FY 1999 FIRST QUARTER PROGRAM REPORT October 1,1998 to December 31,1998

Strengthen Private Enterprises in War-Affected Areas of Croatia Agreement Number NIS-A-00-97-00026-00

Prepared for

United States Agency for International Development

Prepared by

Univers~tyof Delaware 4 Kent Way Newark, DE 19716 TABLE OF CONTENTS

EXECUTIVE SUMMARY 3 Sect~onI - FLAG VUKOVAR/OSIJEK (FORMER SECTOR EAST) 6 Sectlon I1 - FLAG DARUVAIUFORMER SECTOR WEST 14 Sectlon I11 - FLAG PETRINJAIFORMER SECTOR NORTH 2 1 Sect~onIV - FLAG KNIN / NORTHERN DALMATIA (FORMER SECTOR SOUTH) 26 ATTACHMENT A - POLICY ISSUES 3 0 ATTACHMENT B - OBROVAC LIVESTOCK MARKET FEASIBILITY STUDY 35 ATTACHMENT C - ECONOMIC PROFILE - EASTERN SLAVONIA AND BARANJA 45 ATTACHMENT D - ECONOMIC PROFILE - WESTERN SLAVONIA 87 ATTACHMENT E - ECONOMIC PROFILE - FORMER SECTOR NORTH 114 ATTACHMENT F - ECONOMIC PROFILE - FORMER SECTOR SOUTH 128 EXECUTIVE SUMMARY

December 31, 1998 marked not only the end of the first quarter of Fiscal Year 1999 but the end of the first full busmess year for the University of Delaware's FLAG - Croatia program The balance of this report features activities and accomplishments of the first quarter of Fiscal Year 1999 However, within this executive summary key statistics will also be highlighted from 1998

FLAG Accompl~shments Despite extensive economic challenges, 1998 saw many FLAG clients improve Additionally, some clients simply fought successfully to maintain their market position, and a few began to fall due to economic pressures Dunng 1998, FLAG expanded its activities to include Former Sectors North and South Leveraging the knowledge and expenence it gained from 1997 activities, FLAG increased its visib111ty and accelerated its contact with the war- affected business and farming community Not counting follow-up consultations (of whch there were usually several per individual contacted) FLAG provided direct consultation to over 1300 pnvate businesspersons and farm association leaders Over 160 pnvate businesses were contacted by FLAG offices and received assistance ranging from local staff assistance in the Business Advisory Centers to Volunteer Executive assistance (33 volunteers) to participation In the Entrepreneunal Management and Executive Development (EMED) program (7 participants) Of these160 businesses, 37 firms are now FLAG clients with this number increasing monthly While not all firms have completed their end-of-the-year financial reporting, a sample of 27 firms within FLAG's cllent base reveals a 20% increase In employment (164 jobs) and a 7% increase in sales FLAG staff and volunteer executives met wlth over twenty developing associations whose membership represents over 10,000 pnvate farmers in association development efforts World Learning's TRANSIT program provided an opportunity for thirteen (13) association leaders and agricultural extension program leaders to learn how the Farm Cooperative program in the United States provldes services to its membership In addition, FLAG is completing agreements with two professional associations with the potential to provide national representat~onof farmers and small and medium pnvate bus~nesspersons Furthermore, FLAG's outreach program accounted for 20 seminars providing business and agribusiness ~nformationto over 350 attendees The four, individual sector reports for the FLAG offices in Sections I - IV discuss actlvitles in the first quarter of Fiscal Year 1999

FLAG activities for 1999 wll include a continuance of successful efforts from 1998 plus an Increase in the use of outreach actlvlties These activities include an Increase In seminars, use of local radio programming for interviews wlth visitlng volunteer experts with listeners able to call in their questions, and the publication/distnbution of apcultural and pnvate business onented newsletters, in an effort to meet the expanding demand for FLAG technical assistance These actions plus increased communication wlth similar technical assistance efforts in neighbonng countries will expand linkages and promote improved business opportunities FLAG has determined that a reliable source of good information often serves as a good basis to move farmers and businesspersons forward Each Reglonal FLAG office is configured to present a "store front" appearance Inviting walk-in traffic seelung information Thls step has led to an ever-increasing presence of individuals seeking servlces ranging from information on credit opportunities to braln-storming their business Ideas to selecting alternative crops Pol~cyIssues After nineteen months of work in the war-affected areas of Croatia, FLAG has identified a pattern or senes of issues that constrain economic development For those who reside in the war-affected areas of Croatia, the economc environment adds to the individual's difficulty rather than support their choice to remaintreturn FLAG felt it was worth examimng the issues that play a significant role in ths constrain~ngeconomic environment The initial review determined that three general categones of concern stand out as areas requinng intervention Land Tenure and Restitution: Lack of Liqu~dity,and Lack of Incentwe Attachment A provides a discussion on these three areas and proposes some possible solutions While beyond FLAG's current mandate to intervene, these solutions may help fuel the efforts of other USAID implementers' currently active in the areas of opposition political parties, independent media, and civil society

As discussed in previous reports, FLAG farmer and bus~nessclients contend with significant receivables problems related to the overall low level of liquidity in the economy Basrcally, the money cham is broken Firms and indrviduals are not collecting receivables on schedule, if at all It is sipficant to pornt out here that the Government of Croat~a(GoC) is a major offender in the failure to pay on time Consequently, busmessmen and farmers are frequently unable to make investments necessary for expansion, buy the matenals they need, or pay their creditors The implementation and enforcement of the 22 percent Value Added Tax (VAT) dunng 1998 serves to exasperate the liquidity problem Bussinesses, includmg farms, must pay the tax based on sales invoices, regardless of whether rece~vableshave been collected Many companies are operating in a survival mode and must focus on short term operations that will keep them solvent Such firms are nghtly averse to the nsks of expand~ngor undertaking new activities, and they are reluctant to assume additional debt, if they can access cred~tat all Farmers are increasingly having to consider alternative crops in an attempt to improve chances of receiving cash for products In all regions, the business environment is deteriorating rapidly, and is notrcably more difficult now than in December 1997

In the healthy and developed economy of the U S , small bus~nessconsultants preach to management the maxim, "cash is lung" -- watch your recervables, stretch payables Given the spiraling problem of liquidity in Croat~a,FLAG has gone beyond preaching maxims and made as its centerpiece of cooperation with cl~entsthe cont~nualsearch for customers capable of paying on time rn order to ensure survival dunng the current economic cnsls Regardless of whether the client was a product~oncompany or pnvate farmer, ~dentificationof cash markets permeates every meeting, and the export potentla1 of products is examined closely The four regional ovemews that follow the individual FLAG offices' reports provide more deta~land examples of how FLAG clients are dealing with the economic environment

FLAG Research and Sector Analys~s Dunng the first quarter of Fiscal Year 1999, at the request of the International Orgamzation for Migration (IOM), FLAG conducted a feasibil~tystudy that addressed the economic impact of a regronal livestock market for the Mumcipalrty of Obrovac While FLAG recommended that IOM not support a market at the site and level of magnitude suggested by the municipality, we did recommend a modest investment for a local market with minimum mfrastructure FLAG's mvestigation revealed that Obrovac's expectations regarding the economic impact of a regional livestock market were unrealistic However, returnees need a viable source for income generation The conduct of ths study showed that sheep farming provides that potential FLAG further recommended that Obrovac encourage the formation of a Sheep Farmers Association and use that orgamzation as a vehicle for technical assistance provided by local agncultural extension agents and FLAG The Obrovac Feasib~lityStudy is included in this report as Attachment B

As FLAG grew and developed plans for improved service delivery, the need for credible information on the regions grew accordingly Economic data is often disparate FLAG compiled its own economc profile of each war-affected region as a means to synthesize existing data into a usable format Ths information is available for use by USAID implementers as well as similar efforts from the international community These profiles are dynamic documents updated quarterly Attachments C - F provide the current profiles for Former Sectors East, West, North, and South

The current economic environment in Croatia is counter to the successful development of pnvate business and by extension, the ability to return or stay in the war-affected areas Efforts of FLAG have demonstrated that it is a stimulus to moving the economy forward in these areas, and FLAG is malung an impact The 164 jobs created within a subset of FLAG assistance recipients are but one measure of effectiveness While preliminary, the overall total number of jobs created/sustained and the number of individuals who choose not to leave because of programs such as FLAG are significant Sectlon I - FLAG WKOVAR/OSIJEK (FORMER SECTOR EAST)

Quarterly Report October 1 to December 3 1, 1998

I PROGRAM OVERVIEW FOR FORMER SECTOR EAST

FLAG Vukovar and Osijek provided ongoing technical assistance to 16 business and association clients and three new potentla1 clients dunng the quarter Dunng the quarter, FLAG Vukovar concentrated staff resources and volunteer assistance to help members of agricultural associations plan and prepare for spnng sowlng m 1999 There are numerous challenges facing farmers in the former UNTAES area of eastern Croatla and FLAG has been proactive in trying to help overcome these challenges by providing market information, research, and orgamzation assistance

Raising cereal and oil crops will not be profitable for many small farmers in 1999, therefore FLAG is concentrating on introducing alternative crops and alternative marketing strategies for farmers already producing vegetables, raising livestock, and producing milk In general, FLAG has concentrated on collecting production and market information on fresh vegetables (carrots, onions, peppers, and potatoes), high quality 100-kg lean hogs, and raw milk FLAG has also concentrated on organizing the farmers to Increase marketing strength

In Vera, FLAG has identified senous hog producers from among the BIOPROTEIN association and are working with them to market 60 percent lean 100-kg hogs FLAG is concentrating the marketing efforts on butcher shops in urban areas near the Dalmatian coast and Zagreb At the moment, there are brokershuyers purchasing lean hogs fiom Slavonia for these butcher shops The brokers visit each farmer separately in the village and negotiate individually with the producer The buyer also provides transportation to the coast or Zagreb These brokers do not provide contracts or invoices and have not recently been paying on time It is not uncommon for farmers to wait 120 days before being paid, if they are paid at all In the past, FLAG volunteers have provided technical assistance to improve feeding/nutntion and to improve facilities and castration techniques There are about ten out of 120 total members that are producing hgh quality hogs FLAG'S strategy is to strengthen these ten farmers' marketing efforts and to lower product~oncosts Also part of the strategy is to sign contracts with butcher shops on the Dalmatian Coast to coincide with the tounst season when the demand for hogs substantially increases The farmers have elected a single member to represent them, and they can provide transportation of the hogs to the butcher shops

FLAG has also identified several groups of farmers that are producing vegetables for the fiesh markets in Osijek, Vukovar, and Vinkovci In Bilje, FLAG is worhng with these farmers to improve their marketing techniques and to gather market information However, there are several challenges that cannot be overcome with just a marketing effort There are issues of distribution, quality, cold storage, quantity, and the fact that local distnbutors prefer to import vegetables FLAG is designing technical assistance assignments to address the quality issues Imported vegetables are more profitable for distnbutors like Vesna in Osijek and Nama because of the lower cost and quality/packaging of imported vegetables Production costs in Croatia are very high relat~veto other countnes In the region The cost of fertilizers, seeds, hel, and pesticides are 20 - 30 percent higher in Croatia than Hungary, for example However, farmers cannot import these inputs for a lower cost because of hlgh tanffs The tanff on fertilizers is 20 percent at the moment, plus 22 percent VAT There is a "seed sort" list in Croatia that controls the vaneties of seeds that can be sold in the country To have a seed vanety added to the list, an authonzed company or must test the seed institution for three consecutive years As a result, there are a limited vanety of seeds available, and seed producers and importers charge expensive pnces for the seeds The most hstrating aspects of these tanffs and controls is that importers can usually import fresh, processed, or frozen vegetables with either very low or no tanffs Taxing the inputs (fertilizers, fuel, seeds and pesticides) and not taxing the imports as heavily is destroying agnculture in eastern Slavoma In 1997, Croatia imported 1 billion USD and exported 550 million USD of agncultural products In 1994, Croatia imported 613 million USD and exported 490 milllon in agncultural products

FLAG has also identified dary farmers in Baranja and is working with them to improve quality and marketing These dairy farmers have traditionally sold to Belje d d in Baranja but have not been paid for up to six months They are interested in finding another buyer There IS a "gentleman's" agreement between local milk processors that basically prevents one processor from entenng the terntory of another and purchasing milk Baraqa is Belje terntory and the IPK milk factory in Osijek will not break the agreement at ths moment However, there are other companies in Croatia that are interested in purchasing milk in Baranja, and FLAG plan's to continue contacting these buyers once the quality issue IS resolved There are ACDIIVOCA volunteers currently working with these producers to improve quality and farm management

The following is an example of the challenge all FLAG'S clients face with lowenng production costs to compete with imported agncultural products After receiving an offer from a Czech firm interested in selling Sunflower meal in Croatla, one of FLAG'S local staff looked into the possibility of the feed mill client, Protein, importing the meal Into Croatia The pnce in the Czech Republic for sunflower meal is 0 58 kunalkg and the pnce in Croatia is currently 1 3 kunakg However, after paying all taxes, tanffs, and transportation costs, FLAG not surpnsingly concluded that the Czech meal could not compete with 1 3 kunafkg The custom tanff on sunflower meal is 15% plus a surtax of 0 3 kuna/kg plus 22% VAT Therefore the bas~c pnce of 0 58 kunalkg would be 1 18 kunakg after taxes and fees (without transportation costs) Sunflower meal is a source of protein for livestock feed There are similar problems with other key feed ingredients, such as soy meal

I1 CLIENTS

A New Clients

MI-NI

MI-NI is a contract footwear sewing company that is owned by a Croatian returnee The company has relocated to Borovo Naselje from Vlnkovcl and employs 16 full-tlme employees The owner, Nikola Mihelic, is a former employee of Borovo Shoe Company and has more than 20 years of expenence sewing foot wear The company is producing between 80 to 120 shoes per day for two pnmary customers and is actively pursuing additional contracts with several Italian firms The company has enough orders to purchase or lease additional equipment and increase daily production However, the owner was waiting for a loan from Zupanska Banka, whlch has liquidity problems As an alternative, FLAG recommended NOA, and the client has applied for a small loan from NOA that will be used to purchase additional equipment FLAG also looked into the possibility of importing donated equipment from Argentina and are awaiting the owner's decision to import such equipment, whlch could be done duty and tax free since he is located in the Area of Special State Concern

EUROBAGATELA

EURBAGATELLA has opened a production locatlon in the former UNTAES area near Bijelo Brdo and employs 12 people throughout the region (3 in Bijelo Brdo) The company is producing coffee creamer and plans to introduce several additional instant beverage products next year The company has been a successful importer of coffee maker and instant beverage products over the past 10 years and is substituting its own products for imported products In the past six months, it has obtained 25 percent of the Croatian market for coffee creamer and their goal is 80 percent in the next two years The owner will be sent on an EMED program in the next quarter

BARANYAN DAIRY FARMERS (JAGODNJAIQ

The dairy farmers in Jagodnjak are facing challenges marketing their milk to processors outside the Baranja region Their current buyer, Belje has not paid them since June 1998 FLAG has obtained milk test results and has been contacting large and small processors in Croatia to market the milk to a company outside the Baranja region Along with a local vetennanan, volunteers Doran and Sharon Ketz are scheduled to conduct farm record keeping semmars and dairy seminars for the group in the next quarter

B Exisiting Clients

BILJE AGRICULTURE ASSOCIATION

The Bilje Association has more than 110 Croatian returnee members The association requested assistance managing its transformation from a non profit association into a for-profit Western style cooperative Volunteers Doran and Sharon Ketz and Peter McNeill worked wlth the president and agricultural advisor to discuss the transformation of the cooperative FLAG is currently working wlth the association on market research and business planning for vegetable production Farm record keep~ngseminars will be held for the association members in the next quarter ILOK AGRICULTURE ASSOCIATION

The ILOK Agnculture Association has 39 wine grape producer members Volunteer Peter McNeill worked with them on business planning and organizational development FLAG volunteer Frank Mlchael is scheduled to work with the association in January 1999 to propose an alternative marketing strategy for their grapes in 1999 Farm record keeplng seminars are scheduled for the next quarter

BIOPROTEIN AGRICULTURE ASSOCIATION

The BIOPROTEIN Agnculture Association has 105 members and is concentrating on hog production Volunteers Doran and Sharon Ketz and volunteer Peter McNeill have been working with members to improve their hog raising techniques and hog marketing strategy The association has decided to transform Into a cooperative, and FLAG will provide assistance with the transformation in the next few quarters FLAG will also be starting a marketing study in conjuction with the association on the Croatian coast dunng the next quarter Carcass evaluation, castration, and farm record keeping seminars are scheduled for the next quarter

NASE SELO AGRICULTURE COOPERATIVE

The Nase Selo Agnculture Cooperative has 25 members and 9 full-time employees Volunteers Doran and Sharon Ketz and volunteer Peter McNeill worked with the President and Supervisory Committee to prepare them for a long-term volunteer assignment in Apnl Volunteers Ellis and Nancy Clark have been selected for an Apnl assignment with the cooperative The volunteer assignment will focus on two separate goals First, the volunteer will review the current operations, structure, and management of the Nase Selo Cooperative and develop a strategic plan to restructure the cooperative that includes a workplan FLAG can use as a guide to provide technical assistance to the cooperative over the next year This will include reviewing existing bylaws and farmerlmanagement relations and making recommendations to increase farmer membership and other organizational changes necessary to function in a market economy Second, the volunteers will review the cooperative's plans to integrate a new agricultural repair and maintenance facility into ~tsexisting operations and prepare a work plan to help the manager successfully Integrate these services

PILE

FLAG has recruited a volunteer to work with ths broiler hatchery in February 1999 Volunteer John Blake will provide technical assistance in raising broiler breeder pullets, flock management, disease control and prevention, and nutnt~onto increase flock performance As a result of assistance, the company expects to lower production costs, and improve production efficiency and profitability

FLAG also helped the owner prepare a loan application for NOA which he received dunng this quarter Flag also coordinated the visit of an auditing company from Osijek to review their book keeping system and provide technical assistance to Improve thelr current knowledge of the VAT and bookkeeping requirements in Croatia ALBUM

Album is a construction company located in Vukovar and was established in December 1996 while the town of Vukovar was administered by UNTAES FLAG is recruiting a volunteer executive (VE) who will evaluate the current organization of the company and make recommendations about alternative organizational and management structures that wlll fiee the owners to concentrate on long term plans FLAG has been providing information about upcoming bids and has provided contact information about gravel suppliers in Osijek and iupanja

KAC

KAC is a general contracting company owned by a Croatian returnee, Ivan Kovac, who has a construction engineenng degree Volunteer Executive Tony Alfano is scheduled to begin an assignment with the company on January 11, 1999 VE Alfano will evaluate the internal management of the firm and make recommendations about reorganizing its management and decision making apparatus The company has also requested the volunteer executive to help the firm develop monthly cash flow projections, credit and collection procedures, and to make suggestions about selling or (trading) common stock shares with which the government pays ?SAC and other companies for completed construction projects FLAG has been helping the firm locate skilled unemployed labor

SLAVONIA MILK

Slavonia Milk was established in early 1996 and has 8 hll-time employees The company produces milk and sells its entire output to one local company in Osljek, IPK Osjecka Mljekara FLAG has recruited volunteer advisor Walter Wnght to provide technical assistance to improve management and to assist with managing the firm's herd expansion

MATURUS

Maturus' main activity is the manufachmng 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 Luluc was an engineer for designing shoes In 1991, the factory was destroyed and Mr Lukic established his own business for wood processing and desi~nglproductionof windows, doors and furniture He had no pnor expenence in wood processing or production All of his products were made for individual customers on the local market in the fonner UNTAES area For the past few years, he has participated in the reconstruction of large residentlal apartment blocks in Vukovar

The company is currently implementing recommendations made by volunteer Sydney Lebrun in June 1998 VE Lebrun provided a fimshing room layout, and a matenals handling prototype was designed The layout for a warehouse was also drawn, and the operation of an efficient warehouse was discussed with the client and plant personnel The designing assistance also included laying out the entire factory product flow fiom lumber yard to delivery vehlcle, making all of ths possible with a mimmum expenditure of money and not interrupting ongoing factory production Separately, a green lumberyard, dry kiln, and a dry lumber storage area were laid out to service the factory The client has started constructing the dry kiln facility

FLAG has also recently provided the firm with contacts for wood suppliers and has informed the owner about possible lines of credit and bids that have been published

PROTEIN

Protein produces livestock feed and hogs An AN volunteer has worked with the company to improve feed mixes, develop premixes, improve the organization of feed production, and expand hog production As a result of assistance, the company has introduced least cost feed rations, lowered production costs, improved feed efficiency, and improved hog production profitability The owner returned from a World Learning hnded Entrepreneunal Management and Executive Development (EMED) program this past quarter Dunng the EMED program, the owner was introduced to US feed mill operations, technology, and feed rations FLAG has helped the firm locate potential customers in Bosnla - Herzegovina (BiH)

NESIC BB

Nesic is also a livestock-feed production company SEAF has approached Nesic BB for a posslble equity investment They are currently in negotiations, and FLAG has been advising the company about their options and possibilities FLAG has had discussions with the company about a possible project involving pig raising whch would result in a return of DPs m Fonner Sector North Volunteer Dave Gerber worked with the company's hog raising operation and provlded blue pnnts and diagrams for new hog farrowing facilities

WERBA

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

EDEN

Mr Bakic, a Croatian returnee, has a small rented facility in Osijek with equipment where he produces macaroni Mr Bakic sells his product in several shops in Osijek, Nasice, and Slavonskl Brod His product is rare on the domestic market and usually can be found only as an imported product (simllar Czech products cost 12-15 Kuna, while his macaroni cost 10-11 Kuna in local shops) FLAG has been working wlth the company and suggested changes in its packaging which the company has now implemented FLAG also helped the firm determine the profitability of producing fast food pasta, whlch turned out to be not very profitable As a result of the feasibility study, the company decided not to produce fast food pasta FLAG has also located stores in Slovenia that would potentially purchase his product FLAG has assisted the company in registering at the Much Chamber of Commerce, which could potentially result m Eden's exporting pasta FLAG is currently working on determining if Eden's products are competitive on the international markets Volunteer John Gauthier has been recruited and will be arnving on February 20, 1999 to help the firm design a marketing strategy

TRKAC

TrkaE is owned by Mr eeljko Rad~c,a displaced person from Tenja (a small town near Osljek) The company was started in Apnl 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 embroidenng services for the uniforms and for other garments (hats, tablecloths, bed sheets, T-shirts, and jerseys) The company custom designs patterns in cooperation with the customer It uses computer software to design and scan logos (GMI GENIUS software) Volunteer Rudy Jansa provided technical assistance on cost allocation in calculating the pnces of products, pncing strategies, product and market focus, payroll accounting, investment related issues, and calculating profit margins Ths has resulted in improved business activities and increased profits

STROJOREMONT

IESC recruited a VE to work with Strojoremont, wkch is located in Borovo Naselje (Eastern Slavoma) and was established in 1989 The company was one of the first pnvately owned companies in the county The owner, Mr Ratko Njezic, is a mechanical engineer and worked as a machinist for 20 years at a large socially owned company, Borovo

FLAG is currently working with the firm to implement volunteer Adams' recommendations, including a marketing effort in Western Europe FLAG has also helped the firm obtain product certification from the Croatian Quality Research Institute and helped the firm prepare a loan request from V~kovar-SnjemCounty

HIDROING

Hidroing was established m 1990 and employs 8 people The company is manly involved in the design, engineenng, and construction supervision of waste water and sewage systems The firm IS expected to play a cntical role in rebuilding infrastructure in Eastern Slavonia

Dunng ths quarter, the owner returned from a three-week EMED program in the United States funded by World Lemng and has benefited from the information and contacts he made in the US The company is currently prepmng bids and sigmng new projects whch they will be worlung on throughout the year 1999 I11 Summary of upcoming activities

Volunteer Frank Michael will spend three days with the Ilok Association and two days with the Bilje Association in January Volunteer John Gauthier will spend one week with Eden in February Volunteers Doran and Sharon Ketz wlll conduct farm record keeplng seminars m Jagodnjak, Bllje, Vera, and Ilok Volunteer Dave Gerber will work in two weeks with BIOPROTEIN in Apnl Ellis and Nancy Clark are scheduled for a one-month assignment with the Nase Selo Cooperative In Jagodnjak Volunteer Tony Alfano will start a six-week assignment with KAC in January Walter Wnght will begin a six week assignment with Slavonia Milk in February Volunteer John Blake wlll begin a three-week assignment with Pile m February Sect~onI1 - FLAG DARUVAR/FORMER SECTOR WEST

Quarterly Report October 1 to December 3 1, 1998

I Program Overview for Sector

Several ongoing issues contlnue to negatively affect the business environment and undermine the success of SMEs and farmers in the Former Sector West

First and foremost, most of FLAG Daruvar's clients must contend with sigmficant receivables problems related to the overall low level of liquid~tyin the economy Basically, the money chain is broken Firms and individuals are not being paid on time, if at all Consequently, businessmen and farmers frequently are unable to make investments necessary for expansion, buy the matenals they need, or pay their creditors Many companies are operating in a survlval mode and must focus on short term operations that will keep them solvent Such firms are nghtly averse to the nsks of expanding or undertaking new activities and are reluctant to assume additional debt, if they can access credit at all From the perspective of small businesses m Western Slavonia, the business environment is detenoratlng rapidly, and is noticably more difficult now than in December 1998

The following points sumrnanze the situations of some of our clients, which illuminate the business climate in general

B~ogal,a small milk processor, with about 150,000 USD yearly sales, has cut employment from 8 to 5 as the company's receivables problem has worsened considerably in the last quarter of 1998 The state now owes Biogal 12,000 USD in subsidies, 12,000 USD for sales to a hospital, and 24,000 USD for sales to the government owned OTP stores in Daruvar The company will no longer sell through the OTP stores, which limits ~tsmarket penetration

Because of these problems, Biogal's manager has put expansion plans on hold A SEAF investment is a strong possibihty, but the company is reluctant to expand when paying customers are hard to find

Because of the difficulties in collecting milk subsidies and payments, Biogal will start producing more mozzarella cheese and less milk The company will also begin making home delivenes These decisions are expected to improve Biogal's liquidity, and were based on marketing advice from a volunteer expert FLAG recmted Another volunteer will amve in March to help the company specifically with marketing in the tough economy

Konna, a grain and livestock producer with 4 3 million USD annual sales, IS owed 580,000 USD by vanous customers The agribusiness PIK Vrbovec, for example, "bought" 230,000 USD of cattle for which it never paid In order to rnalnta~nits operations, Konna had to take out a loan for this amount In effect, the company was financing PIK Vrbovec's cattle FLAG has arranged for a volunteer expert to help Konna restructure and focus its acitivities on sales to a few butchers in Zagreb and on the coast who pay reliably

Industnal pump manufacturer MPD trades much of its production to the national electncal utility Although the terms of trade are in MPD's favor, barter reduces its liquidity Without steady cash flow, the company cannot regularly pay for the raw matenals it uses As a result, it receives low quality matenals from its suppliers, causing it to produce low quality pumps which can only be sold to unreliable payers at the low end of the market Until MPD is pa~dregularly, it will not be able to break out of this vicious circle FLAG is recruiting a volunteer expert to help the company develop its export and form a partenership with a large foreign pump manufacturer

The Value Added Tax is another common problem, and is most acute for those companies selling to the government or other customers who do not pay This IS because the sellers must pay the VAT based on the invoice regardless of whether they have collected on their sales The flat VAT rate of 22% for all products is especially injunous to farmers, few if any European countries charge such high tax for farm inputs and products Many small farmers have not registered with the system and consequently do not get the tax returned for products they sell

Many businessmen and farmers perceive a lack of consistency In government regulation and policy For example, farmers feel they can no longer rely on the government to pay promised subsidies on industnal crops or to buy off traditional grain harvests Consequently, they do not know what they should plant Similarly, the government assured farmers it would buy surplus pork this year at a protective pnce, but actually bought only about 30% of the surplus

Other misconceived policies aggravate the situation of small farmers One farmer in Badljevina explained that government grain subsidies are only paid to farmers who sell their crops Since he uses his crops to feed hslivestock, he must buy a receipt from a granary willing to claim it actually bought his gram The same farmer has complained about the time and expense necessary to register ~nformationabout the crops growing adjacent to his land Such procedures can be overwhelming to farmers unaccustomed to them

Despite the difficulties, some FLAG clients have fared successfully in recent months Without exception, these have been companies that are linked to customers that pay Usluga, which builds equipment for children's playgrounds, has been selling mainly to mumcipalities in Istna and internationally funded development projects FLAG is helping link USLUGA to projects in BiH Machine tool manufacturer SAB works exclusively on contract with a German company Spnng manufacturer POD barters its production with a Slovenian maker of farm implements So far, POD has not had senous difficulties in retailing the farm equipment it receives in exchange for its spnngs because it maintains a well-managed network of dealers POD received FLAG assistance last quarter from a volunteer expert who focused on their dealer network

I1 Seminars and Staff Tramg

A On 15 October, volunteer expert Rudy Jansa and advocate Nada Kozul presented a seminar on marketing at the Bjelovar Chamber of Commerce Twenty-six people attended the seminar, whch received very positive feedback B On 26 October, volunteer expert Rudy Jansa and advocate Nada Kozul appeared on a Daruvar Radio broadcast with Mr Ivan Fofonjka, the owner of POD, to descnbe the FLAG program Mr Fofonjka encouraged local businesses to make the most of FLAG services

C On 3 December, volunteer expert Martin Clark and advocate Mirsada Vatrac presented a seminar on corn and soy to about 20 farmers in the Novska area The local agncultural extension service hosted the seminar

D On 3 December, regional coordinator Stefan Peterson and advocate Nada Kozul gave a presentation on the FLAG program to a SFOR sponsored workshop for Bosnian chamber of commerce representatives in Banja Luka The presentation was intended to promote linkages between FLAG clients and Bosnian firms

E On 8 December, volunteer expert Martin Clark and advocate Mirsada Vatrac presented a seminar on dairy cattle operations to about 10 farmers in the Jasenovac area The local agncultural extension service hosted the semlnar

I11 Clients

A FLAG Daruvar signed new Memorandums of Understanding with two business clients and two farmer groups

Samtev is essentially a one-man weaving business started in Apnl 1998 Sales for the year totaled 7,660 Kuna Mr Juro Stojic performs all production of handwoven rugs made from cotton and wool textile remnants Samtex now receives all of its matenals from a local rug retailer, whch then buys the rugs the company produces While this arrangement provides a steady income to Mr Stojic and his family, the rug retailer takes almost all of the profit

The main goal of FLAG'S assistance to Samtex is to find viable alternate sources of matenals and new sales outlets Operating independently of the rug retailer, Samtex could increase its profit margin by several hundred percent This quarter, the BAC gave Mr Stojic contact information for six possible suppliers In addition, FLAG is helping Mr Stojic obtain additional looms, which wlll allow hm to hire local women and increase production, even working stnctly on contract for the rug retailer The BAC has prepared a simple budget demonstrating greater profits at higher production levels If the intervention plan is successful, Samtex could provide employment for 10 women within the next two years

