production over the next five years

Lipik Beekeepers Association in Western Slavonia was originally established in 1997 and has 27 members The goal of the new association is to help market the member's raw honey and to eventually register as a savings and loan cooperative Many of the farmers hives were neglected or destroyed during the war, so the associations current activities include searching for credit to help the members rebuild their pre-war operations

Vera Farmer's Association in Eastern Slavonia is in the process of registering with 30 initial members The association w11 raise soya beans and livestock (mainly hogs) The association's first success was obtaining credits to plant soya bean in the spring of 1998, instead of the traditional corn and wheat planted by most small farmers in Slavoma

Bijelo Brdo Farmers Association in Eastern Slavonia is in the process of registration There will be 10 members of this new association The Association is pursuing a project to grow and market vegetables in local markets Volunteer Jim Oliver helped the farmers prepare a business plan for the project that will be initiated in the fall of 1998

Wine Grape Growers Association in Ilok, Eastern Slavonia, was established in October 1997 and has 39 members The man activity of the members is growing grapes for local meproducers The association does not have a winery, but its long-term goal is to start producing wine with the Association's label The Association has been actively searching for credit and loans for its members so that the vineyards can be revitalized to pre-war levels of productivity

Borovo Selo Farmer's Association in Eastern Slavonia is in the process of registering Initial membership is low compared to other villages There are 10 farmers establishng this Association Volunteer Leigh Rekow, who made a presentation to more than 100 local farmers in the village, introduced the Association leadership to the concept of a Western-style association The 10 founding members independently approached UD to assist them after volunteer Rekow's presentation

Establ~shingIndependent Farmer Associations and Cooperahves in Slavon~aand Baranja

UD coilfilmed two months into the program that Croatian Cooperatives do not bear any iesemblance to Western-style Cooperatives These old-style Cooperatives operate as a company that contracts to supply inputs such as seeds and fertilizer to small farmers and are compensated in kind with crops from the farmers at harvest UD discovered this conflict of interest between the farmer and old stvle cooperative after meeting with 10 formerly socially owned cooperatives during June and July 1997 These old style cooperatives were recently re-registered according to Croatian law In the former Socialist system, several different forms of general agricultural cooperatives existed, but the majonty were part of or in close relations with agrokombznats Agrokombznats and cooperatives provided inputs for farmers and marketed products Cooperatives were able to purchase new equipment on credit from the Central Government and provide services to small family farmers, such as harvesting grains Throughout the years, these cooperatives became larger and larger, increasing their employment levels

During privatization, 100 percent of the shares of every socially owned cooperative (excluding land) were sold to current and former employees at subsidized pnces The transformation process has been completed, but this phase of the privatization process resulted in many problems The ownership structure of these cooperatives made it difficult for them to adapt to market conditions Low profitability, excess capacity, and over-employment characterized them Members of most of these former socialist cooperatives are employees only (not farmers) in most cases, and farmers have little influence on management and the type of activity undertaken This conflict of interest persists in the present cooperatives and results in poor managementlfarmer relationships The participation of Croatian farmers as members in cooperatives is thus verv low compared to other European countries and the Umted States Cooperatives are also no longer able to effectively finance the purchasing of inputs, and buying and marketing grains at harvest time Most of these former socialist cooperatives in Croatia are failing or have already closed, and private individuals have purchased their assets The number of solvent and functioning old style cooperatives in Slavonia and Baranja is rapidly declining

The 10 imtial cooperatives interviewed by UD were all characterized by excess employment, poor managementlfamer relations and excess capacity All were on the edge of bankruptcy and are not expected to be sustainable businesses once they are reintegrated into the rest of Croatia Therefore, UD has decided to concentrate on forming new farmer-owned associations It should be noted that five of the initial ten cooperatives interviewed by UD in June 1997 have already collapsed and are no longer operating

