Doi 10.5644/Pi2013-153-00

DOI 10.5644/PI2013-153-00

Co-organizers

Croatian Academy of Sciences and Arts University of Bologna School of Economics and Business, University of Sarajevo – Institute of Economics Sarajevo Faculty of Political Sciences, University of Sarajevo – Centre for the Development of Local and Regional Self-Government Association of Municipalities and Towns of the Federation of Bosnia and Herzegovina Association of Local Authorities of Republic of Srpska

Conference Scientific Board

Academician Božidar Matić Academician Zvonimir Baletić Academician Boris Tihi (president) Academician Muris Čičić (vice president) Mirko Pejanović, PhD, corresponding member of ANUBIH (vice president) Jasmina Osmanković, PhD, Full-time Professor (vice president) Stefano Bianchini, PhD, Full-time Professor Ivan Bićanić, PhD, Full-time Professor Branko Grčić, PhD, Full-time Professor Renzo Daviddi, PhD, Deputy Head of the EU Delegation to BIH Vesna Bojčić-Dželilović, PhD Peter Stanovnik, PhD, Director of the Institute for Economic Research Miroslav Đorđević, PhD, Associate Professor Anto Domazet, PhD, Full-time Professor Veljko Trivun, PhD, Full-time Professor Željko Šain, PhD, Assistant Professor Šaćir Filandra, PhD, Full-time Professor Darko Petković, PhD, Associate Professor Muamer Halilbašić, PhD, Assistant Professor Elmir Sadiković, PhD, Assistant Professor Almir Peštek, PhD, Assistant Professor Vesna Travljanin Aco Pantić Conference Organizing Committee

Mirko Pejanović, PhD, corresponding member of ANUBIH (president) Academician Boris Tihi (vice president) Academician Muris Čičić (vice president) Jasmina Osmanković, PhD (vice president) Amra Avdagić, MSc Belinda Kikić, MA Nerma Tanović

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 3 The Conference was supported by

Federal Ministry of Environment and Tourism Government of the Federation of Bosnia and Herzegovina BH Telecom d.d. Sarajevo JP Elektroprivreda BIH City of Sarajevo Government of the Sarajevo Canton Municipality Centar Sarajevo Municipality Novi Grad Sarajevo Municipality Ilidža Sarajevo Municipality Gračanica ITC d.o.o. Zenica

4 Local Economic and Infrastructure Development of SEE in the Context of EU Accession

CONTENTS

LAW AND POLITICAL ASPECTS OF LOCAL ECONOMIC AND INFRASTRUCTURAL DEVELOPMENT Mirko Pejanović CONSTITUTIONAL AND LEGAL ROLE OF LOCAL AUTHORITIES IN ECONOMIC AND INFRASTRUCTURAL DEVELOPMENT OF MUNICIPALITIES AND CITIES IN BOSNIA AND HERZEGOVINA ...... 25 Josip Kregar, Antonija Petričušić CIVIL SOCIETY: AN INEVITABLE PARTNER IN THE DEVELOPMENT OF LOCAL COMMUNITIES IN YOUNG DEMOCRACIES ...... 45 Veljko Trivun CONSTITUTIONAL AND LEGAL POSITION OF MUNICIPAL AND CITY GOVERNMENTS IN STRATEGIC PLANNING AND PROMOTING LOCAL ECONOMIC AND INFRASTRUCTURE DEVELOPMENT ...... 59 Borče Davitkovski, Elena Davitkovska, Vesna Gočeva INSTITUTIONAL FORMS AND SHAPES IN THE IMPLEMENTATION OF REGIONAL DEVELOPMENT IN THE REPUBLIC OF MACEDONIA .... 79 Elmir Sadiković, Željko Josić ROLE OF MUNICIPAL PREFECTS AND MAJORS IN THE LOCAL ECONOMIC AND INFRASTRUCTURAL DEVELOPMENT ...... 95 Saša Leskovac LOCAL ECONOMIC DEVELOPMENT AND MODERNIZATION OF LOCAL GOVERNANCE IN BOSNIA AND HERZEGOVINA ...... 109

ECONOMIC AND INFRASTRUCTURAL ASPECT OF LOCAL DEVELOPMENT Sofija Adžić FRAMEWORK FOR SUSTAINABLE LOCAL DEVELOPMENT STRATEGY A CASE STUDY OF SERBIA...... 131 Dragan Lončar, Đorđe Kaličanin INTEGRATED METHODOLOGICAL FRAMEWORK FOR FORMULATION AND IMPLEMENTATION OF LOCAL DEVELOPMENT STRATEGY...... 155

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 5 Ensar Šehić, Jasmina Osmanković, Marijana Galić ECONOMIC AND FUNCTIONAL EFFICIENCY OF TERRITORIAL ORGANIZATION OF BOSNIA AND HERZEGOVINA...... 171 Muamer Halilbašić, Emir Agić CONVERGENCE OF LOCAL GOVERNMENT UNITS IN BOSNIA AND HERZEGOVINA...... 181 Marijana Galić, Ensar Šehić COMPETITIVENESS UNITS OF LOCAL GOVERNMENT ...... 191 Elvedin Grabovica THE EFFECT OF CAPITAL CONSTRUCTION OF POWER FACILITIES ON THE ECONOMIC DEVELOPMENT OF LOCAL COMMUNITIES ...... 199 Petar Veselinović, Jasmina Dimitrijević ECONOMIC SITUATION IN THE CITY OF KRAGUJEVAC ...... 217 Jasmina Osmanković, Ensar Šehić, Marijana Galić LOCAL COMMUNITIES AND REFORM OF TERRITORIAL ORGANIZATION: CASE OF BOSNIA AND HERZEGOVINA...... 235 Rahman Nurković INFLUENCE OF TERTIARY ACTIVITIES ON LOCAL AND RURAL DEVELOPMENT IN BOSNIA AND HERZEGOVINA...... 245 Šemsudin Džeko LINKING OF THE URBAN AND RURAL TOURISTIC DIMENSION FOR THE PURPOSE OF INCREASE IN ECONOMIC EFFECT OF TOURISM 259 Emir Kurtović, Senad Softić, Maida Fetahagić, Gordana Memišević STRATEGIC PLANNING AT CANTONAL LEVEL – STEP CLOSER TO EU: CANTON SARAJEVO EXAMPLE ...... 269 Tarik Kupusović, Arijana Huseinović OPPORTUNITIES AND RESPONSIBILITIES OF LOCAL SELF-GOVERNMENT IN ENVIRONMENTAL ASPECTS OF THE EU INTEGRATION PROCESS FOR BIH ...... 283 Alisa Mujkić, Jasmin Jusić, Damir Šaljić EUROPEAN UNION REGIONAL POLICY: LESSONS FOR BOSNIA AND HERZEGOVINA...... 301

FINANCING LOCAL ECONOMIC AND INFRASTRUCTURAL DEVELOPMENT Elena Tagliani PPP TOOLS AS AN INNOVATION ELEMENT FOR THE QUALIFICATION OF THE PUBLIC PROCUREMENT SECTOR IN THE EU POLICY FRAMEWORK FROM A REGIONAL POINT OF VIEW. EMILIA-ROMAGNA POLICY AND A CASE-STUDY, WITH AN ASSESSMENT ON PPPs IMPACTS AND ADDED VALUE AT A REGIONAL SCALE...... 321

6 Local Economic and Infrastructure Development of SEE in the Context of EU Accession Gordana Đurović POTENTIALS OF THE EU PRE-ACCESSION ASSISTANCE IN FINANCING OF LOCAL ECONOMIC AND INFRASTRUCTURE DEVELOPMENT: EXPERIENCES OF MONTENEGRO IN MFF 2007–2013 ...... 343 Maja Bučar THE ROLE OF R&D AND INNOVATION IN LOCAL ECONOMIC DEVELOPMENT...... 365 Izudin Kešetović, Željko Rička FISCAL FEDERALISM AND BORROWING OPPORTUNITIES OF LOCAL COMMUNITIES ...... 383 Fuada Stanković INNOVATION AND ENTREPRENEURSHIP – INVESTMENT IN PEOPLE AND SKILLS...... 401 Andrijana Jovanović THE ROLE AND IMPORTANCE OF THE PUBLIC-PRIVATE PARTNERSHIP IN THE REPUBLIC OF SERBIA IN FINANCING LOCAL ECONOMIC DEVELOPMENT ...... 415 Izet Bajrambašić THE BASE METHODOLOGY TO SAFE IMPLEMENTATION OF PUBLIC PRIVATE PARTNERSHIP ON THE EMERGING MARKET OF THE SOUTH EAST EUROPE ...... 427

LIST OF PARTICIPANTS OF SCIENTIFIC CONFERENCE ...... 437 LIST OF PARTICIPANTS OF FORUM OF MAYORS ...... 442 PROGRAMME ...... 445

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 7

ABOUT ORGANIZERS

Academy of Sciences and Arts of Bosnia and Herzegovina

The Academy of Sciences and Arts of Bosnia and Herzegovina (ANUBIH), arose from the Scientific Society which was established in 1951 by Assembly of the Socialist Republic of Bosnia and Herzegovina, the highest state organ in the country, passing the resolution on foundation of Scientific Society of Bosnia and Herzegovina. Scientific Society as the highest institution in charge of the welfare of scientific life was functioning until the Assembly of the Socialist Republic of Bosnia and Herzegovina passed the Law on the Academy of Sciences and Arts of Bosnia and Herzegovina. The Academy of Sciences and Arts of Bosnia and Herzegovina was founded by this Law, passed in 1966, as the highest scientific and artistic institution on the territory of the state of Bosnia and Herzegovina. Pursuant to this Law, the Academy of Sciences and Arts of Bosnia and Herzegovina was assigned to take care about the overall development of science and arts, to organize scientific and artistic manifestations, to publish works of its members and Academy’s associates, and to take care about the overall condition and development of science and arts in the country. In its work the Academy is entirely independent and autonomous, and it is managed exclusively by the principles and interests of science and free beliefs of its members.

Bistrik 7, 71000 Sarajevo Bosnia and Herzegovina Phone + 387 33 560 700 Fax + 387 33 560703 E-mail: [email protected] www.anubih.ba http://www.anubih.ba/index.php?option=com_content&view=article&id=46&Itemid=132&lang=en

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 9 Croatian Academy of Sciences and Arts (HAZU)

In 1860, Josip Juraj Strossmayer, bishop of Đakovo and Srijem, took action to found a South Slavic Academy in Zagreb. He presented Josip Šokčević, the ban (Vice-Roy of Croatia), with a 50,000 florin endowment for the founding of the Academy. He also sent a letter expressing his wish that the Academy should “bring together the best minds (...) and find a way in which books in the national languages could be produced in the Slavic South; the Academy should also take under its aegis all the areas of human science”. The Academy issue was officially raised by Bishop Strossmayer at the Croatian Parliament session held on 29 April 1861. Following the bishop’s proposal, the Parliament immediately elected a committee to draw up a statute for the Academy, and define its aims and organization. It was only five years later, on 4 March 1866, that the rules of the Academy, in a considerably changed form, were finally confirmed by Francis Joseph I, Emperor of Austria and King of Hungary. These remained unchanged until the beginning of World War II. During the existence of the Independent State of Croatia (1941-1945), the name of the Academy was changed to the Croatian Academy of Sciences and Arts; in the Socialist Republic of Croatia it resumed its activities under the former name of the Yugoslav Academy of Sciences and Arts. The Academy consists of honor- ary, full, corresponding and associate members. The Academy initiated its activities in 1866 with 16 full members. The Croatian Academy of Sciences and Arts has organized over one hundred scientific meetings and conferences, evaluating works of important Croats throughout history. In addition, it has organized a number of symposia focusing on the history and economic development of Croatian regions, cities and towns, as well as on the problems of Croatia’s development. The Academy has a number of scientific research and artistic units in Zagreb and other Croatian towns. They are within the competence of their respective departments. The Academy consists of scientific councils and committees, in addition to various commissions and centers which are located in Zagreb and other Croatian towns.

Zrinski trg 11 10000 Zagreb, Croatia Phone: +385 1 48 95 111 Fax: +385 1 48 19 979 E-mail: [email protected] www.hazu.hr http://info.hazu.hr/foundation_of_academy http://info.hazu.hr/organisation_and_membership

10 Local Economic and Infrastructure Development of SEE in the Context of EU Accession University of Bologna

The University of Bologna was probably the first University in the western world. Its history is one of great thinkers in science and the humanities, making it an indispensable point of reference in the panorama of European culture. The reorganisation of the university system, the presence throughout the territory, the international outlook, the research, the programme catalogue, the information services: in these and many other areas, today the Alma Mater paves the way for innovation. 1008: the Bologna “Studium” was founded by students and for students. It is the oldest university in the Western world. 1888: the celebrations of the Eighth Centennial relaunched the role of the University of Bologna within Europe, thanks to the work of Giosuè Carducci, who in 1906 won the Nobel Prize for Literature. 2012: the entry into force of the new Statute (11 January) concluded the process of university reform which began in 2010, and the implementation of the new university organisation begins. The numbers that make culture and innovation 87,000: the students who have chosen the University of Bologna, making it the most popular university in Italy. Teaching and extra- curricular activities take place in 934,000 m2 of space in the campuses of Bologna, Cesena, Forlì, Ravenna and Rimini. 12,000: (average) number of research products, 180 patents, 277 funded research projects (VII framework programme and other EU programmes), 97 PRIN 2010-2011 research projects, 7 Inter-departmental Centres for Industrial research (CIRI). 33: the Departments of the University of Bologna. 11: the Schools of the University of Bologna. 5: the Campuses of the University of Bologna. 212: Degree Programmes: 94 first cycle 3-year programmes, 107 second cycle programmes and 11 single cyclepro- grammes. 40: International degree programmes, 18 of which are delivered in English. 53: PhD programmes, 50 specialisation schools, 61 first and second level professional master’s programmes, 17 of which are international. 2,365: international students from abroad on exchange programmes and 2,071 students enrolled at UNIBO who spent a study period abroad in 2012. 63: international academic and educational collaboration and transfer of knowledge programmes approved between 2011 and 2012, 24 of which in a coordinator role. 170: agreements with companies abroad for internships, 37 Erasmus Mundus networks running, 5.3 million EUR for European and extra-European mobility projects. 9,826: agreements signed by the Alma Mater with companies and public and private institutions, including 547 abroad, to foster entry to the world of work. 5,982 people: the university community of teaching, technical and administrative staff. 70,000: computers connected to the university network. The library system offers access to 24,000 on-line periodicals, 150,000 e-books and 500 databases. 3.5 million: the monthly average number of accesses to the University Website System in 2012. The quality and functionality of the web services are of the highest level, according to the league tables drawn up yearly by the Censis Guide. 628.3 million EUR: the University of Bologna budget for 2012.

Università di Bologna, Via Zamboni 33 40126 Bologna – Partita IVA: 01131710376, Italy http://www.eng.unibo.it/PortaleEn/University/Our+History/default.htm http://www.eng.unibo.it/ PortaleEn/University/The+University+Today/default.htm

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 11 School of Economics and Business in Sarajevo University Sarajevo

The School of Economics and Business in Sarajevo (SEBS) was established in 1952 as the Faculty of Economics. Its first class consisted of 105 full-time and 129 part-time students. SEBS has the longest tradition and is the largest educational institution in Bosnia and Herzegovina. It is a leading institution in the BH higher education system in the creation and dissemination of knowledge in the fields of economics and business administration. Over the last sixty years, the School has been continually developing and implementing numerous programs leading to the formation of highly-educated and creative professionals capable of assuming managerial and leadership roles in their professional careers. Its main goal is to adopt and apply all current trends in business, economics and education to adapt to our rapidly changing, competitive environment. Endeavoring to make its curriculum and syllabus as modern as possible, as well as to intensify steps towards the internationalization and international recognition of its degrees, the School was the first in Bosnia-Herzegovina to adopt and implement (during the 2001/2002 academic year) a curriculum based on the European Credits Transfer System – ECTS. An appreciable level of cooperation has been achieved with elite schools of economics both in Europe and around the world, providing students with a wider array of choices, and allowing their own independent influence on the development of the programs in which they participate. The second step in implementing the ECTS-based concept of study at the School started in 2005 with the introduction of the “3+2+3” system. SEBS is the only educational institution in BIH that has been a member of European Foundation for Management Development – EFMD and member of The Association to Advance Collegiate School of Business – AACSB. SEBS has been granted the accreditation by the Austrian Agency for Quality Assurance. At present, SEBS is the only faculty in Bosnia and Herzegovina that holds a European accreditation, which means that this institution and its diplomas will be recognized in the European Education Area. SEBS also introduced quality management system in accordance with ISO 9001:2008. In 2009, SEBS gained certification by Bureau Veritas. Introduction and certification of Quality Management System by ISO Standard verifies SEBS as a successful institution in development and implementation of academic programs for 1st, 2nd and 3rd study cycle of higher education and non-academic degree programs, courses and training according to the Life Long Learning concept. In 2009, SEBS was rewarded with EDUNIVERSAL Palmes Certificate. This certificate highlights the growing success of this institution on an international scale, and puts SEBS in the 1.000 best business schools worldwide. According to Webometrics, world universities’ ranking system of the WEB activities, SEBS, was ranked 390th, among the top 400 business schools in the world.

Trg oslobođenja 1, 71000 Sarajevo Bosnia and Herzegovina Phone: + 387 33 275 900 Fax: 387 33 275 994 E-mail: [email protected] www.efsa.unsa.ba, http://www.efsa.unsa.ba/ef/en/ofakultetu/about-the-school

12 Local Economic and Infrastructure Development of SEE in the Context of EU Accession Economic Institute Sarajevo

Economic Institute Sarajevo was founded in 1961. It is a public research institute, with no budget subsidies. So far, Economic Institute Sarajevo has realized more than 500 research projects in field of: Macroeconomic and competitiveness research, Commercial, industrial and sectoral policies, Regional and local development, Labor market and social development, Microeconomic research, • Business consulting in field of strategic management, marketing, finance and human resources, Organizational projects. Besides our own, we are supported by an excellent potential of human resources of the Faculty of Economics in Sarajevo (more than 50 professors and assistants), with whom we have signed an agreement of strategic cooperation. Economic Institute Sarajevo has also a long-term cooperation with several other respected researchers/consultants (in specific areas) from Bosnia and Herzegovina and the region. In 2012, Economic Institute Sarajevo signed a „Charter for establishing Southeastern Europe Association of Economic Institutes – SEEA“, in aim to strenghten cooperation among institutes from Southeastern Europe (SEE) and hereby improve their research, academic and administrative performances. The scope of our research activities is determined by market needs and the structure of demand. In that aim, the public sector and EU funds have dominant role, for whose needs research projects can win only through the public tenders.

Branilaca Sarajeva 47, 71000 Sarajevo Bosnia and Herzegovina Phone: 387 33 565 870 Fax: 387 33 565 874 E-mail: [email protected] http://www.eis.ba/site/index.php?option=com_content&task=view&id=12&Itemid=26

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 13 Faculty of Political Science University of Sarajevo

Faculty of Political Science was established in 1961 and it was one of 24 members of the University of Sarajevo. Teaching-scientific work at the Faculty takes place within five study Departments: Political Science, Sociology, Communication/Journalism, Security and Peace Studies and Social Work. More than a hundred scientific practitioners (teachers and associates) are involved in teaching process in which more than 130 syllabuses at the undergraduate, graduate and doctoral studies are performed. Undergraduate studies last three years (180 ECTS), graduate (master) studies are carried out for a period of two years, and the doctoral program for a period of three years (180 ECTS). In line with the reforms led by the spirit and ideas of Bologna Declaration, Faculty of Political Sciences has, in recent years, made a fundamental innovation of curricula. On average, about 3,500 students participate in teaching process, for which a sound base for professional qualifications to work in government institutions, NGOs, media, cultural and educational institutions, political parties is being provided. Since the establishment in 1961, the Faculty has enrolled about 40,000 students, of which about 10,500 graduated in some of the study programs. About 300 students defended master thesis, and nearly 200 candidates their doctoral dissertations. In addition to its core mission – education of young people, the Faculty has an active role in the affirmation of Bosnian and Herzegovinian identity and culture and the state of Bosnia and Herzegovina.