Usluga manufactures equipment for children's playgrounds The company employs 5 people full-time and had a net profit of over 40,000 USD on 215,000 USD sales in 1998 Because most of Usluga's sales have been to the prosperous Istna region of Croatia and to internationally funded reconstruction projects, the company does not have a considerable receivables problem Mr Turuk has ambitious but realistic plans for the future which include building waterslides, skateboard ramps, and parks in tounst areas along the Croatian coast This quarter the BAC will undertake to link Usluga to reconstruction projects in Bosnia including playgrounds This will help the company maintain its core business while expanding into new operations

The Badlejevina Cattle and Hog Association counts 17 members The group is intended to support the hrther development of hog and cattle raising in the area by improving facilities, services, and methods

FLAG assistance to the association will include designing its management structure, developing work plans, providing updated information about available credit programs, and conducting seminars for members on mutually agreed upon subjects

The planned Prekopakra Frult Growers Cooperative is in the process of registenng and has 7 members The group aims to collectively sell apples and some pears To do ths, they will need to establ~sha cold storage facility for common use

FLAG will assist the group by providing VEs to advise on cooperative management and growing techniques In January, VE Frank Michael will spend a week with the group focusing on growing and value-added processing Subsequent VEs, including Pete Kabat, will emphasize management practices

B Existing clients

SAB The company has 10 employees (a 25% increase since the end of 1997) and 1998 sales of 48 1,000 USD (a 30% increase since last year) SAB is a family owned manufacturer of machine parts and produces pull studs and other machine parts under contract for a German firm SAB is also a dealer for Kramer-Allrad earth moving equipment The company is now building a new facility that will allow it to double its output in 1999 Ths quarter, SAB invested in modern tumng equipment that will eliminate the need to outsource some production processes In the comng year management foresees moving into the new facility, further Investment in equipment, hinng at least three additional workers, and developing a network of distnbutors for its earth moving equipment

Technical assistance next quarter A bnef piggyback visit by VA Rudy Jansa is planned for the second quarter of 1999 Mr Jansa can advise on marketing and how SAB can best evolve its organizational structure as ~t grows, particularly with regard to ~tsearth-movmg equipment dealershp

Linkages None

Changes in the relationship None

MPD Ths manufacturer of pumps and filters for shp building, oil refining, and power generation employs 120 people (no change since 1997) and had 1998 sales of 1,445,797 USD (down 23% from 1998) Liquidity problems have prevented investment to improve qual~tyand competitiveness Thls quarter the Sheibal family gained a controlling share of the company's ownership and replaced Mr Bodulus~cwith Mr Sheibal as manager The company has had modest success in winning bids for shipbuilding projects m Croatia More promisingly, MPD may form a partnershp with a large Italian pump manufacturer This deal would give the company a reliable cash flow, allow it to start a second shift, and bnng the company much closer to profitability

Techn~calassistance next quarter Volunteer expert Rudy Jansa has been recruited to help the company with sales and marketing He will amve in mid-Apnl

Sales Manager Dobnvoj Lukic has been a posslble EMED candidate for the past year However MPD's schedule has not permitted him time for a tnp If the timing IS nght ths quarter, he or another manager may be submitted to World Learning for approval

Linkages The BAC provided information about possible distnbutors in Osijek and the us

Changes in the relationshp None

POD The company now employs 36 (a 6% increase since the end of 1997) and had 1998 sales of 2,135,660 USD (a 4% increase over 1997) POD builds spnngs and replacements parts for agricultural implements and also sells Slovenian-made SIP farm equipment More than half of POD's spnng production is bartered to SIP for its products This quarter, VE Rudy Jansa spent 8 weeks helping the company address issues of marketing, orgmzation, and general management, specifically with regard to strengthening POD's brand Image as a SIP dealer, focusing on sales by developing their distnbution network In the area of general management, VE Jansa advlsed POD on team bullding, motivation, and succession

Technical assistance next quarter Based on VE Jansa's recommendations, FLAG will nominate Mrs Vesna Ignatovska to make an EMED tnp to attend the Farm Progress Show in Iowa at the end of September

Linkages The BAC provided contact Info for a Serbian farm equipment manufacturer seeking a Croatian distnbutor POD management plans to travel to Serbia to meet with this firm

Changes in the relationship None

EccoTherm employs 13 people (no change since the end of 1997) and had 1998 sales of approximately 335,000 USD (down 58% from 1997) The company installs heatlng and cooling systems Earlier in 1998 the company successfully implemented a volunteer expert's recommendations for collecting its accounts receivable However, in the past several months, the receivables situation has detenorated again and the company has taken out expensive short- term loans in order to pay its long-tern debt SEAF has been considenng making an Investment to fund expansion into new operations, such as design and refhgeration inspection However, management feels the company must stabilize first FLAG IS helping EccoTherm by evaluating possibilities to start new operations, such as systems design and refngeration inspection, which would improve cash flow

Technical assistance next quarter The owner, Mr Marijan Osmanovic, cancelled his January 1999 EMED tnp because he feels he cannot take time away from the company His wife, who is involved in all aspects of EccoTherm's management, will make the tnp instead

At management's request, the BAC will provide assistance m evaluating expansion options intended to improve cash flow

Linkages The BAC provided information about a hog farm to be built in Badljevina and an ASB project to rebuild several homes

Changes in the relationship None

B~ogal Biogal employs 5 workers (a 38% drop since the end of 1997) and had 1998 sales of 175,000 USD (down 9% from 1997) As descnbed in the Program Overview, the company has a significant cash flow problem VE Rudy Jansa met with with manager Ms Melita Pokorny twice in November to advise her about marketing issues VE Jansa's recommendations were incorporated into a Scope of Work the BAC prepared to recruit a marketing VE The BAC has also continued to obtain information on HTST pasteurizing equipment from Slovenia, Bosnia, Serbia, and from Italy FLAG also arranged for a local artist to design a new label for Biogal's milk and yogurt

Technical assistance next quarter VE John P Gauthier is scheduled to amve at the end of February He will spend three weeks with Biogal advising on marketing issues and developing a long-term strategy adapted to current economic conditions

Linkages The BAC provided information about 3 producers of milk processing equipment in Slovenia and Bosnia

Changes in the relationship None

Metaflex This producer of seamless pipe elbows employs 120 people (no change since 1997) and 1998 sales were estimated at 2 3 million USD (unchanged since the previous year) The company owns four production areas, three of which are unused The metal elbow business has not been profitable, but it does absorb enough overhead to justify its continuance Manager Mr Petar PleS plans to start a sawmill in one of the company's unused production facilities The BAC has been in correspondence the European Commission to help Metaflex regain the preferential export status it lost when Mr PleS re-named the company The BAC has also provided information about IOM construction projects and coordinated information from VE Manny Katz, who assisted the company last year Mr Katz has been researching US equipment for pipe bending and production of fiberglass storage tanks

Technical assistance next quarter The BAC will continue to work with Metaflex on the trade status issue In addition, the BAC will search for sources of sawmill equipment, including possible donors of used equipment In the second quarter of 1999, VE Rudy Jansa will advise management on marketing

Linkages VE Katz prov~dedinformation about US and European suppliers for pipe bending equipment The BAC hshedinforrnat~on about an IOM funded construction project, an ASB bid to rebuild homes, and five other government tenders

Changes in the relationshp None

IV Summary of upcoming activities

VE Frank Michael will spend the week of 1 1-16 January assisting the planned Prekopakra hitgrowers cooperative

VE Pete Kabat will mve on 15 January to work for 10 weeks as FLAG Daruvar's full-time agncultural advisor His specialization is market~ngof agncultural products, and he will assist farmer groups as well as agncultural busmesses in our area

VE John Gauthier will amve at the end of February to spend 3 weeks helping Biogal with marketing issues

Early in 1999 FLAG Daruvar anticipates sigmng MoU's with the following organizations

- Babur, a mushroom gathering and drying start-up business with 7 planned full time employees and up to 100 cooperant workers

- Konna, a grain and livestock producer with 35 workers and 1998 sales of 4 3 million USD

- Hrekc, a meat processor employing 13 people and with 1998 sales of 588,000 USD

- The Dulovac farmers association, which includes 3 1 members Sechon I11 - FLAG PETRINJAIFORMER SECTOR NORTH Quarterly Report October 1 to December 3 1, 1998

I Program Overvlew

The Croatian economy has a liquidity cnsis, and this has an adverse effect on the business climate for both large and small businesses In the healthy and developed economy of the U S , small business consultants preach to management the maxim, "cash is king" -- watch your receivables, stretch payables In Croatia, where the economy itself is illiquid, FLAG must go beyond preaching maxims and make as its centerpiece of cooperation with clients the continual search for customers capable of paying on time in order to ensure survival dung the current economic cnsis Below are examples of FLAG-Petnnja working with clients to combat the liquidity cnsis

Kaplast-Eko d o o ,Vojnlc (Injectron mold plastlc beverage cases) The firm sells 100% of its products in Croatia but surprisingly has average receivables of 52 days, which is excellent by Croatian standards The reason is that the firm has long-term contractual relationships with strong firms such as the Karlovacko Brewery, Zagrebacka Brewery, Coca-Cola Bottling, and Jarnnica Mineral Water Even with ths impressive client list, management is still hghly concerned about receivables and FLAG is currently worlung on short- term solutions by contacting potential foreign customers for current capacity Long-term, FLAG is bnnging a volunteer expert to Vojnic to help management develop a long-term strategy of new product development for export

KaDrvo d o o ,Vojnic (Beechwood lammates for furniture and construction) Fortunately KaDrvo exports over 80% of its products and has average receivables of 40 days FLAG is helping the firm strengthen this advantage by making contacts abroad for further export and by bnnging a volunteer expert to Vojnic to ensure the company has the latest technical expertise in order to maintam the quality necessary to compete in Western Europe and the U S

Dok- Ing d o o ,Zagreb (De-mmmg machinery production and mlne removal) Because all of Dok- Ing's receivables lead back to the Croatian government's de-mining budget, Dok-Ing has a hornble time collecting from its customers (receivables over 90 days) Before Christmas, the firm was in danger of running out of cash until a partial payment came in from a key customer The new year promises more of the same or worse, so FLAG is busily prepanng plans to search for foreign sources of fimding for de-mimg projects that Dok-Ing can work on either as a general- or sub-contractor Internationally-funded projects are often partially funded upfront and cash is paid out as different phases of the project are completed If the firm is restrzcted to working on Croatian Govemment-funded projects -- at a minimum, growth plans are out of the question unless more investor financing is raised, and the possibility for running out of money before the end of the year is not out of the question Ferro-Art Obrt, Petrinja (Wrought iron element producer) FLAG is worhng with this small Obrt on forming a relationship with a customer in northern Croatia, which supplies a large Italian firm This relationship has several benefits, but the most important is that this potential customer pays regularly within 60 days because of its ties to Italy

Agrozrzn Coop, Dvor (Plum, apple, and mushroom productzon) This coop has a retail location in Dvor for its products and thus receives cash directly for this part of its business (10% of sales) The coop also conducts most of its sales to wholesalers on a cash basis, but did offer 20% of its sales on credit last year (average 45 days) FLAG is helping the coop develop a processing center with the intent of developing products for export because FLAG and Agroznn agree that ensunng long-term contact with paying customers abroad must be a cornerstone of any growth strategy

I1 Sem~narsand Staff Training

Seminars Volunteer Martin Clark led the following seminars in an attempt to educate pnvate farmers about western-style cooperatives and interest them in formlng farmer associations 1 Nov 23, 1998, Hrvatska Dubica Hog production and benefits of establishing farmers association 6 attendees 2 Nov 25,1998, Sunja Beef production and establishing farmers association 45 attendees 3 Dec 7, 1998, Lekenik Sheep production and improving farmers association 25 attendees

Staff Trainlng Regional Coordinator Alan Chelko Led staff trainmg on how to properly interview potential clients and complete internal FLAG initial screening evaluation and diagnostic forms Led staff training on desktop software Advocate David Zmc Led staff training on marketing and financial issues related to exporting Advocate Mirko Parun Led staff traimng on internal petty cash and disbursement reporting Volunteer Martin Clark Led staff training on basics of pig production and marketing

I11 Clients

Agrozrin FLAG signed Agroznn as a client on September 30, 1998 Established in December of 1997, Agroznn has three members and 5 full-time employees In its first year of operation, the coop's main activity was the purchase and resale of plums, mushrooms, and apples from more than 400 farmers in the Dvor region, which lies on the opposite side of the Una fiver from Bosn~ain southern Sisascko-Moslavina County Before Agroznn began operating, no significant market for pnvate farmers had existed in the Dvor area since the end of the war In the future, Agroznn plans to develop fmt and vegetable processing capabilities in Dvor, e g drying, packaging, and marketing local plums and apples

Volunteer Frank Michael, an expert in fruit processing with extenslve international expenence, will arnve in Croatia In January 1999 and assist Agroznn and FLAG to develop the feasibility study for the hit-processing project Upon completion of the feasibility study, FLAG will subsequently assist Agroznn approach financial institutions or vendors for credit financing, locate a cost-efficient source of new or used hit processing/drying equipment, conduct market research and make sales contacts on behalf of Agroznn FLAG has already helped the coop in its attempt to increase membership, and has coordinated with the Dvor-area Sisak County Agncultural Extension Advisor in providing general agricultural technical assistance The coop has already increased membership from 3 to 4, and expects 4 new members and a 50% increase in revenues in 1999

Dok-Ing FLAG signed Dok-Ing as a client on October 15, 1998 Although founded in 1992, Zagreb-based Dok-Ing really began business operations in 1996 as a producer and operator of de-mining equipment At the end of 1997, SEAF-Croat~ainvested 190,000 USD into Dok-Ing for a 38% stake At the time, the company was solely owned by founder Mr Slavko Majetic Mr Majetic has developed a small and light mechanical de-mining device called the Earth Angel and the company has produced 5 of the machines to date Although the firm plans to resell the machines in the future once quality improves, at this time the company uses the machines only for its own mechanized de-mining operations

FLAG signed Dok-Ing as a client at the request of SEAF-Croatia Director, Ms He~keMilhench The firm faces difficulties with the collection of receivables, production quality, and stagnant marketing efforts Although Dok-Ing's Zagreb location l~esoutside of FLAG-Petnnja's Sector North work area, Dok-Ing is umque in that its business activities are restncted to war-affected regions of Croatia Because of SEAF's request and Dok-Ing's unique business activities, FLAG- Petnnja signed Dok-Ing as a client because of the opportumty it presents to assist employment growth in a USAID-funded SME whlch is directly worlung at el~minatinga major obstacle to the reintegration process In Croatia, landmines FLAG has already begun assisting the firm's marketing activities by leading a search for an lnternat~onalfinancial source to finance the removal of land mines from over 30 sq km of area In the municipality of Petnnja FLAG is worhng with the UN and Croatian Mine Action Centers in Sisak and Karlovac to make the project a reality for Dok-Ing and Petnnja FLAG has also begun coordinating monthly financial planning meetings with management and shareholders in an effort to improve the firm's financ~al management abilities FLAG will begin assisting the firm form linkages with international investors/partners, the resale of its product, and improvement of its product~oncost accounting The firm has the potential to increase employment by 38% and revenues by over 50% In the coming year Ferro-Art FLAG signed Ferro-Art as a cllent on October 23, 1998 Ferro-Art is a Petnnja-based start-up whch produces wrought Iron products such as baroque fences, gates, window bars, and spiral staircases Ferro-Art IS registered as an "Obrt" (tradetcraft shop) and ~tspresident Penca BisEan, a disabled war veteran, is currently running the shop independently but hopes to acquire a bank loan in the amount of 70,000 DEM in order to purchase production equipment and hire 4 full- time employees Ferro-Art is already providing services to clients in Croatia requesting expanded work, and has good potential sales contacts In Germany that Mr BisEan made while working there several years ago for a wrought iron producer FLAG is currently assisting the firm secure financing from Pnvredna Banka for the purchase of production equipment with help wnting a financial proposal, and providing linkages with west European buyers Future assistance will entail preparation of a marketing strategy to approach international markets, and fbrther linkages with similar producers and alternative suppliers in Croatia and abroad

Rukotvorine FLAG signed Rukotvonne as a client on October 30, 1998 Rukotvonne is a family-run handicraft products maker and contractor in Petnnja Thls Obrt produces handicrafts such as clay pottery, and wood plates, and works with over 20 local women who produce embroidered "folk textiles" such as traditional wedding towels and tablecloths Of 200,000 kuna in revenues in 1998, 90% were sold in the gift shop in Plitvice National Park Mr Cotic, owner and president, formerly worked as a director for the local craft association before the war and sold almost exclusively to now non-existent Ruktovonne, a formerly state-run firm with over 37 retail locations throughout former Yugoslavia and abroad (a shop in Moscow for one) He was able to take the name, Ruktovonne, after the firm was pnvatized and renamed Moda Valentlna FLAG will largely help the firm's marketing activities via Business Advisory Center (BAC) technical assistance FLAG has already helped Rukotvonne make a timely sales order before the Christmas holidays, and is helping establish a linkage with a senous Amencan buyer located on the Croatian coast The fact that before the war Mr Cotic worked wlth over 250 local women producing folk textiles gives some indication of the impact thls firm's growth can have (although many of the women have left the area, increasing the number to 100 is not unreasonable), and the firm can employ 4 full-tlme people if sales of ceramic products grow to levels approximating 500,000 kuna

KaDrvo FLAG signed KaDrvo as a client on December 3, 1998 Based in Vojnic, ths company produces laminated beech wood components largely for residential stairway construction The company exports approximately 90% of its products (receivables of 40 days) to Western Europe, and finlshed 1998 with 3 6 million DEM in revenues The company recently completed reconstruction of its sawmill and will use the facility for its own production as well as for other wood processing companies purchasing wood in the region in need of low-level processing KaDrvo employs 40 people and is close to adding another shift of close to 30 workers by early March FLAG will assist at the BAC level with locating alternative raw matenals suppliers, potential foreign partners, and new customers, as well as consider bnnging an industry expert from the US with some techcal background to help improve production and assist management plan its growth efficiently The firm has the potential for employment growth of 75% and revenue growth of 61% over the next year Kaplast Eko FLAG signed Kaplast Eko as a client on December 4, 1998 Kaplast Eko is a Vojnlc-based producer of lnjectlon mold plastic products such as beverage container cases for Karlovacko Brewery and Coca-Cola, and plastic parts for the electromcs industry Kaplast Eko is a joint venture between Kaplast d d (Karlovac) and General Plast S r I (Italy) and imports large containers of small plast~cpellets, melts them, and by the process of injection moldlng creates plastic beverage crates and electronic plastic parts The company also buys and breaks down old products from customers and resells them to Croatian recycling brokers, who then turn and sell them to recycling compames In other parts of Europe The company has 4 large machlnes which are used for producing plastic beverage cases and are capable of making plastic moulds up to 3 kg, and 6 smaller machnes capable of producing moulds up to 1 5 kg (used at the moment for produc~ngelectronic plastlc parts) The 4 large machlnes are worlung at full capacity and should stay that way for another 2 years (via renewed contracts), while the 6 smaller machnes are only at 20% capacity w~th7,000 machine hours per year currently available for production

The company's president, Nenad Banjac, is a former EMED participant and apparently a very progressive manager The company employs 55 people with the possibility of hlnng 10 full-time employees currently worklng part-time over the next 6 months Mr Banjac would l~keto work with FLAG to develop long-term growth strategies FLAG will consider bnnging a marketlnglstrategy consultant to assist management consider new product lines, as well as assist with current marketing efforts at the BAC level The firm has the potential to realize 18% employment growth and 19% revenue growth over the next year

IV Summary of Upcom~ngActivities

Mr Martln Clark, a full-time agncultural Volunteer Expert from the U S , returns to Petnnja January 15 and will stay through February 28 in order to assist FLAG w~ththe format~onand development of farmer associations in Sector North lead the following seminars January 20, 1999, Vojnic - Pig production and establishlng farmer associations January 2 1, 1999, Krnjak - Cattle production and establishlng fanner associations January 27, 1999, Cet~ngrad- Cattle production and establ~shingfarmer assoc~ations January 28, 1999, Slunj -- Pig production and establishmg farmer assoc~ations

Volunteer Frank Michael, an expert In fruit processing with extenslve international expenence, will amve in Petnnja the week of January 18, 1999 to help Agroznn and FLAG develop a feasib~litystudy for a fru~t-processingproject

Mr Earl Eugene Hodgluns, a full-time agncultural expert from the U S , will amve In Petnnja March 1, 1999 and stay through June 1, 1999 m order to contlnue with Mr Martin Clark's work and ass~stFLAG with the formation and development of farmer associations in Sector North Sectron IV - FLAG KNIN / NORTHERN DALMATIA (FORMER SECTOR SOUTH)

Quarterly Report October 1 to December 3 1, 1998

I Program Overvrew

Since opemng the Kum office on November 9, 1998 FLAG provided technical assistance to ten business clients, more than 60 individual farmers, and over 25 potential entrepreneurs The hn office works in the Counties of Lika-Sinj, Zadar, and Sibemk-Knin This area, although the largest of the war-affected regions, presents extensive challenges to economic development in Croatia

Pnor to the war, this area suffered economic hardship Aside from well-developed industry and tounst facilities along the Dalmatian coast, the hinterlands resembled a Croatian Appalachia The state established large factones in an attempt to stimulate the economy and foster full employment Selection of the industry or location was based on political factors and not on market cntena These factones are now dehnct Many were war damaged, many failed because of loss of markets Most would have failed if the war had not come because of their disregard for market factors Most production-onented companies in the war-affected areas await privatization or require significant investment to resume operation The business mindset still focuses on production not a market or customer onentation Access to easy credit seems to be the business mantra With few jobs, little capital, and no liquidity, the region has slipped into a barter economy

Existing businesses need to concentrate on survival Challenges to SMEs include a lack of available capital, difficulty in collecting receivables, over-regulation, and ill-conceived distribution networks Existing firms must focus on a consumer-onented strategy and develop business plans so they can act quickly when the situation improves They need to identify opportunities for export and strategies to overcome the liquidity problem The majonty of FLAG Knin's over 25 walk-in visitors were seelung financing

Agnculture has a long tradition in the area and is the most promising sector for growth of productivity and meaningful employment Before the war most people worked in a state job They also had a secondary income from some form of agricultural endeavor Now since few paying jobs exist, amculture offers the best possibility of supporting the family Farming in Dalmatia differs significantly from Slavorua Fragmented landholdings prevent efficient production Many small dairy farmers, who live too far from a milk collection facility, barter their milk or feed it to livestock Farmers' reliance on individual effort translates into few associations Farmers produce the raw product but fail to benefit from any value-added process Unlike Slavonia, production techniques here require substantial improvement Livestock production of sheep and goats, an important traditional activity, provides a pnme example A measure or success for sheep farmers is the percent return of their ewes (lambs that survive) US farmers expect 125-150% Their Croatian counterparts average less than 85% Most fanners lack basic record keeping, this prevents any sound management decisions and limits their access to credit Agnculture offers the best potential for economic growth Agnculture, which is a source of secondary income for most, has few entry barners With prospects of paying jobs scarce, it offers the best prospect to support the return process FLAG Knin's initial approach involved establishing a close working relationship with the Agncultural Extension agents These agents share many of the same challenges that we expenence Knowledgeable yet ready to learn new production techn~quesand market fundamentals, they are proactive and generally accepted by the local farmers With few associations ~n the area, these agents are the best means to leverage FLAG'S expertise Working with them gives us access to farmers that can serve as leaders and role models for the other farmers FLAG visited over 25 small farms, pnmanly dalry and sheep operations FLAG volunteers established their credibility and gave specific advice on management improvements and stressed the importance of basic record keeping and encouraged the format,on of associations FLAG also presented two seminars that reached over 40 people The essential themes of the seminars were record keeping, the value of associations, and the benefits of working with extension agents

FLAG has the capability to make a significant impact in the economic development of this area The existing conditions present formidable challenges and success must be measured in relation to this baseline Businesses will benefit mainly fiom preparation of business plans and marketing efforts They need to adopt strategies to cope with the liquidity problem and seek export opportunities where possible A long-term benefit will be helping small businesses mobilize their power as an effective lobby to effect policy changes Agncultural educational efforts will concentrate on simple, nollow cost management improvements, importance of record keeping, benefits of associations and potential for valued added processes With few existing associations, the delivery approach will require a more time intensive effort a~medat ~ndividual farmers

I1 Seminars and Staff Tralnlng

FLAG presented two seminars entltled "Three Keys to Successful Farming " One in Otocac on December 3, 1998 attracted nine people, the second, in Knin on December 4, drew 32 participants The presentations stressed the importance of basic record keeping, the benefits of farmers' associations, and the advantages of working with the county extension service The number of questions demonstrated a hgh level of interest

The seminar matenals were provided to the rune agricultural extension agents with whom FLAG works The matenal included the basic seminar outline, blank record keeping forms, production record forms, and drury management suggestions Since these matenals were provided on a computer disk in Croatian, their effect will be multiplied numerous times

Staff tralning was conducted in interpreting financial performance The staff also received overviews of the USAID, SEAF, IOM, and NOA programs in Croatia

I11 Clients Vrana d d FLAG made three technical assistance visits with agncultural volunteers and provided an in-depth report Vrana, a former agrokombinant, is overstaffed but can significantly improve its milk production FLAG is currently discussing with the owner how a FLAG-Vrana relationship can foster population reintegration

L~kad d FLAG evaluated the firm's business plan to borrow one million USD to establish a dairy operation on a former state farm Although the plan was not viable, FLAG staff are working with them to see how thelr assets can be productively employed Establishment of a large dairy operation in this area would prov~de"cntical mass" and result in the Zadar Dairy opening a milk collection center in Donji Lapac This would permit small farmers to sell their m~lkfor cash FLAG strongly suggested raising sheep They own three large barns that require little investment, and the barns were previously used for sheep production Pnces for lamb are hlgh and people in the area have expenence with sheep farming Llka should also consider selllng the damaged slaughterhouse which is a non-productive asset with little economic potential Its sale could finance more profitable endeavors

Dragan Perajic A local wholesaler of fruits and vegetables in Polaca, Mr Perajic is also the head the local farmers association FLAG hopes to work with the association to exploit their location near the coast and their ability to grow fruits and vegetables year round

Obrt of Petar Rajcevic Mr Rajcevic operates a successful bullding supply store in Donjl Lapac He hopes to expand Into a small construction company FLAG has provided information on NGO construction operations in the area and sources for possible financing We also linked him with Album, a FLAG Vukovar client, as a source of information and potential subcontractor opportunity FLAG is assisting Mr Rajcevic to obtaln an ICMC grant

Plitvlce Tergovma, Korenica This existing trading company has unproductive assets in Koren~ca They have a sound business Idea to provide laundry servlce and wholesale bakery products in the area They have a letter of intent and some financial backing from Plivice National Park who would be their principal customer FLAG has advised on leasing versus purchase of equipment

Mljekara, Pakovo Selo The owner received an HBOR loan and is constructing a small dairy that will produce yogurt and specialty cheeses Construction will finish early next year In additlon to direct job creation this project would provide a sales outlet to small farmers who currently lack a market for their milk Encouraging these farmers to form an association will benefit the dairy and serve as an successful example of cooperation to other farmers

hbnjak d d Donji Srb This successful trout farm exports 50% of its output to Italy A diagnostic is scheduled next quarter

Ostra D o o , Udbina This small but well organized powdered beverage manufacturer offers potentla1 for significant revenue growth and modest employment increase Initial screening has been completed, and FLAGS expect to complete a diagnostic and sign the firm as a client next quarter Ivlc, Drnis This producer of prsut (smoked ham) is operatrng at 20% capacity He lacks both workmg capital and hog supply to expand Sales of his ham outstnp supply Based on proven performance, Ivlc should be able to obtain financing FLAG hopes to ass~stIn strategic planning and marketing imt~atives In addit~onto direct impact, Ivic's purchase of inputs will support numerous small hog producers

D~etz,Kijev0 This small firm assembles orthopedic and medical equipment for sale to hospitals and to individuals through the State Health Fund The firm offers potential for solid revenue growth and modest employment galns Initla1 screening has been completed and we expect to complete a diagnostic and sign as a cl~entnext quarter

IV Summary of Upcomlng Events

FLAG Knin plans to formalize its cl~entrelationship with four firms in the next quarter These businesses represent combined revenues of over 1 8 million USD, and they currently employ 42 FLAG Knin will continue to enlist enthus~asmfor farmer assoc~ationsbut delivery approach w~ll concentrate on successful farms that have the capability to expand These owners are the natural choices as leaders that wlll serve as examples to other farmers They will be the nucleus for farmer associations and profit onented cooperatives or agnbusinesses The cooperatives under evaluat~onby FLAG represent over 180 cooperants

FLAG Kmn will also meet the challenge of gmding those firms which have unproductive assets into a v~ablebusiness strategy focused on customer requirements not production

FLAG Knin will continue ~tsaggressive OUTREACH Program In many cases this may be convincing would be entrepreneurs to reth~nkcurrent ideas and to prepare a wntten busmess plan FLAG Knin has developed a semlnar a~medat business starts ups Using a dramatization it contrasts the approaches of two entrepreneurs (one market onented, the other focused on production) as they plan their individual businesses

FLAG w~llcontinue its popular seminar on the three keys to successful farming and initlate seminars a~medspec~fically at sheep growers These wlll include both management techn~ques geared to Increasing the percentage of newborn lambs and on basic business practices

Economic conditions in Northern Dalmatia present formidable hurdles Agnculture represents the best opportumty to provide viable economlc support to retmng families FLAG has established a firm foundation m the region Leveraging its expertise will deliver quantifiable gains in the region ATTACHMENT A - POLICY ISSUES

Economic Env~ronmentof Croatian War-Affected Areas

The war-affected areas of Croatia face a multitude of problems on two fronts - recovery from a civil war and working within an economy in transition To successfully deal with either has histoncally taken a great deal of time, money, and cooperation between the international community and the country in question Within Croatia, it IS impossible to address one front without consideration of the other FLAG'S role is to stimulate economic development in such a manner as to facilitate the reintegration of the previous wamng factions

What Needs to Be Done?