Therefore, UD has focused on organizing farmers into independent organization for marketing and purchasing input supplies AN volunteer Leigh Rekow completed an assignment between February 24 and March 28, 1998 During the assignment, Volunteer Rekow met with local farmers and conducted presentations to local farmers about the benefits of forming organizations to help market products and purchase inputs As a result of volunteer Rekow's assignment, UD adopted 5 of its 12 current farmer association clients before his assignment ended in March 1998 Volunteer Rekow spent additional time wth each of these groups explaining the organizational structure and management of Western style farmer owned cooperatives and associations E Target 3 2 (10% increase in revenue of assisted cooperatives and associations)

Target 3 2 will not be met during the 1998 harvest All of UD's association clients are agricult~u-a1and were established or reregistered in the past year The expected benefit of volume purchasing and marketing technical assistance did not materialize as expected when the program was designed The reason for this is fairly simple the situation of the private farmers in both former sectors east and west proved to be one of dependence on a system not designed to strengthen the economic position of the private farmer It is clear, after twelve months of effort, that small, private farmers do not have the market power necessary for them to obtain a fair share of the profits they generate from their production This is due, in large part, to the old style cooperatives prevailing in Croatia, and to the farmers' lack of experience and expertise As previously mentioned, the old style cooperative is a construct of the agrokombznats and used as a method of distributing inputs to private landholders and subsequently collecting their production Market forces do not directly influence the farmers, in fact, they become price takers for both inputs and outputs, and have virtually no choice as to their input vendors or their production buyers

To remedy this situation, UD facilitated the organization of several Westem-style farmer managed organizations in February and March 1998, with a goal of eight organizations before the end of the year UD committed to providing the technical assistance to two of these organizations, and the European Commission sought permission to provide funding for the inputs necessary for the spring 1998 planting of almost 1,000 hectares Both the technical assistance and the input funding were critical to the success of these orgamzations In the absence of either, the organizations would have been forced back into the old system of taking what they are provided regardless of the market realities, and as a consequence, providing their production to a designated buyer for an equally unrealistic price Worse, the price received by the farmer is often in the form of barter commodities, not cash This situation, a result of a larger liquidity problem witlun the economy, aggravates the farmers' situation by forcing them to sell the bartered commodity (usually a surplus commodity) at whatever price they can obtain, further diminishing the farmers' net profit

As mentioned above, the European Commission Representative in former sector east sought permission to reprogram Fiscal Year 1997 funds to provide ECU 330,000 for the inputs necessary for planting 1998 crops This request was denied, leaving the farmers in these organizations mth no real alternatives but a return to the old system In fact, there were four alternatives available to the farmers, and whle each appeared to be viable on the surface, closer inspection ievealed that the farmers in former sector east are "playlng against a stacked deck "

The four alternatives to the donor funding for start up costs are summarized below Behind each alternative are a bewildering array of regulations, plans and policles When taken as a whole, these relegate the farmers to their former roles as poorly paid workers providing labor and land to the bigger, state-funded participants in the agricultural economy (1 e the agrokombznats and the old style cooperatives) Alternative 1 Cash Transactions

Theoretically, it was possible for the farmers to purchase their inputs for cash from whatever supplier they choose In fact, UD learned that the only domestic producer of fertilizer, INA-Petrokemija, would only accept cash for purchases Imported fertilizers were not an option due to the import controls (via licensing requirements) and import duties Seeds were ava~lablefrom a variety of sources, but prices were significantly above world prices for similar seeds The lack of liquidity in the economy has resulted in most farmers receiving "in-kind" payment for last year's harvest, or still waiting for payment Given that most of the farmers interested in organizing new cooperatives or associations fell into the latter category (still waiting to be paid), there was virtually no cash available to them Thus, the cash alternative was not viable without some form of assistance

Alternative 2 Bank Financing

Typically, the old style cooperatives financed the inputs for all of the farmers under contract to them with bank guarantees Others used direct bank loans Both cases require collateral in the form of bank deposits or real property On a bank loan, collateral requirements range from 150%-200% of the loan amount and carry a 2% monthly rate of interest and a 1% loan origination fee, the latter payable at inception in cash For a bank guarantee the requirements are similar, but the interest rate is 5% monthly to the bank Farmers, however, still pay interest to the supplier of the inputs at rates equal or hgher than the bank charges for a loan