Skenderija 72, 71000 Sarajevo Bosnia and Herzegovina Phone: +387 33 203 562 Fax: +387 33 666 884 E-mail: [email protected] www.fpn.unsa.ba http://www.fpn.unsa.ba/ba/historijat/

14 Local Economic and Infrastructure Development of SEE in the Context of EU Accession Center for the Development of Local and Regional Self- Government

Centre for the Development of Local and Regional Self-Government is a separate research unit within the Institute for Social Research of the Faculty of Political Sciences in Sarajevo. It was founded in 1999. In its previous work Centre for the Development of Local and Regional Self-Government of the Faculty of Political Sciences in Sarajevo was the organizer or co- organizer of several professional and scientific conferences on various aspects of local and regional self-government in Bosnia and Herzegovina. In 2004 the Center provided its expert role in changing the Election Law in Bosnia and Herzegovina, which enables the direct election of mayors. During 2005/2006, the Center participated in the expert team for drafting the Law on Principles of Local Self-Government in the Federation of Bosnia and Herzegovina, which was adopted in June 2006. In 2008 in cooperation with the Academy of Sciences and Arts of Bosnia and Herzegovina and the Economic Institute Sarajevo, the Center was a co-organizer of the International Scientific Conference “Euroregions and Southeastern Europe”. In the period from 2005 to 2010, several scientific-research projects were implemented through the Center, including the projects: “Municipalities in Bosnia-demographic, social, economic and political realities” and “The possibility of applying the concept of Euroregion in Bosnia and Herzegovina”. The results of the researches were published in the following publications: Proceedings: “The position and structure of the cities in the Federation of Bosnia and Herzegovina, with a special emphasis on the development of local government in the City of Mostar” (2003); Book: “Euroregions and BIH” by Professor Mirko Pejanović and Professor Jasmina Osmaković (2006); Research study: “Municipalites in Bosnia and Herzegovina- social, demographic, economic and political realities” by authors: M. Pejanović, H. Zolić, Z. Zlokapa, S. Arnautovic (2005); Proceedings: “Euroregions and Southeastern Europe”, editors: Jasmina Osmanković, Mirko Pejanović and Boris Tihi.

Skenderija 72, 71000 Sarajevo Bosnia and Herzegovina Phone: +387 33 666 844 Fax: +387 33 666 844 E-mail: [email protected] E-mail: [email protected]

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 15 Association of municipalities and towns of the Federation of Bosnia and Herzegovina

The Association of municipalities and towns of the Federation of Bosnia and Herzegovina (in further text: Association) is independent organization of voluntarily associated municipalities and towns in the Federation of Bosnia and Herzegovina established with the purpose of local government development and improvement and protection of the local government units interests. The Association of municipalities and towns of the Federation of Bosnia and Herzegovina, as non-governmental and non-for profit organization has been established on the First Assembly held on 29 May 2002 in Mostar. The document about the establishment of the Association has been signed by 54 members. They have also adopted the Statute of the newly established Association. The Association of municipalities and towns of the Federation of Bosnia and Herzegovina is a legal successor of the Community of municipalities and towns of the Socialistic Republic of Bosnia and Herzegovina established in 1972 with the aim to improve and develop the system of the local self-government, protects interests if local communities and develops cooperation between the cities and international cooperation. The second Assembly of the Association of municipalities and towns of the Federation of Bosnia and Herzegovina has been held in Gradacac on 22 March 2007. At this Assembly the new Statute was adopted and new governing bodies elected. At this Assembly 29 municipalities have joined to the Association. Next year one more municipality joined the Association, so therefore as of 2008 there were 79 municipalities on board out of 80 local government units in total (five municipalities have ceased to legally exist: Mostar Old Town, Mostar North, Mostar South, Mostar West and Mostar South-West). At the VII Assembly of the Association of municipalities and towns of the Federation of Bosnia and Herzegovina, held on 6th and 7th of February 2013 in Fojnica, one more municipality, municipality of Kresevo, has joined to the Association of municipalities and towns of the Federation of Bosnia and Herzegovina. From the international legal point of view, three key events have made a pathway for the new perspective of the Association. These are: • Ratification of European Chart of local self-government, October 1994 (Government of the Republic of Bosnia and Herzegovina) Admission of the Community of the municipalities and Towns of Republic of Bosnia and Herzegovina in the Congress of local and regional authorities of Europe (CLRAE) as a special guest (November 1994) Admission of Bosnia and Herzegovina in the Council of Europe (April 2002) Association is the place for the free exchange of experience and opinion, promotion of common interest, participation in the consultative legislative processes, protection of common interests and cooperation with national and international Associations, organizations and institutions of government. The Mission of the Association is to promote democratic and efficient local government in line with the Principles of the European Charter of local self-government. More precisely: advocacy and lobby- ing for the common interest of the members at the level of the Federation of Bosnia and Herzegovina, Bosnia and Herzegovina and at the international level; offering professional services (legal and financial advising); creation of the platform for the exchange of knowledge and information (e-mail, web pages, conferences, seminars, workshops, public debates, round tables). Municipalities and towns in the Federation of Bosnia and Herzegovina only trough joint actions and joint statements can successfully achieve their interests at the Federal and state level. The purpose of the Association, as the representative of the municipalities and towns in the Federation of Bosnia and Herzegovina, is to represent and advocate for these interests in the best possible way.

Musala 5/I, 71000 Sarajevo Bosnia and Herzegovina, Phone / Fax:: +387 33 216 502 E-mail: [email protected] http://www.sogfbih.ba/index.php?lang=en

16 Local Economic and Infrastructure Development of SEE in the Context of EU Accession Association of Local Authorities of Republic of Srpska

Association of municipalities and towns of Republic of Srpska is established in Brčko 1998. as independent, non-political, non-party association of local authorities directed to the supporting and promoting of local self-government. Members of Association are municipalities and towns gathered on voluntary basis in order to exchange experiences, to improve inter cooperation and to act as one aiming on realization of joint interests defined in Association statute, laws and other legal acts. Why do associations/coalitions of local authorities appear in all countries of Eastern and Central Europe? Why is it useful to have an association of local authorities? Why should municipalities with already existing financial problems be ready to finance an association? There are three motives for this: • Together we are stronger.. Municipalities face problems of competence and financing. Competition about competence with central government and financial dependence on central government exists everywhere. Local authorities consider they could do their job much better in more decentralized conditions. Together we are more effective. The second motive of collaboration with association is saving of money while working together. The Association is an effective way to organize specialized activities and functions that are too expensive if municipalities would deal singly with them. Together we know more. The third reason for existence of the association lies in achievement of better communication. Three ways of communication need to be mentioned: Horizontal communication – communication among municipalities with aim of exchange of ideas and experiences; Vertical communication (formulation ideas on local level and their transmission to the central level; Vertical communication (from bellow upwards) – transmission of new ideas (for instance, about new laws) from central to level of local authorities.

Prvog krajiskog korpusa 13, 78000 Banja Luka Republic of Srpska, Bosnia and Herzegovina Phone: +387 51 322 670 Fax: +387 51 327 010 E-mail: [email protected] E-mail: [email protected] http://www.alvrs.com/v1/index.php?lang=en

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 17

FOREWORD

The Conference is organized by the Academy of Sciences and Arts of Bosnia and Herzegovina (ANUBIH), Croatian Academy of Sciences and Arts (HAZU), University of Bologna, School of Economics and Business Sarajevo University Sarajevo, Institute of Economics Sarajevo, Faculty of Political Sciences University Sarajevo, Centre for development local and regional self-government.

This is third conference about local and regional development after 1995, and reflected specific interest and tradition Academy in local, urban and regional development research. Academy, Department of Social Sciences has long tradition, more than six decade, in research problems local, urban, city and regional development.

Conference will start on September 20, 2013, and will finish September 21, 2013. Conference will be first day, September 20, 2013. Forum mayors WB will be second day, September 21, 2013.

The main conference topic is local economic and infrastructural development SEE in context EU accession. This topic sublimes and reflects economic and political approaches to four specific and important themes for local development (communities and cities): first, management and strategic planning of local economic - develop ment; second, financing of local economic and infrastructure development; third, the role of civil society in local economic and infrastructure development and fourth, local communities and territorial organization.

In context constitutional and legal aspects of local economic and infrastructural development, authors discuss: constitutional and legal role local governments in economic and infrastructural development municipalities and cities, role of municipal prefects and majors in the local economic and infrastructural development; institutional forms and shapes in the implementation of regional development; local economic development and modernization of local governance; constitutional and legal position of municipal and city governments in strategic planning and promoting local economic development and infrastructure development

Next part is local economic and infrastructural development with following themes: framework for sustainable local development strategy; situation and perspectives for economic development of city; integrated methodological framework for formulation and implementation of local development strategy; influence of tertiary activities on local and rural development; linking of the urban and rural tourist dimension

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 19 for the purpose of increase in economic effect of tourism; opportunities and responsibilities of local self-government in environmental aspects of the EU integration process; competitiveness local government units; European union regional policy; the effect of capital construction of power facilities on the economic development of local communities

Local communities and reform of territorial organization and economic and functional efficiency of territorial organization; and convergence of local government units consists third part focusing on connections local economic development and infrastructural development with state territorial organization.

Financing of local economic and infrastructural development is very important part on the Conference and consists following themes: importance of the EU pre-accession assistance in financing of local economic and infrastructure development: experiences; the base methodology to safe implementation of public private partnership on the emerging market of the south east Europe; the role and importance of the public-private partnership in financing local economic development; innovation and entrepreneurship – investment in people and skills; the role of R&D and innovation in local economic development; PPP tools as an innovation element for the qualification of the public procurement sector in the EU policy framework from a regional point of view, fiscal federalism and possibility for borrowing.

In the end, but not least, last part is non-government organization (NGO) and their position or role in economic and infrastructural local development focusing on civil society: an inevitable partner in the development of local communities in young democracies.

Mayors of capital city (Ljubljana, Zagreb, Belgrade, Podgorica, Skopje, Sarajevo, Priština) new state on the Western Balkan, part of the Adriatic macro region invited to present experiences about city development, infrastructures, legal framework, financing, and other important question city (urban) development.

We hope, with support Delegation EU in Bosnia and Herzegovina and City of Sarajevo, Forum city mayors should be organize each years and should be place for exchanging experiences and searching answers for the most important questions of local, city and regional development in context EU accession, new development framework, and new approaches.

Proceeding contains papers authors from Italy, Slovenia, Croatia, Serbia, Macedonia, Montenegro, and Bosnia and Herzegovina. Number of papers submitted is of great importance for this conference.

20 Local Economic and Infrastructure Development of SEE in the Context of EU Accession Papers were subjected to a blind reviewing process of international team reviewers. Proceeding indexed in EBSCO and CEEOL (Central and Eastern European Online Library), and has CIP cataloging, ISBN and COBISS number.

Keynote speakers for first day Conference “Local economic and infrastructure development SEE in context EU accession” are: members of Academy of Sciences and Arts of Bosnia and Herzegovina (ANUBIH), Croatian Academy of Sciences and Arts (HAZU), University of Bologna, Unit Forward Studies and Cross-sector policies of Region Emilia-Romagna, Faculty of Economics University of Zagreb, etc. Keynote speakers for second day (Forum mayors) are: mayors of Ljubljana, mayors of Zagreb, mayors of Belgarde, mayors of Podgorica, mayors of Sarajevo, etc. Prof. Komšić, Mayors of Sarajevo City is host of Forum mayors this year.

Conference participant are: academicians, professors, member of university, researchers, policymakers on the local, city, regional and state level, city mayors, community mayors, member of associations municipalities and cities in region, prime ministries and ministries, representatives NGO, international communities, development agencies, PhD students, etc.

The Conference was supported by Ministry of environmental and tourism, Elektroprivreda BiH, BH Telecom d.d. Sarajevo, Sarajevo City, Canton Sarajevo, Municipality Centar Sarajevo, Municipality Novi Grad Sarajevo, Municipality Ilidža, Delegation EU in Bosnia and Herzegovina.

We would like to thank the authors, reviewers, the members of committees, support- ers and others for their efforts toward making this Conference a success.

Professor Jasmina Osmanković, Centre for economic science Academy of Science and Arts BIH Professor Mirko Pejanović, corresponding member of Academy of Science and Arts of BIH Academician Boris Tihi, Academy of Science and Arts of BIH Academician Muris Čičić, Academy of Science and Arts of BIH

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 21

LAW AND POLITICAL ASPECTS OF LOCAL ECONOMIC AND INFRASTRUCTURAL DEVELOPMENT

DOI 10.5644/PI2013-153-01

CONSTITUTIONAL AND LEGAL ROLE OF LOCAL AUTHORITIES IN ECONOMIC AND INFRASTRUCTURAL DEVELOPMENT OF MUNICIPALITIES AND CITIES IN BOSNIA AND HERZEGOVINA

Mirko Pejanović*

Abstract

Basic aim of this article is to present constitutional and legal role of local authorities within economic and infrastructural development of municipalities and cities in Bosnia and Herze- govina. Hence, it presents two models. Basic hypothesis that will be verified in this article is: local authorities, based upon their legal jurisdiction, are able to provide important contribution to the local economic and infrastructural development. Methodology consists of case study method in two cases. The first case study is Municipality of Gračanica in Federation of Bosnia and Herzegovina, and the second case study is City of Bijeljina in Republic of Srpska. Time period of this research is post Dayton period, with distinctive focus on the period 2008– 2012. Territorial frame of this research is Bosnia and Herzegovina. Also, in the process of verification of this research, other relevant methods have been used. This article is systematized in six chapters: introductory approach on local community and local self-government; political-legal concept of local self-government in the regulations of European Charter on Local Self-Government; legal and statutory concept of municipality and city jurisdiction in the area of local economic and infrastructural development; main aspects of the role of local self-government unit in the local economic and infrastructural development; model of local economic and infrastructural development in the local communities: case study of Munici- pality of Gračanica; model of local economic and infrastructural development in the local communities: case study of City of Bijeljina and conclusion.

Keywords: Legal and constitutional role, Local authorities, Economical and infrastructural development, European Charter on Local Self-Government.

Introductory approach on local community and local self-government

Human being as an individual satisfies his needs for living and work in his own local community. Those needs as primary needs of human beings in the local community are: housing and management of settlement; work and earnings for economic

* Prof. Dr. Mirko Pejanović, corresponding member of ANUBIH, University of Sarajevo, Faculty of Political Science, Centre for Development of Local and Regional Self-Government, Skenderija 72, 71000 Sarajevo, Bosnia and Herzegovina, e-mail: [email protected]

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 25 Law and Political Aspects of Local Economic and Infrastructural Development existence; local traffic; water supply and energy products; sewerage; utility services; utility infrastructure; service industries; education of children; health care; social care; culture and sport; informing and security; protection of human rights and protection of environment.

In the sociological theory, local community is specific social group inhabited in the specific area, whose members are connected by territorial nearness and according to that, mutual needs and activities.

Among many theoretical assessments about local community, it seems significant to underline opinion by an academician Eugen Pusić, who stated that local community is specific social system with its own elements in interaction with an area, people in the area, needs of people, mutual activities in fulfilling their needs and awareness of belonging to the local community (Pusić 1963 : 21-23).

Mutual needs of people in one settlement, with reference to local community, are conditioned by territorial nearness of people that are living in that particular settlement. Those needs can be fulfilled by mutual activities. According to the opinion of American sociologist T. Parsons, local community is a special aspect of social systems structure which is referred to the territorial accommodation of people and their systems. In that context, four factors are integrating people at the local level into the social system: housing, working place, jurisdiction and communication (Pejanović 2005 : 187).

In order for mutual people’s needs in the local community to be fulfilled, various institutions are shaped through which different social activities are organized. One of those institutions, which in the course of historical development of society organized and affirmed itself as democratic institution of citizens in local community, is LOCAL SELF-GOVERNMENT (Pejanović 2005 : 188).

A local unit gains a status of LOCAL SELF-GOVERNMENT (territorial self- government community) when political-legal and systemic institution is formed in one or more connected settlements. That local self-government as political and legal institution constitutes itself in the form of municipality as basic unit of local self-government.

Basic subjects of local self-government are people who live in local communities and their mutual interests which result from their joint living in the same territory. Those interests are attained within institutional structure, which is local government. Activities of local government are an essence of local self-government. Basically, there are two components in local government activities. One is via directly elected structures by citizens such as: municipal council, municipal assembly and municipal mayor. The second is via indirect participation of citizens. Forms of indirect participation of citizens in public affairs are: civic initiative, local assembly of citizens and

26 Local Economic and Infrastructure Development of SEE in the Context of EU Accession M. Pejanović: Constitutional and Legal role of Local Authorities in Economic and... referendum. According to this, local self-government in political science is defined as political right of citizens to directly, and through their freely elected structures, participate in management of certain public affairs, particularly those of mutual interests of citizens in the units of local government (Pejanović 2005 : 188).

According to professor Jovan Đorđević, local self-government is characterized by following elements: local citizens have right to elect their own representative bodies and those bodies have certain rights of decision making; elected bodies have their factual and territorial jurisdiction and they perform certain activities as government; jurisdictions of local bodies, according to their content and authority for their implementation, represent those issues which have factual and formal influence on life and local community development (Đorđević 1965 : 621).

In the democratic tradition of Europe of nineteenth and twentieth century, local self- government as political right of citizens is guaranteed by the Constitution and laws of a country. It is guaranteed also in the European Charter on Local Self-Government. In the Charter, Article 2, it is defined that local self-government principle will be determined by legal regulations of the signatory country, and where possible in the Constitutional Law (Anon. 2003 : 4).

All European countries, members of European Council, based upon European Charter on Local-Self-Government have guaranteed local self-government in their legal systems. Brosna and Herzegovina has ratified the European Charter on Local Self-Government on 12 July 2012. Regulations on local self-government did not find their position within Dayton Constitution in Bosnia and Herzegovina. They are positioned in constitution laws of entities of Bosnia and Herzegovina: Constitutional Law of Federation of Bosnia and Herzegovina and Constitutional Law of Republic of Srpska. Laws on local self-government within entities define the position, jurisdiction and organization of local self-government.1 According to this, position of local self-government is achieved by act of state. This position is characterized by independent position in management of public affairs, so the local governments have complete discretion right to implement their initiatives regarding all issues that are not excluded from their jurisdiction, neither placed in jurisdiction of some other authorities (Anon. 2003 : 15).

Political and legal concept of local self-government within regulations of European Charter on Local Self-Government

Theoretical concepts and achievements of local self-government ideas implementation in the countries that are members of European Council have received their

1 Law on Local Self-Government of the Republic of Srpska was adopted in 2004. Law on Principles of Local-Self Government in the Federation of BIH was adopted in 2006.

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 27 Law and Political Aspects of Local Economic and Infrastructural Development foundations in the European Charter on Local Self-Government. The Charter was adopted in 1985 and it is the first multilateral legal instrument for definition and protection of local self-government principles. The Charter is consisted of preamble and three separate parts, which define principles of local self-government, followed by obligations of countries members of European Council after ratification of the Charter.

All principles regarding local self-government and European principles on DEMOCRACY AND DECENTRALIZATION are defined in the Charter.2

Considering historical development possibilities in the context of local self-government, these particular principles are defined in the Charter:

The first principle underlines that local authorities are “one of the main foundations of any democratic regime.”3

The second principle stresses out that “the right of citizens to participate in the conduct of public affairs is one of the democratic principles that are shared by all member States of the Council of Europe” (Anon. 2003 : 3).

The third standard refers to the fact that rights of citizens and their management of public affairs in the local self-government “can be most directly exercised at the local level” (Anon. 2003 : 3).

The fourth principle is consisted in definition that “existence of local authorities with real responsibilities can provide an administration which is both effective and close to the citizen” (Anon. 2003 : 3).