After 17 months of work in the war-affected areas of Croatia, FLAG has seen a pattern or senes of issues that create a less than supportive economic environment for those who either remained in these areas dunng the war or who have chosen to return While it is worth discussing some specific issues that need to be addressed, the majonty of the specific issues fall into one or more of the following three general categones of concern a Land tenure and restitution have emerged as an important issue wthin the war-affected areas Throughout these areas, there has been a consistent request from returning and remaimg farmers to lease or purchase socially owned land that was previously farmed by cooperatives or kombinats Fifty percent of the land in the former UNTAES area is in this category Municipal authorities have permission to lease land if it has not been farmed for two years, which is the case for most land along the former confrontation line In some areas, municipal leaders have leased land to returnees for one year with favorable cond~tions However, these leases do not encourage farmers to make capital improvements on the land, such as building irrigation systems or purchasing equipment A comprehensive land tenure policy that allows for upgrading tenure nghts to ownership and while addressing competing claims for land would encourage small farmers to purchase land and expand production (Note This problem is particularly cntical in view of the damaged, destroyed, and bankrupt businesses in the war-affected areas Many families were part-time farmers with a sigmficant part of the household income being denved from employment in businesses outside of farming With the loss of employment and no significant opportunity for outside employment, these families must now try to support the household from their landholdings These landholdings are for the most part too small for profitable farming )

The lack of liquidity in the war-affected areas continues to place the pnvate farmers and the SME community at a disadvantage This disadvantage comes in vanous forms Receivables are frequently paid in commodities, creating a less than profitable barter environment In the construction sector, govemment contracts that fail to be paid in a timely manner cause salmes and their respective payables go unpaid, placing the hardshp on employees of the construction company and its suppliers Credit has become increasingly hard to access and/or comes at high cost, thus dnving production costs to the point of not being competitive in the market Insolvent state-owned companies use their contacts and Influence with the government to gain subsidies and avoid bankruptcy proceedings

There is a general lack of incentive for someone to either return to the war-affected area or to invest in businesses In these areas Lack of capital and burdensome taxes make investments and employment challenging and have created economic stagnation Frequently, economic development incent~ves(or return incentives) can be achieved through the prudent and transparent use of governmental programs such as Enterpnse Zones Enterpnse zones are created by local, reg~onal,and national governments for a specific area that they wish to develop A mlx of subsidies and technical assistance are usually given to businesses to foster relocation or expansion m the given zone In addition, the businesses are given tax exemptions for a given amount of time to spur investment, job creation, and overall economic growth Typical problems associated with the use of enterprise zones, such as real- estate costs, distribution infrastructure, market expertise, or secunty problems are concerns that can be minimized in Croatia's war-affected areas by government commitment While Croatian Laws on Areas of Special State Concern and Free Trade Zones do exist, the laws are not comprehens~ve,sufficient in scope, and/or weaken upon implementation

The three bullets above discuss bnefly over-arching issues that together create an environment of disincentive rather than Incentive However, they must be addressed through a senes of actions that confront specific concerns with specific recommended solutions The following are three dlscuss~onsdealing with some specific agnbusiness concerns that require specific remedies

Importation of Fertilizer and Seed - The government needs to open the market for imports of fertilizer and fertilizer components Th~swould allow any business or farmer association to Import these products The government should also make this pollcy change for the importation of certified seed into the Croatian market

Result More competition in the production and sale of fertilizer would lower the cost to the producer and allow for the application of fertilizer based on soil and crop types, not on pnce and availability There would also be an increase in production and quality for some crops like wheat A secondary benefit is the creation of small businesses and manufacturers to respond to increased supply and demand

Improved seed allows for increases in production, improved pest resistance, and better vaneties for double cropping Under the current system, lt takes three years for seed to be approved for introduction into the Croatian market This is about the life span of seed in the US, which places Croatlan farmers about one generation behind In seed technology Of course, thls is providing that fanners have access to seed other than what they save from last year's crop For example, FLAG has been told that the soybean seed in use was first introduced to Croatia slxteen years ago

Action Needed This is an administrative decision from the Miastry of Agriculture and the Ministry of Economy and should not require legislative consideration Consistent Import Pollcy - Current import policy vanes dramatically and the only consistency is that it suits the political and economic needs of the party in power and associates of the party For example, no fertilizer imports are allowed There is a tmff on imported soybeans based on the production season in Croatia, but hog carcasses were, until just recently, freely imported from Hungary Some domestic enterpnses are protected while others are devastated by the free flow of imports

Croatian agnculture import policy should prov~dean appropnate level of protection for domestic producers while factonng in the availability of products for domestic processors

Result For the hog industry, the policy should probably allow for importation of a certaln number of hogs to ensue an adequate level of supply for processors This decision would be based on the domestic hog supply, domestic kill and processing capacity, domestic and export demand for finished products, and any seasonality in the marketing of finished hogs With this data, there should be a way to provide some balance between a domestic market for farmers and adequate supply for hog processors

Apparently, the soybean industry does not allow importation of soybeans dunng the fall harvest, but the restnctions are lifted once the domestic supply drops This policy may work for soybeans but warrants closer inspection Lack of transparency in the development of such policy fuels feelings that it is wntten to favor fnends of the government

Actlon Adrnimstrative action taken by the Ministry of Apculture and the Ministry of Economy

HBOR Credlt Pollcy - The Croatian Bank on Reconstruction (HBOR) provides vanous loan programs to finance reconstruction after the war One of the programs is in the state designated "special areas" and focuses on SMEs HBOR funding is provided to local commercial banks, and the local bank works with the borrower Unfortunately, many of the commercial banks do not want to work with HBOR because the return to the lender is so small In addition, HBOR does not provide any type of loan guarantee, leaving the banks responsible for 100% of the loans This program has not worked for a vanety of reasons The banking system is not sound, current conditions make apculture not profitable, and both commercial banks and farmerslsmall business people are still trying to learn how to function as a business with business plans and cash flow statements

One suggestion is for HBOR to lend money to farmer associations so they can purchase inputs to sell to their members Another option would be for HBOR to provide seed money, which would allow the establishment of a Production Credit Association to lend to producers or a Cooperative Bank to lend to Cooperatives/Associations Apparently, the legislative language prohibits HBOR fiom competing directly with commercial banks

Another policy option is for HBOR to be allowed to make loans to individuals, small businesses, or associations when a commercial bank declines the opportunity to provide a loan These individuals and organizations would need to meet other requirements to determine their creditworthiness If they had a sound business plan and cash flow, credit would be available Results One of the biggest problems in the Croatian banking system is that there is no competition In the United States, there is a Farm Credit System (FCS) which is a Government- Sponsored Enterpnse Under the FCS, the government backs the bonds used for financing, and it is similar to the Federal Home Loan Mortgage Association The FCS makes 25% of the agncultue loans in the US, and in some agnculture states, it can be as high as 30% The commercial lenders complain about the competition, but the system provides farmers with options for loans Furthermore, when the pnce of land and commodities drop in the United States, pnvate banks decrease their agnculture loan portfolio The FCS is a consistent, reliable lender to farmers and cooperatives because lending to farmers is the focus of their business

If HBOR had the authonty to make loans to farmer associations or production credit associations, the banks would need to worry about their business going elsewhere and might be more willing to work with their customers

Actlon This would take legislative language to change the charter of HBOR Ths would also require the blessing of the Minlstry of Treasury because HBOR is under the Ministry's jurisdiction

Regulation of the Meat Processing Industry to Ensure Payment to Farmers - One of the biggest problems livestock producers face is delayed or nonexistent payment by meat processors after livestock have been sold and slaughtered There is a law whlch requires timely payment by the meat processors, but farmers are routinely asked to waive ths nght It is possible that sales are contingent on signing this waiver Compounding the problem, producers are required to pay the VAT to the government regardless of whether they have collected the receivables

In the United States, the Packers and Stockyards Act, which IS administered by the Grain Inspection and Packers and Stockyards Administration, provides for payment protection for the sellers of livestock Market agencies that sell livestock on a commission basis are required to establish and maintain, for the benefit of livestock sellers, a bank account known as a Custodial Account for Shipper's Proceeds Payment protection is provided directly under the Act by the statutory requirement of full and prompt payment, by packer bonding reqmrements, and by the packer trust provisions Prompt payment is a sigmficant element of the financial protection afforded producers under the Act For example, the meat packer is required to mail a check to the producer the next business day after taklng possession of the livestock In the event that there is a lien against the livestock, the check is made payable to the producer and the lending institution holding the lien The packer trust provides protection to producers who fail to receive payment fkom meat packers The Packers and Stockyards Act also provides protection for poultry producers while another provides similar secunty for producers of grain

Results Timely payment for livestock and poultry producers would have a large impact on farm cash flow Tks law alone would not make livestock and poultry production profitable However, a cash flow for the livestock producer means that the other small businesses that provide services to the livestock sector would also be paid If the US law were adopted in Croatia, perhaps it would be posslble to requlre that producers be pald before the due date for payment of the VAT In addition, the US law does not allow the packer or llvestock dealer to dictate the manner or forms of payment A similar provision in Croatian law would address the problem of producers being forced to waive the payment terms before they sell their llvestock

Action Most llkely, this would require consideration by the Parliament and support by the Ministry of Agriculture Current law governing payment of farmers would need to be examined to deterrnlne the appropnate course of actlon

How do We Get There?

The situation discussed above answers part of the question "What needs to be done?" However, it may be the "How" that presents the biggest challenge As stated earlier, time, money, and most importantly, comm~trnentto change are essential ingredients Given that the current government has not been proactive m recognizing and resolving problems such as those discussed above, the people of Croatla must demand solutions fiom the government

Criticism without focus breeds an atmosphere of defensiveness and dlstrust Issue ident~fication, defining problems and developing alternative solutions provlde a startlng point for civil soclety to discuss issues with the government Domestlc entitles such as professional associations, independent medla, and alternative polltical parties can present their concerns and desired pohcy/regulatory changes through constitut~onalchannels

As political parties, professional associations, and Independent media develop then strength and constituenc~es,the International community can lobby the Croatian government to make necessary changes Organ~zations,such as UNHCR and OSCE, together worklng in concert with the diplomatic community, have a voice and should conslder the need for key changes in GoC pollcy Changes m GoC policy are necessary to make substantwe progress in the reintegration of the population and subsequent development of the war-affected areas Condltionality in donor ald should be considered

Finally, there are several donor comrnunlty lmplementers operating in Croatia that can research changes needed in the economic environment and provlde subsequent monitoring These implementers are worklng at the grass root level and have the necessary contacts and local credibility to work wlth both the international community and the domestlc entlties in developing dialogue sufficient to bnng about orderly and productive change ATTACHMENT B - OBROVAC LIVESTOCK MARKET FEASIBILITY STUDY

Prepared by FLAG Croaha December 16,1998

I Executive Summary

This paper addresses the feasibility of investment by The International Organization for Migration (IOM) in a regional livestock market for the Municipality of Obrovac The Municipality had proposed a 1 6 million-dollar facility project that it felt would stimulate the local economy FLAG recommends that IOM not support a Regional Livestock Market at the site and level of magnitude suggested by the Mumcipality of Obravac Obrovac should focus on the market itself, that is buyers and sellers meeting to exchange goods, not on a physical infrastructure project By choosing a suitable site, Obrovac could have a local livestock market that would meet the needs of the local population for substantially less than the cost of the tender documents for the onginal project

Obrovac has no industnal base Pnor to the war many people raised livestock to supplement their Income With unemployment over 70%, Obrovac needs an income generation source to attract returnees Obrovac has a competitive advantage to support raising sheep Along w~th their long tradition, public grazing land is available and demand centers are close Current sheep population in Obrovac is less than 25% of the number the area can support Although Croatia lost its overseas market, lamb pnces are high and demand outstnps current supply

Obrovac predicted the proposed project would result in revenue increases to farmers of 30% by eliminating the need for roving brokers The proposal predicted a facility would attract sellers from a 200-kilometer radius These expectations are unfounded Farmers are generally receiving excellent prices mlea large facility project will not stimulate the economy, establishment of a local market with minimum infrastructure will provide benefits to the local farmers Sheep raising is a viable economic activity that will support economic development and encourage returnees Obrovac should help establish a Sheep Growers Association Such an organization would be a vehicle for providing technical assistance that the farmers need to insure their success

Study Purpose

This study addresses the feasibility of opemng a regional livestock market in Obrovac More specifically, it answers the question of whether a regional livestock market will contnbute to the economic expansion of the municipality It provides specific recommendations on necessary infi-astructure needed to establish a market It also addresses a broader but perhaps fundamentally more important issue whether sheep farming is a viable means of generating an adequate family income

Background The genesis of this study was a request from the International Orgamzation for Migration (IOM) to provide a feasibility study for a proposed economic development project Obrovac had agreed to participate in the Returnee Assistance Program (RAP) The Municipality had proposed a facility project to develop a parcel of municipal land as a regional livestock market The municipality believed it had a competitive advantage due to the region's history of stock raising and its favorable location near major demand centers (Split, Sibenik, and Zadar) and the pnnclpal highway north to continental Croatia Municipal leaders recalled the days pnor to the Second World War when Obrovac had been a major point of shpment for sheep to overseas markets More recently, pnor to the war in 1991, they remembered air shipments of lamb to the United Arab Emirates Officials felt confident the market would attract buyers and sellers from a 200-kilometer radius, and this would provide a significant economic effect They belleved farm related suppliers would establish outlets adjacent to the market to reach both livestock buyers and sellers The mayor had been in contact with the major meat wholesaler, Mesopromet from Zadar, which was interested in relocating its slaughterhouse to Obrovac Officials also firmly believed that an organized market would reduce "black market" activities They felt that roving brokers, referred to as "nakupac," were taklng advantage of local farmers by offenng pnces substantially lower than prevailing market pnces They predicted sellers' revenues would increase by 30% The mun~cipality'sestimated first year volume would be 110,000 lambs, and total sales volume for all types of livestock would be 100,000,000 DEM

Obrovac typifies war-affected municipalities located in Northern Dalmatia The region consists of Llka-Senj, Zadar, and Sibenik-Knin Counties Each county extends from a relatively well- developed coastline to rugged mountains astnde the Bosnia border Large cities and tounst facilities and corresponcfing economlc activity are concentrated on the coast Pnor to the war, the inland region was considered an econom~callydistressed area Central planners attempted to locate large state run factones in the area but these collapsed because of both the war and their disregard of market fundamentals The majonty of the area was occupied from 1991 until 1995 by the breakaway Serb Republic of the Krajina Dunng tlvs time the area was cut off from normal markets and affected by economic and polltical sanctions Croatia recaptured the area in August 1995 dunng Operation Storm Infrastructure, state and pnvate busmesses, and personal property were heavily damaged Most towns in the region suffered extensive damage, and many rural villages were destroyed and now resemble ghost towns Today there is almost no industnal production Regional officials recognize there is little potential for economic development from large industnal facilities and therefore concentrate activities on small and medium business development and agriculture

In 1991, when the Krajina Republic was proclaimed, the majonty of the ethnic Croats left the area, after Operation Storm many of the ethc Serbs left In addition, many Bosnian Croats have settled in the area mlethe returnee issue is complicated, there are three basic issues that effect the number of people who desire to return security, infrastructure/ housing, and employment potential

The obstacles to reintegration are tremendous Estimates of damage to homes in the area run as high as 70 percent (partially or completely destroyed), many homes lack electncity, water, and telephones Access to public transportat~onin most villages does not exist To date, the majonty of returnees have been old-age pensioners Given satisfactory solutions to the secunty and housing challenges, these alone wlll not entice young, economically productive people back to the region With unemployment rates as high as 80 percent, potential for income generation is requlred

Pnor to the war Obrovac had a population of approximately 15,000 Agnculture, textiles, mining, and trade were the pnncipal mdustnes Many people remember Obrovac as the site of a huge state owned aluminum plant that was built In 1971 but never commenced operation Today the population IS less than 4,000 The area suffered sipficant damage dunng the war, and the overall economic situation remains dismal The town's former large employers have elther faded or left the area Unemployment is between 70 and 80 percent Since there IS no industry, jobs are scarce and llmited to trade establishments Many people receive government payments in the form of pensions, benefits to war veterans, and support for families with small children Agnculture, always important to the region, now plays an even more vltal role as those remaining search for alternative sources of income and means of survival

Raising livestock has a strong tradition in the region The terrain, generally hilly and rocky, is ideal for raising sheep and goats Weather is generally mild in the winter, pastureland is available, water is plentifbl The region is close to the large demand centers of Split, Siberuk, and Zadar Before the war livestock was an important economic engine Many people with full- time jobs supplemented their income with livestock production

The sheep population in Croatia has decreased substantially since 1990 Nationally, the total sheep population dropped more than 43% Within the Lika-Senj, Zadar, and Sibenlk-Knin counties the reduction was even more pronounced - sheep levels dropped approximately 67%

Exhrbtt I Croatian Livestock Population 1990 Beef Cattle Dairv Cows Horses Sheer,

Zadar 32,709 24,811 7,620 287,440 Slbenik-~nin7,040 4,930 250 77,570

source DZS Statzstzcal Report 827 z 1050 Exhibit I1 Croatian L~vestockPopulation 1997

source DZS Statzstlcal Report 82 7 z 1050

The sheep population In the Obrovac reglon has followed a sim~lartrend Municipality officials est~matethat before the war there were over 120,000 sheep m the ~rnrnediatereglon Today, estimates ind~catethat there are less than 35,000 W~thover 30,000 hectares of available public grazlng land, the Obrovac region should be able to support a sheep and goat populat~onof 200,000

Lamb Demand and Prices

Lamb, cons~dereda del~cacy~n Croat~a,IS generally enjoyed in the spnng and summer Many families choose ~t for special occasions and celebrations Consumers m Croat~aprefer fresh lamb to frozen The only current producers' market IS for young lambs between 20 and 25 k~los(live weight) Consumers who l~kelamb wlll pay a premlum over pork and chlcken Although many restaurants in the region specialize in lamb, anecdotal informat~onsuggests that consumption figures are not significantly dependent on fore~gntounsts A large meat wholesaler in Zadar est~matesthat vlsitors account for less than 10% of the lamb consumed

Quantitative information regard~ngthe market for lamb in Croatia and in the Obrovac reglon IS difficult to obtain For this study, several trends were found sheep and lamb populat~onsare down substant~allyslnce 1990, lamb pnces vary s~gmficantlybetween regions, lamb is more expensive than other types of meat, and lamb pnces in Croatla are higher than in surround~ng countnes In addition, the pre-war robust overseas market for Croatian lamb no longer exists Other countnes now fill this demand Even if Croatia had adequate supplies, it could not compete on pnce with markets In other countnes

Exh~b~tI11 Livestock Pnce (he-weight) $/lb Calves 1 36 Heifers 0 89

Feeder pigs 1 07 Market hogs 0 72 Lamb in the 2 20 Obrovac Reg~on Lamb is expensive A recent survey indicated that on a live-weight basis lamb is the most expensive meat item At $2 20/lb, it compared to hogs at $ 72/lb and calves at $1 36/lb Lamb pnces also fluctuate dunng the year Exhibit IV shows that the pnce of live lamb ranged from an average of $1 73/lb to $2 54/lb Lamb pnces vary greatly between counties in Croatia In July 1997, the county of Brodsko-Posausaka reported a pnce for live ammals of just over $1 10 per pound Split reported an average pnce slightly greater than $2 20 per pound The main reason for the pnce dlfferent~alIS the unique taste of lamb produced in this reglon Both consumers and producers agree that Llka lamb tastes better because of the high salt content of the grass

Exhibit IV Average Live Lamb Pnces m Southern Croatia ($/lb ) February - September, 1998 Februar March Apnl May June July August Septem

Exchange Rate Used 6 44 6 39 6 54 6 39 6 45 6 55 6 43 6 30 USD/HRK

Wholesale Markets

Pnor to the war, major meat processors and wholesalers had a much easier time obtaining their product Buyers and sellers dealt In large quantities with pnces and available quantities readily known This mechanism no longer exists Today both buyers and sellers are tkagrnented Thls results in inefficiencies that increase transaction costs Currently, two pnmary vehicles exist for the sale of lamb small local wholesale markets and direct purchase

There are five local livestock markets In the region Benkovac, located about 50 kilometers from Obrovac IS the closest All are similar in setup and operation Those wishing to sell amve early and pay a small entrance fee and pick a location to display their animals Space appears to be available on a first come first serve basis Buyers negotiate d~rectlywith sellers Buyers consist pnmmly of brokers, although occasionally small butchers or individuals make purchases The term "broker," though often used, is a misnomer These brokers take title to the ammals they buy and are therefore wholesalers If an agreement is reached, the animal is weighted, cash changes hands, and the transaction is completed Each market has a vetennanan on duty whose pnmary role is verifying the health and ownership certificates of the animals sold Markets operate once a week with a majonty of the transactions taking place between 7am - loam Sellers live close to the market they attend Most of those selling sheep mveby tractor with the animals either in a trailer or basket attached to the tractor Sellers rarely travel more than 30 kilometers The alternative is direct purchase Many sheep farmers are unable to transport their product to market or a market is not reasonably close Obrovac sheep farmers face this situation With the nearest market 50 kilometers away, most small farmers do not have transportation (tractors or trucks) to the market Therefore, these farmers directly negotiate with customers who come to them With individual farmers dependent on customers finding them, the nsk exists that some farmers may be at the mercy of unscrupulous buyers and receive an abnormally low pnce However, no evidence of this type of activity appeared None of the ten farmers questioned indicated any difficulty in selling their lambs Many had several customers they dealt with on a regular basis Further, the municipality estimates that 30 to 50 buyers circulate within the area dunng the spring and summer, competing for a l~mitedsupply

Sheep Fanng in Obrovac

The FLAG Team interviewed ten sheep farmers in the area All shared some common charactenstics All viewed sheep farming as profitable and a viable means of generating revenue Most farmers sold their lambs to individual butchers, restaurants, or brokers All were interested in increasing the size of their flocks None seemed to keep basic records of either costs or flock management indicators Most of the fanners shared overall revenue and cost information, but it was difficult to get a detailed breakdown of inlvidual costs Most had a history of raising sheep before the war Obrovac officials indicated that 50 farmers had received favorable cred~tterms dunng the last three years In general, the Croatian government offered economic incentives after Operation Storm to encourage people to return Obrovac officials indicated that no farmers had been turned down for credit, but they indicated that 26 farmers are still waiting since the quota for 1998 has been exhausted The loans were at 6%, required a mortgage, had a two-year grace penod, and a three-year repayment schedule Officials stated that all farmers are paying on time

Sheep management practices and farmer success vaned considerably in the region The following three profiles show a subsistence level farmer, a marginal producer (adversely effected by high mortality and inability to grow her own hay), and a successful rancher

Mr Katvisa operates at the subsistence level He started three years ago with a small flock of 20 sheep purchased with his own funds Today he has 60 ewes and three rams This year he brought 50 lambs to market, selling them to one customer for just less than 7 DEM per kilo Katvisa ~ndicatedhe invests minimally in the care and maintenance of his flock He does not give them supplemental feed dung the wlnter and did not use any vetennary services in the last year He does have a 50-m2 barn where the animals stay at night dunng the winter

Mana would be considered a marginal producer She tends a flock of about 150 sheep She sold 70 lambs this year (100 were born and 30 died) She spent about 1200 DEM on vetennary fees, including medicines Her only other expenditures were one truckload of hay and 2,000 - 3,000 kilos of corn (of which she was unsure of the pnce) She has no barn, which may account for the high mortality rate Mana also sold her lambs to one customer Petar Mancic, head of a family of four, typifies the economic potential in sheep farming He owns 400 sheep Before the war, he had about 200 sheep, and famlly members worked full-time in other jobs Since these no longer exist, sheep farming is their only source of income Their mid-sized farm has two barns One IS used for food and equipment storage, and the other for the sheep They built both barns themselves Their herd produced 300 lambs this year The blrth season lasts from January to May When the lambs reach 20-25kg after 4-5 months, they are sold The herd grazes on state owned pasture in the Velebit Mountains from June to September and the rest of the year pastures near the farm dmng the day but stays nights in the barn Mr Mancic cuts his own hay and buys corn to feed the sheep after they give birth He uses additional pastureland that he does not own, he indicates there is plenty of land available for grazing He sells directly to restaurants and butchers that are steady customers The family returned two years ago, receiving a 5 percent loan with a three-year grace penod The famlly believes they will be able to make payments They were also interested in another loan to expand the herd by 200

Questionnaire Results

In addition to the individual interviews, FLAG requested that Obrovac distnbute questionnaires to the fifty sheep farmers that had received loans The questionnaire requested information about a vanety of issues ranging from expenses to marketing Thrteen farmers responded Their operations ranged in size from 120 sheep to over 450 All of the fanners had received preferential loans in 1995 and all had increased the size of their operations over the last three years The farmers had access to state grazing land without cost

The farmers reported mortality rates ranging from 2-3% The lamb yield averaged less than 85% (as a benchmark lamb yields in the US approach 150% ) The market for lambs operates from Apnl to November with most of the farmers indicating the spnng and summer as the pnmary months when sales take place Brokers, restaurants, and butchers were the pnmary customers Only four of the farmers indicated the buyers were coming from all over Croatia When asked what would contnbute most to increased profits, all of the farmers indicated a market while the second most prevalent answer was more sheep

While all of the farmers saw benefits from a wholesale livestock market none of them have ever participated in one Further, when asked how they would get to the market, only four of the thirteen indicated they would use their own vehicle, one indicated he would amve without a vehicle, and eight Indicated they would need to rent transportation Only one of the farmers indicated he would be willing to travel as far as 20km to use a market, with most of the respondents indicating they would only be willing to travel 15km or less

Eight of the thrteen respondents felt that financing was available The terms they viewed as acceptable included interest rates of 6 percent per year or lower with grace penods from one year up to five years The municipality did indicate that financing was available through local sources However, 26 approved applicants were currently on hold waiting for disbursement

Analysls of Market Feaslbll~ty FLAG'S investigation revealed that Obrovac's expectations regarding the economic impact of a regional wholesale market were unrealistic for the following reasons

Increase In prlces of 30 percent

FLAG found no evidence to support ths claim Most farmers indicated they were getting reasonable pnces for their lambs None felt that the buyers who operate in the region took advantage of them Further, at this time the market appears to be skewed in favor of the seller rather than the buyer The municipality estimates the number of sheep in the area is a fraction of what it was pnor to the war Thus demand is strong and lamb pnces are higher than other regions of Croatia The large number of buyers operating in the region (30 to 50 according to the municipality) also suggests pnce competition

Buyers comlng from all over Croat~a

FLAG found no evidence to support the assumption that buyers would come from all over Croatia to purchase lambs from a market in Obrovac First, the buyers the municipality identified as the major purchasers indicated very little interest Mesopromet Zadar expressed some interest In opening a slaughterhouse near the proposed market but only confirmed a demand for up to 2 0 tons of live lambs a month dung the season Two of the other four major buyers identified by the mucipality indicated they would not be interested in coming to Obrovac to purchase lambs Current practices suggest that buyers will continue to purchase lamb from the region in which they operate

Sellers reachlng the market

The questionnaire results indicate that only four of the thirteen farmers surveyed had their own transportation to the market The rest would rely on rented vehcles or, in all likelihood, brokers to get their lambs to market Since these are the larger, more successful farmers it is hard to belleve that the smaller farmers will have a viable means of transportation This eliminates one of the pnmary justifications the municipality gave for the existence of the market Brokers would continue to provide thls service

Unreallstlc volume estimates

Obrovac predicted first year volume of 110,000 lambs and total sales for all types of livestock of 100,000,000 DEM This represents a weekly average of 2,100 lambs and almost one million dollars m sales The estimate of number of lambs that would be sold is almost four times the current sheep population in the Obrovac region This estimate is patently unrealistic Unfortunately, such overly optimistic and unrealistic projections cloud the municipality's credibility on other issues

FLAG recommends that IOM not support a Reglonal Livestock Market at the slte and level of magn~tudesuggested by Obrovac Obrovac proposed a facility project consisting of well-developed infrastructure The project included leveling a rocky, sloping site wh~chthe municipality owned The site, on the south side of town about three kilometers from the city center, would consist of 10,000 square meters of paved and fenced surface area Vmous facilities to permit animal control were proposed The facilities would be in accordance with the regulations for farmers markets (National Gazette No 3/83) The Mun~cipality'sarchitect, GIN Company from Zadar, estimated construction costs of 1 6 million dollars Dr Zupan, the mayor of Obrovac, felt that minimum essential facil~tiescould be built for 1 1 million Due to the difficult nature of the terran, the construction work required to level the area would be significantly more that any potential site that was level The archtect estimated that preparation of plans and specifications would cost between $50,000 and $60,000

The s~techosen is not opt~malThe mumcipal~tyneeds to evaluate other potential sites, which should include opt~onsfor lease, purchase or exchange of land, to minlmize the requirements for civ~lconstruction work A cursory inspection revealed two potential sites that should be evaluated the bus station wh~chis not operating, and the hard surface area outside the fence line at the aluminum plant The essential charactenstics required are an open, well-drained area adjacent to a hard surface road If the facility is purchased it should be of suffic~entsize (10,000 square meters) to permit expansion and development Office space of 100 square meters, which could be met by temporary facilities, would be sufficient for administrat~vepurposes The market would requlre a livestock scale Specific cost estimates would depend on the slte chosen and the need for construction work The optimum solution would be to locate an existing flat well-drained parcel near a road Options for an administrat~veoffice range from kiosks to permanent construction The l~vestockscale could be portable or permanently installed

FLAG recommends that Obrovac focus on the market itself, that IS, buyers and sellers meeting to exchange goods, not on a physlcal Infrastructure project The reasons that support a market for Obrovac are different than onginally proposed A favorable location, a large number of sheep raisers, potential for add~tionsboth in number of farmers and herd size, and farmer preference for local markets that mimmize thew travel time all support the Obrovac proposal for a local market Brokers would still be the pnmary buyers Fanners without tractors or trucks would still need access to transportation It is unlikely that any farmer would herd hs lambs to market on foot Generally, brokers provide a valuable service and should be compensated They solve the farmer's transportation problem and take the nsk for eventual resale They also incur the "dnft" or an~malstress induced weight loss, which can exceed lo%, that results from transportation The large number of brokers operating indicated most farmers were getting market pnces, but brokers were only buying young lambs for slaughter

While a market in Obrovac will not contnbute significantly to the economic development of the area in the short term, it does offer numerous concrete advantages A market would provide an opportunity for farmers to buy and sell feeder lambs, replacement ewes, rms, in addition to the ability to sell cull ewes It would give them a place to buy inputs such as corn, feed supplements, and vetennanan products at market pnces The market's major advantage will be providing a forum for farmers to meet and exchange information about common interest items and management pnnciples This would s~gn~ficantlyfacil~tate development of farmer associations in the area As visits to other local livestock markets showed, infrastructure requirements are minimal to establish the market The overrldlng conclusion 1s that for substantially less than the cost of the tender documents for the orlglnal project Obrovac could have a local livestock market that would meet the needs of the local populat~on Moreover, the market could begin functioning without a lengthy construction delay Such a market would be a sustainable activity financed by modest user fees Once an Obrovac Sheep Farmers Association begins function~ngthe operation can be transferred to them As the market matures, improvements and upgrades can be added in accordance with a development plan Moreover, vendors that are drawn to the market could cost share in facility upgrades To insure success the new market will require an aggressive marketing campagn It would also need to adopt or foster innovative ideas to asslst small farmers with transportation to and from the market

Sheep farming is a viable economic activity that will support economic development in Obrovac It will provide an infusion of cash to the local economy that will have a multiplier effect throughout the entire municipality Moreover, encouragement of thls activity will increase the number of returnees as they recogmze the potential for sheep raising to sustain their families The Municipality of Obravac should continue its efforts to be proactive in supporting and assisting farmers in this endeavor ATTACHMENT C - ECONOMIC PROFILE - EASTERN SLAVONIA AND BARANJA

FLAG Croatia Vukovar Buslness Advlsory Center Tel 032-641-305, Fax 032-651-195

Former Sector East Overview

FLAG Vukovar operates in the area formerly administered by the United Nations Transitional Administration for Eastern Slavonia (UNTAES), whch includes municipalities and towns in sections of Osijek-Baranja County and Vukovar-Snjem County UNTAES departed Croatia on January 15, 1998, at whch time the area was returned to full authority of Croatia