Alternative 3 Government Plan for Providing Inputs

The government announced a plan for providing inputs to farmers in the "areas of special interest" whch coincided with the former war affected zones This plan went through several revisions that delayed the "reliable" information on what the GOC was proposing for the farmers' source of funding for inputs In summary, the ultimate plan called for working through commercial banks to place production loans to cooperatives and provided interest rate subsidies, but did not compensate the banks for the forgone revenue represented by those subsidies until after the loan was re-paid Commercial banks, in the midst of their own liquidity problems, were understandably reluctant to participate in this program Further, the plan assumed that certain commodity processors (e g sugar beet processors) would also provide subsidies to stimulate production of crops deemed strategically important by the government-sowing plan

Alternative 4 Existing Cooperatives or Private Entrepreneurs

A modification of the previous three alternatives, this option introduced either the old style cooperative or a private entrepreneur as a financial intermediary Simply put, the financial intermediary provides the collateral to obtain bank financing or the cash to provide inputs and then contracts with the individual farmers for their production Interest rates were as high as 36% in this scenario, UD knows of no case where they were below 18% Further, the farmers had virtually no market choice for either inputs or outputs, and as a consequence forfeited a greater percentage of thelr profits to the Intermediary than under any of the other alternatives This alternative had been the one most often used in the past, and the least favorable to the farmers who relied more heavily than ever on their farm incomes for their l~velihoodssince state owned Industrial jobs began disappearing

The absence of international donor funding, whether by loan or by grant, resulted in the newly formed organizations postponing their reg~strationprocess and placed the individual farmers on their own to access Inputs The farmers reverted to various alternatives, mostly Alternative 4, which further discouraged many individual prlvate farmers that had decided to remain in Eastern Slavoma rather than seek a living in another country This was simple to understand considering the economic challenges faced by the farmers They had lost their jobs and had no other source of Income other than their farms They were not pad for much of last year's crops Frequently, the cost of Inputs and labor (at government mimmums) exceed the cost of production of certain crops (especially corn and sunflower) Without access to reasonable financing for inputs, they cannot hope to survive financially Several challenges will follow (e g developing a transparent market for the crops and a distribution system for inputs that does not rely on the state), but without tlmely access to inputs, the follow on challenges are academic Given that the farming business is seasonal, llmted opportunities to introduce market principles will be available until 1999

F. Target 4 1 (3000 benefiting cooperative or association members in a mlnimum of 8 organizations)

Target 4 1 has been met as a result of large membership in the new Federation of Associations in Slavonia The total membership in the 12 association cllents is roughly 3,750 members However, new independent associations in the war-affected areas of Croatia have lower membership than originally anticipated and many farmer members in the Federation of Associations in Slavonia do not live in the former UN protected areas in Eastern and Western Slavonia The number of farmer members who live in the war-affected areas is 340 New independent associations have lower membership than originally documented for the old style cooperatives As previously mentioned, old style cooperatives did not have substantial farmer membership, but contracted with farmers as independent "cooperatants " "Cooperatants" are not members of the cooperatives and do not participate in management, even though they were listed as members in an ongoing Business Registration Project funded by USAID UD's original targets assumed that cooperatants were actual voting members of the existing cooperatives

G Re~ntegratxonOutreach Programs and Semlnars

Throughout the year, UD conducted several programs and seminars to facilitate the reintegration of population in the war affected areas of Slavonia In October 1997, UD organized two semlnars entitled "The Croatian Legal System and Regulations " The first took place in Bell Manastir and the second in Vukovar The goal of the seminars was to introduce Croatian laws to local entrepreneurs that had been separated from Croatia during the past six years The two seminars were facilitated in cooperation with the Croatian Association of Accountants and Bookkeepers Both seminars had a total of 45 participants UD also conducted two seminars in February 1998 on "Buszness Plannzng" facilitated by UD Financial advisor, John Stocker, who also provided techmcal assistance to one of UD's clients in Daruvar, EccoTherm Dr Stocker explained the importance of business plamng and presented an outline for writing a comprehensive business plan He also explained how to determine the financial status of a firm by analyzing balance sheets, income statements, and cash flow statements

