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