The following economic profile provides an overview of the economic conditions, business and agncultural climate, and return data for the key towns and municipalities within the former UNTAES area

General

Estimated unemployment within the municipalities and towns in the former UNTAES region ranges from 60 to 95 percent Agnculture either directly or indirectly accounts for more than 75 percent of the jobs in these two counties Farming represents a significant source of income for many of the inhabitants in the former UNTAES area and the family farms in these counties tend to be larger than those in other parts of Croatia The average size of these farms is 4 5 hectares, with 5 percent of the pnvate farmers operating 20-30 hectares

Livestock numbers decreased significantly dung the war The number of cattle in Osijek- Baranja County declined from 35,000 to 16,218, and the number of swine declined from 277,000 to 147,000 The UNTAES region of Osijek-Baranja County accounted for the largest part of milk production for the county

As a result of the war, the Mine Action Committee in Vukovar estimates that 76,000 hectares in the UNTAES region was contaminated with land mines The landrnine contaminated area is about 35 percent forests, 50 percent agncultural land, and the remaining mines are in villages

Return Propram

The return process has been slower than anticipated by the Government of Croatia and the international community As of December 1998, more than 10,000 displaced persons (DPs) have returned to their homes in Vukovar-Snjem County and more than 1 1,000 displaced persons have returned to their homes in Osijek-Baranja County There were more than 83,500 registered displaced people from these two counties According to government data, 50,000 DPs are still waiting to return to their homes in the area In 1999, the Ministry of Reconstruction and Development plans to rebuild or repair 6,500 more homes in the two counties

' Office of Displaced People and Refugees (Zagreb)

45 The Bosman Serb refugee and Croatian Serb DP population fluctuated over the past two years As of November 1998, there were about 6,000 ethnic Bosnian Serb refugees and Croatian Serb DPs remaining in the area, which has declined from 56,138 in 1996 Dwng the 1996 to November 1998 penod, about 16,500 Croatian Serbs have returned to other parts of Croatia and 33,500 have moved out of Croatia to third countnes The domicile Croatian Serb population has also declined from 72,178 m 1996 to about 45,000 m November 1998 Almost 27,000 domicile Croatian Serbs from the former UNTAES area have moved to third countnes

Transformation and Prlvat~zationm Croatla

The process of transformation and pnvatization of the Croatian economy started in the spnng of 1991 This process has only recently begun in the former UNTAES areas of the two counties The Law on the Transformation of Socially Owned Enterpnses was enacted in Apnl 1991 According to this Law, 2,600 enterpnses were transformed into joint stock companies The process of the pnvatizatlon was mostly handled by the Croatian Pnvatization Fund (CPF) The techniques of pnvatization at this first stage were

A Management and employees buyout (MEBO) - Employees and management of the companies were entitled to subscribe up to Deutsche Marks (DEM) 20,000 of nomnal value of the shares with a 20 percent discount plus a 1 percent discount per every working year with the company B Public offenngs of shares - In excess of 50 percent of the equity of the companies could be bought by any domestic or foreign person or company accorlng to bid pnce and other conditions C Public auctions of the shares on the Zagreb Stock Exchange - The auctions were camed out every week The stocks were available for purchase by cash or frozen foreign deposits in the form of government bonds

In order to improve the speed and effectiveness of these mechanisms, the new Ministry of Pnvatization (MOP) was created in November 1994 Then, the responsibilities for pnvatization were redistributed between the CPF and the MOP The Ministry is responsible, except for pnvatization strategy and legislation, for the mass pnvatization and for pnvatization of public enterpnses

The Pnvatization Law was passed by Parliament on March 1, 1996 and was enacted within eight days of its publication in the official gazette It has introduced new instruments and changes in the pnvatlzation procedures, most of which have been Implemented by now or are on the way to being implemented The following is a bnef overview of the changes the law introduced to matters related to pnvatization

Main provisions of the Pr~vatlzationLaw

Joint Council of Municipalities, Vukovar Press and Information Office, November 30, 1998

46 1 Creation of a new decision making body - the CPF's Board of Directors - which decides on sales of the compames in whch the nominal value exceeds 100 million kuna 2 The law reformulates the pnonties chosen in the assessment of the most favorable offers The pnce bid for an enterpnse shall no longer be the first detenning factor 3 The Board of Directors of the Fund has the discretion to lower the established pnce for the shares of an enterpnse, if the estimated value cannot be met 4 Proceeds from the sale of shares in enterpnses and possible profits have to be transferred to the Croatian Bank for Reconstruction (HBOR) which disburses these hdsmainly to reconstruction and infrastructure projects 5 Importantly, the Pnvatization Law states that public enterpnses, the pnvate companies in whch the Republic of Croatia holds 100% of the shares, and the so-called public institutions shall be pnvatized However, the pnvatization of each of these enterpnses will require separate laws Should these separate laws be enacted, the Pnvatization Law states that the pnvatization procedure shall be executed by the Pnvatization Fund 6 The Pnvatization Law has prolonged the penod from five years to twenty years within which the installments for the purchase of shares by employees and former employees of transformed companies can be paid However the Pnvatization Law equally states that if three consecutive installments have not been paid, the contract on the purchase of shares at a discount will be terminated without pnor notice 7 The Republic of Croatia's pension system is currently cornpnsed of three distinct finds the Croatian Worker's Pension and Disab~lityInsurance Fund, the Croatian Agricultural Pension and Disability Fund, and the Croatian Self - Employed Businessmen's Pension and Disability Fund The latter had not received its adequate amount of shares in the transformation of the former socially owned enterpnses The Pnvatization Law therefore states, that the Croatian Pnvatization Fund has to transfer shares with a value of 1,821,232,000 kuna to this third pension fund The share transferal has been agreed upon and is currently taking place 8 The Pnvatization Law empowers the Ministry of Pnvatization to propose persons far the appointment to supervisory boards of enterpnses in whch the Pnvatization Fund has shareholder status 9 The Pnvatization Law requires every enterpnse in which the Pnvatization Fund holds 25% or more of the equity to file a quarterly report 10 Most importantly, the Pnvatization Law has introduced a third method of pnvatlzation, referred to as "The kght to Shares Free of Charge," commonly known as the Mass Pnvatization Program (MPP) The MPP defines certain groups of people or entitled participants, that were either political pnsoners before the declaration of independence of the Republic of Croatia, refugees from the fatherland war, invalids, widows, or orphans It is estimated that around 300,000 individuals are entitled to receive vouchers, denominated in non-tradable investment points, with which they can bid for shares in selected enterpnses in a three round bidding procedure According to the degrees of disability and other determining factors, the entitled participants will register and receive vouchers denominated in investment points, with whlch they can bid

In the war-affected areas of Eastern Slavonla and Baranja, transfomation and pnvatization has only recently been irutiated There are dozens of state companies and three pnmary

Croaban Chamber of Commerce Agrokombznats operating in the former UNTAES area The Agrokombznats, IPK Osijek, Belje, and Vupik lost a considerable amount of machinery and processing capacity as a result of the war The transformation and pnvatization of Belje and Vupik has just recently begun The Croatian Pnvatization Fund st111 owns 100 percent of Belje and Vupik Belje will submit a pnvatization plan to the Pnvatization Fund in mid-January 1999 The transformation of IPK is complete, but pnvatization has not been completed (please see County sectzons for a more detazled update on transformatzon andprzvatzzatzon zn each county) Osyek-Baranja County

Towns Bell Manastir, Osijek

Munieipalit~es Petlovac, Kneievi Vinogradi, Ceminac, Darda, Bilje, Drai, Erdut, Antunovac, Ernestinovo

County Prefect Stipo LovrinCevic

Populatron 367,193 (1991 census14 Area 3,470 square km, (415,241 ha) Unemployment 15,725 registered unemployed persons in the County (November 1998) In the former UNTAES portion of the County, unemployment ranges from 70 to 95 percent

General

Osijek-Baranja County is located in the northeastern part of Croatia and includes Baranja, the only part of Croatia north of the Drava kver Large parts of the County were affected by the war and were within the UNTAES area, including all of Baranja

Osijek-Baranja County has an area of 3,470 square km According to the 1991 census there were 367,193 residents The area of the County that was under UNTAES adrnlnistration was 1,514 square km The population in that part of the county was 82,577 (1991 census) Total arable land in the County is 260,778 hectares (79,853 hectares were in the former UNTAES administered area of the county) There are 9,559 companies registered in the county, including 7,202 trade companies (6,692 pnvately owned and 21 1 with mixed state and pnvate ownership) Total employment in 1997 was 66,002, including 17,309 employed in manufactunng, 6,248 in agnculture, and 4,689 in construction

There are about 31,000 pnvate farm households in the former UNTAES area of the county Within this area, unemployment is between 70 to 95 percent The major employer in this part of the county is Belje d d , which was the largest agrokombrnat in the former Yugoslavia with 6,983 full-time employees and 1,220 seasonal workers in 1991 Belje has had difficulty paying wages on time and has just recently submitted a transformation and privatization plan to the government The unofficial estimated book value of the company is 250 million DEM, about half of its 1991 value according to the current management Belje works on 36,000 ha of state owned land, of whch 32,000 is arable agricultural land

Populat~onstatlstlcs have not been updated slnce 1991 OSCE Spec~alReport on the Economy m the South Danube Reg~on,July 1998 Mayor Zlatko Kramaric, tel 03 11 228 228

Vlllages SarvaS, Tenja, Klisa

Population 129,792 (199 1 census)

Average Income 2,8 13 kunalmonth

Unemployment 8,576 registered unemployed according to official statistics (December 31, 1998)

Major Industries

Agncultural Processing Textiles Chemical Wood Processing Metal

Major Employers (over 100 employees) IPK, Slavonia, Saponia, OLT, Svilana (cotton factory), Sloboda Osijek, Electrometal, Electro-Osijek Holding Company, Kovinar, MIO, Analit, Niveta, Gradnja, Osijek-Koteks, Progres, Ukras, Panonija

Major Agricultural Actlvltles Livestock production, Cereal and Oil Crops

Arable Land 30,OQO ha

Status of Prlvatlzatlon The transformat~onprocess is complete for all formerly state owned companies The general ownership structure for all of these firms is mixed between small shareholders, banks, and the Croatian Privatization and Pension Funds

Information about Return Process As of November 1998, there have been 153 returns to Tenja, 4 to Klisa, and 69 to SarvaS

General

Osijek is the largest c~tyin eastern Croatia, located next to the Drava nver, 20 krn from where the Drava empties into the Danube The war caused damage to existing Industry and interrupted commercial traffic to the north and east The existing industry is compnsed of food processing, chemicals, metallurgy, wood processing, and the textile industry Beli Manastir

Mayor Veljko Bertic, Tel 03 1-72 1-023

Villages Branjin Vrh, Secerana, Sumarina

Population 13,108 (1991 Census), N/A for 1998

Average Income N/A

Unemployment N/A

Major Industr~es

Agncultural Processing Pnmary Agncultural Production

Major Employers

Major Agr~culturalActlv~ties

Cattle feed production (Belje) Broiler farms (Belje) Vineyards (Belje) Sugar Refinery (Belje) Milk Processing Factory (Belje) Bakery (Belje) Agncultural Repair Station (Belje)

Status of Privatuat~on Belje is still 100 percent owned by the Croatian Pnvatization Fund, but will submit a privatization plan to the Croatian Pnvatization Fund in mid-January 1999

Information about Return Process 557 returnees (November 1998), few remaining Croatian Serb DPs

General

The Municipality of Beli Manastir is viewed as the focal point of political life in Baranja There is a large Hunganan minonty population in the municipality and a smaller Gypsy population The pnmary employer is Belje and there is little other economic activity

Before the war, the following compmes were the largest employers besides Belje in Beli Manastir The Grada trade company employed 117 people and had yearly revenue of 39,860,000 DEM in 1990 They operated 4 shops and one retail store in Baranja and owned 8 warehouses in Baranja (current status unknown) The Dunav trade company employed 491 people and had 24,559,858 DEM revenues in 1990 The company owned 76 retall stores, one department store, 16 "self servlce" shops, and 3 warehouses (current status unknown) IMV employed 370 people and had 10,320,000 DEM in revenues in 1990 The factory produced spare parts for cars, such as shock absorbers, and seat spnngs for Renault The Sutjeska knitwear factory employed 608 and had 5,000,000 DEM revenue in 1990, including 2 1 million USD in exports (current status unknown) Petlovac Municipality

Mayor Marko Posavac, Tel 03 11 782 690

Vlllages Petlovac, Baranjsko Petrovo Selo, Luc, Novo Nevesmnje, Now Bezdan, Sinne, Sudarac, Toganci, Zeleno Polje

Populat~on4,899 (1991 census), 3,793 (December 1998)

Average Income 726 kunalmonth

Unemployment 472 registered unemployed according to official statistics (December 31, 1998)

Major Industries None

Major Employers Poljopnvreda Sinne

Major Agricultural Activities Independent fanning

Status of Pr~vatlzat~onN/A

Information about Return Process Offical figures from the ODPR office in Osijek ind~cate that 786 people have returned, which is 75% of DPs from this mumcipality Kneievi V~nograd~Municipality

Mayor Mr KreSimir Kramaric, tel 03 1-73 113 8

Vlllages KneieviVinogradi, Karanac, Kamenac, Kotlina, Suza, Zmajevac, Sokolovac, Jasenovac, Mirkovac

Population 6,848 (1991 census), 5,500 (December 1998) according to local officials

Average Income 1800 Kuna/month according to local officials

Unemployment 960 registered unemployed according to local officials (December 1998)

Major Industries None

Major Employers

Belje Wlnery

Major Agr~culturalactlvltles

Farming Vineyards

Status of prlvatlzatlon Pnvatlzatlon of Belje winery has not started

Information about Return Process 80% of DPs have permanently returned or have rebuilt their homes and plan to return Ceminac Municipality

Mayor Mr Zdravko Pavlinic, tel 03 1-756043

Vlllages Ceminac, Kozarac, Grabovac, Mirkovac (workers' settlement)

Population 3,650 (1991 census), 2,100 (December 1998)

Average Income N/A

Unemployment 75 percent according to municipal officials (December 1998)

Major Industries none

Major Employers

Poljopnvreda Brestovac (Belje)

Major Agricultural Activities

Independent Farming Dairy Fam (Belje) Beef Cattle Farm (Belje) Sheep Farm (Belj e)

Status of Pr~vatizat~on

Information about Return Process In 1991, 3,300 people left the area and moved mainly to Osijek By December 1998, more than 60% of the pre war inhabitants had returned to the municipality

General

This mumcipality has one pnmary employer, Belje's Poljopnverda Brestovac More than 290 workers were employed at thls facility in 1991 The current employment is about 186 In 1991, another 700 inhabitants in Ceminac were employed at other Belje facilities throughout Baranja Poljopnverda Brestovac is heavlly in debt (7 million kuna) to Pnvedna Banka and INA Petrochem

Before the war, 586 households in the Mumcipality were engaged in pnmary apcultural production on 1,100 ha of pnvately owned land Almost 80 percent of this land has not been cultivated since 1991

OSCE Special Report on the Economy m the South Danube Region, July 1998

5 5 Darda Municipality

Mayor Mrs Dragica Hilak, tel 03 1-824002

Villages Darda, Mece, Svajcarnica, UgljeS

Population 8,685 (1991 census), (Croats 3,104, Serbs 3,293, others 2,288), N/A for 1998

Average Income N/A

Unemployment 80% according to local officials

Major Industries

Wood processing

Major Employers

Darda Agncultural Cooperative Belje Hrvatske Sume (wood processing)

Major Agricultural Activities

Farming Production of L~vestockFeed (Belje) Hog Farms (Belje) Grain Storage and Drying (Belje) Production of One-day old Chicks (Belje) Broiler Farms (Belje) Slaughterhouse and meat processing (Belje)

Status of Privat~zation Darda Agncultural Cooperative completed pnvatization m December 1997 Belje pnvatization has not started

Information about Return Process Approximately 3,000 DPs have returned to this municipal~ty(December 1998) Mayor Mr Darko Varga, tel 03 1-750027

V~llages Bilje, KopaEevo, Kozjak, Lug, Podunavlje, TikveS, Vardarac, Zlatna greda

Population 6,455 (1991 census) (Croats 2,410, Hungarians 2,435, Serbs 708, others 902), The current population IS near 7,000 (December 1998)

Average Income NJA

Unemployment 80 percent accord~ngto Munic~paloffic~als About 70% of local inhab~tants are supported by work~ngon small family farms

Major Industries agnculture, tounsm

Major Employers Natural park "KopaCki rit"

Major Agricultural actlvlties farmmg, l~vestockproduction, fishery

Status of pr~vatuationN/A

Information about Return Process 3,734 DPs have returned as of December 1998

General

Bdje is located directly across the Drava rlver north of Osijek and beside the KopaCevo National Park The KopaCevo Nat~onalPark covers 17,700 ha of marshes and game reserves and has been named one of the e~ghtmost important wetlands in the world It has also been declared an Important Bird Area (IBA) w~thmore than 270 b~rdspecies The National Park has the potential of ~nfluenc~ngthe positive development of the municipality Several of the villages surrounding Bilje, Lug and Vardarac, are majonty Hunganan villages and unemployment is very high Most of the inhabitants were employed as seasonal workers for Belje before the war Jagodnjak Municipality

Mayor Mr Ljubomir Balaban, tel 03 1-784015

Villages Jagodnjak, Bolman, Novi Bolman, Novi Ceminac, Majske Mede

Population 3,602 (1991 census), 3,500 (December 1998)

Average Income N/A

Unemployment 95 percent according to the mayor, 176 registered unemployed according to official statistics

Major Industries None

Major Employers

NaSe Selo Apcultural Cooperative Belje

Major Agricultural Activities

Independent Farming

Status of privatuation Belje has not submitted a pnvatization plan to the Government (December 1998)

Information about Return Process Return process has been slow but without any incidents Drai Munic~pallty

Mayor Mr Vinko Guzic, tel 03 1/ 78 1 474

Villages Draz, Batina, Dubo5evica, Gajic, Podolje, Topolje

Populat~on 7,764 (199 1 census), 3,9 12 (December 1998)

Average Income N/A

Unemployment N/A

Major Industries none

Major Employers Agncultural Cooperative Topolje is in the process of privatization (completion date unknown)

Major Agricultural Actlv~ties Farming and livestock production

Status of Prlvatuatlon Agncultural Cooperative Topolje has been pnvatized

Information about Return Process 95 percent of expected returnees have returned to the municipality

General

In 1991, the Pobjeda foundry employed 70 people in the Mucipality The foundry produced cutlery and had yearly revenue of 540,000 DEM in 1990 We were unable to determine the current status of the cutlery Erdut Munlclpallty

Mayor Stevan Babic, tel 03 1-590111

Vlllages Erdut, Aljmag, Bijelo Brdo, Dalj

Populat~on 14,879 (1991 census), 7,500 (December 1998)

Average Income 2,000 knlmonth (according to municipal officials)

Unemployment 80 percent (estimated by local officials) There are about 400 people employed throughout the municipality according to local officials

Major Industries Agriculture

Major Employers IPK Osijek, Dalj bnck factory

Major Agr~culturalActlvltles

Livestock Product~on Vineyards

Status of Prlvatlzation IPK operates on 3,500 hectares, Independent farmers own 3,500 hectares and the IPK wlnery operates on 450 hectares of vineyards Pnvatlzation of IPK facilities in this area has not started Pnvatlzation of IPK hog farm is partially completed The ownership of the hog farm IS dlvided between the Croatlan privatization fund, penslon fund and several banks The Dalj bnck factory IS 100 percent owned by the Pnvatizat~onfind

Information about Return Process 3,500 DPs from from Western Slavon~ahave left the area this year (1998) and 1,200 Croatians have returned in 1998

General

According to municipal officials, at the end of 1998 IPK Osljek owed local farmers 2,500,000 DEM Antunovac Mun~c~pal~ty

Mayor Mr Ilija Vu~em~lovicAleglc, phone 03 1-396 023

V~llagesAntunovac, Ivanovac

Populat~on4200 (1 991 census) (Antunovac 2700, Ivanovac 1500), NIA for 1998

Average Income 2000 Kunalmonth according to local officials

Unemployment 20 percent of 1700 eligible persons according to local officials (December 1998)

Major Industries None

Major Employers IPK Osljek

Major Agricultural activit~esIndependent farming, livestock production

Status of pr~vatisation Privatization of IPK facilities is underway (completion date unknown)

Information about Return Process 1600 DPs have returned to Antunovac and the returnee process m Ivanovac IS complete Ernestinovo Mun~c~pality

Mayor Mr Ladislav Ferenc, tel 03 11 396 330

Villages DivoS, Ernestmovo, Laslovo

Population 2,898 (1991 census), 834 (December 1998)

Average Income NIA

Unemployment Between 60 to 75 percent unemployed according to local officials 284 registered unemployed according to officlal statist~cs(December 3 1, 1998)

Major Industries Agriculture

Major Employers "Prvl maj" Laslovo, Agncultural Cooperative Emestinovo, IPK Silos-mill

Major Agricultural Activit~es Livestock production, independent farming

Status of Privatlzat~on Agncultural Cooperative Emestinovo has been pnvatized

Information about Return Process By the end of 1998, there were 20 people living in Divos and reconstruction of many homes was underway In Emestinovo, there were 800 retumees and reconstruction of homes and infrastructure has begun In Laslovo, there are 14 returnees and reconstruction of homes has been slow and ~nfiastuctureproblems still exlst (water supply, electnclty, etc ) ~odolovciMunicipality

Mayor Pero KliEkovic, tel 03 11396 339

Villages Sodolovci, Koprivna, Petrova Slatina, Paulin Dvor, Ada, PalaEa, Silag

Population 2,770 (1991 census), 2,720 (December 1998)

Average Income NIA

Unemployment 104 people are employed throughout the municipality according to local officials (December 1998)

Major Industries There were several small industrial facilities located in the Mumclpallty before the war, including fish ponds In Kopnvna, an agncultural cooperative and textile facility in PalaCa, wood processing in Petrovo Slatina, a small textile facility, grain elevator, agricultural cooperative, and he1 station in SilaS, and an IPK Cooperative in Sodolovci Only the wood processing facility in Petrovo Slatina was pnvately owned The agricultural cooperatives are the only companies still operat~ng(December 1998)

Major Employers IPK Osijek and Agncultural Cooperative Palaca, Agncultural Cooperative Silas

Major Agricultural Activities Small farming, mostly corn, soybean and sunflower production in 1998

Arable Land 750 hectares are not cultivated because of minefields

Status of Privatization Only the agncultural cooperatives have been pnvatized The remaimng companies mentioned above have not been pnvatized

Information about Return Process There are about 20 returnees m the mun~cipality

General

213 of the pnvately owned agncultural land in th~smumcipality is st111 mined Towns Vukovar, Vinkovc~

Mun~c~palit~esBorovo, Bogdanovci, Stan Jankovc~, Lovas, Ilok, Tompojevci, Tovarnik, Trpinja, NuStar, Nijernci

County Prefect Rudolf Konig

Populat~on23 1,241 (1991 census)' Area 2,442 square krn Unemployment NIA

General

Vukovar-Snjem County has an area of 2,442 square km According to the 1991 census there were 231,241 residents The area of the County that was under UNTAES administration was 1,141 square km The population in that part of the county was 115,018 (1991 census), 50 5 percent Croats, 34 5 percent Serbs, and the remaining 15 percent included Slovaks and other ethnic groups Arable land in the former UNTAES area of the County was 77,159 ha (45,750 ha pnvately owned and 3 1,409 ha state owned) More than 11,000 ha of arable land is covered by mine fields and IS not be~ngused Before the war, more than 3 1,000 people were employed in this part of the County and the current number IS about 7,000 Almost 60 percent of the population was displaced by the war

According to 1991 census data, the UNTAES part of the County had 27,200 family farms that cultivated an average of 3 11 ha of land The average monthly net salary is about 1,690 kundmonth in the UNTAES area of the county The average monthly salary in Croatia is about 2,800 kundmonth

EMPLOYMENT IN VUKOVAR-SRIJEM COUNTY IN 1989 AND 1998 (former UNTAES areas of the County)

Number of Number of Activities employees m employees, March 1989 31,1998 Industry 17,479 1,633 Agriculture 2,452 1,447 Construction 2,154 370 Trade 2,542 858

' Population statlstlcs have not been updated slnce 1991 * Vukovarsko-Srljemska County, Programme of Restorahon and development of Farmly Farms, Vukovar, November 1998 Crafts 146 530 Other 5,393 - Total economy 27,624 4,838 Total non-productive activities 3,125 2,006 Grand total 30,749 6,844 Source of data Vukovar-Snjem County

REVIEW OF FINANCIAL SITUATION FOR BUSINESES IN THE FORMER UNTAES AREAS OF THE COUNTY IN THE FIRST SIX MONTHS OF 1998 (AMOUNTS ARE IN THOUSAND KUNAS)

JANUARY-JUNE 1998 PROFIT TAX PAID BY 4,194 BUSINESSES PROFIT IN THE CURRENT 5 1,007 PERIOD LOSS IN THE CURRENT 42,791 PERIOD INSOLVENT BUSINESSES AND INDIVIDUALS IN THE ENTIRE COUNTY

BUSINESSES PHYSICAL PERSONS TOTAL SITUATION NUMBER OF NUMBER OF AMOUNT IN NUMBER OF AMOUNT INNLTMBER OF NUMBER OF AT THE END BUSINESSES EMPLOYEES THOUSAND PHYSICAL THOUSAND BUSINESS EMPLOYEES OF THE KUNAS PERSONS KUNAS AND MONTH PHYSICAL PERSONS

JANUARY 219 2,182 95,598 269 15,338 488 2,182 FEBRUARY 244 3,010 98,716 304 17,660 548 3,010 MARCH 223 1,517 91,041 3 18 19,213 54 1 1,517 APRIL 24 1 2,204 103,813 330 25,023 571 2,204 MAY 23 6 1,843 114,538 338 26,396 574 1,843 JUNE 245 1,809 118,053 346 28,238 591 1,809 FINANCIAL RESULTS ACCORDING TO SIZE OF BUSINESS (UNTAES AREAS)

ITEM BUSINESSES TOTAL LARGE MEDIUM SMAL L NUMBER OF ENTREPRENEURS 1 EXACT NUMBER 437 3 25 409 PERCENTAGE (%) 100 0 7 5 7 93 6 NUMBER OF THE EMPLOYED 2 EXACT NUMBER 6,497 1,189 2,783 2 525 PERCENTAGE (%) 100 18 3 42 8 38 9 TOTAL INCOME 3 AMOUNT IN THOUSAND 825,633 114,126 276,888 434,619 KUNAS PERCENTAGE (%) 100 13 8 33 5 52 6 TOTAL EXPENDITURES 4 AMOUNT IN THOUSAND813,221 115,395 280,466 417,359 KUNAS PERCENTAGE (%) 100 14 2 34 5 51 3 PRE-TAX PROFIT 5 AMOUNT IN THOUSAND 55,101 3,994 17,240 33,867 KUNAS PERCENTAGE (%) 100 7 2 31 3 61 5 PRE-TAX LOSS 6 AMOUNT IN THOUSAND 42,689 5,263 20,819 16,607 KUNAS PERCENTAGE (%) 100 12 3 48 8 38 9 PROFIT TAX 7 AMOUNT IN THOUSAND 4,194 - 456 3,737 KUNAS PERCENTAGE (%) 100 10 9 89 1 GAIN IN CURRENT PERIOD 8 AMOUNT IN THOUSAND 51,007 3,994 16,784 30,229 KUNAS PERCENTAGE (%) 100 7 8 32 9 59 3 LOSS IN CURRENT PERIOD 9 AMOUNT IN THOUSAND 42,791 5,263 20,819 16,709 KUNAS PERCENTAGE (%) 100 12 3 48 7 39 0 NUMBER OF 10 ENTREPRENEURS WITH LOSS IN CURRENT 120 1 10 109 PERIOD PERCENTAGE (%) 100 0 8 8 3 90 8 STAFF EXPENDITURES 11 AMOUNT IN THOUSAND 112,064 22,108 49,3 17 40,639 KUNAS PERCENTAGE (%) 100 19 7 44 0 36 3 WAGES AND SALARIES 12 AMOUNT IN THOUSAND 68,459 13,637 30,197 24,626 KUNAS PERCENTAGE (%) 100 19 9 44 1 36 0 AVE MONTHLY GROSS SALARY 13 PER EMPLOYEE 2,875 3,099 2,953 2,682 AMOUNT IN KUNAS AVE MONTHLY NET SALARY 14 PER EMPLOYEE 1,756 1,912 1,808 1,625 AMOUNT IN KUNAS GAIN PER ONE EMPLOYEE 15 AMOUNTINKUNAS 7,851 3,359 6,031 11,972

LOSS PER ONE EMPLOYEE 16 AMOUNT IN KUNAS 6,585 4,426 7,481 6,618

FINANCIAL RESULTS OF THE ENTREPRENEURS IN UNTAES AREA OF VUKOVAR I SRIJEM COUNTY ACCORDING TO OWNERSHIP (January 1,1998 to June 30,1998) ITEM TOTAL STATE- PRIVATE COOPERATIVE COMBINED OWNED 1 NUMBER OF BUSINESS437 8 3 97 7 25 ENTITIES 2 NUMBER OF EMPLOYEES 6,497 666 3,765 20 2,046 PERCENTAGE (%) 100 10 3 58 0 0 3 31 4 3 TOTAL INCOME AMOUNT IN THOUSAND 825,633 57,886 590,775 1,005 175,967 KUNAS PERCENTAGE (%) 100 7 0 71 5 0 1 21 3 4 TOTAL EXPENDITURES AMOUNT IN THOUSAND 8 13,22 1 6 1,098 575,727 1,327 175,069 KUNAS PERCENTAGE (%) 100 7 5 70 8 0 2 21 5 I (CONTINUED FROM PREVIOUS PAGE)

NUMBER OF 10 ENTREPRENEURS WITH LOSS IN CURRENT 120 1 10 109 PERIOD PERCENTAGE (%) 100 0 8 8 3 90 8 STAFF EXPENDITURES 11 AMOUNT IN THOUSAND 112,064 22,108 49,317 40,639 KUNAS PERCENTAGE (%) 100 19 7 44 0 36 3 WAGES AND SALARIES 12 AMOUNT THOUSAND 68,459 13,637 30,197 24,626 KUNAS PERCENTAGE (%) 100 19 9 44 1 36 0 AVE MONTHLY GROSS SALARY 13 PER EMPLOYEE 2,875 3,099 2,953 2,682 AMOUNT IN KUNAS AVE MONTHLY NET SALARY 14 PER EMPLOYEE 1,756 1,912 1,808 1,625 AMOUNT IN KUNAS GAIN PER ONE EMPLOYEE 15 AMOUNTINKUNAS 7,851 3,359 6,031 1 1,972

LOSS PER ONE EMPLOYEE 16 AMOUNT IN KUNAS 6,585 4,426 7,481 6,618

FINANCIAL RESULTS OF THE ENTREPRENEURS IN UNTAES AREA OF VUKOVAR SRIJEM COUNTY ACCORDING TO OWNERSHIP (January 1,1998 to June 30,1998)