While working with several construction companies in former sector East, UD designed a project to collect available information about Croatian regulations and procedures for the construction industry in the area IESC volunteer Sandford Kaplan conducted a survey of the construction industry in May 1998 that provides background information for future volunteers working with individual contractors and with the construction Industry The survey helped UD make strategic decisions about future assistance to individual firms, an emerging association and the overall industry Volunteer Kaplan completed the survey and made recommendations for assistance to individual firms and the industry

Prior to 1991, most construction companies in Yugoslavia were state owned and were characterized by over employment and most were near bankruptcy In the past two years during the United Nations Transition Administration, there were 81 registered construction compames in the Danubian region In Vukovar, there were eight Serb owned construction companies operating durlng the transitional administration period All eight were registered and have continued operating after UNTAES departed the area There are currently two primary sources of funding for reconstruction projects in the Slavonian region, international donors and the Government of Croatia

Eastern Slavonia suffered heavy damage and destruction as a result of conflict between 1991 and 1995 Estmates are as high as $27 billion for all of Croatia The city of Vukovar was about 90 percent damaged or destroyed with about 10,000 houses and 5,000 flats in vanous states of damage or destruction In addition, the County has about 23,600 houses similarly affected The Ministry clams a total 5,500 houses and flats have been repaired The Government and international donors provided $160,000,000 and $80,000,000 respectively in 1997 to begin reconstruction which has slnce been initiated However, complaints surround Ministry of reconstruct~onand Development and UNTAES bidding procedures In addition, in May 1998, there were still 1,500 finished apartments standing vacant in Vukovar because of fsulure of former tenants to return There appears to be no attempt to stimulate job creation

Prior to 1991, Vukovar City had a population of 50,000 Now its population is about 15,000 Population in the rest of Eastern Slavonia declined sharply after January 1998 The Croatian government appears not to have enough money to quickly repair all the damage New and additional money and new creative solutions need to be found to solve the problem The most important priority is job creation Volunteer Kaplan recommended incentives such as free port status and tax holidays as necessary to induce businesses to locate in war torn areas He also recommended an urban renewal approach to be tried to more quickly get some compensation to owneis of damaged and destroyed property In addition, he suggested property should be auctioned to private developers so that free enterprise can be harnessed to speed the reconstruction process and gear it more closely to the needs of the community

Volunteer Kaplan's opinion is that UD can help by becoming pro-active with the Government at all levels to reduce bureaucracy and implement the above recommendations UD can also provide assistance to contractors to react to market conditions and opportumties and funding changes and to modernize and improve their operations

Volunteer Kaplan made the following observations at the conclusion of hssurvey

1 Government -job activities

Job creation is fundamental to the recovery of Eastern Slavonia With the creation of jobs will come an increase in privately funded construction/reconstruction Along these lines, Government should take new and decisive steps to provide an environment that encourages new private investment in the area Specifically 1 Create a free trade zone in the Danube waterfront area including freedom from customs and VAT 2 5-year exemption for new or reconstructed business from all taxes including VAT, income, real estate taxes, for businesses which locate in Eastern Slavonia 3 Provide mechanism for low cost loans for new manufacturing industries via industrial revenue bonds issued by the international community

2 Government reparations The rational for gratis Government repair and reconstruction of property is that governments and chance made these people victims of the devastation of war, and Government should make them whole That having been said, the process is too slow, costly, and cumbersome It will take a generation to give the victims relief A middle ground needs to be found which provides some compensation and frees the Government to encourage redevelopment of the properties One method that Volunteer Kaplan suggested would be to offer victims with buildings damaged in categories 4, 5, and 6 a cash payment in the amount of the present value of the land plus 25% of the cost of reconstructing the buildings This would be an urban redevelopment taking These costs are reasonably well established now and can be reduced to a standard value per square meter for each category The Government can then recoup part of all of its cost by auctioning off the property with title passing after the successful bidder has had completed restoration within a reasonable deadline (e g two years) In this way the Government will at once have discharged its responsibility to the victims, the victims will have immediate if less than total satisfaction, and the Government will have harnessed private initiative and the free market to speed the restoration process