Foundation for shaping of principles, or general guidelines, for the development of local self-government is set in the European Charter about theoretical concepts and synthesis of experiences of local government. One of the preliminary principles concerns the legislation and capability of the local authorities to “regulate and manage a substantial share of public affairs under their own responsibility and in the interests of the local population” (Anon. 2003 : 4). Constitutional, legal and statutory frame for jurisdiction of local authorities provide, based upon autonomy of local self-government unit, an independent regulation of public affairs that are of interest to citizens. Besides that, all locally significant activities are also regulated independently. All the activities in the spheres of interests of citizens and their implementation are conditioned by responsibility of the local self-government institutional bodies:

2 In the eighties of the twentieth century all countries of developed democracy in Europe have implemented reforms of the local and regional self-government and strengthened institutional capacities of local self-government and administration. 3 European Charter on Local Self-Government (2003) Association of Municipalities and Cities of the Federation of BIH, Sarajevo, page 3.

28 Local Economic and Infrastructure Development of SEE in the Context of EU Accession M. Pejanović: Constitutional and Legal role of Local Authorities in Economic and... municipal council, municipal mayor and municipal administration. Members of municipal council and municipal mayor are directly elected by citizens at free elections according to their ethical and management capabilities.

In the scope of local self-government and field of activities, basic rights are determined by Constitution of country and by Statute of the local self-government unit – municipality. In regard to that, the Charter stipulates the principle of discretionary power of local authorities to “exercise their initiative with regard to any matter which is not excluded from their competence nor assigned to any other authority” (Anon. 2003 : 4). Right of local authorities to implement initiatives to solve development issues for the benefit of citizens has the broadest basis. Those are interests of local population. Everything that is not excluded from the competence of local self-government or assigned to any other authority represents an activity entitled to local self-government, before all municipal council/assembly, which has the power to start development projects of local interests.

Regulations of European Charter on Local Self-Government are the foundation for the principle of subsidiarity. This principle has specific importance for the positioning of local self-government and its institutions.

The principle of subsidiarity as defined in the Charter, states that activities shall be exercised “by those authorities which are closest to the citizen” (Anon. 2003 : 4). This is the way local authority units (municipalities and cities) acquired a primary position in the management of local public affairs.

The Charter also classifies an assignment of jurisdiction to other authorities taking into account nature and scope of activities, efficiency and effectiveness of requests. At the same time, the Charter defines principle in which rights entrusted to local authorities will be “according to the rules, full and exclusive” (Anon. 2003 : 4). These rights may not be limited by other authorities, central or regional. This is possible only in cases that are postulated by law. In cases where jurisdiction is transferred to the central or regional authorities, local government/authorities have right to adjust their implementation to the local conditions and be consulted about the whole procedure.

One of the most important supports in activities of the local authorities is local government. Regulations of the European Charter on Local Self-Government provide space for them to “determine their own internal administrative structures in order to adapt them to local needs and ensure effective management” (Anon. 2003 : 4). Local government is important human and institutional resource for providing services to citizens and shaping development projects within the jurisdiction of local self-government.

One of the very significant segments of local self-government development refers to autonomy in the area of financing the local government bodies. Within the economic policy

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 29 Law and Political Aspects of Local Economic and Infrastructural Development of the country, bodies of local authorities have right “to adequate financial resources of their own, of which they may dispose freely within the framework of their powers” (Anon. 2003 : 6). Sources of financing of local authorities are adopted according to their jurisdiction and duties, regulated by the constitution and the law of the country.

European Charter’s regulations uphold the protection of financially indigent local communities, i.e. less developed ones compared to the average development of local communities. In that context the need imposes itself to establish adequate “equalisation procedures or equivalent measures which are designed to correct the effects of the unequal distribution of potential sources of finance...” (Anon. 2003 : 6). Local authorities are consulted by higher level of authorities regarding the allocation of finance resources. European Charter’s regulations define that the sources allocated to local authorities “shall not be earmarked for the financing of specific projects. The provision of grants shall not remove the basic freedom of local authorities to exercise policy discretion within their own jurisdiction” (Anon. 2003 : 6).

The widest needs of municipalities and cities for financial support are related to the capital investments in building and maintaining communal infrastructure: water supply and sewage, regulation of construction land and construction of local roads. Basic financial sources for these activities are located in the budget lines of local self-government. Those sources are insufficient even in the developed local communities. Therefore, the need for capital investments through credit loans is much expressed. Bearing in mind this need, Charter defines that “local authorities shall have access to the national capital market” (Anon. 2003 : 6). This part related to access to the national capital market is one of the most important for the communal infrastructure financial segment. Borrowing of municipalities and cities is limited by many obstacles: lack of own participation, difficult procedure of getting approval by parliaments of the higher level of government, difficulties regarding the loan instalments, etc. Beside this, it is important to underline that access of local communities to the national capital market is institutionally and functionally unsolved and it is one of the most difficult factors in the field of communal infrastructure in all countries of the post socialist transitions. In that context it is significant to stress out the fact that without communal infrastructure and regulation of construction land it is not possible to use environment as the basic resource in the local community development.

Legal and statutory jurisdiction concept of municipalities and cities in the area of local economic and infrastructural development

According to the Law on Local Self-Government in the Federation of Bosnia and Herzegovina (Anon. 2006), self-government area of the local self-government unit is based upon the concept of full jurisdiction. Basic idea is situated in the fact that local 30 Local Economic and Infrastructure Development of SEE in the Context of EU Accession M. Pejanović: Constitutional and Legal role of Local Authorities in Economic and... self-government unit – municipality and city have a right to deal with issues related to the local impact, which are not excluded from their jurisdiction or assigned to any other authority. For the unit of self-government (municipality) in the Federation of Bosnia and Herzegovina, there are 30 questions set up by the Law on Principles of Local Self-Government in the Federation of Bosnia and Herzegovina, which determines self-government segments and independence in the decision making process (Anon. 2006). Those questions are related to important areas of social, economic and cultural local community development. In the area of local economic and infrastructural development, the city and municipality as units of local self-government deliver acts in which all development policies have been formed. Among those acts are: municipality budget, mid-term and annual development plans of the local self- government aimed to create conditions for economic development and employment. Regarding the policy of environment management and protection of environment, municipality and city are delivering urban, environmental and implementation plans. Definition of assignment, allocation and use of the environment is in the full jurisdiction of municipality and city. One of the most important plans regarding the environment as a resource is the plan of arrangement and organization of the construction land. Only after preparation of construction land, it is possible to implement the building plans for housing and building plans for industry and economy.

Area of the local self-government infrastructure development and communal infrastructure improvement primarily belongs to the jurisdiction of the local self- government unit. Bearing that in mind, Law on Self-Government Principles of the Federation of Bosnia and Herzegovina has regulations towards local self-government to manage, finance and improve activities of the local communal infrastructure. The role of the unit of local self-government is very important regarding building and maintaining objects of the local communal infrastructure. In this context, it is provided that units of local self-management have jurisdiction for water supply, assortment and withdrawal of sewage, maintain public sanitation, building local roads, organization of local and public transportation (Anon. 2006).

Law on Local Self-Government in Republic of Srpska (Anon. 2004), defines municipality as basic territorial unit of local self-government. Its jurisdiction is extensive and based upon principle that municipality is self-determining regarding all issues of local interest, which are not excluded from their jurisdiction or allocated to another level of government (Anon. 2004). In the field of economic and social local community development, municipality autonomously develops economic development plans, urban and implementation plans.

Jurisdiction in the segment of communal activities has extensive legislation foundation. This Law sets up that municipality concerns water supply, gas and other energy supplies. Furthermore, municipality is taking care of the public transportation, assortment and withdrawal of sewage, maintenance of cemeteries, streets, parks and green areas (Anon. 2004).

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 31 Law and Political Aspects of Local Economic and Infrastructural Development

It is observable that concept of the legal jurisdiction of municipality in the field of economic and infrastructural development is the same in both entities of Bosnia and Herzegovina. In statutes of municipalities and cities based upon legal regulations, jurisdiction is maintained in order to shape and implement policy of local economic and infrastructural development. For example, statutes of Municipality of Bihać and City of Banja Luka have very extensive scope of jurisdiction regarding the issues of economic and infrastructural development. Statute of Municipality of Bihać regulates following jurisdictions of this local self-government unit: water supply, assortment and withdrawal of sewage, maintenance of cemeteries, streets and bridges, parks and green areas, street lighting, etc (Anon. 2005a).

Statute of City of Banja Luka regulates jurisdictions in the area of maintenance and development of local communal infrastructure. Besides the regulation of public communal infrastructure objects, City of Banja Luka has other jurisdictions such as to ensure production and deliverance of water, heat energy, assortment and withdrawal of sewage, public sanitation, public transportation, maintenance of streets, roads, parks, cemeteries, public parcels sanitation (Anon. 2005b).

Initiation, creation and implementation of local economic and infrastructural development policy are performed through legal and statutory role of municipality council and municipality mayor. Municipality council/assembly is composed of direct elected councillors, representatives in municipality’s councils. They express the will and interest of citizens in all aspects of social, economical and infrastructural local self-government development. Those interests are mostly expressed in the activities of citizens in their territorial community unit. Municipality council, based upon the proposal from municipality mayor, shape the economic development policy through mid-term economic development plans, urban and environmental plans and capital investments plans. Municipalities and cities are establishing various bureaus for all needs concerning the preparation of development plans. The role of municipality mayor in the segment of local economic and infrastructural development has two aspects: the first aspect is to propose development policies and projects, and the second aspect is to implement development policy adopted by municipality council. Preparation and implementation of development projects are evident in the authority, responsibility and management skills of the municipality mayor. His authority is evident as the highest influence in executive power performance. At the same time, his responsibility for development policy in the local self-government unit is based upon the general will of citizens. Moreover, municipality mayor has two aspects of political power: proposition of local community development policy and policy implementation when confirmed by municipality council/assembly. Relation towards citizens and their interests creates the institution of municipality mayor as the responsible subject for the local community development dynamics. Examples of successful practices in the context of social, economic and infrastructural development

32 Local Economic and Infrastructure Development of SEE in the Context of EU Accession M. Pejanović: Constitutional and Legal role of Local Authorities in Economic and... in Bosnia and Herzegovina verify hypothesis that this kind of development is determined by responsibility and management skills of the municipality mayor.

According to the relevant indicators of local economic and infrastructural development for the period of several decades, these are the municipalities, which are remarkable with their results: Gračanica, Široki Brijeg, Tešanj, Ljubuški, Tuzla, Bijeljina, Centa Sarajevo, Srebrenik, Zenica, Čitluk, Laktaši, Doboj, Živinice, Bosanska Gradiška, Stari Grad Sarajevo, Prijedor, Konjic, Vitez, Bihać, Goražde, Ilidža, Novi grad Sarajevo and Novo Sarajevo.

The main aspects of the local self-government unit’s role in local economic and infrastructural development

After the Second World War, many European countries’ municipalities and cities have gained important role in the local economic and infrastructural development, particularly as holders of the reconstruction and development processes. This kind of practice has been especially confirmed in Germany after the war, whose leader Conrad Adenauer, initially as the Mayor of Köln, created the model of rapid local economic and infrastructural development in municipalities and cities. Local communal infrastructural development and industry had created a wide-ranging economic and social development in Germany, making Germany one of the most developed countries in Europe in the 60’s of the twentieth century.

In the period of communal system reconstruction in the fifties of twentieth century in the Yugoslav socialist federation, local self-government and free initiatives of citizens in the area of local economic and infrastructural development have been initiated. Interest of citizens for their local community development was expressed by introduction of self-contribution for local community development. It was especially articulated in the construction of water supply systems, electric energy supply systems and local roads.

After the Dayton Peace Agreement in 1995, units of local self-government in Bosnia and Herzegovina have had very important role in the reconstruction process of local communal infrastructure. Considerable role was also played by the international community, which contributed greatly with financial support for the reconstruction of the communal infrastructure.

Mayor aspects of the municipalities’ and cities’ role within the local economic and infrastructural development are articulated by activities that provide planning of industrial economy and employment of the population. Unit of local self-government is able to create conditions for development of industry and employment. Those conditions are visible in policies and measures that can be brought up by the municipality

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 33 Law and Political Aspects of Local Economic and Infrastructural Development and city council based upon resources of the city and municipality. Those resources are area itself and management capacities for creating development projects. Beside all this, it is possible to have supporting measures for economic and industry development and service industry development through tax reliefs, favourable conditions for deliverance of construction land and encouraging conditions for loans.

The main aspects of municipalities’ role as the unit of local self-government in the area of local economic and infrastructural development are articulated in these elements: Unit of local self-government carries out plans for mid-term and annual social and economic development. Within those plans, municipality defines goals for its development according to natural and human resources at her disposal; Unit of local self-government: municipality and city carry out urban and environmental plans and plans considering construction land; • Based upon the preparation of construction land, unit of local self-government defines assignment for industrial zone and the zone for small businesses development; Unit of local self-government implements measures regarding employment and economy development, especially towards young people. These measures provide better conditions regarding tax policy and loan conditions; Unit of local self-government, with its own resources or in cooperation with other units, establishes and develops bureaus for the local economic and infrastructural development; Bureaus of the local self-government unit establish professional capacities for local economic development projects and qualification of municipalities for the donations’ applications within the European structural funds.

Ideal of local self-government implied democratic participation of citizens in decision making processes regarding their interest in the local communities. One of the most important interests of citizens is establishment of conditions for employment and industry. In that view, local authorities: municipal council, municipal mayor and municipal administration have irreplaceable development function in the widest context of local economic development and democracy development in the whole society. Local self-government has a capacity to develop and promote the role of citizens within the participative and representative democracy.

Local infrastructure development, its conception and function is a precondition of entire social, economic and welfare development of municipality and city as units of local self-government. Provision of water supply, energy supply, treatment of waste and sewage are the basis for the fulfilment of people’s everyday needs in their local communities, rural and urban settlements.

The role of local community and its authorities in the segment of infrastructural development have these following aspects:

34 Local Economic and Infrastructure Development of SEE in the Context of EU Accession M. Pejanović: Constitutional and Legal role of Local Authorities in Economic and...

Units of local self-government in their institutions, before all in the activities of municipal council, set up goals, policy and instruments for the implementation of endeavours in the segment of infrastructure; Unit of local self-government is the carrier of projects’ development and capacity building for water supply of entire population in the local community, then collection, treatment and disposal of sewage; • Unit of local self-government is responsible for the financial conditions for construction of facilities aiming to supply citizens with energy products: gas, electric energy and heat energy supply; All inhabited places in the unit of local self-government are connected with the centre of municipality and surroundings by local transportation. Municipality as the local self-government unit obtains local roads and organization of the public transportation for residents.

Construction and maintenance of communal infrastructure determines the dynamic of local community social and economic development. If the local self-government institutions – municipal council and municipal mayor – have no plans and no ensured financial sources for regulation and urban planning, water supply planning, supply of energy products, etc., subsequently all new housing construction and construction of new business capacities are disputed. Due to the inappropriate position of municipalities in the distribution of public profit4, units of local self-government in Bosnia and Herzegovina do not operate with adequate financial sources and financial independence for the capital investments in constructing infrastructure. Particular problem is articulated in municipalities that are inadequately developed or undeveloped at all.

Insufficient financial sources in municipalities’ budgets for capital investment in local communal infrastructure, especially in undeveloped and poor municipalities, stress out the question of municipalities’ and cities’ approach towards the capital market in the country. The fact is that conditions and procedures of credit loans for municipalities and cities considering capital investments are not resolved within national legal regulation. Because of that, many municipalities have no opportunities for capital investments in the communal infrastructure. They depend on the grants allocated from higher level authorities.

Credit loans for municipalities considering capital investments are recommended by Committee of Ministers of Council of Europe (Anon. 1992; Anon. 2003 : 34). Beside the recommendations for approach to the local national capital market, in addition, an approach towards integrated European markets in capital market investments has been recommended (Anon. 1992; Anon. 2003 : 34). This kind of position of the local

4 According to the Law on Public Income Allocation in the Federation of BIH, municipalities participate with 8.45%. In the Republic of Srpska, based upon the Law on Public Income and Expenditure, municipalities receive 23% of income.

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 35 Law and Political Aspects of Local Economic and Infrastructural Development self-government unit is analyzed through examples of Municipality of Gračanica and City of Bijeljina as models of successful practices.

Model of local economic and infrastructural development: case study Municipality of Gračanica

Municipality of Gračanica has 58.000 inhabitants. It is one of the most developed municipalities in Tuzla Canton. In the area of Municipality of Gračanica there are 9.500 employed citizens. This municipality has had very dynamic economic and infrastructural development in the last ten years and more. Analysed achievements concerning local development projects for the period 2008–2012 offer knowledge that local self- government institutions – municipal council, municipal mayor and municipal administration – primarily direct their legal and statutory role towards the needs of local population in the segments of economic development and communal infrastructure construction.5 This municipality defined its strategic goals in the Strategy of Integral Municipality Development. This Strategy was redefined for the period of 2011–2020 (Anon. 2011a : 3). Based upon the Strategy of Integral Municipality Development of Gračanica, programme goals of the municipal mayor, adopted by municipal council for 2008, 2009, 2010, 2011 and 2012 were focussed into three areas: Support to the local economic development; Functioning of municipality administration as the service for citizens and local business; Increasing and improving services of public communal companies and institutions at the higher level for all citizens and their interests.

For the realization and implementations of these goals (economic and infrastructural development), Municipality of Gračanica has designed various economic development and communal infrastructural projects. What especially characterised the va- lidity of this local economic and infrastructural municipality of Gračanica development is the philosophy of developing not only the midpoint of municipality but other communities in the area as well. I this context, development projects were structured as huge projects for the municipality and smaller development projects for the local communities in the area.

Among the most significant municipal development projects are the following: Structure of regulation plans for industrial zone and numerous business zones with construction land; Support to the self-governing business throughout better conditions concerning allocation of land, and payment of municipal tax and annuity;

5 This opinion is result of content analyses of program activities of the Mayor of Municipality of Gračanica for 2008; 2009; 2010; 2012

36 Local Economic and Infrastructure Development of SEE in the Context of EU Accession M. Pejanović: Constitutional and Legal role of Local Authorities in Economic and...

Establishment of municipal centre for business, which provides services for busi- nessmen, all necessary documents and permissions for business in seven days; • Heating of city area and industrial zone. Municipality of Gračanica uses energy from own thermal sources; Business promotional project through municipal trade fare “Grapos – expo”; Construction of local roads; Water supply project; Financial support to projects for agriculture; Sewerage construction projects in all municipality areas; Projects for collection and treatment of sewage; Public lighting projects in all municipality inhabited areas.6

Financing for development projects is ensured from municipality’s own financial recourses. Annual budget in the period 2008–2012 was 10.000.000 KM. Around 40% of Municipality of Gračanica’s budget is allocated to local economic and infrastructural development. Annually, Municipality allocates three to four million KM (Anon. 2012a : 2). Therefore, budget of Municipality of Gračanica has primarily development function. The following presents the dynamic of investments viewed annually. During 2008 in local economic and infrastructural development of Municipality of Gračanica it invested 4.824.716 KM in 85 capital projects (Anon. 2008a : 9-12). The biggest investment was allocated for capital projects: heating system of the city, building of local roads, communal water supply systems and public lighting. In 2009, 46 capital projects were implemented with invested 4.441.800 KM of the budget resources. Mayor projects were: heating system of the city with 815.000 KM, as well as the construction of sports hall “Luke” with the budget of 1.100.900 KM (Anon. 2009a : 12-13). For 2010, the programme of the Mayor of Municipality of Gračanica planned implementation of 57 capital projects. These 57 capital projects required 3.721.716 KM to be invested out of the budget sources. During that year (2010) the biggest investments were allocated to the construction of water supply system in 11 communal units. In the communal unit of Stjepan Polje 533.571 KM was invested for communal infrastructure (Anon. 2010a : 15-16). Moreover, significant investments were allocated to the construction of communal infrastructure in the business zone and local road: Gračanica-Lendići.