1 ITEM TOTAL STATE- PRIVATE COOPERATIVE COMBINED OWNED 1 NUMBER OF BUSINESS437 8 397 7 25 ENTITIES 2 NUMBER OF EMPLOYEES 6,497 666 3,765 20 2,046 PERCENTAGE (%) 100 10 3 58 0 0 3 31 4 3 TOTALINCOME AMOUNT IN THOUSAND825,633 57,886 590,775 1,005 175,967 KUNAS PERCENTAGE (%) 100 7 0 71 5 0 1 21 3 4 TOTAL EXPENDITURES AMOUNT IN THOUSAND 8 13,221 6 1,098 575,727 1,327 175,069 KUNAS PERCENTAGE (%) 100 7 5 70 8 0 2 21 5 (CONTINUED FROM PREVIOUS PAGE)

5 INCOME BEFORE TAXATION AMOUNT IN THOUSAND 55,101 554 38,744 60 15,743 KUNAS PERCENTAGE (%) 100 10 70 3 0 1 28 6 6 LOSS BEFORE TAXATION AMOUNT IN THOUSAND42,689 3,767 23,697 380 14,845 KUNAS PERCENTAGE (%) 100 8 8 55 5 0 9 34 8 7 PROFITTAX AMOUNT IN THOUSAND 4,194 4,096 5 93 KUNAS PERCENTAGE (%) 100 97 7 0 1 2 2 8 GAIN IN CURRENT PERIOD AMOUNT IN THOUSAND 51,007 554 34,748 54 15,651 KUNAS PERCENTAGE (%) 100 11 68 1 0 1 30 7 9 LOSS IN CURRENT PERIOD AMOUNT IN THOUSAND42,791 3,767 23,799 380 14,845 KUNAS PERCENTAGE (%) 100 8 8 55 6 0 9 34 7 10 STAFF EXPENDITURES AMOUNT IN THOUSAND 112,064 13,783 64,294 255 33,732 KUNAS PERCENTAGE (%) 100 12 3 57 4 0 2 30 1 11 WAGES AND SALARIES AMOUNT IN THOUSAND 68,459 8,429 38,360 158 2 1,512 KUNAS PERCENTAGE (%) 100 12 3 56 0 02 31 5 12 AVERAGE MONTHLY GROSS SALARY PER EMPLOYEE 2,874 3,449 2,846 2,129 2,747 AMOUNT IN KUNAS 13 AVERAGE MONTHLY NET SALARY PER EMPLOYEE 1,756 2,109 1,698 1,312 1,752 AMOUNT IN KUNAS 14 GAIN IN CURRENT PERIOD PER EMPLOYEE 7,855 837 9,234 2,721 7,654 AMOUNT IN KUNAS 15 LOSS IN CURRENT PERIOD PER EMPLOYEE 6,591 5,660 6,326 19,021 7,260

1 r LIST OF COMPANIES LOCATED IN FORMER UNTAES AREA THAT WERE CONVERTED ACCORDING TO BOOK VALUE AND ARE IN THE PROCESS OF TRANSFORMATION

FIXED CAPITAL IN DEM VELEPROMET D D VUKOVAR 37,475,000 00 VUTEKS, D D VUKOVAR, 37,371,000 00 VUPIK D D VUKOVAR, 156,767,000 00 VETERENIARIAN STATION, VUKOVAR 1,875,000 00 DRVOPROMET VUKOVAR, 1 1,242,000 00 BOROVO D D , BOROVO NASELJE, 59,777,429 00 GRADEVINAR D D , VUKOVAR, 4,500,000 00 ELIP, VUKOVAR, 4,800,000 00 VUCEDOL, VUKOVAR, 3,500,000 00 VODOMATERIJAL, VUKOVAR 1,176,000 00 BOJORAD, VUKOVAR, 1,500,000 00 VUPROJEKT, VUKOVAR, 2,800 000 00 CIJAN, VUKOVAR, 800,000 00 RAZVITAK D D , ILOK 1,900,000 00 ILOKTURIST D D , ILOK 1,200,000 00 AGROKOMERC, ILOK 6,500,000 00 ITEKS, ILOK (DECLARED BANKRUPT) PP NIJEMCI, D D ,NIJEMCI 172,725 00 PP LIPOVAC D D ,LIPOVAC 154,800 00 PP HENRIKOVCI D D ,NUSTAR, 6,617,900 00 PP SIDSKI BANOVCI D D , S BANOVCI 153,000 00

TOTAL VALUE 874,282,139 00 Mayor Mladen Karhc, tel 0321 332 - 274, fax 0321 332 624

Vlllages Mirkovci

Population 38,580 (1991 Census), N/A for 1998

Average Net Income 1,756 kunaJmonth (June 1998)

Unemployment 35% or 2,588 reg~steredunemployed according to official county statistics (December 1998)

Major Industries Bnck Production, Services, Construction, and Trade Compan~es

Major Employers Dilj-Vikovci, Vibrobeton, Obrtaj, Telekomp, Tnangl, Djuro Salaj, Fenix, Kvalitet, Gradnja

Major Agr~culturalActlvlt~es Livestock Production, cereal crop production

Arable Land 4,982 ha

Status of Prlvatlzatlon All compames have completed transfonnat~onprocess, but some are still partially owned by the pnvatization and pension funds

Information about Return Process N/A

General

Total employment In Vinkovci is 14,413 people 9,047 are employed in mdustry, 2,491 m services and trade, 2,393 by craft companies, and 116 in agnculture

Dilj recently established a branch in Sarajevo to begin regalnlng market share lost dung the war BiH represented 50 percent of Dilj's market for building matenal before the war Vukovar

Mayor Vlado Stengl, tel 0321 655 487,0321 655 746

Villages Town of Vukovar, Borovo Naselje, LipovaEa, Sotin

Population 45,963 (1 991 census), 17,500 (December 199819

Average Income 6 12 kunalmonth

Unemployment 22% or 3,397 registered unemployed according to official statistics The actual unemployment rate is probably much higher

Major Industr~es Rubber processing

Major Employers Vuplk, Borovo, Public Sector

Major Agricultural Activities Independent farmers and livestock production

Arable Land 6,592 ha

Status of Privatization NIA

Informat~onabout Return Process 1,671 returnees (September 1998)

General

The town of Vukovar is made up of four separate urban areas, Old Vukovar, New Vukovar, Borovo Naselje, and Luzac Old Vukovar is on the nght bank of the Vuka and Danube nvers and contains dense rows of houses New Vukovar is on the left Vuka bank and has a planned network of streets Borovo Naselje was created more recently and contains a separate industrial complex several kilometers northwest of Old Vukovar Luzac is a former village between Borovo Naselje and Old Vukovar that has been merged with the town

The Vukovar Port suffered extensive damage dunng the war and reconstruction of warehouses and other facilities have not been completed

Based on information from the Vukovar tax office, one large company, five medium size companies (Borovo Wholesale, Vukovartrans, Epirus, Razvitak, and Agrocornmerce), and 196 small busmesses filed reports with the tax office One of the largest employers, Vupik, did not submit complete financial statements to the tax office More than 50 percent of the 196 small pnvate companies are located outside the area, but have registered compames in Vukovar The

The population of Vukovar m December 1998 has been estimated from several unofficial sources that have cited figures ranging from 16 000 to 19,000 vast majonty of small compames registenng net profit for the first six months of 1998 were located outside the area, such as Borovo Commercial Department Stores (Zagreb), AutoWill (Zagreb), DE-KO Metalopromet (Velika Gonca), and Kolis d o o (Velika Gonca) Only one of the medium size companies (Epirus) registered net profit The largest losses were registered by

Razvitak (220 employees) 2,628,354 kuna net loss Agrocornmerce (142 employees) 41 8,824 kuna net loss Vukovartrans (122 employees) 908,847 kuna net lossi0

Vukovar city was about 90% damaged or destroyed with about 10,000 houses and 5,000 flats in vanous states of damage or destruction The Croatian government appears not to have enough money to quickly repair all the damage New and additional money and new creative solut~ons need to be found to solve the problem The most important pnonty IS job creation Incentives such as free port status and tax holidays are necessary to induce businesses to locate in war tom areas

DAMAGE ASSESSMENT (VUKOVAR)

4,000 of 5,000 homes were damaged m the town In the Mitnlca distnct, one of the most heav~ly damaged, 1,450 houses were damaged in categones 1 through 6 as follows

Category Number of houses 1 146 (some inhab~ted) 2 117

6 576 TOTAL 1,332 (75% of the houses are unmhabitable)

Another heavily damaged distnct, Trpinjska cesta, received damage as follows

Category Number of houses 0 (undamaged) 52 1 146 2 82 3 62 4 125 5 268

'O ZAP, Vukovar Branch Office (December 1998)

73 Whole streets were completely damaged Electnc wires are gone, water and sewer systems damaged or destroyed, and water meters stolen State owned utllity companies are responsible for repair of utilities The government is responsible for highways, and the municipality is responsible for repair of streets However, there is no money for repair For example, street lights have not been repaired in many locat~ons

There are several hundred inhabited houses in the Trp~njskacesta distnct The infiastmcture was not as heavlly damaged as in Mitnica The current state budget is for repalr of 1,000 houses in Vukovar Since there are 10,000 houses In the city, it will take at least 10 years to repair them all

The total estimate of damage in Vukovar is

Category Number of houses 0 200 1-2 1450 3 2000 4,5,6 6000 TOTAL 9650

Number of flats (apartments)

Category Number 4 1510 5 1970 6 745 4225

Total number of units is approx~mately15,000 About 6,000 houses and 1,000 flats have not yet been accurately assessed, and it was targeted to be completed by year end 1998

STATUS OF HOUSING CONTRUCTION AND RECONSTRUCTION

Completed 2,500 flats in Vukovar 2,000 houses in Vukovar

Under construction 300 flats in Vukovar by the international community

The Ministry has stopped reconstructing flats until the 1,500 empty flats have been absorbed Nuitar Municipality

Mayor Pero Dnnavac, Tel 0321 386 214, Fax 0321386 492

Vlllages Ceric, Marinci, NuStar

Population 6,632 (199 1 Census), 6,6 12 (December 1998)

Municipal Budget 2,400,000 KN (1998), County provided 600,000 kuna of the total budget

Average Income NIA

Unemployment 60-70 percent according to local officials There are 416 registered unemployed persons according to official county statistics (December 1998) In 1991, there were about 1,000 people employed Today, local officials estimate that about 300 people are employed

Major Industries Agriculture and services

Major Employers Mira Ferbah (Health Care facility for elderly employing 20 people), NuStar Commerce (Central Heating installation company employing about 15 people), 12 retal shops employing about 25 people, 12 craft companies, Susak (road maintenance company employing about 12 people) Most of the remaimg employed commute to jobs in Vinkovci

Major Agr~culturalActivities Corn, sunflowers, and soybeans grown on small family farms

Arable Land 3,786 hectares, about 300 hectares are heavily mined

Status of Privatlzatlon Hemkovci, a medicinal plant and herb production company has not been pnvatized Most of the facilities were looted or destroyed and are not currently operating

Information about Return Process According to local officials, 95% of the displaced have returned to NuStar, 85% to Ceric, and 60% to Marinci (December 1998) Bogdanovcl Mun~c~pal~ty

Mayor Pavica Filkovac

Vlllages Bogdanovci, Svinjarevci, Petrovci

Populat~on 3,167 (1991 census), N/A for 1998

Average Income NIA

Unemployment 151 registered unemployed according to official statistics (December 3 1, 1998)

Major Industries NIA

Major Employers NIA

Major Agricultural Activltles NIA

Arable Land 4,441 ha (70 percent mined according to local officials)

Status of Privatuat~onN/A

Information about Return Process 250 returnees (November 1998) S tar1 Jankovci Munlc~pality

Mayor Ivan Lozic

Villages Stan Jankovci, Orolik, Novi Jankovci, Snjemslu Laze, Slakovci

Population 6,635 (1991 census), N/A for 1998

Average Income N/A

Unemployment 379 registered unemployed persons according to official county statist~cs (December 1998)

Major Industries None

Major Employers Stan Jankovci Apcultural Cooperative, Snjemslu Laze Agncultural Cooperative

Major Agricultural Activities Independent farming and oil crops on land used by the two cooperatives

Arable Land 6,216 ha

Status of Privatization Stan Jankovci Agncultural Cooperative fac~litieshave been completely pnvat~zed and Snjemski Laze Apcultural Cooperative facilities are in the process of privatization (complet~ondate unknown)

Information about Return Process 430 returnees (November 1998) Lovas Mun~cipality

Mayor Mr idJko Cirba, tel 032-73 1-099

Villages Lovas, Opatovac

Population 2,23 1 (1991 Census, Croats 75 3%, Hungmans 11 8%, Serbs 12 5%), most current population data is 1,145 (September 1998)

Average Income 1,028 kunatmonth according to the Vukovar ZAP office

Unemployment 60 percent according to Municipal officials, 63 registered unemployed persons according to county statistics (December 1998)

Major Industr~esNone

Major Employers Lovas Agncultural Cooperative which currently employs about 40 people (100 employees before the war), Borovo, and INA oil terminal

Major Agricultural activities farming (1788 ha pnvately owned land and 2,464 ha of state land), livestock production, and fishery

Arable Land 3,541 ha

Status of privatisation Lovas Agncultural Cooperative has been pnvatlzed except for the land, and Borovo and INA have not been pnvatized

Informat~onabout Return Process 539 returnees (September 1998) out of 1,600 displaced A total of 1,000 DPs were expected to return by the end of 1998 Ilok Municipal~ty

Mayor Stjepan Kralj evlc

Villages Ilok, Bapska, Mohovo, Sarengrad

Population 9,748 (1 991 census), 5,000 (September 1998)

Average Income 304 kunalmonth

Unemployment 630 registered unemployed

Major Industries Textiles, winery, construction matenals

Major Employers Iteks, Razvitak, Vupik, and Agrokomerc

Major Agricultural Activities Winery and independent farming

Arable Land 8,127 ha

Status of Privatuation

Information about Return Process 2,585 returnees (September 1998)

General Overview

A Demography

Ilok is comprised of four munic~palities/opcina The terrain is generally flat to rolling wlth the predominant land use in vineyards, adjacent to Danube Ihver, soil and climatic conditions are excellent for wine production The area is ordered by Serbia to the east and southwest as it is a "finger" that extends into Serbia Croatians, Serbs, and Slovaks compnse cultural/ethmc groups in the Ilok region, with Serbs the prevailing minonty group, followed by the Slovaks

B Employment (1991)

1991 employment Approximately 4,000 m the Ilok region (includes all production, manufactunng, farmlng and small businesses) 199 1 employment City of Ilok was about 2500 1998 (October) employment Ilok region was 1,500 (includes 500 employees and 1000 self-employed as family farmers plus those involved in providing goods/services) "

" Clty of Ilok Econormc Summary Report 1998 ILOK

a Dunng the pre-war penod, the Ilok region consisted of pnmary small family farms with several larger rnanufactunng and agricultural enterpnses Several rnanufactunng facilities are located withn the City of Ilok, w~ththe predominant company, Iteks, currently in receivership b Based on the 1991 census, the pre-war population of the Ilok consisted of 24,000 persons The current population IS approx~mately10,000 persons

Currently, total employment is estimated to be 3,000 persons w~th2/3 of the working population Involved in family fanning The remainder are involved in providing goods and services to the Ilok area

ILOK COMPANIES

Introduct~onIt should be noted the following companies benefited from reglonal marketing and dlstnbution channels pnmanly to Serbia pnor to 1991 The markets to the east were in the mun~cipalitiesof BaEka Palanka, Novi Sad, and Belgrade The followng companies represent the prevailing employment base in ths region

Iteks Com~anvPnmanly involved m the manufacture and retail distnbut~onof textile products The company began to lose market share and subsequently closed formal operation in early 1991

Textile and other rnanufactunng equipment were taken dunng and after the outbreak of hostilities Although legal documents have not been reviewed, Iteks IS In a form of receivership or bankruptcy with no specific time set for resolution The company began to suffer decreased market share pre- 199 1 as a result of imported products Ths was a result increased competition, lack of dlstnbution channels, rudimentary rnanufactunng techmques, production problems, and non-local marketing initiatives Pnor to 1991, the company had purchased Itallan machnery for the process of automating the weaving process

The production of finrshed woven products was dependent upon cotton and other raw matenals not found In eastern Croatia Hence, the cotton was imported from other parts of the former Yugoslav~acausing s~gruficantsupply and cost problems Due to the significant challenge of competition of imported products from outs~deCroatia and the acquisition of raw matenals, it is doubtful the Iteks company will re-open with a simllar focus on textile manufacturing

The Initla1 assessment of companies in the region dunng UNTAES penod indicated an employment base of 1200 to 1400 persons This represented about one half of the employment base in the City of Ilok A recent report issued by City of Ilok working group indicates the potentla1 for 500+ jobs in the future

Lack of investment cap~taland dependence on Imported cotton and other raw matenals indicates the seventy of the challenge of re-establishng the Iteks Company as an operating entity Vupik Ilok-Wine Currently the grape harvest for the manufacture of wlne is in the process of delivery from the independent farmers The wine production is in the form of bulk packaging and bottled products The facillty encompasses the pressing and bottling along with the wine cellar for storage Total employment is between 100 and 150 based on seasonal demands and harvest penods

The current Director, Mr Ivan JuroS stated that the ptlvat~zat~onprocess is ongomg, and completion is expected in early 1999 No specific details on the valuat~onprocess have yet to be received Mr JuroS was formerly a member of Croatian Parllarnent and had previously served as the Minister of Agriculture pnor to this posting The lack of marketing and sales ~mtiatives, distnbution channels, and a long-term business plan remain key obstacles to normalization of Vupik Ilok-Wine

The recent announcement of a regional, wholesale marketplace planned for Osijek is hoped to provlde a significant improvement for small to medium fming/agnculture companies expenencing distnbution problems

However, currently there is little or no market for the production of the wine outslde the Ilok area Efforts to sell the wne mash to other production entities, part~cularlyKneievi Vinogradi, did not prove successful

A~rokomercproduces and sells agriculture products including wheat, barely, and hops used pnmanly for making of beer Pre-war employment was 340 with current employment at 150 The average salary for employees is 2000 Kuna per month Visiting the warehouse and inffastructure indicates a senous detenoratlon of equipment and building infrastructure The company has yet to privatized, no date is yet set for completion

Razvitak-br~ckfactorv The bnck factory provides residential and commercial bncks The company also provides bagged concrete and other building supplies for the consumer market Based on current inventory, the demand for bagged supply items appears to be low

Pre-war markets for products produced were pnmanly in BiH, the market for products in BiH is currently non-existent l2

12 Randy Hampton, OSCE Field Office Ilok, "Special Report Ilok Econormc Assessment (October 1998) Tompojevcl Munic~pality

Mayor Stanko Penavic, tel 031 730 11 1

Villages Tompojevcl, Berak, BokSic, Cakovci, MikluSevci

Population 3,092 (1991 census), 3,270 (December 1998)

Munlclpal Budget Total annual budget for 1998 was 1,400,000 kuna Vukovar-Snjem County provided 950,000 kuna toward thls budget

Average Net Income 686 kunalrnonth

Unemployment 129 registered unemployed persons according to official County statistics (December 1998), The Mayor estimates that unemployment is about 85% and only 150 people in the entire Munlc~pal~tyare employed (December 1998)

Major Industries Amculture

Major Employers None

Major Agricultural Actlvitles Independent farming

Arable Land 5,664 ha

Status of Prlvatlzation 2,500 hectares of state land will be pnvatlzed in the future (date unknown)

Information about Return Process 408 returnees (September 1998), which represents 50 percent of expected returns Tovarnik Municipal~ty

Mayor Ivan Beljo, tel 0321 732 208

Villages Tovarn~kand IlaEa

Population 4,240 (1 99 1 census), 2,200 (December 1998)

Average Income 2,000 kunaJmonth according to local officials

Unemployment 117 registered unemployed persons according to county statlst~cs(December 1998) There are currently about 200 people employed by state companies and the public sector Most of the employees of state firms have not been pad for three months The unofficial estlmate of unemployment IS 90 percent

Major Industries None

Major Employers Vupik, IlaEa Agricultural Cooperatlve

Major Agricultural Activities Cereal production on small farnlly farms

Arable Land 5,653 ha (1,500 ha state land used by Vupik and the remaning IS pnvately owned land)

Status of Privat~zation Vupik facll~t~esand IlaEa Cooperatlve facil~tlesare m the process of privatization (completion date unknown)

Information about Return Process 1,500 returnees accord~ngto local officials (December 1998) Mayor Drago Pantic, tel 0321 738 050

Villages Trpmja, Pacetin, BrSadin, Vera, Bobota, Ludvinci

Populat~on 6,49 1 (December 1998)

Average Net Income 410 kunalmonth

Unemployment 85% or 5,525 people according to the Mayor, 426 unemployed persons according to official County statistics According to the Mayor's office, there are 608 people employed in the Municipality

Major Industries Agriculture

Major Employers Vupik, independent farmmg, small crafts

Major Agricultural Actlvlties

Arable Land 10,5 13 ha

Status of Privatlzatlon Vupik facilities located in the Municipal~tyand state land will be privatized at a later date (date unknown)

Information about Return Process 26 returnees (September 1998)

General

The Trpinja Municipality is located in the northern section of the County and is compromised of a majonty domicile Serb population (97% Serb) Approximately 85% of the 6,500 residents are unemployed The annual budget for the municipality is 650,000 kuna There are several small feed mills operating in the mumcipality and several trade companies that buy and sell livestock Many of the residents have hog farrowing buildings Nljemci Municipality

Mayor Ivica Klem, tel 032/ 280 012

Villages ApSevci, Donje Novo selo, Deletovci, Lipovac, Nijemci, VinkovaCki Banovci, $idski Banovc~,Podgrade

Population 6,5 15 (1 991 Census) 4,500 (December 1998)

Average Income NIA

Unemployment 454 regirtered unemployed persons according to county stat~stics(December 1998)

Major Industries Agriculture

Major Employers Three agricultural cooperatives in Nijemci, Lipovac, and Sidski Banovc~

Major Agricultural Activities

Independent fming Vegetable production

Arable Land 10,051 ha

Status of Privatuation All three cooperatives are in process of privatization

Information about Return Process 3,600 returnees (December 1998)

General

The Nijemci Municipality is located in the southern region of Vukovar-Snjem County and a large part of the municipality was situated along the former confrontation line The municipality consists of eight villages, and it is the largest mun~cipalityin the County (22,000 square hectares) After a concerted reconstruction effort by the Ministry of Reconstruction and Development, about 80 percent of the population has returned to the municipal~ty The single largest challenge for the Municipality is demmng In 1998, one person was killed and five others were severely wounded in mine acc~dents Negoslavci Municlpallty

Mayor Jovica hstic, tel 0321 733 478

Vlllages Negoslavci

Population 1,720 (December 1998)

Municipal Budget 962,000 kuna annual budget in 1998, of wh~ch600,000 was provided by the County

Average Income NIA

Unemployment Accord~ngto the Mayor's office, about 250 people are employed in the Municipality (December 1998)

Major Industr~esNone

Major Employers Independent farming, 12 small craft companies, Agricultural Cooperative, and Public Sector

Major Agricultural Actlvltles Small Famng

Arable Land 1,969 ha

Status of Pr~vatlzation Cooperative facil~tieshave been privatized

Information about Return Process This is a predominantly Croatian Serb rnumc~palityand is not expecting many returnees ATTACHMENT D - ECONOMIC PROFILE - WESTERN SLAVONIA

FLAG Croatia Daruvar Business Advisory Center

Western Slavonia Economic Profile

Sector Ovewaew

FLAG Daruvar operates in the former UN Sector West protected area, whlch includes sections of the follow~ngfour counties and key towns/municipal~ties

Bjelovarkso-Bllogorska Daruvar, GrubiSno Polje, Deianovac, Dulovac, Hercegovac, Sirac Brodsko-Posavska Dragalic, OkuEani, Stara Gradiska Pozesko-Slavonska Lipik, Pakrac Sisacko-Moslavacka Novska, Hrvatska Dubica

This report includes descnptions of the county economies and data on key towns and municipalities within the former Sector West boundary

General

The former UN Sector West lies within the region of Western Slavonia, whch was one of the nchest areas of Croatia before the war Until 1991 the population of the region was predominantly Croat with a large Serb minonty concentrated in Daruvar, Pakrac, Lipik, and OkuCani The Serb Democratic Forum estimates that 40,000 Serbs lived in the area until 1991 The Serb population is now estimated at 7,000, settled mostly in Pakrac and Lipik (3,000), OkuCani (400), GrubiSno Polje (goo), Vocin (200), and Daruvar (1,500) Groups of Czechs, Hungmans, Italians, and Slovaks also inhabit the area

/ The FLAG Daruvar office is located approximately in the center of the former Sector West Though Daruvar itself was only sl~ghtlydamaged dunng the war, many outlying towns and villages were devastated

Because the FLAG Daruvar area of responsibility falls under vmous governmental authonties, there is no consolidated source of information about the sector However, reasonable generalizations and estimates can be made regarding the following areas of importance

Main business activities Milk processing, timber, metal processing, textiles Main agricultural activities Cattle (dairy and beef), hogs, grains Unemployment 17% Average income 2,200 Kunalmonth for those employed

Access to credit is limited throughout the sector and a senous problem for SMEs The government sponsors a development credit program (HBOR or CBRD) typically offenng 5 year loans at 9% interest with a 2 year grace penod However, these loans do not reach all those who need them HBOR funds are made available through commercial banks wbch must bear the nsks of all loans The banks most active in the HBOR program m the sector are Bjelovarska Banka, Pnvredna Banka Zagreba, Slatinska Banka, and Poieska Banka Two banks once act~ve in the area, Glumina and Zupanjska, have failed Some counties, notably Bjelovar, have subsidized business loans made through local banks

A good road network serves the reglon with the main routes being the Zagreb-Lipovac and the E- 661 pnmary road, which connects the highway, Stara GradiSka, Pakrac, Lipik, and Daruvar to Hungary

The reintegration process is proceeding slowly Although there is little direct opposition, mistreatment, or harassment against returnees, the maln problems are

Thelr houses are occup~edby other famil~es(mainly Croat Refugees from Bosrua, Kosovo, or Vojvodina) who have a property contract prov~dedby the Croatian Government, which allows them to live in the houses tempormly

Then houses are totally destroyed or senously damaged Approximately 2,000 houses are under reconstruction, most of them Croat owned

Returnees must contend with the weak economy and high unemployment The region's flagsh~pcompanies are now toppled giants Some of them now employ only a fraction of their former employees Others have not paid salmes to their employees in months or cannot collect then receivables for even longer penods of time Others have had government pnvatizatlon terminated because of alleged fraud and embezzlement amounting to mill~onsof dollars

Business

The large production companies that sustained the economy before the war are now mostly obsolete, ruined by war, or have lost the~rformer markets in Serbia All confront problems of liquidity, timely collection of receivables, and access to credit Many formerly state-owned companies are also mired in pnvatizatlon related issues

Dunng the fighting many factones and busmesses were heavily damaged Such companies typically work at 30 - 50% of capaclty Based on their pre-war size, the most important companies In the sector are

Kamen-Slrac, quarry, in Slrac Daht, metal processor, in Daruvar Inda, fish processor, in Daruvar Moderna, textiles, in Pakrac Papuk, furnture manufacturer, in Pakrac Glass factory in Lipik Poljopnreda, apbusiness, in Lipik Zdenka, milk processor, in Veliki Zdencl Trokut, sawmill, in Novska Metaflex, metal processor, in Novska Sloga, metal processor, in Novska PIK, agnbusiness, m Novska

Aanculture

Western Slavonia is hilly and covered with trees in the central and northern parts In the south along the Sava nver, it is a typical flood plain with intens~vefanning The region is a nch agncultural area with fertile valleys, although not all the existing landholdings are big enough to ensure susta~nablecommercial farming Another uncertainty is the market for agncultural produce The local market is rather llmited in terms of real demand (population), and the closest large market is Zagreb, two hours by road Both road and rail connections with the capital are good

The main crops traditionally grown in the area are corn, wheat, barley and oats, fodder, and potatoes Pnmary l~vestockproduction is hogs, cattle, sheep, goats, and chickens Farming is most often a secondary source of income or solely for the family's own consumpt~on Average surface area per family farm is estimated at 3 - 4 ha

The area has a continental climate, with low winter and hlgh summer temperatures The coldest month is January and the warmest IS July The ra~nfalldistnbution, throughout the year, is rather uneven Unexpected, unusual, or wandenng cl~maticevents - in terms of temperature or ra~nfall - are somewhat fiequent

The following table shows the main cllmat~cdata over the last 17 years

Average yearly temperature (OC) 10 6 Absolute maximum temperature 37 6 Absolute mimmum temperature -21 5 Average yearly rainfall (m~llimeters) 858 Average air hum~dity 76%

The expenence in the reglon has proven that plalns have a high potential for the production of corn, wheat, brewers barley, soybean, sunflower, tobacco, and potatoes It is known that very high yields can be obtained, especially in those areas where attention is paid to soil and water management

In the hlly areas, potatoes, barley, common rye, oat, wheat and corn can also be grown, but with lower yields than in the valleys

In both the h~llyand flat areas, it is possible to organize grazlng (pastures) and plant production for animal husbandry

Besides the crops mentioned above, a number of vegetables are grown m the region, such as cabbage, onions, and beans They are at present llmited by the lack of imgation Similarly, fruit production is not very developed m Western Slavoma, although condit~onsare favorable for growing plums, apples, and pears However, crop production is still l~mitedin the reglon, ma~nly due to some unfavorable soil conditions General

Towns Bjelovar, Cazma, Daruvar, GareSnica, Grubigno Polje

Municipalities Berek, Deianovac, Dulovac, Hercegovac, Ivanska, Kapela, Koneanica, Nova RaCa, RoviSce, Severin, SiraE, Sandrovac, Stefanje, Velika Pisanica, Veliki Grdevac, Veliko Trojstvo, Velika Trnovitica, Znnski Topolovac

Zupanj Mr Mmjan Coner, HDZ, tel 042-244-892

Populatzon 142,789 Area 2,652 sq krn Unemployment 27% (10,389 persons, half of whch are under 30 years old) Inflatron Estimated at 8% VAT caused some pnces to nse by 3 - 4%, but pnces actually decreased in Daruvar 2%

The county is charactenzed by hills, streams, and forests, with most of the area having an elevation between 120 and 150 meters

The ruling party in the county assembly is the HDZ with 15 seats The HSS has 15 seats and the HSLS has 2 This pattern extends to town and municipal governments

In the summer of 1991, the war crept into Bjelovar county The areas of Grubisno Polje, Daruvar, Vocin, and Slatina were occupied by rebel Serbs or came under direct military attack Some areas were liberated by the Croatian Army in the winter of 1991, others remained as UN protected areas until 1996

Upon the Croatian liberation in 1991, much of the Croatian Serb population left their homes for the FRY or Bosnia Members of the Croatian ethnic group living in Bosma and the FRY became "~ettlers'~and were accommodated into the recently vacated Serb houses In 1992 the largest waves of settlers came to Dulovac and Vocin from Kosovo