1 Kaplan suggested that this proposal has enough merit to be tried wrth a block of buildings in Vukovar 2 A similar procedure involving apartment buildings would involve auctioning off damaged buildings with title passing once the building has been restored to at least a minimum standard The present building owner would receive the auction price The apartments could then be rented at market or the building could be converted to condominium and sold (or auctioned) at market by the successful bidder 3 Both proposals require availability of viable mortgage loans perhaps insured and/or subsidized by the Government or the international community

1 Other Government actions

1 The current requirement that houses be reconstructed to pre-1991 standard means that homes are not insulated and heating systems are not provided This is not in the owners' nor is it in the country's best interest Providing retro-fit central heating systems will be more costly Energy costs will be much hgher Walls should have 5 cm polystyrene, top floor ceilings should have 10 cm polystyrene Central heating should be included in original reconstruction 2 Exterior masonry walls should require full mortar bedding of blocks, and tooled mortar ~olnts 3 Windows should meet a reasonable international standard for water and air infiltration Wood wdows need upgrading of gasketing 4 Former tenants of flats should be given 3 months to reoccupy completed apartments after which they lose their rights Units should then be offered to absent people who qualify and are willing to return 5 The tender process should be made fair and transparent using the E C process as a model Contractors should be prequalified using well defined publicly stated criteria up to certain total amounts of work according to their capacity, without the need to requalifL for each tender 6 Provide for entry of new contractors by allowing lower qualification standards for smaller projects 7 1,500 completed apartments Consider auctioning off buildings to private owners who would rent them at market or convert to condominium at market with title passing to successful bidder when 80% occupancy is achieved

Volunteer Kaplan recommended the following follow up activities for the University of Delaware program to support the private construction industry

1 Become pro-active with Government to advocate reform and change, encourage transparency in the tender process, upgrade specifications, promote free enterprise and free market solutions, and change overt and hidden discrimination at all levels of Government 2 Provide volunteers for all levels of Government to help unblock the system 3 Work wth Zagreb contractors' associations to organize branches in Osijek, Vukovar andlor Ilok 4 Provide volunteers to advise on association activities on such thngs as Government liaison at all levels, membership activities, education and trade shows 5 Provide help to contractors to penetrate the tender process, including the prequalification process, obtaining bank guarantees and joint venturing with other contractors 6 Provide technical assistance to contractors to improve quality, efficiency, management and accounting, and acquisition of more modem methods and equipment 7 Provide opportunities to tour American housing projects combined with trade shows including the National Association of Home Builders- January show and the concrete show Work with international donors, including USAID, to upgrade specifications and provide private enterprise, and free market solutions wth their capital 8 Provide legal and administrative assistance at the local level to help contractors and developers obtain land and/or buildings for development 9 Assistance to properly document their request for bank loans and guarantees 10 Training and assistance in the preparation and use of business plans, feasibility studies, and due diligence reports for projects

H SUMMARY (Lessons Learned and Year Two Program Actlvltles)

UD has submitted a request for modification of the original agreement that seeks to expand the number of businesses assisted in the former sectors East and West while further strengthening those firms already being assisted The requested revision also includes expanding program activities to former sectors North and South and worlung more closely within municipalities designated as target cornrnunities under the International Organization for Migration's (IOM) Return Assistance Program (RAP) With the return of more Croats to the east and more Serbs to the west, north, and south, there will be an increasing demand for technical assistance for new compames and firms that are relocating to those areas or restarting production

At the completion of year one, UD is adjusting to lessons learned over the past year to more effectively support the reintegration process in Croatia As UD considers possible technical assistance to businesses and associations in RAP mumcipalities, it has become apparent that the reintegration process must be integrated with an economc development program that reaches small private farmers and small and medium business people Conversations wth municipal officials regarding the reintegration process have revealed an overwhelming desire among municipal officials to develop local economic development efforts to support the emerging private sector Business opportunities and a meaningful chance for employment will be important aspects to the return process during the upcoming year