General economic crisis had influence on declining of the financial investment for municipality budgets. That is why the budget for capital projects in 2011 was decreased too. During this year, 58 capital projects were implemented with an investment of 1.838.766 KM of budget sources (Anon. 2011b : 22-24).

Increase of the budget sources for investment in the capital projects emerged in 2012. During this year, nearly 5.000.000 KM was invested out of the budget, plus

6 Implementation of these development projects during 2008, 2009, 2010, 2011 and 2012 is based upon annual activities programme of the Mayor of Gračanica Municipality.

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 37 Law and Political Aspects of Local Economic and Infrastructural Development the sources obtained by the loan from commercial bank in the amount of 2.200.000 KM. Those financial resources were used for completion of key roads and streets with investments of 1.329.000 KM. For the capital water supply projects 1.044.000 KM was invested. At the same time, during current year, 2.104.000 KM was invested for the sewerage project (Anon. 2012a : 31).

Dominant allocation of the local self-government capacities of the Municipality of Gračanica in the segment of local economic and infrastructural development made this municipality an example of good practice. This Municipality is affirmed as the one of the most successful models of the local economic and infrastructural development in Bosnia and Herzegovina. Through execution of the discretion power principle for initiating activities in the interests of citizens, local authorities successfully used that possibility in the jurisdiction that is neither out of municipality nor is it allocated to another level of government, which is regulated by the European Charter on Local Self-Government. Therefore, Municipality of Gračanica created local self-government with its own self-organization and responsibility. According to all this mentioned, Municipality of Gračanica as the unit of local self-government effectively achieved and performed the function and the role in the local economic and infrastructural development and it substantiates interests of citizens for economic development and better living conditions.

Model of local economic and infrastructural development: case study City of Bijeljina

According to the analyses of the Activities Report of the Mayor of Bijeljina for the period 2007–2012, it is concluded that this is an example of good practice in the achievement of successful role in the segment of local economic and infrastructural construction and development.7 After the period of longer backwardness in the construction of communal infrastructure, there was a turning point in the Municipality of Bijeljina. In the first decade of 21st century, institutions of the local self-government of the Municipality of Bijeljina – municipal assembly, municipal mayor and municipal administration – reshaped the plans and projects concerning communal infrastructure. During 2007 at the Municipal Assembly meeting in June, the Development Strategy of the Municipality of Bijeljina until 2015 was adopted (Anon. 2007a : 5).

Implementation of the Development Strategy of Municipality of Bijeljina is performed through several infrastructural projects:

7 “Local communities in BIH, according to the recommendations of international institutions, very often use an example of good practice in the City of Bijeljina, so we have had a huge number of visits by representatives of local communities from RS and FBIH, who asked for our assistance in the implementation of some solutions.” See: Activities Programme Report of Mayor and Administrative Service of the City of Bijeljina in 2012, page 3

38 Local Economic and Infrastructure Development of SEE in the Context of EU Accession M. Pejanović: Constitutional and Legal role of Local Authorities in Economic and...

Sewerage system; • Regional landfill; Water supply system facilities; • City traffic junction; Local roads; Gas supply system; Heating.8

The design process of these projects was based upon the opinion that construction of communal infrastructure presents an assumption for the general development in Municipality of Bijeljina: economic, social, demographic and cultural. It is also an assumption towards better life and fulfilment of citizens’ needs. Vision for the infrastructural development of Municipality of Bijeljina is ensured by the Development Strategy of this Municipality. Excellent management skills and capacities are articulated in the role of municipal mayor and modernization of the municipal administration.

Implementation of capital projects considering communal infrastructure in the Municipality of Bijeljina indicated the new approach towards obtaining financial resources. This approach is ensured by increase of the municipal budget and obtaining financial resources through loans and donations as well as obtaining grants from Republic of Srpska (Anon. 2007a : 6).

Budget of the Municipality of Bijeljina in 2007 was 46.291.971 KM (Anon. 2007a : 14). Resources based on loans amounted to 8.030.000 KM and based on the capital grant of Republic of Srpska 335.000 KM. In 2008, the budget of the Municipality of Bijeljina grew and was 53.460.940 KM. Participation of local capital grants from the other levels of government increased to 1.085.247 KM. Gain from the loans was 7.020.680 KM (Anon. 2008b : 16). Decreasing of budgetary funds came in 2010. Budget resources for 2010 were 47.951.748 KM (Anon. 2010b : 4). For 2011, municipality budget increased to 50.293.379 KM which provided investments for the infrastructure and other premeditated obligations.

Secured financial resources in the budget of the Municipality of Bijeljina for 2012 were 48.567.035 KM. Gains from the loans within the budget structure were 4.900.000 KM (Anon. 2012b : 25).

Since 2012 Municipality of Bijeljina has a status of City of Bijeljina. With this status, Bijeljina gained new opportunities in local self-government capacity building. Cross-city collaborations, including cross-border collaborations with other cities, will create possibilities for the new development projects promotion and their financial

8 Activities Programme Report of Mayor and Administrative Service of the City of Bijeljina in 2007, page 1-2.

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 39 Law and Political Aspects of Local Economic and Infrastructural Development support. City of Bijeljina has significant natural and human resources. Municipality has outstanding soil for food production and its placement in the region.

Local authorities of City of Bijeljina in terms of good practice development for project planning9 and communal infrastructural financing have confirmed that success is possible with good self-organization, strategic planning and capacity building, while listening to the will and interests of citizens. City Assembly and the Mayor were the most responsible for the implementation of capital investments in the communal infrastructure. Communal infrastructure construction was an encouragement and stimulation for development expansion concerning economic development, local transportation, health care, education and culture in the City of Bijeljina. Communal infrastructure construction of City of Bijeljina increased democratic participation of citizens in decision making processes about public affairs and encouraged their trust in the local institutions: City Assembly, Mayor and Municipal Administration.

Communal infrastructure development model in this Municipality, or rather City of Bijeljina since 2012, confirmed the importance of legal and statutory regulations within the unit of local self-government. When local economic and infrastructural development of municipalities in Bosnia and Herzegovina attains dynamic improvement, at the same time it means that the whole state of Bosnia and Herzegovina has flourishing development on the entire territory.

Conclusion

In the history of society development, local community emerged in the form of permanent inhabitancy of people at one particular territory. Inhabitancy throughout the history has two types: urban and rural communities.

Territorial proximity of people in one settlement sets up mutual needs. Those needs are known as primary needs in everyday living: work, housing, water and energy supply, local transportation, communal and social activities.

Mutual needs of people in the local community are fulfilled by their activities. Citizens in local community create a network of social relations and establish institutions, which by their activities fulfil their needs.

Local self-government within the historical democracy development appeared as political and legal institution of citizens in the local community. Local self-government is the most suitable form for direct participation of citizens in the management of public affairs. Local self-government is established and performed in the

9 City of Bijelina started with production of Development Strategy of City of Bijeljina for the period 2015–2023.

40 Local Economic and Infrastructure Development of SEE in the Context of EU Accession M. Pejanović: Constitutional and Legal role of Local Authorities in Economic and... municipality as the basic self-government territorial unit. Citizens directly elect the bodies of local self-government units. Municipality has its own statute and autonomy in self-organization and financing of its internal management and administration.

European democratic tradition brought up an adoption of the European Charter on Local Self-Government as the multilateral legal and political document in the Council of Europe in 1985. According to the theoretical basis, as well as according to the synthesis of different experiences in practice of local self-government development in European countries with developed democracy, various standards and principles were set up considering local self-government development. Starting point of the local self-government development is the principle of subsidiarity. Social meaning of this principle in the Charter is defined in a way that public affairs should be firstly obtained by the local authorities that are closest to the citizens. The Charter also provided the principle of discretion power use in order for local authorities to implement their own initiatives regarding all matters that are not assigned in the jurisdiction of any other level of government. In that context, local authorities, based upon their own skills and responsibility, according to the legal regulations, can control and manage significant part of public affairs in the interests of local population.

As the member of Council of Europe, state of Bosnia and Herzegovina has ratified the European Charter on Local Self-Government in 2002. In that manner, principles of the European Charter on Local Self-Government became a property of citizens in their municipalities as the units of local self-government. Principles of the European Charter on Local Self-Government in Federation of Bosnia and Herzegovina are situated in the Laws on Local Self-Government of Federation of Bosnia and Herzegovina and Republic of Srpska, because the local self-government is guaranteed by the Constitutional Laws of BIH entities.

Legal jurisdiction concept of municipalities presents their self-management scope within which institutions of local self-government: assembly/council, municipal/city mayor and municipal administration open initiatives and reshape development projects considering various interests of their local community.

In the wider context of legal jurisdiction concept, units of local self-government have a significant position regarding local economic and infrastructural development. Local economic and infrastructural projects are the basis for successful development of entire local community and improvement of quality conditions for living and work.

Municipality with its management capacities reshapes long-term and mid-term economic development projects activating its human and natural resources. At the same time, municipal councils/assemblies as the representative bodies of citizens endorse environmental, urban and regulation plans: construction land, construction of industrial and business zones. Municipality introduces supporting measures for economic and industrial development and employment with its tax policy.

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 41 Law and Political Aspects of Local Economic and Infrastructural Development

Social, economic and cultural municipality and city development depends on implementation of projects and construction of local infrastructure. Those projects before all are: water supply systems, sewerage systems, heating and electricity systems and treatment and disposal of sewage. Also, those projects are: communal roads construction, organization of local public transportation, public lightning in inhabited areas.

Communal infrastructure construction indicates financial recourses management. Own funds from the municipalities and cities are insufficient because the relations considering public income sharing are not suitable for the units of local self-government. In Federation of Bosnia and Herzegovina, municipalities participate with 8.45%. In Republic of Srpska this participation is more suitable for municipalities with 23%. The biggest number of municipalities in Bosnia and Herzegovina belongs to the group of undeveloped municipalities. Near to 10-15 municipalities has a status of extremely undeveloped local communities.

In addition to this, municipalities’ and cities’ approach towards national capital market is not solved yet. Loans for capital investments are difficult to get for almost all cities and municipalities. Optimal solutions are needed for capital investments financing.

Examples of successful practices considering local economic and infrastructural development are several cities and municipalities in Bosnia and Herzegovina. According to the content analysis that belong to the activities of mayors of Bijeljina and Gračanica in the period 2008–2012, some key elements are defined considering their successful models.

Planning and implantation of local self-government economic and infrastructural development model in Municipality of Gračanica verifies the hypothesis that institutions of local self-government have responsibility for the local community development and interests of their citizens. This can be very important lesson for strengthening the role of less developed local self-government units. Municipality of Gračanica allocated more than 40% of its annual budget towards capital investments in the communal infrastructure development and industry. What presents the particular characteristic of this Municipality’s development model is the equal development of local communal infrastructure in all community units in the area of entire Municipality.

Municipality of Bijeljina – holding a status of City as of 2012 – according to results achieved in the field of communal construction is also among the most successful units of local self-government. Institutions of local self-government of City of Bijeljina – municipal mayor, municipal assembly and municipal administration – reshaped development projects in the segment of local communal infrastructure.

42 Local Economic and Infrastructure Development of SEE in the Context of EU Accession M. Pejanović: Constitutional and Legal role of Local Authorities in Economic and...

Those projects are: construction of sewerage system, water supply system, city traffic junction and regional landfill. These development projects became the basis for the general development of City of Bijeljina and for the better living and working conditions of citizens.

The main characteristic of this local communal construction model in City of Bijeljina is in locating the financial resources for the capital investments with loans from the World Bank and European Bank for Reconstruction and Development. This development model in City of Bijeljina became an example of successful practice for other municipalities and cities in Bosnia and Herzegovina.

Strengthening the role of local authorities in the field of local economic and infrastructural development considers more reforms within the legal treatment of the municipality’s position regarding the public income and regarding improvement of conditions for an access to the national capital market. Following reforms should be taken into the consideration:

First, adjustment is required considering participation of municipalities as units of local self-government in the public income allocation. Present participation of municipalities should be raised to the European average level of 25% to 30%.

Second, it is important to provide adjustments in the legal regulations for municipalities and cities to have an access to the national capital market and to obtain loans in the field of local communal infrastructural construction.

Third, it is vital to form bureaus for business and economy activities considering development of local communities through association of municipalities. These bureaus should strengthen municipality management capacities, especially in application capabilities regarding European structural funds. This would also speed up integration processes of Bosnia and Herzegovina in the European Union.

Fourth, municipalities and cities have different level of economic, social and infrastructural development. For the municipalities that are in the group of undeveloped municipalities – 20% out of 140 municipalities in Bosnia and Herzegovina – it is necessary to establish the Fund for Undeveloped Municipalities in Federation of Bosnia and Herzegovina and in Republic of Srpska.

Improvement of management quality and skills of municipalities and cities and improvement of their financial position will be important contribution for the strengthening of their development role in Bosnia and Herzegovina in the field of local economic and infrastructural development.

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 43 Law and Political Aspects of Local Economic and Infrastructural Development

References

Anon. (1992) Recommendation no. (92) 5 of European Council’s Committee of Ministers for countries members on loans from local and regional bodies of government dated 27th March 1992. Anon. (2003) European Charter on Local Self-Government, Part I, Act 2 (2003) Association of Municipalities and Cities of the Federation of BIH, Sarajevo. Anon. (2004) Law on Local Self-Government of Republic of Srpska, Official Gazette RS, No. 101/04. Anon. (2005a) Statute of the Municipality of Bihać, Act 16, Official Gazette of the Munici- pality of Bihać, No. 2/01 and 6/05. Anon. (2005b) Statute of the City of Banja Luka, Act 14, Official Gazette of the City of Banja Luka, No. 25/05. Anon. (2005c) Statute of City of Banja Luka, Act 14, Official gazette of City of Banja Luka, No. 25/05. Anon. (2005d) Statute of Municipality of Bihać, Official Gazette of Municipality of Bihać, No. 2/01 and 6/05, 2001/05. Anon. (2006) Law on Local Self-Government in the Federation of Bosnia and Herzegovina, Official Gazette Federation of BIH, No. 49/06. Anon. (2007a) Activities Programme Report of Mayor and Administrative Service of the City of Gračanica for 2007. Anon. (2007b) Activities Programme Report of Mayor and Administrative Service of the City of Bijeljina in 2007. Anon. (2008a) Activities Programme of the Municipality Mayor of Gračanica for 2008. Anon. (2008b) Activities Programme Report of Mayor and Administrative Service of the City of Bijeljina in 2008. Anon. (2009) Activities Programme of the Municipality Mayor of Gračanica for 2009. Anon. (2010a) Activities Programme of the Municipality Mayor of Gračanica for 2010. Anon. (2010b) Activities Programme Report of Mayor and Administrative Service of the City of Bijeljina in 2010. Anon. (2011a) Activities Programme and Report on Mayor’s Activities in the Municipality of Gračanica for 2011, page 3., Municipality of Gračanica 2011. Anon. (2011b) Activities Programme of the Municipality Mayor of Gračanica for 2011. Anon. (2012a) Activities Programme of the Municipality Mayor of Gračanica for 2012. Anon. (2012b) Activities Programme Report of Mayor and Administrative Service of the City of Bijeljina in 2012. Anon. (na) City of Bijelina started with production of Development Strategy of City of Bi- jeljina for the period 2015–2023. Đorđević, J. (1965), New Constitutional System, Savremena administracija, Beograd. Pejanović, M. and Sadiković, E. (2010) Local and Regional Self-Government in Bosnia and Herzegovina, Šahinpašić, Sarajevo-Zagreb. Pusić, E. (1963) Local Community, Narodne novine, Zagreb.

44 Local Economic and Infrastructure Development of SEE in the Context of EU Accession DOI 10.5644/PI2013-153-02

CIVIL SOCIETY: AN INEVITABLE PARTNER IN THE DEVELOPMENT OF LOCAL COMMUNITIES IN YOUNG DEMOCRACIES

Josip Kregar* Antonija Petričušić**

Abstract

The classical democratization theories often ignore the importance of civil society in successful democratic consolidation emphasizing predominantly the importance of institutional consolidation and legislative reforms. However, institutions and legal norms are often empty shells in democratic consolidation if not promoted among political forces (representative and behavioural consolidation) and through consolidation of civil society and civic culture (attitudinal consolidation).

In this article we argue that the process of democratic consolidation has many dimensions and is result of specific ideographic circumstances. The cultural (political culture) and institutional dimension (institutional building) of democratic consolidation do not correspond and have different pace and scope of changes. That is because the cultural change is slow, reinforced by mentalities which are often not supportive towards new institutional principles and blueprints, legislative changes and official politics. In such discrepancy, the phenomenon is seen as unpredictable, as a gap between programs and realities, strategies and realization. The change is perceived as formal and successes are reversible.

In the emerging democracies such a gap is bridged by the activity of the civil society. Though the civil society is promoting democratic values and policies it cannot replace the main institutional skeleton of state (bureaucracy, political parties, etc.). It furthermore depends significantly on global programs and international support which subsequently might result in a strong bias toward isolation from society and the local priorities. The situation is paradoxical: the state and political elites are not ready to promote (democratic) changes and civil society organizations are marginalized to politically neutral subjects. In explaining conditions pertinent to a successful democratic consolidation, this article assesses if civil society has the capacity to promote changes of predominant social values in young democracies and induce an emergence of civic culture.

Keywords: Democratic consolidation, Consolidation of civic culture and civil society, Civil society, Trust.

* PhD, tenured Professor at the Faculty of Law, University of Zagreb, Trg m. Tita 3, 10000 Zagreb, Croatia, phone: +385 14 897 522, e-mail address: [email protected] ** PhD, Faculty of Law, University of Zagreb, Trg m. Tita 3, 10000 Zagreb, Croatia, phone: +385 14 897 547, e-mail address: [email protected]

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 45 Law and Political Aspects of Local Economic and Infrastructural Development

Introduction

In this article we will argue that democracy becomes sustainable and “the only game in town” (Linz and Stepan 1996 : 16) merely when it becomes consolidated at the level of civil society. The concept of civil society is hereby understood broader than a group of non-governmental organizations (which need to be formally established and are firmly structured) but is perceived as a wide range of organizations that are concerned with public issues (being made of civic, issue-oriented, religious, and educational interest groups and associations) (Diamond 1999 : 222). The civil society is thus understood as the intermediary associational realm of social life organized between state and family, made of organisations that are formed on a voluntary basis by citizens to protect their interests or shared values and, though bound by a legal order, enjoy autonomy in relation to the state (White 1994 : 379; Diamond 1999 : 221). It provides “the basis for the limitation of state power, hence for the control of the state by society, and hence for democratic political institutions as the most effective means of exercising that control” (Huntington 1984 : 204). Similarly, Larry Diamond argued that the civil society plays primary role in checking, monitoring and keeping the government and institutions responsive to the public. Secondly, by insisting on transparency and by “restraining the exercise of power by the state and holding it accountable” (Diamond 1999 : 239-240; Tusalem 2007 : 364) civil society fights political corruption and nepotism in governance at the local or national levels, and keeps the government accountable and transparent. Civil-society organizations furthermore might stimulate political participation, what is particularly important in young democracies where political indifference and apathy are epidemic (Diamond 1999 : 242; Tusalem 2007 : 362). Fourthly, civil society organizations, by articulat- ing and disseminating democratic principles and values, help to assert the rights and power of the people (Diamond 1999 : 244) and in this way make the elites and the mass public more committed to democracy. Lastly, civil society organizations cast competent future political leaders since they allow their members to learn how to organize and motivate people, publicize programs, reconcile conflicts and build alli- ances (Diamond 1999 : 245). Consequently, through those numerous functions, civil society organizations help consolidation of democracy in a number of ways.