The return process has shown little success More than 9,000 Serbs left the area since 1991, decreasing the number of Serb residents from 13,096 to 3,400 To date it is estimated that only 547 have returned The returnees houses are either destroyed or occupied with little chance for timely reconstruction or repossession Housing commissions, instituted as of recently to accelerate the return process, are overloaded, underpaid, and in no position to provide alternative accommodation to temporary residents The APN reports purchasing 168 homes in Bjelovar county, of which about 75 are inhabitable

According to the 1991 census, 68% of county residents were Croats, 16% Serbs, and 16% other ethnicities (mostly Czech) Only one town, Dulovac, which was 65% Serb, had an absolute majonty of any one ethnic group Other towns with sigmficant Serb populations were Grubisno Polje, Sirac Municipality (35%), Daruvar (30%), and Veliki Grdevac and Velika Pisanica wlth around 25% More than 8,000 Czechs reside in the county, pnncipally in Koncanica, Brestovac Daruvarski, Gomji Daruvar, and Dezanovac

Some 1,800 Kosovo Croats have settled in Dulovac whle approximately 2,400 Bosnian Croats settled in Grubisno Polje, Daruvar, Slrac, and Velilu Grdevac

In addition, mines and unexploded ordinance make the situat~on increasingly difficult Minefields are by and large unmarked and little demining has been accomplished to date Unexploded ordinance constitute an equally senous danger It IS estimated that 20 - 30% of all shells did not explode upon Impact because of the age of the ammunition Hundreds of thousands of shells were fired in Bjelovar county dung the war

There are 145 known minefields in the county, pnncipally near Daruvar, Dulovac, Velilu Grdevac, and Vellka Pisanica along the 1991 confrontation line Unexploded ordinance exacerbates the problem

Total war damage is estimated at 2 5 billion kuna The most significantly affected areas are the towns of Daruvar, Grubisno Polje, Dulovac, Sirac, and Veliki Grdevac Among businesses, the quarry Kamen-Sirac suffered 2 9 mlllion DEM damage Damages in excess of 1 million DEM were sustained by Vinanja, Dalit, Poljodar, OTP, and Daruvarske Toplice in Daruvar, kbnjacharstvo in Konchanlca, and Zdenka in Veliki Zdenci Damage to residential houses totaled 547 million kuna, with 4,322 homes destroyed, mainly in Daruvar and Dulovac (over 1,000 each) and Bijelovar and Grubsino Polje (about 600 each) There has been some mine clearance in Dulovac

Business

There are 1,000 firms in the county employing 18,800 workers, and 2,435 obrts, employing 3,400 workers No more than 25% of the workers in enterpnses are employed in large firms (over 500 employees) Forty percent work in enterpnses with between 51 and 250 employees There are 1,080 entrepreneurs and 2,27 1 tradesmen registered in the county

For the first year since 1994, industnal production for the county as a whole increased by 3 1% in 1997 The metal industry revived, increasing production by 900% compared to 1996 The total value of production was 2,275,378 kuna The textile industry also increased production 148 2%

Two of the largest milk processors in Croatia are Sirela in Bjelovar and Zdenka m Veliki Zdenci Sirela produces over 100 million liters of milk annually and large quantities of milk products Zdenka and Cromax face senous business problems While Zdenka is undergoing pnvatlzation, the pnvatlzation of Cromax has been terminated due to alleged embezzlement and fraud estimated at 26 million kuna Prerada in Bijelovar and Zito in Cazma are also sipficant milk processors The forestry and wood-processing sector is next in importance, accounting for 26% of exports Timber production is 500,000 cubic meters yearly Cesma in Bijelovar and DIK in Brestovac export about half their production

Although there is relatively little industnal production, the metal industry has significant capacity (Dalit in Daruvar)

Tomsm IS another source of revenue In addition to the hotel and health spa in Daruvar (Daruvarske Topllce), hunting and fishing also draw tounsts to the area

The county exported 70 mill~onUSD worth of wood products, text~les,and food products, mainly to Germany, Italy, Slovema, and Bosnia Imports totaled 76 million USD the same year The total value of goods exported in 1997 was 86 5 million USD, which constituted an Increase in exports of 24%, whle imports decreased 1% In addition to the aforementioned countries, the Czech Republic was a leading importer

Aanculture

Agriculture is the pnmary economic activity in the county Mills and confectionery, meat, and fish processing plants have become its most sipficant industnes There are 153,319 agncultural acres (58% of total), 142,000 arable acres, and 94,000 acres forested, 26% of the population IS involved in apculture (37,000 people)

The main activity is agncultural production, including livestock and food processing, especially dairy and meat products Fish-famng near Veliki Zdenci is also significant

The three most important industnes for exports are timber and wood, food and dnnks, and textiles Four compames account for one-third of all exports S~rela(mllk processor in Bjelovar, Modea (clothng) in Garesnica, Koestlin (bakery) in Bjelovar, and Cesma (plywood) in Bjelovar

The most sipficant companies in the confectionery industry are Koestelimn Bjelovar and Franck in Hercegovac In the beverage industry, there is the Daruvarska brewery and Vinanja wlnery in Daruvar In the meat processing industry, there is Cromax in Bjelovar and Inda in Daruvar for fish processing The textile company Modea In Garesnica is a significant exporter, other significant companies in this industry include Nada in Hrastovac, Pemc-tekst~land Vesna ln Daruvar

In Bjelovar, the tractor factory Tvornica Traktora is becomlng a large producer of small tractors for domestic and foreign markets Members of the same industry are also the foundry Ljevaonica and TAD in Bjelovar and Dalit in Daruvar

The county estimates that its Program of Incentives for Small and Medium Size Entrepreneurs and Tradesmen in cooperation with the Ministry of Economy has given loans totaling 17 million kuna, thus creatlng about 300 jobs Mayor Ivan Raos, (HSLS), tel 043-33 1-241

Population 14,210 (56% Croat, 17% Serb, 20% Czech)

Average income 2,000 Kunalmonth

Unemployment 1,785 registered

Major industries Metal processing, food processing

Major employers There are 13 large companies including

Inda Fish fann/processor MPD Industnal pump and filter manufacturer Dalit Metal processor, now operating at 15% capacity making parts for Volkswagen Vesna Textlles Gaj Sawmill Podravka Slaughterhouse Daruvarcanka Meat processor Daruvarska Pivovara Brewery Novogradnja Construction company

In addition, there are 78 small firms The large and small companies combined employ 1,300 people 246 obrts have a total of 3,076 employees

Major agricultural activities Cattle, sheep, hogs, goats, fruits

Status of Privat~zation Inda, Dalit, and Vesna are pending

Attitude of Leaders toward SME Development Excellent The mayor has given FLAG valuable leads on clients

Information about Return Process Before the war, the population was about 35% Croat, 36% Serb, and 18% Czech 250 houses were abandoned dung the war, 180 of whlch are now occupied by Bosnian Croat refugees Infrastructure Problems Infrastructure is sound although total war damage is 114 million DEM Mines are a problem in the outslurts and hills around the town Unexploded ordnance IS presumed to exist m the hills and even Julijev park Mayor Zlatko Bionic, HDZ, tel 043-485-036

Population 6,500-7,000 (1991 population was 9,716, lncludlng 3,374 Serbs)

Average income 2,642 Kunalmonth

Unemployment 19% (1,224 unemployed, 1,485 employed)

Majoi industries Milk processing

Major employers "Zdenka" milk processor In Vellkl Zdenci

Major agricultural activities Cattle, grain production

Status of Privatrzation NA

Attitude of Leaders toward SME Development Unknown

Information about Return Process As elsewhere in the county, proceeding slowly

Infrastructure Problems The water works and some gas llnes are being improved In Vellh Zdenci the kindergarten and town hall are being rebullt Mayor Drago Hodak, tel 043-382-044

Population 4,300 (4,600 before war)

GDP 2,500 Kuna/month for employed

Unemployment 50%, 250 people are registered as unemployed

Major industries Forestry

Major employers No large employers, only a construction firm, the "Gradollk" quarry, and the sawmill "Gaj" (not locally owned), Forestry Dulovac

Major agricultural activities Beef and dairy cattle (1,000 head plus) There are many small farms with 3 - 5 head Also sheep, goats, chickens Fruits and grapes are grown The municipality has 1,800 ha of state-owned land ava~lablefor lease, but much of it is In small plots

Status of Privatization NA

Attitude of Leaders toward SME Development Excellent, the municipal head is also the leader of the farmer's association and is enthuslastlc about working wth FLAG

Information about Return Process Some 500 Serb returnees are expected eventually About 2,000 Kosovo Croat refugees have moved In slnce 92 and occupy 50 Serb homes Ten Serb families returned recently, however houslng is a problem

Infrastructure Problems Bad farm roads and limited water supply are st~flingm~lk production

Other Economic Development NGOs IOM IS considering slgning a W agreement with the municipality General

Towns Slavonski Brod, Nova GradiSka

Munzczpalztzes Bebnna, Brodski Stupnik, Bukovlje, Cernik, Davor, Donjl AndrIje~~l,Dragalic, GarCin, Gornja Vrba, Gornji Bogicevci, Gundmci, Klakar, Nova Kapela, OkuEanl, Opnsavci, Onovac, Podcrkavlje, Regetan, Sibinj, Slkirevci, Slavonskl Samac, Stara GradiSka, Staro Petrovo Selo, Velika Kopanlca, Vrbje, Vrpolje

Zupanj Mr Mirko Tomac, HDZ, tel 035-231-427

Populatzon 174,988 (4% Serb, 8% Bosnian Croat refugees) County area 2,034 Ism2 Populatzon denszty 86 personslkm2 Number of workers 33,276

The county IS located in the southern part of the Slavonlan plain, in the area between the mountans of Psunj, Pozeska, and Dilj in the North and the nver Sava in the South The county shares its southern border with Bosnia The administrative center IS Slavonski Brod

Brodsko-Posavska county is a crossroads for vanous traffic, including road (the L~povac-Zagreb highway), rail, and ship (Sava kver)

The western areas of the county, including Dragalic, Okucan~,and Stara Gradlska, suffered war damage, and some infrastructure IS lacklng Planned projects Include

Construction of a "regional waterhne" whlch will solve the problem of supply of potable water for the eastern part of the county, inclusive of the town of Slavonski Brod = Improvements in the water supply system of the town Nova Gradishka and the western part of the county Construction (in progress) of the waterllne Bartolovci-Brodski Stupnik Complex construction of the drainage system and the clearance installations Gasification of the county through systematic construction of the gas pipelines Construction of the reglonal gas pipeline Kutina-Slavonski Brod

The county's basic goals in terms of economic policy are

Repair of war damages Economic growth and increased employment Economlc development initiated dnven fi-om the publlc sector Increasing the county's competit~venesswithln Croatia in terms of quality, innovation, and technology Development of the main business sectors industry, agnculture, traffic, and services Emphasizing SMEs and trade Flexible organization and connection to enterpnses Developed economic infrastructure for entrepreneurship (business incubators, technological centers, agencies for development and financing)

Business

The county economy includes about 2,000 commercial enterpnses, 3,254 trade companies and 23,855 agncultural firms The structure of the economy, in terms of employment, is as follows

Agriculture and fishing Industry Traffic and communications Financial services Forestry Civil construction Trade Tounsm and hotels

Pnmary sector Secondary sector Tertiary sector

The biggest companies are

In Slavonski Brod, the Duro Dakovic metal factory, Termo Plan heating system, Agrokombinat Jasinje agncultural company, "Ciglana Brod bnck factory, and DI Slavonija sawmill

In Nova Gradiska, the Klas apcultural company and the Elda, Vingoqe and Nova textile companies

In Onovac, the Onolik furniture factory

In Donji Adnjevci, the Europak paper factory

In 1995 exports totaled 61 8 rmllion USD, whch was 1 35% of Croatia's total Imports that year were 55 1 million USD, or 0 73% of the national total The most important foreign trade partners are Germany (35 7%), Italy (25 4%), Belgium (4 8%), Austna (4 6%), France (2 7%), Slovenia (10 3%), Bosnia (5 4%), and Hungary (3%)

Businesses face numerous changes in the business environment following the transition kom the socialist planned economy to the market economy, in addition to the direct and indirect consequences of the war which interfere with their operations in domestic and foreign markets Twenty-one industnal firms exist in the county, predominantly in metal and wood processing Other sectors include the final manufacture of wood products, production of transportation vehicles, textiles, and food processing

The improvement of industnal production requires essential changes in organization of manufacture through

Cooperation wlth foreign companies on joint projects (especially in production of final wood and metal products)

Organization of small enterpnses, using the surplus capacities m already existing companies

The total agncultural area in Brodsko-Posavska county covers 120 ha, includ~ng104 ha of fertile soil Due to shortages of resources, the present level of production is unsatisfactory and is reflected in the constant decrease of production of all kinds of agncultural products, an increase of untilled soil, and the underutilization of the existing capacities The future growth of agnculture in the county shall be directed toward - Enlargement of family farms Change in the structure of agncultural production (more cultivation of industnal plants and fodder, and less of traditional corn and wheat) Intensification of cattle raising Construction of smaller storage and food processing plants Focusing on horticulture, floriculture, and seed cultivation

Land use is as follows

Towns 52 4 km2 Gardens 88,000 ha Orchards 2,766 ha V~neyards 1,193 ha Pastures 13,128 ha Fish Ponds 2,432 ha Forests 60,255 ha Mayor Zdenko Gorup, HDZ, tel 035-36 1-363

Average income 1,000 Kunalmonth

Unemployment 120 people are registered as unemployed

Major industries None Supposedly, someone is starting a small shop to produce auto parts There are two registered obrts

Major employers None Most people work in Nova Gradiska

Major agricultural activities Cattle, wheat, possibly fruit drying in the future The municipality owns 3,150 ha of land near the Sava hver, which sometimes floods The land would be sultable for cattle or poultry Before the war there were at least 400 head of cattle, now there are about 40

Status of Privatization NA

Attitude of Leaders toward SME Development Positive The municipal head called FLAG seelung assistance He would specifically be interested in feasibility studies for agricultural land use, whch would be prerequisite to obtaimng start-up capital

Information about Return Process Since the six villages in thls municipality were on the confrontation line dung the war and were totally abandoned, in a sense every resldent IS a returnee

Infrastructure Problems First, most of the area is mined Clearance costs range from $10 million for the maln areas to an onerous $300 million for the whole mumcipality Second, most public facilities were mined includ~ngschools, water, and sewage systems There is electnc~ty The Ministry of Development and Reconstruction is building houses The situation is so dire that the municipality could not accept cattle offered by the My Neighbor NGO since there were no facilities for the animals

Access to Capital Practically non-existent

Other Economic Development NGOs IOM will likely sign a RAP agreement and finance water and sewage systems, then renovation of schools Mayor Drazen Japundic, HDZ, tel035-828-001

Population 3,700 (now 90% Croat, the 1991 population was 5,712, including 4,777 Serbs)

Average income 2,000 Kuna/month

Unemployment Unknown, but 200 people have jobs

Major industries

Major employers PIK Okucani, fish pond Slobostina (now employing 20, formerly 400), agricultural cooperative (20 employees) One hundred employees work in governmental and public organizations

Major agricultural activities Cattle, grain production

Status of Privatuation

Attitude of Leaders toward SME Development Unknown

Information about Return Process 2,800 of the current res~dentsare Croatian refbgees from BiH and Vojvodina 450 Serbs have returned OSCE reports that "the high incidence of verbal harassment" against Serbs is a cause for concern Bosn~anCroat refugees are also harassed

Infrastructure Problems Many wells are poisoned Needs include public transportation, rehrbishment of the old age home, upgrading the water system, construction of a sewage system (estimated at 56 million kuna), and road repair

Other Economic Development NGOs IOM will probably slgn a RAP agreement IRC hnded a kindergarten Other NGOs include Helsinki Watch, SDF, Fenix, and Center for Peace Mayor Stefica Slovica, tel 035-374-05 1

Population 1,500 (2,532 before the war 45% Croat, now 90% Croat)

Average income 2,000 Kunalmonth Many residents are pensioners earning 700 KunaJMonth

Unemployment 200

Major industries The metal and wood processor Sava once employed 300 people, now has 16 workers Its metal facility does not work The sawmill MI~ICin Novi Varos has 2 employees

Major employers Before the war, a jail employed 600 (incidentally, the former holding site for the Jasenovac concentration camp) Now people are gravitating toward Okucam and Nova Grad~ska

Major agricultural activities Small family farms, cattle (now 10% of pre-war quantity) and hogs (30% of pre-war)

Status of Privatlzatlon Sava is not privatized

Attltude of Leaders toward SME Development Positive

Information about Return Process 1,400 of the res~dentsare considered returnees OSCE feels that the possibil~tiesfor return are small and estimates the maxlmum for return at 200, mostly to the v~llageof Gredam S~nce1991 only 60 Serbs have returned Few houses are occupied The secunty s~tuation for returnees is satisfactory Money is lack~ng for reconstructing homes

Infrastructure Problems Broken connect~onwith Bosanka Gradiska, now a part of the Republika Srpska Sewage and water systems There is no kindergarten Roads need repair The morgue, sports gym, and Dom Kultura must be rebuilt Although the area IS "officially" mine free, several m~nefieldsare known to exist

Access to Capital Chronically l~mited According the munic~palhead, people need loans for everything livestock, equipment, businesses, etc The Special Areas of State Concern Act is inadequate

Other Economic Development NGOs IOM has considered fbnding infrastructure projects Help Age has given some food IRC has undertaken some reconstruction projects General

Zupanj Mr Antun Bagmc, HDZ, tel 034-272-323

Towns Poiega, Llp~k,Pakrac, Pleternica

Munzczpalztes Brestovac, Caglin, JakSic, Kaptol, Kutjevo, Velika

Populatzon 99,334 in 1991

Unemployment 17% (5,180 persons unemployed, 15,000 have jobs)

Average salary For those employed, 2,45 1 Kunaimonth

Areas badly damaged dunng the war include Pakrac, Llpik, and Brestovca

Natural resources include thermal spnngs m Lipik and Vel~ka

The front llnes of the war ran stra~ghtthrough Pakrac and L~pik,which were very heavily damaged Today, all areas near Pakrac and Lipik are presumed mined unless they have been cleared There has been some mlne clearance in KUSO~J~EC reconstruction projects have been undertaken in Kusonj e and Pakrac

Firms employ 13,000 people The main industnes are timber processing and textiles All major employers were signrficantly damaged or destroyed dunng the war Chief among these are

In Pakac, the Papuk hture factory whlch operates at 10% capacity (now 130 employees vs 1,300 pre-war), and the Moderna textile company, which was 50% destroyed but is now rebuilding

In Llplk, the glass factory (320 employees now vs 900 pre-war), the Poljopnvreda food processor (50 employees now vs 320 pre-war), and the health and recreation center (25 employees now vs 320 pre-war)

Industry IS growlng in Pozega at a yearly rate of 6 1%, compared with 6 9% in Croatia as a whole

Amculture Over 14,000 farmers work in the county There are 89,000 ha of fertile land and a climate favorable for grain, fruit, and cattle production Grains are cultivated on 3 1,000 ha, industrial crops on 4,235 , and vegetables on 3,484 ha Production totals in 1997 were

Wheat 56,070 tons Barley 5,589 tons Oil rape 2,006 tons Corn 109,811 tons Sugar beets 28,5 12 tons SOY 4,092 tons Potato 26,868 tons Cabbage 3,533 tons Apples 743 tons Plums 4,398 tons Grapes 10,384 tons

Vineyards occupy 1,000 ha and produce 1 million liters yearly for the Kutjevo winery

82,000 ha of forest produce 500,000 m of timber each year Mayor Damir Spancic, HDZ, 034-41 1-080

Population 8,500 (In 1991 the population was 16,367 including 7,780 Serbs)

Average income 2,100 Kuna/month

Unemployment 800 persons (1,000 people have jobs)

Major ~ndustr~esTimber processing, and textlles

Major employers

The Papuk wood processor works at 10% capaclty Before the war it employed 1,300 (700 Serbs), now there are 130 (20 Serbs) The factory was almost completely destroyed in 1991, and damages are estimated at 53 miillon DEM Papuk made chairs which were exported throughout western Europe Now Papuk manufactures boards and parquets which they export to Macedonia, Italy, Germany, and Austna They have a plan to rebuild the most important areas of the company, whch would cost 11 mlllion DEM They have had some d~scussionswlth foreign investors, but nothng concrete has developed Cutting wood is a problem, because some forest areas are mined The director is not very optimistic about the hture

The Moderna clothes factory half of the plant was destroyed but it is currently rebuild~ng and employs 170

Main agr~culturalactivities Cattle, hogs, hit growlng The presence of mlnes and unexploded ordinance has almost completely rulned the agncultural industry

Status of privat~zation Papuk and Moderna are not yet pnvatized

Attitude of leaders toward SME development The town is investing in an industr~alzone and will launch a small Industry scheme with 9% interest loans to potential investors

Informat~onabout the return process About 720 Serbs have returned 200 refugees from BiH remrun OSCE regards the secunty situation for returnees as excellent w~thno incidents involving returnees reported The police chief is highly regarded More than 4,500 houses (over 50% of all) were damaged dunng the war Without substantial reconstruction no major return can be expected There is a chronic lack of flats or houses that the houslng commission can give to returnees The confrontation l~neran through the center of the town, and the town consequently was nearly destroyed Landmines and unexploded ordinance have had negative affects on the return process The entire area is presumed to be mined, except for areas certified as clear Population 6,000 (In 1991 the population was 11,222 lncludlng 5,000 Serbs)

Average income 2,300 Kunalmonth

Unemployment 1,300 persons (900 have jobs)

Major industries Glass production

Major employers

Glass factory 320 employees vs 900 pre-war, 120 milllon USD war damage Mlneral water bottler Studenac (part of the Podravka company) Diversified agrobusiness Poljopnvreda Formerly bred Llplzzaner horses, now mostly in gram production with some cattle, 50 employees vs 320 pre-war, worklng on 1,500 ha state land vs 3,200 pre-war, 75% pnvatlzed, 10 mlllion USD war damage Health and Recreational Center Completely destroyed dmng the war, today 25 employees vs 175 plus pre-war "Gamadof' plastics factory with 170 employees, pnvate Fish ponds 48 employees, 75% pnvatlzed

Major agricultural activit~es Frult growing (apples), cattle, hogs About 13,OO ha of land is under cultivation

Status of Privatlzatlon Glass factory and Poljopnvreda both 75% pnvatized, Studenac not pnvatized

Attltude of Leaders toward SME Development Favorable

Information about Return Process 260 Serbs have returned and 600 refugees remain The secunty situat~onfor returnees IS very good No incidents have been reported An OSCE survey Indicated that returnees were concerned only about unemployment and housing, not mistreatment There is a refugee camp (Topolik)

Infrastructure Problems Italy will finance the rebuilding of gas and water lines IOM has begun work on the lundergarten in Llpik and plans to rebuild the electrical gnd m Jagma The town is negotiating wlth ASB to rebulld houses

Other Economic Development NGOs ASB, IOM General

Towns Novska, Sisak, Glina, Hrvatska Kostajmca, Kutina, Petnnja

Munzczpalztzes Donjl Kukuruzn, Dvor, Gvozd, Hrvatska Dubica, Jasenovac, Lekenlk, Lipovljani, Majur, Martinska Ves, Popovaca, Sunja, Topusko, Velika Ludina

Zupanj Duro Brodarac, HDZ, tel 044-522-777

Populatzon 25 1,000 Unemployment 15,000 persons Area 4,418 sq km

Natural resources include oil and natural gas, fertile land (45% of total), and forest (37%)

About 2,000 people were killed dunng the war, and about 35,000 Serbs fled in 1995 In the meantime, 15,200 Croats from Bosma migrated into the area, 15,000 Croats returned to the liberated terntory (50% of the county was under Serb occupation from 1991 to 1995), and over 3,600 Serbs have returned to the county

21,000 houses were destroyed dunng the war, as were 17,000 commercial establishments and 34 bndges

Business

Within the county are 9 large compames, 42 mid-size compames, 1040 small companies, and 3000 small entrepreneurships Of these 50% are registered in the trade sector, 14% in production, and 12% in real estate and other services

The county constituted 25% of Croatia's total lndustnal potential Before the war, the economy pnmmly consisted of a number of heavy industries, with agnculture and small enterpnse also playing important roles The county economy is suffenng as its competit~venessand productive efficiency decline due to obsolete industnal facilities There are also problems with liquidity, insolvency, and the supply of raw matenals In December 1997,845 compames had frozen bank accounts whle the total debt was 135 million kuna

In 1997, there was a modest overall increase in industnal output of products including chemicals, oil derivatives, and metal goods The textile Industry before the war employed six t~mesas many people as today Clothing production in 1997 declined 17% Wood processing declined 23%, while furniture production rose by 15%

Exports totaled 174,500,000 USD in 1997 in contrast to 146,800,000 m imports Compared to the previous year, exports fell 11 4% while imports increased 10 3% Domest~ccommercial banks are not able to stimulate the county economy, and foreign capital, which would allow the transfer of modern technology through investments and loans, is currently not available

Thls year, the county received 5 5 m~ll~onkuna for loans to SMEs in metal processing, rock processing, food production, wood processing, among other industnes Mayor Zlatko Kos, HDZ, tel 044-600-155

Population 17,731

Major industr~es Metal processing, timber

Major employers Metaflex (metal processor), Sloga (metal processor), Trokut (wood processor)

The city was heavily damaged in the war and the economic situation is very poor Because of its nch forests, the area is onented toward wood processing Trokut IS a manufacturer of fbrniture and furniture parts Dunng the war, the company experienced damages of 16 5 million DEM Investments to date allowed for 70% of pre-war production to be achieved Current difficulties are found in obsolete technology, drained matenal supply, and requirements to maintain artificial employment levels Investments in pnmary and final production machnery and drying facilities are also needed I Mayor Zelko Mikic, tel 044-855-003 I Population 2 500 (4,237 before the war) Major ~ndustrles The only active ~ndustryIS forestry, which employs 20 people

Major employers "Strojna Obrada," a Zeljezara Sisak facility, is owned by the Croatian Pnvatization Fund and, although perfectly operable, not running The War in Western Slavonia

On March 2, 1991 fighting broke out at the police stat~onin Pakrac, whlch was surrounded by Croatian police The reason was that the police station, manned mainly by Serb officers, was rehsing the orders of the Ministry of the Intenor in Zagreb This began numerous conflicts between the Croatian police and the local Serbs, armed with weapons from the Yugoslav National Army (JNA) JNA forces often sided with the Serbs

On August 20, 1991 JNA forces from Banja Luka crossed the Sava Bver and occupied Stara GradiSka With the help of formations already present, they managed to occupy a narrow but long pocket which reached nearly to Slatina Ths terntory became known as the RSK, or Krajina Serb Republic

After taking over the JNA barracks m Bjelovar, the Croatian Natlonal Guard launched a counteroffensive m November 1991 This decreased the slze of the Serb held pocket

In March 1992, UNPROFOR came to the area and established the UN Protected Area Sector West

On May 1, 1995, the Croatian Army and Croatian Special Police launched Operat~onFlash in Sector West and overran it in five days with almost no resistance About 100 civilians were killed, but the UN accused the Croatian forces of human nghts violations including looting, burning, and murders

As a result of Operation Flash, about 7,000 Serbs fled to Bosnia where they were not welcomed Another 5,000 Serbs were accommodated in temporary "dlsplaced person" centers throughout Croatia After the operation these 5,000 people returned to their homes in Pakrac, Lipik, OkuEani, and Daruvar By the end of the month, 2,000 remaimg Serbs decided to leave again, this time to Banja Luka iuDanls

Bjelovarsko-Bilgorska Chamber of Economy

Brodsko-Posavska Chamber of Economy

Pozesko-Slavonska Chamber of Economy

Sisacko-Moslavacka Chamber of Economy

Towns and Munlc~pal~ties

Daruvar

Dragalic

Lipik

Stara GradiSka

10s and NGOs

CARE-Austna (Study on creatlng small scale business in Pakrac, March 1993)

ECMM, Daruvar

IOM, Daruvar

Local Democracy Embassy, Sisak

OSCE Daruvar, Lipik, and Nova Grad~skafield offices

Serb Democratic Forum, Lipik

UNDP, Pakrac ATTACHMENT E - ECONOMIC PROFILE - FORMER SECTOR NORTH

FLAG Petrinja

Economlc Report for Former UN Sector North

EXECUTIVE SUMMARY

FLAG-Petnnja began operations in late August of 1998 with the goal of offenng technical assistance to small and medium sized pnvate firms and pnvate farmer associations in the Forrner UN Sector North (FSN) FSN is compnsed of the area south of the Kupa fiver In Sisak- Moslavlna county, and the eastern part of Karlovac county south of the town Karlovac To generalize, Karlovac has traditionally been more lndustnallzed and developed than Sisak and IS fixther along m its economlc revitalization follow~ngthe war For this reason, FLAG'S reglonal office in FSN was opened in Petnnja, the most heavily war-damaged town in Sisak-Moslavina county (43% of county's war damages occurred here), and approximately 66% of FLAG- Petnnja's efforts have been concentrated in Sisak-Moslavina county

In its first month, FLAG-Petnnja met in person wlth vmous NGOs, local government officials, chambers of commerce, government-sponsored agricultural programs, potential and existing fanner associations, and pnvate firms in the FSN, with a greater emphasis placed on Sisak- Moslavina County than on Karlovac county Slnce early September the office has focused on slgning business clients and pnvately owned farmer associations as well as providing techmcal assistance to s~gnedclients FLAG-Petnnja continues to search for new business clients in FSN and is busily working at forming pig fanners Into assoc~at~onsin areas near Petnnja and Sunja

To date, FLAG-Petnnja has slgned the following 5 businesses and one farmer cooperative as clients 5 business clients Rukotvonne (Petnnj a) Handicraft shop Ferro Art Biscan (Petnnja) Wrought iron forming producer Kaplast (Vojnic) Injection mould plastlcs producer Kadrvo (Vojnlc) Laminated beech wood element producer Dok-Ing (Zagreb, but worlung in all war-affected areas) Mechanized de-mimg company 1 farmer cooperative Agroznn (Dvor) Farmer coop interested in starting fruit processing facil~ty

The follow~ngreport contalns information obtained from a number of sources that FLAG- Petnnja has had access to, including European Community Monitor Mission (Glina) economlc report, Local Democracy Embassy (Sisak) economic report, Sisak-Moslavina and Karlovac County Chamber of Commerce matenals, FLAG-Croatla reports, personal interv~ewsand anecdotal information from working in the area The chef aim of this report is to prov~dea dynamic document whlch w~llbe continually updated on a quarterly basis and can be used to provide a summary of chief economic activ~tym FSN to all interested partles, including FLAG staff In Petnnja and all of Croatla and Bulgaria, Un~versityof Delaware home office, USAID, I future visit~ngvolunteer experts, and other international organizations worlung m Croatla SISAK-MOSLAVINA COUNTY