Against earlier democratization theories of 1980s that gave primary emphasis to the role of elite in the regime transformation (O’Donnell et al. 1986) emphasizing that “democracies are created not by causes but by causers” (Huntington 1991 : 108), the civil society was recognized as the missing link in making democracy work (Putnam 1994; Diamond 1994; Fukuyama 2001; Inglehar and Welzel 2005). Civil society organizations are hereby understood as fora of interpersonal trust expression, playing an important role in both democratic transition and consolidation in a society that has been transforming its political system from authoritarian into democratic. The theoretical concept in this article applies Wolfgang Merkel’s four dimensions of the democratic consolidation: constitutional, representative and behavioural

46 Local Economic and Infrastructure Development of SEE in the Context of EU Accession J. Kregar, A. Petričušić: Civil Society: An Inevitable Partner in the Development of... consolidation, and finally, the consolidation of civic culture and civil society (Merkel and Puhle 1999; Merkel et al. 2003). In explaining conditions pertinent to a successful democratic consolidation, the consolidation of civic culture and civil society helps to understand what the role of subjective values and attitudes of citizens in the stability of democratic regimes is. In this article we will therefore claim democratisation efforts also need to be driven from the people at the lowest level of governance, i.e. in the local communities, in order for democratisation to be successful and sustainable. In the ethnically divided societies the emergence and consolidation of the civil society is even more relevant, because “democracy requires a public that is organized for democracy, socialized to its norms and values, and committed not just to its myriad narrow interests but to larger, common, ‘civic’, ends” (Diamond 1997 : 5). Though it does not seek to “govern the polity as a whole“ (Schmitter 1997 : 240) civil society is a relevant actor in a political process since it serves an important function in mobilizing pressure for political change through creation of organized social groups (Diamond 1997 : 8; Schmitter 1992). Civil society is able to serve as a mobilizing agent of political change in the transitional period or as a watchdog in a time of consolidation since “[c]ivil society organizations seek from the state concessions, benefits, policy changes, relief, redress, and accountability” (Diamond 1996 : 229). Since civil society organizations are capable of influencing different levels of government consequently the strengthening of civil society allows conversion of democratic forms into democratic substance (Carrothers 2002 : 7). However, for democratic consolidation to take place it is necessary that the civil society operationalises at the local, i.e. municipal level. This paper argues consequently that a specific set of values and behaviours needs to emerge and prevail in local communities in order to successfully consolidate young democracies of the region. Those values need to be articulated through informal forms of social interaction that indicate higher levels of interpersonal trust among citizens. Once the trust emerges in local communities, democracy is genuine, achieved from inside a society.

Democratic consolidation of civic culture and civil society

Among different and numerous institutions and actors that work together in a democracy, the role of civil society is very often marginally treated in the democratization literature. Whereas political elites, institutional and normative reforms do play a prevalent role in political, social and economic reforms, in the last two decades democratization theories started to take thorough account of emergence of civil society as playing a significant role in both democratic transition and democratic consolidation, at the same time allowing for a wider societal transformation (Diamond and Schmitter 1997; Merkel and Lauth 1998; Merkel et al. 2003).

Juan Linz and Alfred Stepan argued that democratic consolidation presupposes development of civil society. Those two prominent theoreticians of democratic

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 47 Law and Political Aspects of Local Economic and Infrastructural Development consolidation held that, given that a condition of a functioning state is secured, in order for a democracy to be consolidated, five other interconnected and mutually reinforcing conditions must emerge. These conditions, once met, result in five arenas of democratic consolidation: “[f]irst, the conditions must exist for the development of a free and lively civil society. Second, there must be a relatively autonomous political society that is made of institutions of a democratic political society – political parties, legislatures, elections, electoral rules, political leadership, and interparty alli- ances. Third, throughout the territory of the state all major political actors, especially the government and the state apparatus, must be effectively subjected to a rule of law that protects individual freedoms and associational life. Fourth, there must be a state bureaucracy that is usable by the new democratic government. Fifth, there must be an institutionalized economic society” (Linz and Stepan 1996 : 17).

Wolfgang Merkel suggested the sequence theory of democratic consolidation through four levels where the civil society plays a predominant role in the so called attitudinal consolidation. According to him, the democratization process starts with constitutional consolidation, which “refers to the key political, constitutionally established institutions, such as the head of state, the executive, legislative, and judicial branches of government, and the electoral system. Collectively, they form the macrolevel, the level of structures” (Merkel 2008 : 15). The first democratization level, constitutional consolidation, being structural and macro-level component, as a rule is the first one to finish, and “it affects the second, third, and fourth levels through components of norms and penalties that facilitate or constrict action and thereby shape structures” (Merkel 2008). The second level of democratic consolidation, according to Merkel, is a stage of representative consolidation, and “concerns the territorial and functional representation of interests. In other words, it is primarily about parties and interest groups, or the mesolevel of collective actors” (Merkel 2008). Guillermo O’Donnell similarly claimed that a democracy is consolidated when “power is alternated between rivals, support for the system is continued during times of economic hardship, rebels are defeated and punished, the regime remains stable in the face of restructuring of the party system, and there exists no significant political anti-system” (O’Donnell 1996 : 12-13).The second level is followed by the level of behavioural consolidation, “where the ‘informal’ actors operate – the potentially political ones, such as the armed forces, major land owners, capital, business, and radical movements and groups. They make up a second mesolevel, that of informal political actors” (Merkel 2008). Merkel hereby recalled that success with constitutional and representative consolidation is “crucial in deciding whether the informal political actors with potential veto power will pursue their interests inside, outside, or against democratic norms and institutions” (Merkel 2008). Finally, “if the first three levels have been consolidated, they become seminal for the emergence of the civil society that stabilizes a democracy” (Merkel 2008). As a result, the fourth, micro-level, represents the democratic consolidation of the political culture and concludes with the emergence of a citizenship culture. Merkel considered the culture of citizenship as

48 Local Economic and Infrastructure Development of SEE in the Context of EU Accession J. Kregar, A. Petričušić: Civil Society: An Inevitable Partner in the Development of...

“the sociocultural substructure of democracy” (Merkel 2008). However, the process of the political culture consolidation takes the longest to achieve. For example, political culture consolidation in the countries that became democracies in the second wave of democratization (Italy, Federal Republic of Germany, Austria, and Japan after 1945) took decades and, moreover, “can be sealed only by a generational change” (Merkel 2008). Along with the authoritarian tradition, the lack of democratic political culture in the post-communist countries has been discouraging the consolidation of democracy. Philippe Schmitter correspondingly underlined importance of political culture and social values in the process of democratic consolidation. He argued that a democracy is consolidated when “social relations become social values i.e. patterns of interaction can become so regular in their occurrence, so endowed with meaning, so capable of motivating behaviour that they become autonomous in their internal function and resistant to externally induced change” (Schmitter 1992). Václav Havel similarly acknowledged that democratic consolidation might require a generational change, arguing “while the formal establishment of democracy typically took only a matter of days, weeks or, at most, months, real democracy did not emerge easily. It is, indeed, an ongoing process, one that has not been completed even now. New generations, without the burdensome experience of life under totalitarianism, are only now emerging into adulthood. These new generations are only gradually mov- ing into positions in the decision making process in their countries” (Havel 2011 : 6).

In another writing of his, Merkel put forward a shorter consolidation format, considering that “the process of democratic consolidation is best described as a sequence of three interlocking phases. It starts with structural consolidation (constitution, political institutions), influences the level of representative consolidation (intermediate organization of interests: parties, interest groups), in order to then bring about long term attitudinal consolidation (specific and diffuse support of citizens)” (Merkel 1996 : 3). With respect to attitudinal consolidation, Wolfgang Merkel and Hans- Joachim Lauth consider the existence of a civil society to be a requirement for democracy to emerge since its activities promote democratic values and civic culture by executing four functions: (1) it serves as a protection against arbitrary use of state power, it contributes to a balancing between state authority and society, (3) it serves as a political socialisation agent, educating about the democracy, (4) it serves as a means of public criticism of the state activities (Merkel and Lauth 1998 : 4-6). Manal A. Jamal similarly considered that “civil society can contribute to democracy in four central ways: (1) it counters state power, (2) it facilitates political participation by helping in the aggregation and representation of interests, (3) it serves as a political arena that could play an important role in the development of some of the necessary attributes for democratic development, and (4) more broadly, it plays an important role in furthering struggles for citizenship rights” (Jamal 2012 : 12).

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 49 Law and Political Aspects of Local Economic and Infrastructural Development

Prerequisites for the consolidation of civil society

Robert Putnam’s conceptualization of the civil society as being made of the dense networks of associational life that bound communities together and promote norms of reciprocity and trustworthiness (Putnam 1994) will be operationalized in this article. Interpersonal trust is particularly important in pluralistic societies, where different communities, diverse either in political affiliations, membership or support to various interest groups or by belonging to different ethnic groups, are becoming more and more interdependent. Since society cannot be maintained in the case where there are strong value conflicts present, the very existence of interpersonal trust helps to facilitate life in diverse societies. It fosters tolerance and acceptance of the plurality of ideas, interests and attitudes. In words of Joerg Forbrig, civil society is “an important agent to anchor a democratic political culture in the broader populace” (Forbrig 2002). Such democratic political culture is “characterised by attitudes of tolerance, pragmatism, trust, willingness to compromise, and civility. On the behavioural level, these attitudinal dispositions translate into a pattern of moderation, cooperation, bargaining, and accommodation” (Diamond 1993). Consequently, existence of interpersonal trust has implications in the political sphere, allowing citizens to join forces in interest groups and political parties, since trust enables them to come together in citizen’s initiatives more easily.

As Lucian Pye notes, “[p]olitics rests upon collective actions which in turn depend upon a basic spirit of trust and a capacity for cooperation. At the same time politics involves conflict and competition. Cultures must therefore strike an acceptable balance between cooperation and competition, and the capacity of political cultures to manage this problem usually depends on how the basic socialization process handles the problems of mutual trust and distrust in personality development” (Pye 1968). American political scientists Almond and Verba back in 1963 demonstrated that in those countries where a greater proportion of interpersonal trust exists, democracy has historically worked well (Almond and Verba 1963 : 33). That is, according to them, because interpersonal trust resulting in relationships formation leads to a sense of cooperation which in turn creates stable democracy. Therefore, one of the most basic of the supportive attitudes and values for democracy to prosper is that a population needs to share a sense of interpersonal trust. This connection has been further elaborated in the works of numerous political and social scientists, who confirmed the causal relationship between socio-cultural factors and the performance of democratic political institutions. For example, Roland Inglehart argued that interpersonal trust is an enduring cultural syndrome conducive to the viability of democracy (Inglehart 1990 : 1211; Inglehart 2001, see also Offe 1999). He explains that “trust is not a fixed genetic characteristic: it is cultural, shaped by the historical experiences of given peoples and subject to change” (Inglehart 1990 : 1211). He was the pioneering sociologist in establishing that a broader process of cultural change is gradually transforming political, economic, and social life in advanced industrial

50 Local Economic and Infrastructure Development of SEE in the Context of EU Accession J. Kregar, A. Petričušić: Civil Society: An Inevitable Partner in the Development of... societies as younger generations gradually replace older ones in the adult population (Inglehart 1977). Undertaking numerous research efforts on value orientations world-wide, Inglehart also surveyed the role of civic culture in the development of democracy, measuring it with three variables: interpersonal trust, life satisfaction, and percentage of people who support revolutionary change. His survey results indicated that, since cultural values are stable and enduring, substantial and consistent cross-cultural variations prevail, and that in those nations that are characterized by high levels of life satisfaction, interpersonal trust, tolerance, etc., maintenance of democratic institutions is more likely than those whose publics lacked such attitudes (Inglehart 1990).

However, although “interpersonal trust is a prerequisite to the formation, trust alone is not sufficient to support stable mass democracy. A long-term commitment to democratic institutions among the public is also required, in order to sustain democracy when conditions are dire” (Inglehart 1988 : 1205). Robert Putnam established a strong link between the performance of political institutions and the character of the civic community (Putnam 1999 : 15). Other authors argued that the output of national institutions helps to generate interpersonal trust and tolerance or encourages citizen’s associational involvement (Rothstein and Stolle 2008; Kumlin and Rothstein 2005). Robert Dahl similarly considered that political beliefs of citizens do withstand democracy if people believe in the legitimacy of the institutions (Dahl 197 : 132).

More diversity often leads to less trust. As a rule, modern states are pluralistic, the fact of ethnic diversity might constitute a barrier for social capital with regard to trust at the community level (Delhey and Newton 2005; Anderson and Paskeviciute 2006). Putnam’s research similarly showed that social trust and networks of civic engagement appear to be negatively associated with ethnic diversity at the community level (Putnam 2007, see also Letki 2008; Costa and Kahn 2003). Andreas Wimmer argued the unsuccessful regime change is often conditioned by improper inter-ethnic relations. He argued that in those cases “[w]here states were too weak to overcome indirect rule and communal self-government, to penetrate a society or override other bonds of loyalty and solidarity, and where a network of civil society organisation had not yet developed, ethnicity was quickly politicised and politics turned into a matter of ethnic justice [i.e., bitter competition among ethnic groups]. The timing of the two processes – state modernization and the rise of civil society – and the values reached on each scale therefore explain whether the ethnicised or the fully national- ized versions of state formation prevail” (Wimmer 2002 : 79). It is established that a civic identity is more prone to formation of trust than a national one. For example, Mikael Hjerm and Linda Berg researched comparatively how two forms of collective national identity (ethnic and civic) affect individual political trust and concluded that a strong civic national identity has positive impact on political trust whereas a strong ethnic national identity has negative impact on political trust (Hjerm and Berg

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 51 Law and Political Aspects of Local Economic and Infrastructural Development

2010). Finally, pursuit of the principle of equality by the institutions helps to overcome the barriers of particularized trust in diverse societies and enhance generalized trust (Rothstein and Stolle 2008).

Finally, economic development is closely linked with the level of interpersonal trust: the people of rich societies show higher levels of interpersonal trust than in poorer ones (Inglehart 1999). Seymour Martin Lipset established the relationship between high levels of economic development and democracy (Lipset 1959 : 1994) and Huntington acknowledged the economic component of democratisation, arguing that “most wealthy countries are democratic and most democratic countries are wealthy” (Huntington 1991 : 21). In addition to economic affluence, “modernization leads to enduring mass attitudinal changes that are conducive to democracy (Inglehart and Welzel 2010)”. Welzel, Inglehart and Klingemann argued however that the intertwined combination of (i) socioeconomic development, (ii) along with emancipative cultural change and (iii) democratization lead a social progress. Namely, “[s] ocioeconomic development gives people the objective means of choice by increasing individual resources; rising emancipative values strengthen people’s subjective orientation towards choice; and democratization provides legal guarantees of choice by institutionalizing freedom rights” (Welzel et al. 2003).

Development of local civic communities in young democracies through the activities of Civil Society Organizations

Putnam holds that trust and associational membership are sources of social trust. According to him, “social trust and civic engagement are strongly correlated; the greater the density of associational membership in a society, the more trusting its citizens” (Putnam 1995 : 73). His theory of social capital proved that rich and dense associational networks facilitate the underlying conditions of interpersonal trust, tolerance and cooperation, providing the social foundations for a vibrant democracy (Putnam 2000). He understands social capital as “connections among individuals – social networks” (i.e. signifying a structural phenomenon) and as “the norms of reciprocity and trustworthiness that arise from them” (those being social norms, i.e. cultural phenomenon and signifying a cultural phenomenon) (Putnam 2000 : 19). Though Putnam acknowledged that “social capital is closely related to what some have called ‘civic virtue’” he warned that “civic virtue is most powerful when embedded in a sense network of reciprocal social relations. A society of many virtuous but isolated individuals is not necessarily rich in social capital” (Putnam 2000 : 19). Putnam argues that a kind of trust that he labels as a ‘thin trust’, built by generalized mutual reciprocity, is the core of social capital, because it nurtures newly formed networks and chances of new associations beyond daily friendship, which arise out of a ‘thick trust’, which is derived from personal experiences (Putnam 2000 : 19). According to Putnam, “a dense network of secondary associations both embodies

52 Local Economic and Infrastructure Development of SEE in the Context of EU Accession J. Kregar, A. Petričušić: Civil Society: An Inevitable Partner in the Development of... and contributes to effective social collaboration” (Putnam 1995 : 90). Moreover, the engagement in civic associations contributes to the democratic consolidation since it enhances a shared responsibility, and increases ability and inclination toward collaboration and cooperation. Interaction is directly linked to enabling people in building communities, committing to each other, and the knitting of the social fabric (Beem 1999 : 20).

The civic engagement implies active participation in public affairs. Being interested in public issues and prepared to be involved in debates and common activities are important signs of civic virtue. There are four central themes which regard participation in the civic community (Putnam 1993 : 87-91). A civic community needs to entail equal rights and obligations for all. Putnam explains that “such a community is bound together by horizontal relations of reciprocity and cooperation, not by vertical relations of authority and dependency. Citizens interact as equals, not as patrons and clients, nor as governors and petitioners. […] The more that politics approximates to the ideal of political equality among citizens following norms of reciprocity and engaged in self-government, the more civic that community may be said to be.” (Putnam 1993 : 88). Participatory civic community implies virtuous citizens that are “helpful, and trustful to one another, even when they differ on matters of substance” (Putnam 1993 : 88-89). Such a community is characterized by dialogue, respect for the other and recognition that we are dependent on each other in various ways. And, finally, by stressing that the norms and values of the civic community “are embodied in, and reinforced by, distinctive social structures and practices” (Putnam 1993 : 89).

By strengthening the participation of the citizens in the political processes through their involvement into civic associations, democratic structures at local level are being enhanced and strengthened. It is primarily considered that “[c]ivil society participation in public policy processes and in policy dialogues leads to inclusive and effective policies, if conjugated with adequate allocation of resources and sound management” (European Commission 2012 : 6). In order to strengthen democracy at the local level citizen associations need to feel invited to cooperate in local decision- making processes and policy planning and to be able to propose joint initiatives with local authorities. Thus, a dialogue between local authorities and civil society organizations should be promoted particularly at the local level, as civil society organizations “guarantee useful entry points for policy input in decentralised contexts. This enhances the responsiveness of national policies to local realities.” Besides, civil society organizations also help to “mobilise local resources and social capital, share information and bring marginalised groups into play, thus helping improve local governance and territorial cohesion” (European Commission 2012 : 7). Secondly, civil society organizations furthermore “play a role in boosting domestic accountability at local and national levels through a free, clear, accessible flow of information. They can contribute to nurturing respect for the rule of law by monitoring effective implementation of laws and policies and they can initiate and support anti-corruption

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 53 Law and Political Aspects of Local Economic and Infrastructural Development efforts” (European Commission 2012 : 7). Thirdly, civil society organizations “play an important role in service delivery, complementing local and national government provision and piloting innovative projects. Their capacity to identify needs, address neglected issues and human rights concerns, and mainstream services to populations that are socially excluded or out of reach is particularly important” (European Commission 2012 : 8). Fourthly, civil society organizations work for inclusive and sustainable growth as they “have increasingly become active players in the economic realm, with initiatives having an impact on local economy or by monitoring repercussions of national and international economic policies” (European Commission 2012 : 9).

Conclusions

We have in this paper investigated prerequisites for the consolidation of civil society and researched importance of the development of civil society in the local communities of the young democracies. Putnam’s argument that “democratic government is strengthened, not weakened, when it faces a vigorous civil society” (Putnam 1994 : 182) has been endorsed to demonstrate that local political, cultural and socio-economic contexts play a role in democratic consolidation of young democracies. By recognizing that trust is an inevitable variable for emergence of civil society, we demonstrated that trough engagement of citizens in civic associations, people develop skills of cooperation, a sense of shared responsibility for collective endeavours and a means of engaging with broader political systems. Apart from contributing to creation of citizen’s associations, interpersonal trust and social capital influences a complexity of attitudes and behaviours towards public affairs and institutions. Vigilant citizens require a vigilant administration. By empowering local civil society organizations in their actions for democratic governance it is reasonable to expect that local governments will be more accountable, be willing to modernise their administrations, introduce transparent financial management and improve the quality of their service provision. Lastly, since local authorities are often more severely affected by the economic problems of the country than the central government, it is necessary to set up a functional administrative system that is capable of providing funds allowing for functioning of the cities, towns and municipalities.