Overv~ew Sisak-Moslavina County covers a part of Central Croatia, southeast of Zagreb, and consists of the following sub-regions Moslavina, capital Kutina, Posavina, capital of Sisak, Banovina, capital Petnnja, part of Kordun, cap~talTopusko The county covers an area of 4,418 square km (8% of land area of Croatia), and has 6 cities and 13 municipalities The county has the following natural resources oil and gas (60% of Croatia's total production), fertile land (45% of total area), forest complexes (37%), aquatic potential, navigable nvers Kupa and Sava with a number of non-contaminated tributary streams, fruit-growing complexes, clay deposits, rock and ore deposits, and thermal wells

Populat~on According to the 1991 census, 25 1,023 l~vedIn the county Dunng the war, 2,100 people died as a result of the war and 5,000 Serbs left the county in 1995 Since Operation Storm in August 1995, 15,200 Bosnian Croats migrated into the area, 15,000 Croats returned to liberated terntory (50% was under Serb occupation), and 3,600 Serbs have returned

War Damages War damages entailed 21,000 residential build~ngs,17,000 commercial buildings, 84 religious buildings, and 34 bndges, amounted to damages of 30 mill~onUSD The following are estimated damages to state-run enterpnses In the county Hrvatska Elektropnvreda (Sisak office) 350 million kuna, Croat~anRoadways (Sisak office) 260 million kuna, Croatian Waterways (Novska office) 3 6 million Kuna, Croatian Waterways (Sisak office) 5million kuna, Croatian Mail and Telecommunications (Sisak) 1 lmil kuna, and Croatian Forest Authonty 14million kuna

The county has 300 mlne fields with an estimated total of 16,500 total mines 250,000 sq meters have already been cleared in pnonty areas around bndges, power lines, and ra~lroads

Economy In 1991, the county represented 25% of the total industnal output of Croat~a Most of this output was concerned with heavy industry wlthn cities There were over 62,000 employed compared to less than 25,000 today There are 9 large companies, 42 mid-sized companies, 1040 small companies, and 3000 small entrepreneurships (coffee bars, retail shops) In 1997, there was an increase m industnal production in Petnnja, Glina, Kutina, Topusko, and Popovaca, but overall industnal production fell by 10 6% in 1997 47% of the county's exports go to the EU, (chiefly Italy, Austna and Germany), and 35% go to ex-Yugoslavia (mamly Slovenia and Bosnia)

The county has been hit by the effects of war and the transitional nature of its economy from state-controlled to free market Big state-run firms have proven to be uncompetitive, inefficient, and over-employed, and one of the many negative consequences of the war has been the loss of traditional markets m other parts of former Yugoslavia, whlch only serves to exacerbate an already difficult transition penod These facts coupled with the gradual strengthening of international trade agreements have meant that firms must downsize staff and search for investment capital to achieve competitiveness in the world market The problem is that with the incredible illiquidity of the Croatian economy caused by the government's inability or unwillingness to pay its bills and make much needed changes to a ternbly inefficient banking system, compames consistently find themselves in a cash crunch with no obvious hope of receiving credit All of th~sleads to further problems, such as a lack of supply of raw matenals and production matenals due to a general inability to make payments and an inability to pay wages For example, in December 1997, 845 companies' accounts were frozen in the county with a total debt of 134,500,000 kuna Much needed foreign capital is scared off by perceived political nsk, a suspect legal structure, and a generally inhospitable investment climate

As of February 1998, there were 10,781 unemployed persons Of these 10,781, 5906 were qualified people, 5,s 12 were women, 4,192 were looking work for the first time, and 1,153 were unemployed because of the bankruptcy of their employer The following IS a breakdown of unemployment figures in key communities in war affected regions of the county Dvor 53 2% (2 18 looking), Kostajnica 28% (778 looking), Petnnja 10% (2059 looking), and Glina 12 6% (824 loolung)

Agriculture Of the 534,000 ha of land, 51% IS used for agnculture, of whch 80% is pnvately owned and 20% owned by the state Figures from 1996 still give a good breakdown of agncultural production corn, 110,000 tons, wheat, 35,000 tons, oil rape, 1000 tons, grapes, 15,000 tons, apples, 5,000 tons, and plums, 3,800 tons

The northern border of FSN in Sisak-Moslavina county basically follows the turns of the Kupa hver Outside of some notable exceptions, Sisak County south of the Kupa has always been dom~natedby agnculture, namely the production of beef and pork Like a mill town, the Petnnja- based Gavnlovic meat processing plant (see deta~ls in Petnnja section) dom~nated the agncultural scene of the war-affected areas of the county

Gavnlovic is a Petnnja-based sausage and meat products producer, currently employing nearly 800 employees with no regard to ethnicity with the potential to hire another 300, and it was the economic motor of the region before the war These employment numbers pale in companson to the economic impact Gavnlovic will have if it begins to actually buy inputs locally and create real local economic activity - not only the obvious effects it will have on the farmers and villages raising l~vestock,but the multiplier effect it will have on all businesses in the region The problem is that Gavnlovic buys 100% of its meat from outside of the region and most from abroad, and it has a Herculean task in finding local input sources because of the wreckage that is the local economy -- half-filled or deserted villages still rebuilding houses with no money or credit sources to buy start-up livestock, inputs of seed, fertilizer, hand tools, and equipment The farmers that are producing are often unorganized and cannot produce at the quality and cost necessary to entice Gavnlovic to buy, assuming the farmers have the marketing acumen to even approach Gavnlovic

Gavnlovic is currently planning to establish three pig breedmg centers in the region and form relationships with local farrners who will raise feeder pigs FLAG plans to assist local farmers in cooperation wlth Gavnlovic by forming associahons and gallung purchasing contracts from Gavnlovlc, as well as providing production technical assistance and help accessing credit KARLOVAC COUNTY Overview The county of Karlovac covers an area of 3,644 square km and has 184,577 inhabitants, thus being one of the largest counties of the Republic of Croatia The county is situated in central Croatia surrounded by the county of Pnmorje and Gorski Kotar, the county of Zadar and h, the county of Sisak and Moslavina, the county of Lika and Senj, and the county of Zagreb The town of Karlovac is the political, cultural, and economic center of the county of Karlovac, which connects and unites northern and southern Croatia The county has the key towns of Duga Resa, Karlovac, Ogulin and Slunj and 14 municipalities, as well as 4 nvers flowing through it Koran, Kupa, Mreznica and Dobra

Economy More than 4,000 firms and 2,020 craft shops are registered in the county The most important industnes are foods, beverages, metal-worlung, engineenng, textile, leather goods and footwear, chemicals, building, agriculture, forestry and wood, services, and craftsmanship The county's business community is fairly sophisticated with a decided international onentation--over 50% of manufactured products are exported, and the county is host to vanous foreign firms, e g ABB, Detroit Diesel, and Karlovacko Brewery's joint venture with L~echtenstein'sSouthern Brewenes Establishment

In Karlovac, the northern boundary of FSN cuts just south of the city of Karlovac The city of Karlovac is a major transportation hub, industnal center, Croatia's fifth largest city, and disproportionately dnves the county's economy Despite enjoying the quickest turnaround following the war than any other section of FSN, it is in need of economic development and techcal assistance by any standards But as much as the city of Karlovac needs continued assistance, the areas south and east of the city are worse In these regions, there are many relatively forgotten centers surrounded by agricultural areas of the county such as Vojnic, Slunj, and Plaski whch have expenenced heavy inflows of Serb returnees and have some of the highest unemployment rates of the county These areas represent the greatest opportumty for FLAG as well as businesses in the industnal north near the city of Karlovac whch have the potential to employ large numbers of people in the less-developed regions further south and east

I MUNICIPALITIES OF KEY FLAG ACTIVITY

SISAK-MOSLAVINA COUNTY

PETRINJA Area of Special State Concern, Group 2 IOM RAP participant Mayor Josip Dolenec, HDZ Population Current 20,000 (80% Croat, 20% Serb) Pre-war 35,000 (50% Croat, 50% Serb) Summary Due to the fact that Petnnja is located on the former confrontation line, it suffered 43% of the war damages in Sisak-Moslavina county It is heavily mined with nearly 30 sq krn of mined land Small servlce business There are 153 small enterprises in Petnnja employing 313 people Most important are the 29 supermarkets employlng 84 people and the 20 coffee bars employlng 48 people

Key Firms Gavrilovic (potential FLAG cooperant) This pnvate meat processing plant was founded by the Gavnlovic family in 1821 The factory was nationalized in 195 1 Dunng the social~stpenod in former Yugoslavia Gavnlovic became a holding company with 9 d~fferentcornparues with a vanety of holdings meat factory, fms, transport, animal feed, silos, 40 warehouses, hotels, restaurants, food wholesalers, and retail stores The company was officially declared bankrupt in the Zagreb Trade Court in 1991 On November 11, 1991 Mr Gavnlovic, son of the last owner of the company before it was expropnated m 1945 by the communists, bought five parts of the company for 3 5 million DEM, including meat processing facility along with 5 farms, 10 wholesale centers, 200 retail stores, 470 flats, and a grain drying and storage facility At the time of purchase, all assets were under Serb control and Mr Gavnlovic made personal tnps to Belgrade and Banja Luka to lobby with Serb officials not to destroy or loot the facilities After Operation Storm in 1995, most of the assets were intact and Mr Gavnlovic re-started production wth an initial investment of 850,000 DEM

The Gavnlovic ownership of Gavnlovic do o has not resulted in the ability to hold on to all assets purchased in 1991 There has been a ruling of the Commercial Court that the sale was valid but other government pressure has resulted in the loss of all 470 flats, 50% of the wholesale centers, 85% of the retail outlets, and four of the five farms Additionally, land books for Gavnlovic real estate disappeared dunng the war and the company cannot use their own assets for collateral and are unable to obtain credits as a result Mr Gavnlovic has wntten a proposal to the Croatian government with the purpose of resolving all outstandmg issues He is awaiting a response by the end of 1998, and will consider taking hls case to international arbitration court in Austna if the GoC does not reach agreement

Despite these difficulties, the firm has been growing steadily since 1995 The firm expects revenues of approximately 200 million kuna in 1998 and expects revenue growth of 33% in 1999 The firm currently employs over 700 and should employ 800 people by the end of 1999 Current production numbers follow 40 to 50 tons per day 8 to 10,000 tons per year 70% pig, 30% cattle 60% from abroad, 40% domestic (same basic breakdown for both cattle and pigs)

The firm currently buys all of its domestic product from outside the region of Former Sector North but has already implemented plans to spur local production The firm recently started cattle production with 600 heifers and plans to open three local pig breeding centers in Petnnja, Topusko, and Dragotrna near Glrna (breeding and raising) Each p~gbreeding center wrll entail the followrng 1 lm~ll~onDEM investment (excluding livestock) 560 sows 25 boars 10,000 prglets per year Work with 40 local farmer cooperants (once had as many as 5,000 farmer cooperants) feed and piglets provided by Gavnlovic farmer receives 6-7% of revenues (takes market nsk w~thGavnlovic)

Finel Before the war, the factory employed more than 800 people and produced veneer, furniture, and wooden elements for construction Dunng the war, as the factory was located on the confrontation line, it was largely destroyed and 150 machines were stolen War damage assessment 6 2 mrll~onDEM The productlon was restarted wrth 120 employees on December 6, 1995 due to 2 8 million DEM of rnternal investment and a credlt of 1 8million DEM from HBOR This money was used for reconstructron and the purchase of trucks and heavy equipment On October 25, 1997 production stopped due to the rnability to purchase raw matenal The firm was pnvatlzed this year and 54% is held by President Antun Cv~tas,and 46% by the Dvor Assoc~ationof Coupon Pnvat~zation Currently the firm employs only 20 employees who largely work maintarmng equipment and providing low-level saw mill wood processors for Italian firms shipplng raw matenals back to Italy Full productlon startrng in the near future IS uncertain because of cloudy ownership issues and a need for faclllties rnvestment and work~ngcapital

Slavijatrans Transportation Thrs company employed 950 persons before the war In September 1991 a total of 300 workers fled to the unoccupred part of Croatla wrth 12 buses and 40 trucks, where they created a firm with the same name

Andrasek This construction company was founded by Mr Franjo Andrasek in 1985 and grew Into a workshop employing 40 people in 1991 Dunng the war, Mr Andrasek together wlth 8 workers left for Sisals and continued actrvitres After Operation Storm, Mr Andrasek returned to Petnnja and restarted wrth 30 employees Facrlities rn Petnnja suffered war damages of 5mlllion DEM

IGM Ciglana An old bnck factory started as a pnvate company for simple handrcraft in the 1930s It became Independent in 1982 wlth approximately 91 employees 50% of productlon was sold in Bosma Hercegovina Dung the war, the company was shut down and suffered 3 5mill1on DEM drrect war damages, and 6 mrll~onDEM indrrect war damages Currently, the plant is not operating but the company is nemng full privatization and management has plans of startlng productlon m 1999

GLINA Area of Special State Concern, Group 2 Mayor Marko Sremic, HDZ Population Current 23,000 Agnculture The terntory of Glina covers 54,000 ha, of which 36,000 ha were cultivated before 1991 Approximately 1,000 ha is cultivated although thls number is increasing with the returning population One major obstacle to agriculture is that 33% of Glina's land area is mined Small service busmess 89 small enterpnses which employ 216 people The most important are 15 supermarkets which employ 42 people and 17 coffee bars whch employ 48 people

Key firms Pamucna Predionica Glina (FLAG candidate) This textlle factory was established in 1964 and pnvatlzed in Apnl 1998,71 10% IS owned by small shareholders and 28 9% is owned by the Dvor Association of Coupon Pnvatization The firm employs over 350 people and produces threads of cotton which are sold in rolls to cloth-producing customers Raw matenal (cotton) is imported fiom all over the world (largely Central Asia at the moment) The cotton then undergoes a 4-phase production process 1) cleanmg, 2) matenal is thnned, 3) actual thread making, and 4) packaging The firm is currently at 25% capacity producing 6 tons of matenals per day It is technologically behind its competitors abroad and requires investment to catch up It currently sells 50% abroad, and its accounts receivables balance for exports is 60 days versus 90-120 days for ~tsdomestic customers It can get 90 days with some suppliers but for good quallty matenals must sometimes pay cash The company has been one month behnd on salary payments at times thls year, so it is obvious that there is a cash crunch at the moment Management believes that a 5million DEM investment in new equipment would bnng production up to 50% capacity at 12 tons per day and allow it to employ up to 500 employees, while becoming more profitable as a result of economies of scale and improved efficiency Even without the investment, management feels that improving current production along with increased sales abroad could make the company more profitable and allow it to hire 50 more people Vlvera Ths firm is a branch of big state-owned conglomerate, Pliva Pliva was founded in 1921 with Croatian and Hunganan capital and is today one of Central Europe's largest companies, employing more than 5,500 people in Croatia Before the war, Vivera employed 140 employees and several part-time workers, but today employs approximately 60 employees Vivera was established in Glina because of the good and fertile agncultural land available In December 1997, Vivera started to test one of the three production lines whch produce dned baby food The other two lines can produce cornflakes and "green" baby food In 1998, the firm expects to produce 1,150 tons of baby food, and 500 tons of corn flakes Raw matenals are mainly purchased domestically (92%) - the rest imported from the EU and Slovema 80% of products sold are exported, largely to Russian and Ukraine (handled by Pliva) The state still owns 42% of the firm In the past, the company has expressed interest in increasing production levels and possibly working with local farmers as cooperants who would produce the raw matenals for baby food production

SUNJA Area of Special State Concern, Group 2 Population Current 8,000 Pre-war 12,309 Agriculture There are senous problems because many people do not own their own land, and without land, it is next to impossible to get credits There is also senous mine contamination in the area Despite this, FLAG has contacted a group of pig farmers who have expressed interest in starting a farmer-owned association Small service business 43 small service businesses exist which employ 115 people - most are supermarkets (1 1) and coffee bars (9)

Key Fzrms Vajda chicken breeding facility is a part of Vajda and Sava saw-mill which pnor to the war had 3 manufactunng facilities and numerous cooperants in the Sunja region -- today, access to facility is not possible because it is surrounded by minefields

Sava saw mlll once employed 118, today it is pnvately rented (from the CPF) and employs 22 people One of the problems facing every aspect of the domestic wood industry is the supply of quality wood, which is often sold to foreign firms for cash payments by the Croatian Forest Authonty

DVOR Special Area of State Concern, Group 1 Population -Pre-war 14,500 (95% Serb, 5% Croat) -Current 8,000 (approximately 50% Serb, 50% Bosnian Croat)--majonty of Serbs are pensioners, while the majonty of Bosnian Croats are worlung families Economic Summary Dvor lies on the opposite side of the Una hver from the Bosnian border (Republika Srpska) and was heavily damaged in the war The current economic situation is adverse with few employment opportunities None of the factones, including a large sawmill, are operational Small service businesses 28 small enterpnses in Dvor employ 68 people Agriculture In the past farming m the area was pursued as a source of supplemental income for people employed in the local industry With the destruction of war and the effect on the industrial sector, agncultural development is the key to local economc development Key problems lie with the pecuhmties of the population - over 90% of the returning Serbs are pensioners with no interest in commercial fanng, and almost all of the Bosnian Croats do not own their own homes or property and are therefore unable to galn credits Although generally dismal, there are some positive signs of life in the local agncultural sector, namely 2 farmer coops mentioned below under key firms

Key Fzrms - Agrozrin Farmers Coop (FLAG client - slgned October 1,1998) Agromn was established on December 1, 1997 and started operating on Apnl 20, 1998 There are three members of the coop (Mladen Halavuk, Davor Ivanean, and Ivan Vojnic Hajduk) Agroznn is a profit-onented organization which currently employs five people The coop owns l~mitedassets (computers, scales) but has fi-ee access to 4 buildings (including a small retail shop) in a special arrangement with the Dvor Municipality The coop projects 1998 revenues to be over 600,000 Kuna (100,000 USD) In its first year, the coop's chief activity was organizing the buy-off of hits and vegetables in the Dvor area from over 400 cooperants at 5 different collection points and reselling them to several larger traders and processors in other parts of Croatla The following products made up over 90% of the coop's turnover 500 tons of plums, 400 tons of apples, and 200 tons of mushrooms

Agroznn plans to expand its business by developing a processing center in Dvor Based on prevlous market research, Agroznn sees a market opportunity in the Croatian dned plum and apple market because of the prevalence of imported products and export potential for dned mushrooms The coop approached FLAG for help prepmng a feasibility study for the idea of creating a drying facility in Dvor The study would not only lay out a strategy for the coop, but be used to help secure necessary financing for the purchase of drying equipment

Dvor Stockbreeders Assoc~at~on This farmer association has over 50 members and is currently engaged m milk production The association gained credits from an Austnan supplier of cows, and purchased the majonty of ~tslivestock in this way Because of the association, Dukat has set-up a Dvor area milk collection station Largely due to the fact that Dukat pays in cash on t~me,the association plans to grow and cont~nueits ability to purchase cows on credit from Austna

PDP Rujevac Ceramic tiles manufacturer is owned by Croatlan Pnvatlzation Fund and is awaiting a buyer (nearby deposits of first-class clay) and is currently not in operation

Grollng d o o A suspension, footing, and construction locks manufacturer is also owned by the Croatian Pnvatlzatlon Fund and is not currently in operation

GPRAD Local construction company employing 30 people

HRVATSKA KOSTAJNICE Special Area of State Concern, Group 1 Population -Pre-war 5,000 (70% Serb, 30% Croat)

Key Fzrms TT Pounje This textile factory was founded as a small shop in 1985 and grew into one of the three major textile factones in the former Yugoslavia It employed 1600 people in 1991 Today it is not in operat~onbecause of heavy war damages (IOm~llionDEM) and is owned by the Croatian Pnvatlzation Fund awaiting a buyer, but there seems to be little interest at ths time

UNA This shoe factory was established m 1972, and UNA employed 562 workers in 1991 It suffered between 2 - 3milhon DEM In war damages and today employs only 102 workers It IS still not pnvatized and suffers from a lack of worhng capital and a lack of skllled workers (many formerly employed Serb workers have set up a similar plant also called UNA on the other s~deof the Una lver fiom Kostajnice In Bosnia) N~naMarkovlc Before the war, this graphics factory (carton packages, pnnted catalogues and brochures) employed 240 people (including 1 15 Serbs) War damages were assessed at 1million DEM The firm now employs 30 people (including about 5 - 6 Serbs)

TOPUSKO Special Area of State Concern, Group 1 Economic Summary Topusko has fewer employment problems than other neighbonng municipalities (10% unemployment) The main employment is generated by TIM, a stretched steel fencing producer, and a thermal bath resort Small service businesses 30 small businesses exist which employ 51 people Most are supermarkets (6) and coffee bars (6) Agriculture Before 1991, a big farm of Gavnlovic Holding was operational with 1,000 heifers, 550 sows, and 60 employees Most area fmers at the time supplied pigs and cattle to Gavnlovic Corn was cultivated on approximately 800 - 1,000 ha Most of the farmers had their own tractors and machinery although Gavnlovic provided the specific machnery to raise cattle Gavnlovic also insured the farmers for crop failure and other agncultural misfortune Milk was sold to milk producers KIM (Karlovac) and Dukat (Zagreb) Some farmers had up to 15 cows Today, agriculture is a fiachon of its former production due to the displacement of people by the war, lost markets and the illiquid Croatian economy, but Gavnlovic plans to start one of its 3 planned pig breedlng centers in Topusko (500 sows, 25 boars, 10,000 piglets per year) and will need local fanner cooperants to raise feeder pigs

Key Fwms Topllce Hotel The prospects for the Zupanija-owned (county-owned) hotel are bnght There were 60,000 visitors (almost solely domestic) and revenues of 13 million kuna in 1997, and the hotel should better that performance in 1998 Current capacity is 262 beds with plans to increase to 350 Some foreign investors have expressed interest in the hotel and also m bottling the resort's water and marketing it in Croatia

TIM (potentlal FLAG chent) The factory produces construction elements, stretched metals as fences and roadside steel guard-rails with 7million DEM in revenues in 1998 The firm was founded in 1963 and was part of Zeljezaro Sisak, a state-owned foundry 50% of the firm is still owned by the Privatization Fund but should be hlly pnvate by the end of 1998 Over 70% of the company will belong to employees and management with the remainder belonging to coupon holders The firm employed over 400 people before the war, but today employs 140 with the potential to hre 10 more people in 1999 if the firm hts its revenue target of 10 5 million DEM The firm is interested in techcal assistance fiom FLAG in order to improve its marketing efforts (namely help in bidding on the Bechtel project), improving its production processes, and in locating debt financing or a relationship (equity or non-equity) with a foreign partner KARLOVAC COUNTY

VOJNIC Special Area of State Concern, Group 1 Mayor Mman Slavlca, HDZ Population -Pre-war (95% Serb, 5% Croat) -Current (approximately 50% Serb, 50% Bosnian Croat)--majonty of Serbs are pensioners, while the majonty of Bosman Croats are working families Agnculture A small farmers association composed of both pig and cattle farmers has recently formed, but the area Ag Extension agent said that the going has been rough so far because of a lack of focus

Key Fzrms Kaplast Eko (FLAG client signed December 4,1998) In 1971, a company for injection molding was formed in Karlovac city under the name Ivo Mmnkovic From 1971 - 1991, the company was growing and was the first company in Karlovac county pnvatized in 1991 under the name Kaplast d d In 1997 Kaplast d d, (plastic textile button production, hydrographics, and trade), and General Plast S r I (Itahan firm owned by two brothers -- polymer processing, resins distribution, mould making) formed Kaplast Eko d o o in Vojnic General Plast took 25% of the company for 500,000 DEM in cash-the money was used for new equipment Today, 20% of Kaplast d d is owned by workers, and 80% is split between 4 pnvate persons (2 managers and 2 non-managers)

In 1991, Kaplast d o o owned 3 facilities (2 production, 1 office) m Karlovac, and one production facility in Vojnic There were over 75 people employed in Karlovac, and only 10 in Vojnic, although Vojnic had a bigger production capacity Since that time one of the production facilities has been sold m Karlovac, leaving the office employing 8 people, and a textile button production facility employing 23 people Kaplast Eko d o o was formed in 1997 to utilize the bigger Vojmc facility and now employs 55 hll-time, and 10 part-time Kaplast Eko d o o uses the financial and purchasing staff of Karlovac d d , and is billed for it The simple fact that Kaplast d d in Karlovac has access to customs, banks, and better telecomrnunications overwhelms any VAT considerations for consulting service fees charged to Kaplast Eko d o o

Kaplast Eko d d imports large containers of small plastic pellets, melts them, and by the process of injection mold~ngcreates plastic beverage crates and electromc plastic parts The company also buys and breaks down old products from customers and resells them to Croatian recycling brokers, who then turn and sell them to recycling companies in other parts of Europe The company has 4 large machlnes whch are used for producing plastic beverage cases and are capable of making plastic moulds up to 3 kg and 6 smaller machines capable of producing moulds up to 1 5 kg and are used at the moment for producing electronic plastic parts The 4 large machines are working at full capacity and should stay that way for another 2 years (via renewed contracts), while the 6 smaller machnes are only at 20% capacity with 7000 machine hours per year currently available for production Management plans to be at full capacity (for plastic beverage crates) and reach revenue targets of approximately 5 million DEM for each of the next two years but wants to form a strategy 3 years In advance in which to grow further The chief idea is to go into other products with its basic injection molding expertise, e g medical pharmaceutical trays used both in hospitals and at home Mr Banjac expects to covert 10 current part-time employees to full-time over the next 6 months by increasing capacity in electronic plastic parts production, and he believes that Kaplast could double the number of people it currently employs in the next 18 months if the firm were to successfully pursue financing for an aggressive and sound growth strategy

KaDwo (FLAG client signed Dec 3,1998) Mr Babac, (25 years expenence in wood processing industry in general management and finance), Mr Frkovic, (12 years expenence in industry, 6 years as director of a sawmill), and Mr Neihold, (engineer by background with 12 years industry expenence), formed KaDrvo in 1996 and started working out of an office in Karlovac in October of that year with the intent of purchasing a formerly state-run wood processing plant in Vojruc The plant was owned by SOUR, a state-run firm started in 1985 with plants in Vojnic, Gwozd, and Karlovac Ka-Drvo purchased the plant from the owners of the assets at the time, Karlovacka Banka, via a bankruptcy committee for 2 million DEM Karlovacka gave KaDrvo a loan for the amount of 2 million DEM (300,000 DEM in cash for war damage reparations and stolen machinery paid directly by the bank, and 1 7million DEM in equity) The firm began operations at the Vojnic facility on November 1, 1998 with 20 employees-the rest of the year was spent repainng facilities and training staff in work and safety with no recorded revenues The onginal worlung capital was generated by the partners' own resources

In 1997, the firm employed up to 55 at the Vojmc facility (40 full-time, 15 seasonal summer workers), issued its first sales invoice in March, and generated 2 5 million DEM in revenues for the year The company chiefly exports laminated beech boards used in furniture and stairway construction to the EU via Croatian trading companies Export Drvo and Forest The firm increased sales by 44% in 1998 to 3 6 million DEM, and plans to hre 30 more people to work a second shift helping to work a newly renovated saw mill at the Vojnic plant The firm plans to operate at a production capacity of 200 cum of final product per month m 1999, with 70 employees producing 5 8 mallion DEM in revenues The firm believes, that with 500,000 DEM in working capital, it could increase monthly capacity to 300 cum, and employ up to 100 employees and produce over 7 2 million DEM in revenues Management would also like to invest 1 million DEM into the upgrading of current facilities

Silikem This ceramic tile producer was founded in 1968 and severely damaged dunng the war 86% of the firm is in pnvate hands with plans to be fully pnvatized by early spnng in 1999 The plant is currently not in operation but the firm hopes to go into production upon completion of privatization and hlre 70 employees and realize 2 2 million DEM in revenues in 1999 The company's management is very open to export possibilities and cooperation with foreign firms, especially Italian Source Matenals

1 European Commun~tyMon~tor Mission (Glina) 1998 Sisak-Moslavina County Economic Report 2 Local Democracy Embassy (Sisak) 1998 Sisak-Moslavma Economic Report 3 S~sakChamber of Commerce 1998 Sisak-Moslavina Economic Report 4 Karlovac Chamber of Commerce 1998 Economic Report 5 Personal Interviews conducted by FLAG-Petnnja staff with vmous regional NGO's, local government officials, chambers of commerce, government-sponsored agncultural programs, potentla1 and existing farmer associat~ons,and pnvate firms m the Former UN Sector North 6 FLAG-Croatia internal documents ATTACHMENT F - ECONOMIC PROFILE - FORMER SECTOR SOUTH

FLAG KNIN FORMER SECTOR SOUTH

Reglonal Overview

Background

FLAG Knin works in Northern Dalmatia The area corresponds to the Former UN designated Sector South The region consists of Lika-Senj, Zadar, and Sibenik-Kmn Counties Each county extends from a relatively well-developed coastline to rugged mountains astnde the Bosma border Large cities and tomst facilities with their economic activity are concentrated on the coast Pnor to the war the inland region was considered an economically distressed area Central planners attempted to locate large state run factones in the area, but these collapsed because of both the war and their disregard of market fundamentals The majonty of the area was occupied from 1991 until 1995 by the break away Serb Republic of the Krajina Dung ths time the area was cut off from normal markets and effected by economic and political sanctions Croatia recaptured the area in August 1995 dung Operation Storm Infrastructure, state and pnvate businesses and personal property was heavily damaged Most towns in the region suffered extensive damage and many rural villages were destroyed and now resemble ghost towns Today there is almost no industnal production Regional officials recognize there is little potential for economic development from large industnal facilities and therefore concentrate on small and medium business development and agriculture

In 1991, when the Krajina Republic was proclaimed, the majonty of the ethc Croats left the area, after Operation Storm many of the ethnic Serbs left In addition, many Bosman Croats have settled in the area While the returnee issue is complicated, there are three basic issues that affect the number of people who desire to return secunty, infrastructure/ housing, and employment potential The obstacles to reintegration are tremendous Estimates of damage to homes in the area run as high as 70 percent, many homes lack electncity, water, and telephones Access to public transportation in most villages does not exist To date the majonty of returnees have been old-age pensioners Satisfactory solutions to secunty and housing will not entice young, economically productive people back to the region With unemployment rates as high as 80 percent, potential for income generation is required

These counties have a population of approximately 300,000 Agnculture, textiles, mining, and trade are the pnncipal industnes The area suffered significant damage dung the war, and the overall economic situation remains dismal Most of the regions former large employers have either failed or left the area Unemployment ranges between 70 and 80 percent Since there is little industry, jobs are scarce and limited to trade establishments Many people receive government payments in the form of pensions, benefits to war veterans, and support for farmlies with small children Agnculture, always important to the region, now plays an even more vital role as those that remain search for alternative sources of income and means of survival Business Environment

Significant impediments to SME development exist The local business population has focused on production with little thought given to the need for the product, competitive advantage, the nature of the market, or the existing competition

Credit is difficult to obtain, even for successful businesses Although government programs exist on paper, actual disbursements are few Banks often evaluate the loan based on the assumption that the individual will default (so collateral and co-signers are paramount) rather than the potential for success

Existing businesses operate in a cash strapped environment Lack of liquidity starts with the government Payments are late and are often in non-liquid shares of the pnvatization fbnd The implementation of the VAT exacerbates the problem Firms must pay the VAT every month whether they have collected the receivables or not A npple effect results where workers and suppliers are not paid Large state supported firms that should go bankrupt limp along and are not allowed to fail, in fact they receive government subsidies This creates a difficult environment in whch small business owners must compete

Agriculture has always been important in the region Full time workers often kept livestock or cultivated land as a secondary source of income For many, agnculture is now their sole source of subsistence In the coastal lowlands, the area referred to as Ravni Kotan, fertile land exists for vineyards, orchards, and vegetable production Large and small dairy farms also exist Cross the Velebit Mountains and moving into the hinterland generally referred to as Lika, fertile farmland is scarce and the rocky and rolling terrain lends itself to sheep and goat product~onThe pre-war sheeplgoat population of 400,000 has dwindled to 135,000, over a 65% reduction Although grain is not grown extensively in the area, significant hog production exists to supply persut factones located around Drms

Tounsm along the Adnatic coast is well known and an important source of foreign currency The season however is short, July and August are the busy months with May, June and September less active Many establishments close after the season finishes Moreover the entire area was war-affected since travel to the region for much of the war was restncted Tounsm currently is less than 60% of its prewar level The region's most successful business is the Plitvice National Park, which employs over 500 people The Krka National Park lies withn the war-affected part of the region It is a rugged nver gorge that offers possibilities for tounsm, but unfortunately little activity is organized Climate in the region vanes widely The coastal region has hot summers and mild, rainy winters that are charactenstic of a Mediterranean climate The fertile plain known as the Ravni Kotan has a sub-Mediterranean climate with colder weather than the coast Once across the mountains in Lika, there is a continental and alpine climate with harsh winters and frequent snow Most of the region, Including the coast can suffer from a cold north wind referred to as "bura" The bura can cause damage to agriculture and disrupt road traffic Ralnfall vanes from 800-900 rnrn per year on the islands and along the coast, to 900-1 100 in the Ravni kotm while Lika receives between 1100 and 2300 rnrn

Transportation

The main transportation node in the region is Knln The main trunk road from continental Croatia passes from Karlovac, Slunj, Koremca, Udbina, and Gracac to hnIt continues from Knin to Split, Croatia's second largest city and pnncipal port Access to the other pnncipal coastal towns, Sibenik and Zadar, is also through Knin The road is two lanes, hard surface and is generally in good cond~tion Heavy truck traffic, tounst traffic dunng the summer season, snow dunng the winter and fallen rocks in the spnng make dnving hazardous

Knin is also known as a major rail junction with lines mngnorth to Zagreb, south to Split, west to Sibemk, and northeast to Bosma (currently non-operational) Most freight traffic in handled by truck and passengers generally prefer bus travel

An international aqort in Split has flights to other Croatian cities as well as Rome, Vienna, and Frankfurt Zadar also has an airport but has fewer flights and destinations

SIBENIK - KNIN COUNTY

The County of Sibemk-~nmcovers about 2,939 square kilometers It includes 5 towns Sibemk, Dm$, Knin, Vodice, and Skradin, 12 municipalities, and 194 settlements The population in 1991 was 152,152 This area is deeply Indented by the canyons of the nvers Krka and Cikola Lake Prokljan and the Sibenik channel physically divide it The town of Sibemk, with its 42,000 inhabitants (1991 census), is the commercial, cultural, and admimstrative center of the county The coast is indented with numerous coves, small ports, and over 240 islands The most numerous groups of islands are the Kornati Of these islands only Prvic, Zlm, Kaprlje, iirje, Krapaq, and Murter are permanently inhabited The air length of the coast is 56 2km, but the true length is 805 9km

Industnal production structure in 1989 was 57% commerce, 15% civil engineering, 6% catenng and tounsm, 6% traffic, and 5%communications Dunng the war a great deal of industrial and other commercial facilities were destroyed Tounsm has special memng for the economic development in the county Tounst activities are concentrated mostly in the coastal belt where, in the pre-war penod, about 400,000 foreign and local to~stsrealized over 3 5 mlllion nights In 1998 the results were 40% of pre-war ones In agncultural there are s~gnificantpossib~lities for intensive growlng of specific Mediterranean plants, winter early fru~tand vegetables, as well as poultry ralsing, dalry industry, and cattle breeding development

Part of the county was occupied, and the other was put under heavy shelling Sibenik-~nm County suffered not just economic damages such as damaged or destroyed mdustnal facilities, but also housing, human losses, damaged or stolen cultural hentage, and non-matenal damage The county also faces the senous problem of mines There is also the loss of Gross Domest~c Product dunng the penod 1991 - 1996

Dernograph~csituation

Prefect Ivo Balca

* Mun~c~pal~tyof Spec~al State Concern ** Parts of Munlc~palrtyof S ec~alState Concern 1Number of unemployed only for towns (! ibenlk Kn~nDrnd)

Information about the Return Process

The county suffered two population migrations Croats left dunng the 199 1 - 1992 penod After Operation Storm many ethnlc Serbs left The return process is ongolng Senous imped~mentsstill exist Progress is being made in secunty and housmgl infrastructure but lack of employment is the major obstacle To date most returnees have been old age pensioners

Officials report that the total income of businesses in the County increased In 1997 by 21% For the first tlme since 1991, the total income was higher than the expenses Expenses increased in that penod by 8% In 1994 the losses were 16%, in 1995, 6% (186 5 million kuna), and in 1996, 4% (123 million kuna)

Total Income structure

Industry 37% Trade 28% Traffic 11 % Bullding 6% Catenng and Tounsm 5%

Export % Import % Slben~k-~n~nCounty 0,93 36 038 699 0,87 67 668 004 Republ~cof Croat~a 4140369764 100,OO 7 284 951 685 100,OO Source Chamber of Commerce, 1998 Revue

Average Wage r ., Average Net WageIKn S~ben~k-Kn~n 2 310,OO Republ~cof Croat~a 2 699,OO Source Employment Office, October 1998

Major Industries

Major mdustnes are alummum, plastic, textiles, and construction Total industry production decreased in the first year of the war and fell to 113 of the pre-war production (in year 1997 the total amount is 30 7% of pre-war production)

Major Employers

A State owned 1) TLM-TAR d o o Raiine, Tehnological production process of aluminum slabs and billets is made in the melting and casting furnaces, semi-continuous casters, and on the homogemzation and machmg eqmpment for product processing The facillty capaclty is 60 - 65,000 tonslyear The current capaclty efficiency is 20% (260 employees) 2) TLM d d -TPP Sibenik, produces extruded and drawn almnum-semis profiles, rods and tubes (250 employees) 3) TLM-ELEMES Sibenik (273 employees) 4) TLM-TVP Sibenik, production of standard alumnum plates and stnpes, aluminum foil with thickness ranging from 8 to 200mm, shipbuilding and tread plates(710 employees) 5) TLM-TOFAL Sibemk, production of aluminum foil covered with vanous hnds of paper treated with paint and embossed (73 employees) 6) TLM-PROMAL Sibenlk, production of chassis for motor vehicles, production of accessones, equipment, and maintenance and repair for motor vehcles(l59 employees) 7) TLM TAL Lozovac, production of secondary silicon-based casting Aluminum-alloys according to worldly accepted standards and production of high-pressure casting of Al- alloys for automobile industry and applications(256 employees) 8) ZM -VIKOM d o o Sibenik fabncation and assembling of the complete commercial facilities with basic steel construction, fabncation of metal construction for vanous purposes, production of screws and nuts (120 employees) 9) LAVCEVIC SIBENIK d o o Slberuk, company makes integral part of the Lavcevic Montmontaia Group, the main activities are performing of construction, handicraft, and installation work In Dubrava near Siberuk, the company has installed power plant for the production of road metal, stone pit, concrete products etc (80 employees) 10) TVIK Knin, the screenworks main activity is production of screw (65 employees)

B Undergoing privatization

1) SHIP REPAIR YARD SIBENIK, production of boats and llfe rafts, docking, and overhaul (500 employees)

C Pnvate

1) POLIPLAST d d Sibemk, factory for plastic manufacturer engaged in plastic substances Factory was pnvatized in 1993194 (262 employees) 2) TOF DrniS, production of multi-layered foils, pnnting and tnmrning of multl-layered foils Production started in 1985, resumed in 1997 (82 employees) 3) SKLAD COMMERCE d o o Knin, all kind of construction works arrangement of mntenors, production of femte beds, and movable concrete mixer(56 employees) 4) KODI-TEX d o o Knin, established in June 1996, production of ready made clothes, catering, and hospital equipment (56 employees and plans to extend production and employ new workers) 5) REVIJA-MODNA KONFEKCIJA d d Sibemk, Fashion ready-made clothlng (380 employees) 6) BRODOSERVIS d o o Sibenik, deslgn of ships equipment, des~gnof lashmng equipment made of wire rope, repair and maintenance of small crafts (25 employees) 7) ADRIA VJ do o S~bentk, established in 1950, deals with service activihes, investments work in all categones of construction plants without using dnlling or mimng operations and with construction machinery (1 1 employees) 8) IZGRADNJA d d Sibenik, hlgh-nse buildmg, civil-engineenng, hydro-engmeenng, production of stones and concrete, trading with construction matenals (198 employees) 9) KAMENAR Siben~k,stone-pit (87 employees) 10) KALUN DmiS, cement, lime, and plaster production (103 employees) 1 1) ZAK d d Sibenik, Installation work (95 employees) 12) VINOPLOD-VINARIJA d d S~benik,product~on of w~neand beverages (2 15 employees) 13) KRKA d d Sibenlk, tounsm and catenng, trade (141 employees) 14) ARAUSA Vodice, buildlng carpentry and elements (41 employees) 15) DRNISPLAST DmiS, production of HDP pipes and LDP pipes In 1971, it entered into the system of the OKI company and in 1974 OK1 integrated with INA (Industry of fuel production)

Major Agricultural Activities

The Sibenik-Knin region is suitable for cattle raising, espec~allysheep, goats, and dairy There is also big potential for intensive growing of specific Mediterranean plants, winter early fruit and vegetables, and grapes Before the war the majonty of the ~nhabitantsworked in big industnes as their full time jobs, with agriculture as a secondary source of income Apculture is now their main source of income

Cattle raising is the most significant agricultural activity, especially sheep and goats Cattle can go for pasture 9 months, and they require feed dunng the remaining three months There is an abundance of free pastureland Currently about 40% of capacity is used The state owned land is used on Common Law baas Demand for the lamb outstnps current supply and the pnces are high (8 DEM per lulo of live weight) Although there are many sheep, there is no market for the wool The local breed gives low quallty wool and the former market in Bosnia is now lost

Dairy farms in the region are small and have old equipment, ~f any The biggest herd IS 20 cows, but that is the exception Thelr milk is hard to sell because of financial difficulties and the distance between the producers and da~ry The major buyers, Zadar and Split daines, usually delay their payments A new, small dairy, expected to open in February 1999 near DmS in Pakovo Selo, will help Increase milk production and raise quality of the milk The dalry will produce yogurt and specialty cheeses

An important business in the county, especially in the DmiS region, has been the production of prSut Before 1991, a factory operated wlth a capacity of 10,000 pieces but is now at 20% capacity Accord~ngto the owner he lacks working capital to resume normal production The building of 7 new, pnvate priut factones with a total capacity of 50,000 pieces has already started It is uncertain whether sufficient ~nputsor markets exist to support these endeavors All producers are located in the Miljevach Plato area, in the villages Mi1jevci, Bogetic, Kneievic, and Ljubic As production expands, it will provide an incentwe for local residents to raise hogs Also important to apculture in the region are grape, olive, and fruit production Most of the arable land is pnvate but deserted The Landholdings are fragmented and only a small percent of the land is tillable To deal wlth ths issue, the demographic problem has to be solved first The biggest wlne producers are VINOPLOD-VINARIJA dd fiom Siberuk and DALMACIJAVINO-SPLIT Both have production facilities in DrniS and employ 308 workers

Attitude of Leaders towards SME development

Small and medium size businesses never really existed in the region due to the monopoly of big state owned enterprises SME development began after 1991 The GoC recognizes the importance of SMEs The main problems in the development of SME in the region, as for the country, are inadequate access to capital, a lack of liquidity, and a ngid tax system, all of which discourage investment

Access to Cap~tal

Credits are available from banks through HBOR and the Croatian Ministry of Agnculture and Forestry, but the credits are offered under unfavorable conditions that are hard to obtain The conditions require a guarantee with a mortgage or cosigners with a salary Although terms are below market rate, most people consider the grace penod too short and interest rates too hgh

Other Economic Development NGOs Operating m the Area

1 SEAF 2 mops 3 ICMC 4 CRS

ZADAR COUNTY

General Descriphon of County's Economy

The Zadar County stretches over 3,541 square lulometers, which compnses 9% of the temtory of Croatia There are 215,000 inhabitants, including 15,000 on islands There are 75,000 inhabitants in the city of Zadar alone, 125,000 in other towns and settlements along the shoreline and in the hinterland of the country Zadar County has a sigmficant role as a transportation comdor between the middle and western parts of Croatia and those of southern Croatia Economic development of Zadar County is based on agriculture, fishng, trade, tounsm, and industry (pnmanly metalworlung and chemical) Agricultural development is closely linked with 120,000 hectares of arable land that offers special poss~bilities for the production of vegetables and fruits Cattle breeding possibil~tiesfor the production of meat and dairy products also exist Agnculture consists of both large farms and small family farms Zadar County's geographical position, extended coastline, many inlets and bays, beautifid beaches and islands, and crystal clear water provide unlimited potential for tounsm Zadar County also has the special attraction of beautiful natural reserve areas the Velebit, the TelaSCica, and the Paklenica Parks The Krka kver natural gardens and the Koranati Islands are also close at hand

Employment

Zadar County, once a major contributor to the national GDP, is st111 stumbling after the war Officials report that most big industries continue to report losses despite the injection of government fund~ng for the development of the different sectors Overall, the county employment rate continues to drop Officials believe this is because businesses cannot maintain high levels of production and has caused a subsequent reduction in employment This is a legacy from large state companies which were built in the region to stimulate employment

Overall County unemployment rate is 20% (35,425 employed/14,436 unemployed) Prefect %me PrtenjaEa IMunlclpality IMayor l~opulat~onl~thn~clt~l~thnlclty /NO /Town (prewar) (now) unemployed' Benkovac Branko Kutlja 10,000 Mix Cro 1325 Biblnje ~imeSimunic 3,777 Cro Cro Biograd Adiic Kapitanovlc 5,315 Cro C ro 1444 Galovac Stanko Vujevlc " * GraCac Tadlja SiSlc 5,500 Ser Cro 37 1 * Jasenlce Martin BariCev~c 1.800 Kall Josip Grzunov 3,113 Cro Kukljica Milka Blagdan * LiSane Ivan N~mac 3,390 OstroviCke " Nin Jakov Salov 9,043 Cro C ro * Novigrad Josip Klapanw 2,920 * Obrovac Dr Ante Zupan 3,100 Ser C ro 428 Pag Borko Ogulc Cro C ro 41 6 PakoStane Milivoj Kurtov 4,398 Cro PaSman Ante Kraljev 3,349 Cro * PolaEa Radoslav 9,251 Cro Bobanovlc ** PollCnik Davor Loncar 6,265 ** Posedarje Ivan Vulic 3,996 Povljana lvica Pogorelic Preko Mladen Lucin 4,613 C ro I Privlaka ~KoioKolanov~c I I Cro ~Cro I I Raianac Dragutin Mloc~c 3,805 C ro Sali Marlno Buturic 2,932 C ro " ** Stankovcl Zeljko Baradlc 5,538 C ro Starigrad Role Dokoza 2,097 Cro Su koSan Ante Martinac 4.363 Cro C ro Sv Fllip I Jakov Mirko Cinclc 4,599 Cro " ** Skabrnia Mile lvkovic 2.350 Tkon Danijel Katicin Vir Miroslav Glavan 860 ** Zadar Boiidar Kalmeta 80.355 Cro 10827 ** l~emunikDonji I~ileFabijan 16,083 lcro * munlclpallty of specral state concern ** part of munlc~palltyIS of spec~alstate concern 1 number of unemployed IS available just for towns and not for rnun~c~pal~t~es - All mayors rn Zadar County are belleved to be HDZ members Major Industries

Major industnes are metalworking, engineenng, chemicals, transportation, food, and especially tounsm

Major employers

BAGAT-ZADARd d - precision mechanics plant (950 workers) SAS d d Zadar - special tools production (300 workers) ELKA Zadar - electncal cables and metal ropes factory (400 workers) ELEKTRONIKA Zadar -electronic equipment and preclslon mechamcs plant (400 workers) TIZ d d Zadar - textile lndustry (1010 workers) TVORNICA MRE~Ad d Biograd na moru - fishing nets factory VRANA d d Biograd na moru - agncultural crops, dairy farm, poultry farm, auto camp MARASKA d d Zadar - manufactures alcoholic and non-alcoholic beverages (430 workers) CENMAR d d Zadar - fish hatchenes (130 workers) MARDE~ICd d Sali - fish factory (250 workers) TANKERKOMERC dd Zadar - The firm IS handling import and export of goods and equipment It suppl~esforeign sh~ps,offers services in nautical tomsm, handles loading and unloading services for shps with petro-chemical products and other fluid goods LUKA d d Gaien~ca- cargo harbor FOLIAPLAST d o o Zadar - manufactmng, refimng and labeling of foils (207 workers) TANKERSKA PLOVIDBA d d Zadar - the tanker shlpping company (1200 workers) PLODINE d d Zadar - wholesale and retail tradlng with food, durable and nodurable goods (17 11 workers) KEMOPLAST TRADE d d Zadar - manufactures PVC tubes and pipes for clean and wastewater mstallatlons, as well as tubes for telephone and electricity installations (297 workers)

Major agricultural activities

The Zadar reglon IS suitable for cattle raising, especially sheep, goats, and dairy There is a large potential for intensive growlng of speclfic Mediterranean plants, wlnter early hits and vegetables, and grapes The raismg of cattle, sheep, and goats are the most sigmficant agncultural activity in the hinterland Demand for lamb outstrips current capacity, so the pnce to the producer is hgh -- about 8 DEM per kilo for live lambs Dairy farming also plays an important role In the coastal reglon two large dairy farms (Bokanjac near Zadar and Vrana from B~ogradna mom) supply the large milk processing plant ~n Zadar Ths milk factory is act~vely searching for additional suppliers and has initiated a loan program that supplles small farmers with cows An obstacle to agncultural production is the mines planted in the fertile so11 of Ravnr kotarz, the large agncultural area of the Zadar hmterland The deminlng of that region is top pnonty for both the county and state

Status of Privatization As Zadar had a 20% share of national economic production before the war, officials believe it essential to revitalize industnes in the area Privatization plays a major role in th~sprocess One of the glants of pnvate business in Zadar County is Tankerkomerc Tankerkomerc has several different branches dealing w~thexport-import, nautical tomsm, fishmg, and meat products The company is also now manufactmng soybeans, exporting fresh vegetables to Holland, and ~mport~ngfrozen vegetables It IS a main dealer for Bell Helicopters in Croat~aas well as for the Bntlsh Royal Navy in the Adnat~cSea Tankerkomerc was privatized m 1993 and now has 92% of its stocks in pnvate possession The remaining 8% are in pensions and apcultural hnds The total amount of goods traded each year is near 200 m~lhonDEM The total number of employees is 427

Tankerkomerc has companies in Ploce, Split, and Rjeka and formerly had business partners in Montenegro and Serbia It has already reestablished connections with Serbian partners and is trading In cattle and milk wlth Hungary At the same t~me,Tankerkomerc, m concert with Cenmar, was reported to have signed a number of major contracts with Ch~na These contracts would apparently enable it and Cenmar to build a fish and cattle food factory, a hatchery, and related facilities in the Chlnese provlnce of Zhukai The factory is expected to operate with a capacity of more than 10,000 fishlyear

Mljekara Zadar is a pnvate dalry that seeks local farmers for milk processing Accord~ngto the dairy's program, farmers are provided with cows on a loan basis, 1,500 farmers are already participating in the program Qual~tycows cost 2,000 DEM plus loan costs The dairy is interested in expanding the program to return areas and to establish milk collecting and processing points There are already plans in place to establish a business in the Llka area, probably in Donji Srb The plan involves lomng cows to participating returnees on the guarantee that the dairy would buy the milk Officials prehct that a returnee with 2 cows could earn 400 DEM per month

The only international investment of note has been funneled Into a Club Med Hotel in Pakostane, south ofZadar The hotel opened in 1997 and has now had two successful summer seasons It employs more than 150 locals as waiters, cleaners, sports trainers, etc

Development Attitude of Leaders toward SMEs

Municipal leaders generally support the development of small and medlum businesses The main problem m the development of SMEs in the reglon, as for the country as a whole, are inadequate access to capital, illiqu~d~ty,and a ngid tax system, all of which discourage investment

Informat~onabout Return Process

The return process is ongoing, and many people have returned to the region Returnees are mostly older people who are not working, a lack of employment opportunities has discouraged the return of younger population Accord~ngto pollce records, 4,127 Serbs returned between Apnl 1997 (signing of the sgreement on return between ODPR, UNHCR and UNTAES) and December 1998 Infrastructure Development

Major I&-astructuredevelopment is the Zadar Arport Though a major civil airport before 1991 with between 140 and 160 intematlonal flights dwng the summer seasons, the arport was heavily damaged dung the war Terminals were damaged and more than 14 tons of explosives were found In tubes under the runway Direct war damages to the airport were estimated at 11 billion DEM

The aqort was reopened in May even though the passenger terminal was still not fully completed There are now two commercial fllghts a day, one to Zagreb and the other to Pula

Until 1997, the alrport was state property Now its ownership is shared between the Zadar Municipality (25%), Zadar County (25%), and the GoC (50%) For the acquisition of technical equipment, the French bank Soclete General granted a credlt of 115 million DEM for a 5 year term The GoC guarantees the credit As the airport IS not yet finished, lt currently employs only 50 people wlth an average salary of 2200 kuna/month More jobs should be available at the airport as it becomes fully operational

Access to Capital

Credits are available from banks through HBOR and the Croatian Ministry of Agriculture and Forestry, but the credits are offered under unfavorable conditions that are hard to obtain The condltlons require a guarantee with a mortgage or cosigners with a salary Although terms are below market rate, most people consider the grace penod too short and interest rates too high

Other Econom~cDevelopment NGOs operat~ngin area

SEAF ICMC CRS

General Descr~pt~onof the Economy

The County of Lika-Senj, the largest by size in the Republic of Croatia, spans 5,384 91 km2 or 6 6% of Croatian territory The county covers inland L~ka,with the towns of OtoEac and Gospic, and the coastal region at the base of Velebit, as well as islands, such as Pag The population is around 72,000, the capital is Gospic There are about 180,000 ha of farmland in Llka-Senj County, and the mountainous regions, with vast meadows and grazmg land, provlde perfect conditions for livestock Fishing IS also a significant industry, producing 100 tons of fish annually Tounsm IS present on the islands of Llka-Senj County as well as at Pl~tviceLakes National Park

Gospic - county seat Gospic is located on the west edge of Lika, at the foot of Mount Velebit, on the river NovEica It lies on the railroad line between Zagreb and Split Gospic is home to the Tower of Lord Senkov~cand a Baroque church from the late 18th century Today, the town is the center of trade and culture m Lika

Administratively the County consists of twelve municipal~ties The eastern, mountainous area of the county geographically called Lika, traditionally has been an undeveloped area The main infrastructure elements, such as the water supply, electricity, and roads are inadequately developed or are in bad shape In companson, the coastal mun~cipalitiesof Karlobag and Senj, as are much more developed their main Industry is pnmmly tounsm (60%)

Pnor to 199 1 living conditions m Lika were strained, and a difficult situat~onhas turned into extreme one The war produced many tragic consequences including the widespread destruction of publlc and pnvate buildmgs, mlne contaminat~on,damage to mfiastructure, the financ~al burden of displaced persons and rehgees, loss of traditional markets, and a hlgh level of unemployment

The county is an area with mainly small-~ncomebusinesses, these are generally trade and consumer servlce buslnesses with little potential to grow or create additional jobs While some new Industry and foreign ~nvestmentshave been encouraged, such as in Udbina, OtoEac, and Donji Lapac, the number of persons working In industry IS very small According to statistics from Central Banking Affalrs, 412 buslnesses had deallngs with the county in 1995 In 1998 there were only seven companies w~thmore than 150 employees, 357 firms (94% of all business) had less than 50 employees in the county Small companies, of whlch 63 (16%) are in the catenng industry and 132 (40 47%) are in the wholesale / retail industry, make up 38% of those employed in the county These sectors contnbute 54% of the county's total income and 48% of goods In areas where former residents are returning, the majonty are pensioners who will not engage in lndustnal or economic development but will instead look for ways to grow their own food and raise their own livestock

Gross Dornest~cProduct (GDP)

Although the largest county, its GDP was only 0 5% of Croatia's overall GDP The slower development of the county, part~cularlyin lndustnal manufactmg, in companson to the rest of country for 1997, is shown in Exhib~t1 Exhrbrt 1 The L~ka-SenjThe Republ~c of County's share as a County ~roatia' percentage of the Republic of Croatia

GDP 2 94,564,000,000 1 00% 946,495,000 GDP per capita 20,523 NIA (HK) 15,399 Investment 10,474,264,275 1 20% 125,847,233 realized Source Statistical summer journal 1997 2 Source Study "Long-tenn development of Lika-Senj County for the penod 1995-2015"

Exports / Imports

The county has no slgmficant exports The income generated from exported products or services in Llka-Senj County makes up only 0 25% of Croatia's export income

The Lika-Senj The Republic of County's share as a County Croatia percentage of the Republic of Croatia

Imports (US$) 7,530,000 7,509,884,000 0 10% Exports (US$) 11,850,000 4,632,669,000 0 25%

' Source Statistical summer journal 1997 Source The Croatian Chamber of Commerce, the County chamber of commerce

Employment

At the end of June 1998, the employment office in Gospic reported there were 2,9 17 unemployed ind~vidualsOf thls number, 940 individuals are looklng for employment for the first time This group makes up 32 2 % of those currently unemployed

For the end of June 1998, the breakdown of the total number unemployed individuals was as follows - 1,111 ~ndividualswith no qualifications (3 8 1%), - 116 indiv~dualsw~th some academic qualifications (4%), - 959 qualified mdividuals (33 3%), - 622 individuals with high school diplomas (21 3 %), - 77 individuals with some un~versity(2 6%) and, - 32 individuals with a graduate (four-year) diploma (I 1 %)

Commencing May 1988, the Croatian employment office has targeted the following in order to stimulate employment - Employment of indiv~dualswho lack experience, - Traimg and acclimatization of individuals to the work place, - Qual~fyingand expert trainlng for professions which are lacklng employees

The overall county unemployment rate is 20% (12,457 employed/3,006 unemployed)

Prefect Ante Frkov~c Municipality Mayor Populatior Ethnicity Ethnicity Number Prewar Now Unemployed Bnnje Ivan Lokmer Cro Cro 154 * Donji Lapac Milan Ledenko 3000 Ser Mix 21 1 (HDZ) ** Gospic Milan Kolic (HDZ) Cro Cr o 925 Karlobag ieljko Dokozic 49 * Lovinac Ivan Pmic Cr o Cro 17 Novalja Ivan Dabo(HDZ) Cr o Cro 233 ** OtoCac Draien Cr o Cro 598 Bobinac(HDZ) PeruSic OreSkovic Tihomir 130 PlitviEka jezera Mile Cancar Ser Cro 375 S enj ieljko Cr o Cro 608 Biordic(HDZ) * Udbina Ivan PeSut Cro 104 * Vrhovine Zdravko 28 iegarac(~~z) * munlclpal~ty of special state concern ** part of mun~clpalltyIS of spec~al state concern Major Industries

Trade is the most represented economic sector or activity The reason for thls is that stores are less uform in terms of actlvlty and regulations are less comprehensive Independent store work is often a way Into larger firms The largest number of companies are registered in the catenng and tomsm sector

Major Employers

The largest and only succesful buslness is the PlitvlEka Jezera National Park (530 employees) The other major companies are - Cosmocemia, OtoCac - 138 people employed - IN0 OtoEac - the furniture factory with 263 people employed - Metalworks, Senj - 150 employees - Kalcind, LiEko LeSce - 275 employees

Major agricultural activities

Cattle raising is an important source of income whether it is on the subsistence level (small households) or it is a profitable business (medium and big fanns) Near the coast there are lots of dairy farms both small and large People there also raise sheep mostly as an additional occupation In the eastern part of the county people raise mostly sheep Although there is the potential for dairy production In eastern Lika, no local dairy exlsts Existing farms are too small and fragmented to warrant establishment of a milk collection point from the large daines

Status of Privatization

In an effort to Improve the economic situation, the county has decided to sell six destroyed, closed, or otherwise inefficient companies These companies are Boncevac Farm (Donji Lapac), UNA (Donji Lapac), Likagraf (Korenica), Marko Oreskovic (Llcki Osik), Jelen (Vrhovine), Oteks (Otocac), Sloga (Gospic), Vodotec Farm (Bnnje) A short descnption of each of these compames follows

The Boncevac Farm, a cattle farm in Donji Lapac, had the slaughter capacity of 180 units per day and a refrigeration capacity of 800 tons The farm is abandoned and is pnmmly owned by CFP (Croatian Fund for Privatization) UNA is a company with two hotels and two large warehouse facilit~esin Donji Lapac It is also owned by CFP Likagraf is a former cardboard and paper packag~ngfactory It is also owned by CFP as IS Marko Oreskovic, or MOL It specializes in the production of mechanical parts for radios, standard tools, tools made to order, and radiators It employs some 70 persons and is included in the Licko-Senjska County project for the development of small business zones

Also offered for pnvate sale are Jelen, a bankrupt, Vrhovine-based company formerly in the service industry, the bhpt textile factory Oteks, and Sloga, which specialized in the production of garments and is owned by the Ministry of Justice Finally, Vodotec, a feeding farm for heifers, is abandoned and out of production

Attltude of Leaders toward SME Development

Mumcipal leaders generally support the development of small and medurn businesses Municipalities, such as Udbina, offer land and abandoned factones at nominal rent to entrepreneurs As w~thmany government-supported programs, the wntten plan, which looks good on paper, often falls short in execution

Information about the Return Process

The return process is ongolng Many refugees have returned but are mostly older people who do not work Again, there is a lack of younger returnees because of a dearth of employment

Infrastructure problems that h~nderdevelopment

In many cases ~nfrastructureproblems hinder further development of the economy There are cases where busmesses suffer because telephone service, including mobile service, does not ex~stDwng the wintertime roads are often not passable In many v~llagesthe water supply and the electnc system do not hction

Access to Capltal

Credits are available from banks through HBOR and the Croatian M~nistryof Agnculture and Forestry, but the cred~tsare offered under unfavorable condit~onsthat are hard to obtain The conditions require a guarantee with a mortgage or cosigners with a salary Although terms are below market rate, most people consider the grace penod too short and interest rates too hgh

Other Economlc Development NGOs operating m area

SEAF (no clients)