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Local Economic and Infrastructure Development of SEE in the Context of EU Accession 57

DOI 10.5644/PI2013-153-03

CONSTITUTIONAL AND LEGAL POSITION OF MUNICIPAL AND CITY GOVERNMENTS IN STRATEGIC PLANNING AND PROMOTING LOCAL ECONOMIC AND INFRASTRUCTURE DEVELOPMENT

Veljko Trivun*

Abstract

Nowadays, the importance of the local community is growing all over, but the fact that Bosnia and Herzegovina (hereinafter: BiH) has no state law on local self-government that would clearly define the position and the role of citizens in the system administration, is not officially recognized at the state level. Also, it is important to note that this area is not under the direct jurisdiction of any of the ministries. Given that there are entity laws and cantonal laws, or municipal statutes, there are cases of overlapping responsibilities of higher and lower levels of government, for example between entities and cantons or between cantons and municipalities. Here it is matter of the fulfilment of the obligations of BiH in terms of implementation of the principles contained in the European Charter of Local Self-Government of the Council of Europe.

BiH Constitution did not specifically specify constitutional and legal position of municipal and city governments. In terms of the constitutional provisions, in the Federation of BiH cantons have all the responsibilities that are not expressly granted to the Federal Govern- ment. The Constitution of the Republic of Srpska also, among other things, determines the constitutional order based on local government. In the Brčko Distrikt situation is somewhat simpler because the District is considered a single unit of local self-government, and in this sense instruments of international law are directly applicable.

Local Governance in BiH is devoted adequate attention through special entity laws. Separate entity legislation does not end the process of division of the system of local self-government, because each canton in the Federation of BiH has a law on local self-government, and in addition, municipalities have statutes. As in RS there are no regional or cantonal laws on local self-government, the municipalities are considered the base units of local government. This is an advantage in RS compared to the Federation of BiH in which the system of local government is compounded by the existence of a cantonal law.

“The system of local government shall be regulated by law. A law may entrust the performance of local government tasks to the city. The city and the municipality shall be entitled to revenues determined by law and shall be provided with the funding for the performance of

* Full professor, School of Economics and Business Sarajevo University of Sarajevo, Trg Oslobođenja 1, 71000 Sarajevo, Bosnia and Herzegovina, phone: +387 33 275 900, e-mail: [email protected]

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 59 Law and Political Aspects of Local Economic and Infrastructural Development their duties.” The Act contains a specific provision on the so-called local governments that have followed different laws.

Keywords: Local communities, Municipalities, Constitution, Economic status, Regional development.

Legal status of municipalities in Bosnia and Herzegovina

This work is limited to the legal aspects of the existing position of municipal and city authorities in terms of their capabilities and limitations to stimulate local economic development and infrastructure development. The importance of the local community is growing all over, but the fact that Bosnia and Herzegovina (hereinafter: BiH) has no state law on local self-government that would clearly define the position and the role of citizens in the system administration, is not officially recognized at the state level. This article discusses the legal aspects of local self-government. In addition, this work will cite the individual studies that dealt with these problems. This work also examines complex constitutional system. Therefore, it especially exposes the legal aspects of this issue in BiH as a state, its Entities and Brčko Distrikt as well. In addition, it will give the basic overview of best practices in EU for local government. In this paper, comparison between domestic circumstances in this area will be presented.

BiH Constitution did not specifically specify constitutional and legal position of municipal and city governments. Article I, section 4 (movement of goods, services, capital and persons) defined that there is freedom of movement throughout the country. Neither Entity shall carry out any checks on the entity border.

Sarajevo was designated as the capital of BiH. According to the Article III of the Constitution of BiH, jurisdiction and relations between the institutions of BiH and the Entities are not determined by a special authority of state institutions as op- posed to the local community. This applies to the jurisdiction of the Parliamentary Assembly and the Presidency of BiH. Same Article (Item 3, b) provides that the entities and their subdivisions shall fully comply with the Constitution, which super- sedes inconsistent provisions of the law of Bosnia and Herzegovina and of the constitutions and law of the Entities, and with the decisions of the institutions of Bosnia and Herzegovina (Anon. 1995).

In terms of the constitutional provisions, in the Federation of BiH cantons have all the responsibilities that are not expressly granted to the Federation Government (Chapter III, Article 4), and are particularly relevant in the adoption of: f) regulations on the use of local land including zoning; g) Regulating and promoting local business and charitable activities; h) regulating and ensuring the availability of local energy production facilities; i) making policy concerning radio and television

60 Local Economic and Infrastructure Development of SEE in the Context of EU Accession V. Trivun: Constitutional and Legal Position of Municipal and City Governments in... facilities, including decisions concerning regulation and provision thereof. Only in Chapter VI (Articles 1 and 2) certain powers of municipalities are mentioned in detail. Thus, in the exercise of their responsibilities, each municipality: a) takes all necessary measures to ensure protection of the rights and freedoms set forth in Articles II. A. first to 7 and instruments listed in the Annex; b) take into account the ethnic composition of the population in the municipality (Anon. 2003b).

According to the Constitution of the Sarajevo Canton, local governments are established in the municipalities; municipalities have statutes that must be in accordance with this Constitution and cantonal legislation. According to Article 15 of Constitution of Sarajevo Canton, the Canton can transfer its competences in the field of education, culture, tourism, local businesses and charitable activities, radio and television to the municipalities in its composition. These competencies shall be expressly transferred to those municipalities where the majority of the population according to the national population structure is not a population which makes up the majority in the area of the entire Canton. Canton can transfer some of its responsibilities to the Federal Government if this would ensure their efficient and rational exercise. The decision on the transfer of powers is delivered by the Assembly according to the (Article 35). Within the Canton a number of municipalities as units of local government are established according to the European Charter of Local Self-Government and the law and regulations of the Federation of BiH. Number of municipalities and their territorial coverage is determined by regulations issued by the Assembly. In the process of establishing, municipality is obligated to obtain the opinion of citizens, at a referendum, of the part of Canton which wants to organize a municipality. Municipalities may have original jurisdiction and responsibilities delegated by Canton through a special regulation in accordance with the Constitution. Municipalities in the Canton area may have different responsibilities depending on the global policies of functioning and development of Canton, and depending on the economic, spatial and other position of individual municipalities. In order to ensure efficiency and unity in the functioning of government, in exercise of their jurisdiction municipalities are obliged to establish mutual cooperation as well as cooperation with the authorities of the Canton. Municipalities bring their statutes in accordance with the Constitution of Sarajevo Canton and the Constitution of the Federation of BiH (Article 36).

The Constitution of the Republic of Srpska also, among other things, in Article 5 determines that the constitutional organisation is based on local government. Municipalities and cities are granted a special place in this Constitution. Thus (according to Articles 102 and 103) a municipality through its bodies and in accordance with the law: adopts development programme, urban plan, budget; regulates and ensures the provision of municipal services; regulates and provides for the use of urban development land; takes care of the construction, maintenance, and use of local roads, streets and other public facilities of public interest: provides for the specific

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 61 Law and Political Aspects of Local Economic and Infrastructural Development needs of citizens in culture, education, health and social welfare, physical culture, public information, arts and crafts, tourism and hospitality, environmental protection and other areas; enforces the laws, other regulations and general acts of Republic of Srpska whose execution is entrusted to the municipality, provide for the execution of regulations and general acts of the municipality; establishes bodies, organisations and services to meet the needs of the municipality and regulates their organisation and work, and performs other tasks based on the Constitution, the law and the statute of the municipality. The system of local government shall be regulated by law. A law may entrust the performance of local government tasks to the city. Furthermore, towns and municipalities are entitled to revenues determined by law and funding for the performance of their duties. The Constitution contains a specific provision on the so-called local governments that have held separate local governments. They are realized in local communities as a mandatory form of local self-government. The law, therefore, is committed to the establishment of the local community as a unit of communication and cooperation between citizens and local authorities, and with the political representatives (Anon. 2006d).

Local governance in BiH is devoted adequate attention through special Entity laws. In the Federation of BiH there is in force Law on Principles of Local Self-Government of the Federation of BiH (Official Gazette, Federation of BiH, no. 609/06). This law regulates: the definition of local self-government jurisdiction, the local authority, relations between the council and the mayor of the local government, finance and property, transparency, direct participation of citizens in decision-making, administrative supervision, cooperation of local governments and higher authorities, the relationship and cooperation between the federal and cantonal authorities and local self-monitoring of laws, and other issues. In the Republic of Srpska, these issues are regulated by the local self-government unit (Official Gazette of RS, no. 101/04, Local Self-Government Law). This legal act governs the local government, the manner and conditions of their education, jobs in local government bodies, property and finance, acts of organs of local self-government, public scrutiny of local government, the administrative supervision of the local government, the cooperation of local governments, protection of the rights of local government, forms of citizen participation and the rights, obligations and responsibilities of employees in the administrative service of the local government. This Law requires municipalities and cities to adopt mechanisms that would enable citizens to participate in decision-making, stating that as a way of encouraging people they can use all ways that do not conflict with other laws. As means of participation the Law states referendums, citizen’s initiatives, local communities, citizens’ panels, mayor’s authorities (Anon. 2006e; Anon. 2004a).

Separate Entity legislation does not end the process of division of the system of local self-government, because each canton in the Federation of BiH has a law on local self-government, and in addition, the municipal statute. As in Republic of Srpska there are no regional or cantonal laws on local self-government, the municipalities

62 Local Economic and Infrastructure Development of SEE in the Context of EU Accession V. Trivun: Constitutional and Legal Position of Municipal and City Governments in... are considered the units of local government. This is an advantage in the Republic of Srpska in comparison to the Federation of BiH in which the system of local government is compounded with the existence of a cantonal law. All this would not be a big deal if the municipal statutes, cantonal and entity laws would clearly define the responsibilities of local governments. Thus it often happens that there is overlapping of responsibility which reduces the efficiency of the functioning of the system of local government.

In the Brčko Distrikt situation is somewhat simpler because the District is considered a single unit of local self-government and instruments of international law in this field are directly applicable. Brčko Distrikt has also adopted the document “Principles of partnership” based on shared values and civic initiative which stems directly from Article 4 of European Charter of Local Self-Government, Article 2 of Constitution and Article 15 of Statute of Brčko Distrikt. In this way, the Brčko Distrikt improved efficiency of the system of local government, and through adoption of basic principles proved that it understands the importance of citizen participation in the decision making process.

Legal status of municipalities in Europe

Here it is matter of the fulfilment of the obligations of BiH in terms of implementation of the principles contained in the European Charter of Local Self-Government of Council of Europe (hereinafter referred to as: the Charter) which was adopted in 1985 and since then is opened for signature. The main objective of the Charter is to minimize the lack of common European standards for identifying and preserving the rights of local authorities which are closest to the citizens and to give them the opportunity to participate effectively in decision-making related to their everyday surroundings. The Charter commits the parties to applying basic rules guaranteeing the political, administrative and financial independence of local authorities. It is thus a demonstration, at European level, of the political will to give substance at all levels of territorial administration to the principles defence since its foundation by the Council of Europe, whose task is to keep the Europe’s democratic conscience and the defence of human rights in the widest sense. Specifically expressed is the belief that the degree of self-government enjoyed by local authorities can be considered an indicator of genuine democracy. The Charter is the first multilateral legal instrument that defines and preserves the principles of local autonomy as one of the pillars of democracy, and the function of the Council of Europe is to protect and develop it (Anon. 1985; Kaganova et al. 2006).

Strategic Plan for the development of local self-government in BiH is a key outcome of the project of creating a strategy for the development of local government in BiH by key local actors (Rodić 2008). Partnership Group for the development of

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 63 Law and Political Aspects of Local Economic and Infrastructural Development local government, consisting of the leading municipalities and non-governmental organizations, and the team of experts, composed almost entirely of practitioners who have achieved respectable results in the improvement of local government in BiH. The strategic plan is based on a critical, comprehensive and detailed analysis of the situation, adopted by the Partnership Group in May 2005. At the heart of the development vision is a new local government, that citizens perceive both as a right and an obligation to act responsibly and proactively manage local development and jobs according to the principles of the Charter, achieving a new quality of life, both in their local community as well as throughout the country. Such local government runs several important, strategic orientations, defined in the form of seven strategic goals, which include: the substantial and simultaneous functional and fiscal decentralization, ensured modern leadership, competent and motivated staff, significantly improved quality and efficiency of services, increased direct participation of citizens and civil society organizations in public affairs, partnership and responsibility of all levels of government and the productive collaboration of local government, with active participation in regional networks and initiatives.

Analysis of a number of documents in the last decade related to the subject of local government can be used to summarize weaknesses, threats, strengths and advantages of local communities. This would be one special SWOT analysis that is tailored to the needs of local communities in BiH (Miovčić 2006). High level of aligned interests of municipalities unites local authorities throughout the country in the requests for a balanced functional and fiscal decentralization, respective redistribution of responsibilities and material resources for the benefit of local government levels. Local level of government of the Brčko Distrikt is the only government in BiH which provides example of positive and progressive effects of functional and fiscal decentralization. Municipal practices in the exercise of jurisdiction, the provision of services and efficient use of available financial resources are best compared with other levels of government. Constant exposure to local government assessment and control by the citizens as service users is essential. When the Charter was ratified by BiH it was the beginning of its implementation into national legislation. Basic presented negativities are: inadequate and uneven treatment of local government in the legal system of BiH, incompatible with European standards; jurisdiction centralization of the entities and cantons; practice of taking “attractive” jurisdictions from the municipalities and assigning them to cantons and entities; threatening principle of administrative proceedings on two instances of decision making; inadequate and often vague and imprecise distribution of responsibilities between local and other levels of government in practice often results in inefficient service delivery; mis- understandings and conflicts; very uneven territorial structure of local government, where legal framework does not allow for performing some common tasks among several municipalities or connection of territorial interests.

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Furthermore, there is no difference in the legal status of municipalities, with simultaneous enormous differences in: the degree of urbanization and infrastructure equipment, collisions between the law on local self-government and other laws governing jurisdiction, income disparity between the financial capacity of municipalities and their responsibilities and needs. Municipalities with modest income are sharing their revenues under the control of senior levels of government. System of revenue collection is set up so that the municipality cannot cause an increase in efficiency, and allocation system stimulates municipalities to stay underdeveloped. Distribution of powers and fiscal instruments is blocking municipalities in attracting investments and economic development. Imbalance of the municipal financing system is present, and therefore financial management system and multi-year financial planning in the municipalities are poorly developed. Also, more problems are lack of cooperation and self-organization of municipalities in order to influence policy-makers, autarchic tendencies in the municipalities and the tendency towards closure and self-sufficien- cy. (Miovčić 2006)

Project activities and their results in Bosnia and Herzegovina

Project activities and their results could be presented as opportunities, challenges, threats and strengths.

Outlined opportunities and challenges are: full implementation of the principles of the Charter and European good practice in terms of the competence of local self governance, • full implementation of the principles of the Charter in terms of finance, proactive approach to the current level of local public administration reform in BiH, • coordinated functional and fiscal decentralization, using the available experience in countries that joined the EU, • creation of models of flexible structures by the local government, • flexible solutions in terms of the legal status of local government, interest and functional connectivity, creating modern territorial organization, fast and complete transfer of assets to municipalities with emphasized support of key donors and international partners to strengthen the position of municipalities, local government development strategy in BiH, access to EU regional funds through regionalization and economic development strategies, development of the system of fiscal equalization, the introduction of local taxes, the formation of capital markets for the municipality, a partnership of public and private sector in local economic development, capital investment, and

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infrastructure services (Anon. 2009a).

Most notable threats are the following: there is no clear and strong political commitment in support of the development of local government, the unwillingness of central, entity and cantonal authorities, and international actors in BiH to make a real functional and fiscal decentralization, the continued practice of the reform of public administration, • functional and fiscal redistribution in BiH, running only between central and entity authorities, partial and selective application of the Charter, • the current fiscal centralization, slow reform of tax policy relating to taxes that belong to municipalities, the continued practice of avoiding consultation with municipalities regarding issues related to financing, lack of safeguards in cases of violations to the detriment of the municipality, • insufficient transparency of the allocation of funds to municipalities from higher levels, frequent changes and instability of certain municipal revenue, • lack of effective financial planning, • continuing practice of financing activities and needs that are not relevant for municipalities or are not awarded funds, continuing practice of seizure of property of the municipality, continuing delays in the transfer of assets to the municipalities, managing the privatization of utility companies exclusively or predominantly by higher levels of government, noticeable decline and probable imminent cessation of donations for the renovation and construction of municipal infrastructure (Anon. 2009a).

Highlighted strengths are: a growing group of municipalities as leaders of change, growing interest of municipalities to modernize the municipal administration with good practice and innovative solutions in the management of quality, customer orientation, the realization of citizens’ participation, the use of information technology, applying for international funds, regional cooperation, self-reliance initiative, growing group of practitioners, experts and organizations with credible results in the introduction of good governance at the local level, • established solid domestic NGOs and consulting organizations specialized in providing training and development of local government, complementary programs and facilities,

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• examples of successful cooperation between local authorities and local NGOs in the modernization of the administration, advocacy and the creation of mechanisms for the active participation of citizens, the tradition of achieving citizen participation in local communities, the introduction of benchmarking models in comparison and learning from best practices, creating centres for human resource management in local government training centres and municipal offices, the creation of knowledge centres for the development of local government, retraining programs, additional training and education for local government staff, the introduction of professional managerial jobs and positions in local government, using the successful experiences of other countries, horizontal and vertical networking (among municipalities, with other bodies and organizations, with other levels of government), government, and especially local government, is becoming an increasingly attractive market for manufacturers of electronic equipment and software, creating competing jurisdictions/alternative forms of service delivery, entrustment of the public affairs to competitive non-governmental organizations and the private sector (Anon. 2009a). Special attention should be paid to: strategic documents for the reform of public administration fact that IT companies do not operate in the area of local government, • some key principles of good governance such as customer orientation, efficiency and effectiveness, quality, e-government, are not promoted by normative acts which regulate local governance in BiH, the current normative solutions do not provide adequate employment and reward for quality, there is no adequate educational infrastructure or professional training programs for staff in local government, weak institutional support for human resources management at the local level, no adequate educational infrastructure or professional training programs, the current organizational structure of municipal administration has impractical demands of modernization, unfavourable age structure of employees, surplus in employees with obsolete skills, bureaucratic mentality and clerical approach, with a concurrent lack of quality personnel and modern knowledge in adopting European standards and inclusion in the information society, lack of internal evaluation system for contribution and promotion of employees, a huge lack of managerial skills and knowledge in the municipal administration,

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the lack of key management instruments in municipalities (development, spatial, urban plans) and insufficient capacity of consultants to quickly answer the large demand for quality, the gap between user oriented, high quality municipal administrations equipped with information technologies and the majority of others with still emphasized bureaucratic environment, weak computer equipment and software in a number of municipal administrations in BiH, still weak political will of decision makers at the local level to embrace and stimulate active participation of citizens on the one hand and poor awareness and ability of citizens to actively participate on the other hand, the use of a small number of mechanisms of direct citizen participation, with a very modest impact (Anon. 2009a; Bojčić-Dželilović 2011).

In relation with the above stated, in order to better understand the problems it is necessary to analyze following legal documents: the Constitution of BiH, the Constitution of Republic of Srpska, the Constitution of the Federation of BiH, • Brčko Distrikt Statute, Law on Local Self-Government of Republic of Srpska, Law on Principles of Local Self-Government in the Federation of BiH, Law on Construction Land of Republic of Srpska; Law on Construction Land of the Federation of BiH, Law on Concessions of Republic of Srpska, Law on Concessions of the Federation of BiH, Law on Spatial Planning of Republic of Srpska, Law on Spatial Planning of the Federation of BiH, Law on Agricultural Land in Republic of Srpska, Law on Agricultural Land in Federation of BiH, Law on Spatial Planning and Land Use at the Level of Federation of BiH, Law on Communal Activities in Republic of Srpska, Law on Establishment and Transfer of Rights over the Property of the Local Government Units in Republic of Srpska, Law on the Temporary Prohibition of Disposal of State Property in BiH, Federation of BiH and Republic of Srpska (Anon. 2009a).

European Declaration of Urban Rights defined some basic rights and obligations based on solidarity and responsible coexistence of citizens of European cities. The declaration came from the European Urban Charter, adopted by the Council of the European Standing Conference of Local and Regional Authorities of Europe (CLRAE) on 18 March 1992, at a meeting held during the annual Plenary Session

68 Local Economic and Infrastructure Development of SEE in the Context of EU Accession V. Trivun: Constitutional and Legal Position of Municipal and City Governments in... of CLRAE, 17-19 March 1992, in Strasbourg. Rights in this Declaration should be a model for the development of local communities in BiH (Anon. 1985).

According to the Declaration (European Urban Charter), citizens have the right to: SECURITY – to a secure and safe town, free, as far as possible, from crime, de- linquency and aggression; • AN UNPOLLUTED AND HEALTHY ENVIRONMENT – to an environment free from air, noise, water and ground pollution and protective of nature and natural resources; • EMPLOYMENT – to adequate employment possibilities; to a share in economic development and the achievement thereby of personal financial autonomy; • HOUSING – to an adequate supply and choice of affordable, salubrious housing, guaranteeing privacy and tranquillity; MOBILITY – to unhampered mobility and freedom to travel; to a harmonious balance between all street users – public transport, the private car, the pedestrian and cyclists; HEALTH – to an environment and a range of facilities conducive to physical and psychological health; • SPORT AND LEISURE – to access for all persons, irrespective of age, ability or income, to a wide range of sport and leisure facilities; CULTURE – to access to and participation in a wide range of cultural and creative activities and pursuits; • MULTICULTURAL INTEGRATION – where communities of different cultural ethnic and religious backgrounds co-exist peaceably; • QUALITY ARCHITECTURE AND THE PHYSICAL SURROUNDINGS – to an agreeable, stimulating physical form achieved through contemporary architecture of high quality and retention and sensitive restoration of the historic built heritage; • HARMONIZATION OF FUNCTIONS – where living, working, travelling and the pursuit of social activities are as closely interrelated as possible; • PARTICIPATION – in pluralistic democratic structures and in urban management characterised by co-operation between all the various partners, the principle of subsidiarity, information and freedom from over-regulation; • ECONOMIC DEVELOPMENT – where the local authority, in a determined and enlightened manner, assumes responsibility for creating, directly or indirectly, economic growth; • SUSTAINABLE DEVELOPMENT – where local authorities attempt to achieve reconciliation of economic development and environmental protection; • SERVICES AND GOODS – to a wide range of accessible services and goods, of adequate quality, provided by the local authority, the private sector or by partnerships between both;

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• NATURAL RESOURCES – to the management and husbanding of local resources and assets by a local authority in a rational, careful, efficient and equitable manner for the benefit of all citizens; • PERSONAL FULLFILLMENT – to urban conditions conducive to the achievement of personal well-being and individual social, cultural, moral and spiritual development; • INTER-MUNICIPAL COLABORATION – in which citizens are free and encouraged to participate directly in the international relations of their community; • FINANCIAL MECHANISMS AND STRUCTURES – enabling local authorities to find the financial resources necessary for the exercise of the rights as defined in the Declaration; • EQUALITY – where local authorities ensure that the above rights apply to all citizens, irrespective of sex, age, origin, belief, social, economic or political position, physical or psychological handicap. (Congress of Local and Regional Authorities 1992)

Economic aspects

The basis of this approach to local development is a new local government, which implies an active approach to citizens and their participation in the development and management of local affairs, according to the principles of the Charter (Bertović et al. 2004).

The question of ownership and management of resources at the local level is essential in the process of decentralization, economic empowerment and development of local government. The Constitution of Republic of Srpska and Constitution of Federation of BiH as a form of ownership envisage state property so that the property of the local government is treated as part of state property and entities appear as its owner. Analysis of the situation in the area of fiscal decentralization in BiH indicates that local governments do not have adequate financial and material resources necessary to ensure the quality of jobs that are under their jurisdiction, and for the development of local communities in accordance with the needs of its citizens. Assets such as material resources needed to carry out the functions of local government units on the territory of BiH, are often either partially or not at all owned by them. Local units have almost no impact on the management of local resources and local communities often do not benefit from their use (Anon. 2005; Anon. 2003b; Anon. 2006d).

This study designs and introduces the possibilities of disposal and ownership of the local resources in BiH, and also provides answers to many questions (Anon. 2005). In the Republic of Srpska, the local government is under the jurisdiction of the Republic of Srpska Government, especially the Ministry of Public Administration and Local Self-Government and the Ministry of Finance. These Ministries promulgate by-laws,

70 Local Economic and Infrastructure Development of SEE in the Context of EU Accession V. Trivun: Constitutional and Legal Position of Municipal and City Governments in... they decide on how to distribute revenues from indirect taxes, and create proposals of legislative solutions. Cities and municipalities are in direct contact with the relevant ministries and entity’s Assembly. This situation has led to the fragmentation of local government, and many municipalities, due to lack of adequate resources and difficulty to service the obligations and responsibilities, diminish the quality of their work, to the detriment of their citizens. In addition, in cities and larger municipalities there is a problem of distribution of competences and financing of expenses. The best examples of this are the institutions in the field of culture and education, which are under the responsibility of the entities and logically have claim to part of the entity budget. However, the funds for these purposes are modest, and since mayors are under pressure from citizens, they distribute these funds to institutions that are part of local government. This way, every local community can be only partially funded by the entity, so they have reduced funds for activities within their jurisdiction. (Miovčić 2006; Rodić 2008; Miličević 2005)

The finding of the cited Study is: the key problem successful implementation of the Law on Local Self-Government is a single stage system (so called: monotypic) of local government, which is characterized by a high degree of unevenness of local self-government in all relevant characteristics (demographic, spatial, financial, development, urban, etc.) (Anon. 2005). Law on Local Government of Republic of Srpska satisfactorily positioned municipality/city in terms of competence and powers, but the problem is that other laws, particularly those governing the disposal and ownership of local resources, do not comply with this law, encourage local government passivity and make them less responsible for their own development.

Recommendation of the cited Study is: harmonization of legislation and by-laws relating to the resources available to local governments according to the Law on Local Self-Government and introducing of multifunction structure of local government (Anon. 2005).

The provisions of the local government are pointing to the fact that the local authorities in the Federation of BiH are under the strong influence of the federal and cantonal authorities. Thus, it is envisaged that the Federal and Cantonal authorities are considering initiatives, proposals and suggestions of local governments, and inform them about their attitude and take action. On the other hand, in the exercise of certain powers, local governments apply all the instructions and guidelines provided by the federal and cantonal authorities. The government has the right to execute delegated authority to adjust to local conditions when it is envisaged by law or when so authorized by the competent federal or cantonal authorities (Anon. 2005).

The main finding of cited Study is quoted: the analysis shows that the Constitution of the Federation of BiH does not treat the municipality as the basic territorial political community, not giving it a chance to express themselves in their primary specific

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 71 Law and Political Aspects of Local Economic and Infrastructural Development needs and obligations, as well as to determine the directions of its development, in accordance with the specific local conditions and development assumptions, which she herself best recognizes (Anon. 2005).

Recommendation of cited Study for Federation of BiH is the same as for the Constitution of Republic of Srpska (Anon. 2005).

Finding related to the Law is that the Law provides a basis for greater autonomy of local governments in the Federation of BiH in securing the material resources to service their own jurisdiction and powers. However, the way in which jurisdiction of local government is defined in this law implies that they are practically excluded from activities related to the economy at the local level or activities for creating any new value. Her responsibilities are purely ancillary and subordinate in function of Cantons and the Federation of BiH, without being able to influence the destiny of their own economic development (Anon. 2005).

The main recommendations of the Study are: amendments to the Law on Principles of Local Self-Government of the Federation of BiH to enable municipalities/cities greater powers to create their own development policies (Anon. 2005).

One of the very important elements needed for effective management of local resources is the existence of an adequate database on these resources and assets in the municipalities. Regarding this matter, some researches were conducted, in order to form a database that would contain information about the resources and assets that are owned by municipalities. Such database can be used in order to optimise further development. Unfortunately, the situation in BiH is far from favourable in terms of existence of such a database. Municipalities in BiH, regardless of the level of development, size, association or entity, canton, organization of municipal administration, population, or other characteristics, in general do not have a register of assets and resources which are on their territories and are their property (Anon. 2005).

Analyses were made as part of a strategy for local government in BiH, and other projects have shown that local governments do not have the necessary resources to perform functions that belong to them. Assets such as material resources required for performance of the functions of local government units are often not at all or are only partially owned by them. Also, except for urban construction land, local government formally and practically has no effect on the available resources which are on their territories, therefore revenues are symbolic on that basis, and cannot be used to solve development problems. On the contrary, they very often suffer direct losses caused by the exploitation of these resources. These problems were identified as the main obstacle to the development of sustainable local communities in BiH (Miovčić 2006).

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The principle of decentralization of power means that local governments must own property necessary to carry out their responsibilities, but also a significant degree of financial sovereignty. Adequately defined ownership position of local governments in the management of local resources would undoubtedly attain this and would cause their increased responsibility and better material conditions to carry out their responsibilities. Common position of all local communities should be that all facilities that are constructed from the voluntary and community infrastructure should be governed by local communities. This holds because local communities have interest in well functioning of these facilities. (Bojčić-Dželilović 2011; Kaganova et al. 2006; Miovčić 2006)

A new approach to local development is based on the assumption that the new local government implies an active approach to citizens and their participation in the development and management of local affairs.

Management of local resources is transparent, efficient and citizen oriented process of maintaining and creating value through increased revenue, expenditure control, risk management, compliance with regulations and ensuring adequate maintenance of the physical assets of local communities.

Creating a new model of management of local resources is linked to the new role of the local government units and their greater responsibilities in this area. To avoid the trap of inadequate management of local resources after transfer of jurisdiction and powers from higher levels of government to the municipalities/cities, it was necessary to precisely elaborate the possible organizational form of governance, with the ultimate goal that resources have to be available for the benefit of citizens of the local community.

The existing system of access to local resources in BiH significantly restricts the rights of local governments to use local resources according to the principle of good governance and improve the quality of life in the local community on this basis. Extremely restrictive right to dispose assets (profit, sales, transfer, establishing mort- gage, renting, setting up public-private partnerships, etc.) limit the capacity of local communities to invest in local economic development and infrastructure, and reduce material base for servicing assigned responsibilities and powers and authorization (Bojčić-Dželilović 2011; Kaganova et al. 2006; Miovčić 2006).

The proposed new model of disposal and ownership of local resources in BiH is just an attempt to resolve the path drawn by the quality of this obviously very complex problem. Its main characteristics are: the basis of the model is resolving ownership and property rights issues, with a focus on access to and ownership of local resources,

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the basic principle of the model is that assets should not be transferred to local authorities without transfer of responsibility and authority, model is designed to take into account the demands of the real decentralization manifested in need for new territorial and functional organization of local government in BiH entities, model consists of amendments to, and harmonization of the regulatory framework and recommendations for the efficient management of local resources (Miovčić 2006).

The new governance model and access to local resources is related to: land (construction and agricultural), concessions, and • municipal infrastructure and enterprise (Miovčić 2006).

The model includes three groups of changes in legislation in the entities: changes in the constitution, harmonization, amendments to existing laws, and the adoption of new laws, but also all other regulations pertaining to this matter which should comply with these legal documents, at the same time taking into account the principle that these laws are lex specialis to all other regulations in this area (Miovčić 2006).

The model assumes that the local government is: independent in the exercise of property rights, limited only by law in respect of property rights, and Committed to expanding of property rights acting as good hosts, all while taking the public interest into account in a transparent way. (Miovčić 2006)

Creation and introduction of disposal and ownership of local resources in BiH model predicts changes and harmonization of the legislative framework in BiH with the aim of transferring the ownership of local resources and recommendations for effective management of these resources by local governments. This model assumes that when local governments receive ownership over local resources, they should also be assigned to a new role with more responsibility. (Miovčić 2006)

Conclusions

In conclusion, the improvement of relationships within the community and achievement of effects is stressed.

In order to improve relationships within the local communities, following steps should be taken:

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• redefining the legal framework relating to existing status of local communities, preparation of amendments to the law in terms of empowering local communities, • preparation of draft amendments to the law that will be required in the first phase of strengthening local communities, in accordance with the analyzes, harmonization of laws and procedures, analysis of the legal heritage of the EU in terms of harmonization of our legal system, with the ultimate aim of improving the position of local government units, • redefining ways of funding local communities, resolving problems of asset management at the local government level, analysis of the effects of access to local resources and its upgrade.

Provided the above is fulfilled, the following effects would be achieved: • redefined position of the local community, better funding and greater autonomy, developed and adopted system of criteria for the distribution of rights of disposal and management of local resources, clear procedures for the normative and practical implementation of new solutions, transferred assets owned by local governments in accordance with the legally given jurisdictions, • more efficient and effective development of local communities on the basis of effective use of available resources, strengthened capacity development of local governments, created conditions for the establishment of sustainable local government that can service the assigned responsibilities and powers, relieving entity governments in the performance of certain functions of local importance, set database and the degree of computerization would be raised to a higher level.

Constitutional and legal positions of municipal and city governments in strategic planning and promoting local economic and infrastructure development are very important and have to improve in EU accession process.

Resources

Anon. (1985) European Charter on Local Government. (www.bbnet.org.yu/blnet/yug/pov- elja.htm) Anon. (1995) The Constitution Act of BiH, Sarajevo. (http://www1.umn.edu/humanrts /icty/ dayton/daytonannex4.html) Anon. (2002) Concession Law in Bosnia and Herzegovina. (http://www.oecd.org/countries/ bosniaandherzegovina/40507771.pdf) Anon. (2003a) Law on Construction Land in the Federation of BiH, Federation of Bosnia and Herzegovina, Sarajevo. (http://www.ohr.int/decisions/plipdec/doc/fed-construction- land-law-15-may-03.doc)

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Anon. (2003b) The Constitution Act of the Federation of BiH, Official Gazette of the Fed- eration of Bosnia and Herzegovina, No. 1/94, 13/97, 16/02, 22/02, 52/02, 60/02, 18/03, 63/03. Anon. (2003c) Law on Spatial Planning in the Republic Srpska, Official Gazette of RS, No. ‘84/02 and 14/03, Banjaluka. Anon. (2004a) Law on Principles of Local Self-Government of the Republic Srpska, Official Gazette of RS, No. 101/04, Banjaluka. Anon. (2004b) Outline of the methodologies for spatial planning in Republic of Srpska (BiH), The Institute of Urbanisms, Banjaluka. (http://www.agrowebcee.net/fileadmin/content/ agroweb_ba/ files/ Country_profile/Z/) Anon. (2005) Fiscal Decentralization in Transition Economies: Case Studies from the Bal- kans and Caucasus, UNDP, Bratislava. (www.undp.org/europeandcis; http://europeandcis.undp.org/ files/ uploads/ LG/FiscalDecentralization2005.pdf) Anon. (2006a) Law on determining and transferring of property rights to local self-governments, Official gazette of the Republic of Srpska, No. 70/06, Banjaluka. Anon. (2006b) Law on Spatial Planning in the Federation of BiH, Federation of Bosnia and Herzegovina, Official gazette of Federation of BiH, No. 2/06, Sarajevo. Anon. (2006c) Law on construction land, Official gazette of the Republic of Srpska, No. 112/06, Banjaluka. Anon. (2006d) The Constitution Act of Republic Srpska, Republic Srpska, Banjaluka. (http:// www.vijecenarodars.net/materijali/constitution.pdf) Anon. (2006e) Law on Principles of Local Self-Government in the Federation of BiH, Fed- eration of Bosnia and Herzegovina, Sarajevo. (http://www.sogfbih.ba/uploaded/pravni_ okvir/osnovni/Law%20on% 20principles%20of%20local%20elf-government%20FBiH. pdf http://www.advokatprnjavorac.com/l egislation/cons titution _ fbih.pdf) Anon. (2006f) Law on the Temporary Prohibition of Disposal of State Property in BiH, Fed- eration of BiH and Republic Srpska. (http://www.ohr.int/decisions/plipdec/default.asp? content_id=38187) Anon. (2007) Law on Agricultural Land, Official Gazette of Brčko Distrikt, No. 32/04, 20/06, 19/07, Brčko. Anon. (2008a) Law on construction land in Republic Srpska, Official gazette of the Republic of Srpska, No. 112/06, Banjaluka. Anon. (2008b) Law on Concessions in Republic Srpska, Banjaluka. (http://www.koncesije- rs.org/eng/index.php?prikaz=stranica&id=19) Anon. (2008) Law on Agriculture, Food and Rural Development, Official Gazette of BiH, No. 50/08, Sarajevo. Anon. (2009a) Study: Local First, Mission of OSCE in BiH, Sarajevo. Anon. (2009b) Law on Agricultural Land, Official Gazette of FBiH, No. 52/09, Sarajevo. Anon. (2010a) Law on Agricultural Land, Official Gazette of RS, No. 93/06, 86/07, 14/10, Banjaluka. Anon. (2010b) Law on Agriculture, Official Gazette of FBiH, No. 88/07, 04/10, Sarajevo. Anon. (2010c) Law on spatial planning and construction, Official gazette of the Republic of Srpska, No. 55/10, Banjaluka. Anon. (2010d) Brčko Distrikt Statute, Brčko Distrikt. (http://www.bdcentral.net/images/sto- ries/Vazni_akti/Statut/Hr/statut_brcko_distrikta_bih-precisceni_tekst-2-10-hr.pdf) Anon. (2011a) BiH Strategic Plan for Harmonization of Agriculture, Food and Rural Devel- opment (2008–2011), Sarajevo.

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Anon. (2011b) Law on agricultural cooperatives, Official gazette of the Republic of Srpska, No. 73/08, 106/09 and 78/11) Anon. (2011c) Concessions Law in the Federation of BiH, Federation of Bosnia and Herze- govina, Sarajevo. (http://www.fbihvlada.gov.ba/english/sjednica.php?sjed_id=219) Anon. (2012a) Law on agricultural land, Official gazette of the Republic of Srpska, No. 93/06, 86/07, 14/10 and 5/12, Banjaluka. Anon. (2012b) Law on public servants, Official gazette of the Republic of Srpska, No. 118/08, 117/11 and 37/12, Banjaluka. Anon. (2013) RS Agricultural Development Strategy, Republic Srpska, Banjaluka. Bertović, H. et al. (2004) Handbook of asset management in local / regional (regional) governments, The Urban Institute: Association of Cities and Municipalities Republic Croa- tia, Zagreb. Bojčić-Dželilović, V. (2011) Decentralisation and Regionalisation in Bosnia-Herzegovina: issues and challenges, LSEE Research on South Eastern Europe. (http://www.lse.ac.uk/ europeanInstitute/ research/ LSEE/Research/SEE_Programme/images/Research_Pa- per_2.pdf) Congress of Local and Regional Authorities (1992) European Urban Charter. (https://wcd. coe.int/ViewDoc.jsp?id=887405) Kaganova, O. et al. (2006) Managing Government Property Assets: International Experi- ences, Urban Institute Press, Zagreb. Law on Communal Activities in Republic Srpska, Republic Srpska, Banjaluka. Law on Establishment and transfer of rights over the property of the local government units in Republic Srpska, Republic of Srpska, Banjaluka. Miličević, N. (2005) State and problems of local self-government in Bosnia and Herzego- vina. (http://www.fes.hr/E-books/pdf/Local%20Self%20Government/05.pdf) Miovčić, D. (2006) Strategic Plan for the development of local self-government in BiH, De- velopment Agency, EDA Banja Luka, Banjaluka Rodic, R. (2008) Project: Creating a strategy for the development of local government in BiH, Institute for Economy, Banjaluka.

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DOI 10.5644/PI2013-153-04

INSTITUTIONAL FORMS AND SHAPES IN THE IMPLEMENTATION OF REGIONAL DEVELOPMENT IN THE REPUBLIC OF MACEDONIA

Borče Davitkovski* Elena Davitkovska** Vesna Gočeva***

Abstract

Regional development is a current issue not only for the Republic of Macedonia but also for the whole European Union. This problem has just started to attract the attention in the Republic of Macedonia. Europe urges and favours the idea that the development should not be addressed only locally, within the municipality, but from another higher level, that is, regionally. In this paper the authors will specifically explore the institutional forms for implementation of the regional development in the country. Therefore, the aim of this paper is to explain the institution in charge of implementation of the regional policy of the Republic of Macedonia. Thus, the legal status of Bureau for Regional Development as the body having separate legal entity within the Ministry of Local Government and the Centres for Regional Development will be in particular presented. Macedonia is, namely, divided into 8 statistical regions on NUTS 3 level as well as the same number of centres responsible for development and promotion of development of separate regions. There will be special emphasis toward legal position and status of these centres under current legislation (2007 Law on Balanced Regional Development and other regulations concerning the regional development of the Re- public of Macedonia). Also, the legal position and status of the Bureau for Regional Develop- ment as administrative body which takes care for regional development and should be understood as a chief implementer of regional policy in Macedonia will be specifically presented.

Keywords: Regional development, Regional policy, Bureau for regional development, Insti- tutional forms, Centres for regional development.

* PhD, full-time Professor and Dean at St. Cyril and Methodius University Skopje, Iustinianus Primus Faculty of Law, Blvd. Goce Delčev 9b, 1000 Skopje, Macedonia, phone: +389 2 3117 244/154, fax: +389 2 227 549, e-mail address: [email protected] ** PhD, assistant Professor at St. Cyril and Methodius University Skopje, Institute of Economics, phone: + 389 70 222 899, e-mail address: [email protected] *** MA, Civil servant, Ministry of Local Self Government – Bureau for Regional Development, M.H.V. Jasmin n. 20, 1000 Skopje, Macedonia, phone: +389 71 209 002, +389 2 3121 350, e-mail address: [email protected]

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Introduction

Regional development is a theme that is relevant not only in the Republic of Macedonia but in the whole European Union. This is a problem that has only recently started to gain popularity in the country. The European Union has long been divided in the manner “Europe into regions”. Europe has been trying to push the idea of not thinking just locally and municipally, but at a higher level – the regional level. Although the European Union is one of the richest regions in the world, still there is a great inequality between different regions within it. You can safely say that in a country there is different development among its regions.

The regional policy of the European Union is a policy of investing in creating jobs, competitiveness, economic growth and improved quality of life. The regional policy includes solidarity by the EU towards the less developed countries and regions, concentrating resources in areas where there are large developmental differences. On the other hand, in recent times there is a new understanding of the concept of regional policy between members of scientific circles, weighing towards the fact that from solidary, it should be restructured and transformed into competitive. The meaning of this new thinking incorporates abandonment of the process of “growing up” of certain regions which are expected to cooperate with regions that are less developed, thus helping the disadvantaged regions and cities.

To achieve these goals of regional policy, each EU Member State is entitled to decide on national level about how and which institutions would carry, lead, implement and coordinate this policy. As project leaders and implementers, there have always been different institutions.

Nowadays, Europe spends a substantial part of the Budget on the regional policy and cohesion policy of its member states. “The biggest part of the regional spending is reserved for the regions with GDP under 75% of the Union’s average, in order to improve their infrastructure and the development of the human and economic potential,” (Gerg et al. 2010 : 3). Innovation and research, as well as sustainable development and training at work in less developed regions, are funded in all EU member states. A small part of these funds is allocated to cross-border cooperation and interregional cooperation projects.

Legal solutions in Macedonia

The Law on Balanced Regional Development was adopted on 22 May 2007. The Law regulates the principles and objectives of the policy makers to promote balanced regional development, regional development planning, financing and resource allocation for balanced regional development, monitoring and evaluation of the

80 Local Economic and Infrastructure Development of SEE in the Context of EU Accession B. Davitkovski, E. Davitkovska, V. Gočeva: Institutional Forms and Shapes in the... implementation of planning documents and projects and other issues related to regional development. Legally defined regional development is the process of identifying, promoting, managing and exploiting the development potential of the planned regions and areas with specific development needs. The policy of regional development is a system of goals, instruments and measures aimed at reducing regional disparities and achieving balanced and sustainable development of the Republic of Macedonia. The law set the framework for the future passing of the whole documentation on national, regional and local level. (Anon. 2007)

For strategic and long term planning, as well as promoting regional policy, a ten-year strategy was developed. One of the main strategic documents through which regional development is planned in the country, apart from the National Development Plan and the Spatial Plan of the Republic of Macedonia, is the Strategy for Regional Development of the Republic of Macedonia, which was adopted in 2009 with a va- lidity period from 2009–2019. The strategy is a multi-sectoral document, in which two approaches are applied with the definition of objectives – sectoral and regional. The strategy respects the principles and purposes of the Law on Balanced Regional Development, such as balanced and sustainable development of the territory of the Republic of Macedonia, based on the model of polycentric development, reduction of disparities between and within the planning regions, and increasing of the quality of life of all citizens, increasing of the competitiveness of the planning regions by strengthening their innovation capacity, optimal use and valorisation of natural resources, human capital and economic characteristics of the planning regions. The model of polycentric development is focused on reducing disparities in the development between planning regions, which involves allocating more support to the less developed regions. The programs for development of regions must be aligned with the Strategy. (Anon. 2009)

Just like Law, Strategy also defines the same makers of regional development policy, as well as the implementers. The strategy has assessed the capacity of the main carriers for regional development in the country. The results of the assessment showed that the available institutional capacity for regional development in the country is quite limited. (Anon. 2009 : 74) Insufficient capacity arises from the long absence of policy and system for regional development in the country. The process of capacity building has been identified as a priority in the strategy, which should be a continuous process of upgrading to create a base of trainers in the field of regional development and providing training of trainers in order to use unified methodology for knowledge transfer.

According to the Law, art. 15 of the Law on Balanced Regional Development, the policy holders for promotion of balanced regional development are: the Government of RM the Council for Balanced Regional Development of the Republic of Macedonia

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the Ministry of Local Government the Council for Planned Regional Development. (Anon. 2007)

The Bureau for Regional Development and the Centres for Development of planning regions also participate in the planning of regional development and implementing the planned documents for regional development. The Strategy expanded the list of actors with the units of local government which should apply with proposals for funding in order to maximally utilize the available financial resources for regional development and other ministries relevant to the design and implementation of regional development policy, which have defined Regional Development in their programs – Ministry of Finance, Ministry of Economy, Ministry of Transport and Communications, Ministry of Agriculture, Forestry and Water Management, the Ministry of Labour and Social Policy, Ministry of Education, Ministry of Environment and Spatial Planning and the Ministry of Culture. What is essential is good coordination between primary carriers of regional development policy and national ministries to harmonize the mutual programs and activities that may have an impact on regional development.

Therefore, for the purposes of this paper, we would consider separately the Ministry of Local Government as the policy holder for Regional Development, Bureau for Regional Development as the main body and implementation centres for development of regions, as regional level to implement this policy. The Council for Regional Development of the Republic of Macedonia is the coordinator of regional policy, which includes Ministers of 8 ministries, the Minister for Local Government, 8 presidents of councils for Regional Development and chaired by the Deputy Prime Minister for Economic Affairs. The Council for Regional Development is a political body comprised of the mayors of the region.

Figure 1: Relevant institutions for promotion of balanced regional development

Policy makers Council for Balanced Regional Development of the National level Republic of Macedonia Ministry of Local Government National level Council for Planned Regional Development Regional level Operational institutions Bureau for Regional Development National level Centres for Development of planning regions Regional level

Source: The Law on Balanced Regional Development, Off. Gazette, No. 63/07

82 Local Economic and Infrastructure Development of SEE in the Context of EU Accession B. Davitkovski, E. Davitkovska, V. Gočeva: Institutional Forms and Shapes in the...

The reform of the policy included also preparation of the National Strategy for Regional Development, which, in accordance with the National Development Plan is the leading document destined to reduce the disparities among the Macedonian regions and consequently, in a more advanced stage, help reduce the existing gap between the European and the Macedonian average development index. The Strategy defines the paths that should lead to equal development of the regions in the period between 2009 and 2019 and points out two overall objectives: improvement of the competitiveness of the regions achieved through sustainable development and promotion of greater demographic, economic, social and spatial cohesion of the planning regions. (Cvetanovska and Angelova 2012 : 11)

Ministry of Local Government

The Ministry of Local Government is responsible for adoption and creation of the regional development policy and the process of decentralization. The Macedonian Law on Local Self-Government was enacted in 2002, with a wide consensus from the most influential parties in Macedonian politics. (Davitkovska and Stefanovski 2011 : 203-217). In cooperation with other ministries that deal with regional development, it defines and implements policies to promote balanced regional development, in accordance with the objectives of the Government’s policy and the program documents for Macedonia’s integration into the European Union. The Council for Regional Development of the Republic of Macedonia is a political body formed by the Government; it coordinates policy to promote balanced regional development with sectoral policies and the macroeconomic policies of Macedonia, it determines the draft strategy for regional development, gives prior approval for programs for Regional Development, initiates consideration of the issues of regional development, which require coordination between the Government, the units of the local government and other stakeholders, as well as performs other duties specified by law. The Council for Regional Development is established for each region, and it is composed of the mayors of the municipalities that are part of the planning region.

The implementer of the policy of Regional Development is the Bureau for Regional Development as a separate entity within the Ministry of Local Government.

Bureau for Regional Development

The efforts that are being made for a faster and more comprehensive development of the areas in the country that are lagging behind in their development have been continuously monitored and systematically elaborated since 1974. The regional policy has undergone several stages so that today we have already adopted the Law on Balanced Regional Development (2007) as a European law (passed according to the

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 83 Law and Political Aspects of Local Economic and Infrastructural Development example of the Republic of Slovenia) and specific regulations that implement the policy of balanced regional development.

The Bureau for Regional Development is operational body responsible for implementing regional policy in the country. Historically, the institution, or together with its institutional predecessors, has existed for nearly four decades. Although it has re- peatedly changed its legal forms, the Bureau in essence remains the only institution that is continuously engaged in implementing policies to promote balanced regional development. • Тhе operational body responsible for funding the development since its inception in 1974 until today operates in the following legal forms: • National Fund for crediting faster development of underdeveloped areas, which was formed in 1974. The institution was established under the Law on National Fund for crediting faster development of underdeveloped areas (Anon. 1974); Agency for underdeveloped areas, with the Law on encouraging the development of economically underdeveloped areas. (Anon. 1994) Bureau for underdeveloped areas, which is the legal successor of the agency. The institution was established with the Law on Organization and Operation of the State Administration (Anon. 2000) Bureau for Regional Development, an institution established by transformation of the Bureau for Economically Underdeveloped Areas of 01 January 2008 in accordance with the Law on Balanced Regional Development (Anon. 2007)

The Bureau for Economically Underdeveloped Areas was transformed into Bureau for Regional Development in 2008 and assumed the role of a real task force for the implementation of regional policy in the country. The Bureau for Regional Development has separate legal entity within the Ministry of Local Government.

The Bureau for Regional Development performs the following tasks: Prepares analytical documentation on the development of strategic and operational planning documents for regional development, Produces the proposed methodology for the preparation of planning documents, Prepares annual reports on the implementation of the Action Plan of the Strategy Produces the draft decision on the criteria and indicators to identify areas with specific development needs, • Produces the draft list of areas with specific development needs Prepares the draft criteria for the level of development of Local Government and the Regions, • Prepares the draft act on classification of local government units and regions according to their level of development, Provides technical assistance to the Centres for Regional Development, in the preparation of programs for development of regions and performs other activities related to regional development,

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Informs stakeholders about the types and volume of funds and instruments to encourage regional development, Establishes and provides maintenance of the information system for regional development in cooperation with the National Institute of Statistics, and • Performs other duties related to regional development, defined by law (Anon. 2007)

The Bureau for Regional Development, as provided by the Law on Balanced Regional Development, has an immediate direct communication with implementers of regional development policy. With the new law it is clear that the Bureau has been deprived from many obligations that should be executed as a true institution for implementation. It deals with only purely technical matters (Goceva 2011 : 41). It has been shown as an institution capable to be able to undertake any additional actions that should naturally be assigned to it, no matter whether they are activities which are currently performed by the Ministry of Local Government or any other department or agency. That would facilitate the work, and transfer of powers from one institution to another will be avoided in case of misunderstanding and inability to produce evidence by law.

Centres for development of planned regions

In accordance with the Law on Balanced Regional Development (Anon. 2007), as one of the carriers in regional development planning and implementation of planning documents for regional development is the Centre for Development of planned regions (Art. 12-2b, The Law on Balanced Regional Development), The Republic of Macedonia is divided in eight regions, with different level of development. The funds are allocated to the regions on the basis of a Decision of the Government of the Republic of Macedonia on classification of the planning regions according to the level of development. Furthermore, in the same law, the legislators are trying to define the Centre for Development of planned regions, and thus determine its legal status (Anon. 2008). Therefore according to the law, a Centre for Regional Development has been established, in favour of performing professional activities relevant to the development of the planning region. This centre is established for each region and the founders are the municipalities within the planned region. The decision to establish the centres adopted by the local government should closely regulate its organization, operation and financing. The Centre is a legal entity and its headquarters are located in the local government unit which has the largest population in the planning region.

The lawmaker governs how the head of the Centre is elected as well as their mandate and the budget, which comes from the budgets of local governments that are part of the planning region.

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The Law, in a separate article, lists the powers of the Centre for Regional Development. Thus, under Article 26 of the Law, the Centre: prepares a draft program for regional development, prepares proposals – Action Plan for implementation of the Programme for Regional Development, • prepares proposals – projects for regional development and for areas with specific development needs, coordinates activities related to the implementation of the Programme for Regional Development and realizes projects for regional development, prepares an annual report on implementation of the Programme for Regional Development, provides information to stakeholders on the implementation of the program for regional development and other issues related to regional development, provides professional and technical assistance to local governments in the preparation of their development programs, provides professional services to associations and other stakeholders in the preparation of projects for regional development encourages cooperation between municipalities within the planning development, implements projects to promote regional development, funded by the European Union and other international sources, promotes the development possibilities of the planning area and performs professional and administrative – technical work for the council for development of the regional development.

In order to determine the legal status of the Centre, the legislator has not invested much effort nor paid enough attention to it. It raises the question of the nature of the legal status of the Centre derived from the question of what kind of institution it is. If we take the general law, we can locate that such a centre would arise from Article 14, which refers to the inter-municipal cooperation. But the fact is that as a separate organ of the local administration, the centre is not provided for in this general law (Anon. 2002). This is perhaps due to the fact that this law was enacted five years before the adoption of the Law on Regional Development. So the basis for the legal status of the Centre should be sought in this law. As noted by the provisions of this law, the Centre is defined as a body which performs professional activities relevant to the development of region. The legislator did not attempt to define the nature of this body nor whether it is a public company established by the local government, public institution performing activities of the public or some kind of pairs local authority established by the local government unit to perform professional activities (Davitkovski 2012 : 21).

According to the Law on the organization and operation of the administrative bodies (Anon. 2011) as authorities on the territory of the Republic of Macedonia that perform professional activities, there are the administrative bodies established by the Republic. So for this kind of institutions and similar ones, the legislator set the

86 Local Economic and Infrastructure Development of SEE in the Context of EU Accession B. Davitkovski, E. Davitkovska, V. Gočeva: Institutional Forms and Shapes in the... competence at central level, which does not mean that the local governing units cannot establish similar bodies. Yet it remains an open question about the nature of the activities of this centre and it will result in the type of organizational form through which the professional activities that are crucial for regional development will be realized.

The dilemma that there are inconsistencies regarding the nature of the centre exists. First, in the analysis of the decisions brought forth by the municipalities participating in the eight regions, as well as the registrations at the Central Registry of the Republic of Macedonia, where these centres are all registered under the code 01.4 – local government, without specifying and defining the legal status and dominant competence in performing professional work of these centres.

To be able to expect for the Centres for Regional Development to really exist in the future as organizational forms that are of utmost importance for the regional development, certain measures should be taken. The next amendments to the Law on Balanced Regional Development in Article 24 should precisely define the organizational form of the Centre and its legal status and, in particular, greater autonomy in Founding Act should be provided, which would allow editing and original organization, operation and financing of such organizational forms exclusively to the development of the planning region. One of the most highly proposed legal forms under which the CRD’s should operate was a consulting firm. (Stojanova et al. 2012 : 30)

According to the needs of the region, it should be left at free disposition of the founder, that the act of establishing a centre is to provide a new and specific jurisdiction as well as specific educational preparation which should be required for the head of the centre, and it should be especially made available for the assets of the local government units that are part of the planning region for themselves to predict the appropriate financing of the centre. In this way, the Centre for Regional Development will result from the needs and specificities of the local government, as legal and organizational form that the founders of the centre prefer and mostly know about the regional development.

Analysis of the situation starting from 2009 up to today

For the regional development policy to develop in the right direction in line with EU requirements, the Republic of Macedonia has started this process by passing the Law on Balanced Regional Development in 2007 which was the basis for the adoption of the Strategy for Regional Development of the Republic of Macedonia 2009–2019. Two additional Action Plans 2010–2012 and 2013–2015 were adopted for the implementation of the Strategy. During the following years, all regulations were passed to implement the policy, such as the decision to classify regions according to their level

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 87 Law and Political Aspects of Local Economic and Infrastructural Development of development, the decision on determination of areas with specific development needs (at national level), programs for development planning regions (at regional level) and local development strategies (at local level). This largely opened the door for the process of legislation in line with the European standards. Based on the Law at end of 2008 and beginning of 2009 the Centres for Regional Development were established, whose main task is to participate in the development of the region by finding and applying for funding projects to boost economic growth and development of the region, as well as highlighting its competitive value. This set up a network of institutions in charge of this policy. The results of these newly established institutions can be seen only in the last 2 years, with the application of mature regional projects to the Regional Development Bureau and through the use of the EU funds. The whole system that was set up with the law and a new strategy was new for all parties involved and quite a lot of time was lost to meet the need for adequate staffing of the centres and the national institutions as well. The problem arises in that the regional policy is a complex field and a multisectoral policy. In a way there is a gap between policy and the system that runs the Ministry of Local Government and the policies of other ministries. The Funds from the Ministry of Local Government and Regional Development Bureau are divided according to the Decision for classification of regions according to the degree of development of the regions (the old decision was valid until 2012 and for the period from 2013 to 2017 a new one was made), while other ministries share according to their own criteria without paying attention to balanced development. Centres for regional development programs in almost all the ministries are not recognized as institutions which can apply for projects. In the period 2009 to 2012, the Bureau for Regional Development announced 3 public calls for proposals in which the Centres could participate with their own projects on the development of regions and local government development in areas with specific development needs and development of the villages. In 2010 there was no public call as yet because the projects from 2009 were still being paid and implemented. During these 3 public calls a total of 187 projects were funded to promote balanced regional development. The Law established the right of use of funds as 1% of GDP or 21 732 million MKD. In the past five years (2008–2012) of the implementation of the Law on Balanced Regional Development, the Ministry of Local Government and Regional Development Bureau accounted for 839.7 million, which represents only 0.04% of GDP. In 2009 major funding 0.06% or 243 million MKD were provided, but with the passing of time the percentage of the funds was reduced in 2012, and only 0.02% of GDP was allocated. According to the statistics of the Government, in accordance with the programs of the ministries and other state institutions, for the year of 2012 the allocated funds directly or indirectly provide promotion of regional development and they amount to 1.5% of the GDP. Starting from what is said above, we are coming to the conclusion that despite the priorities and objectives of the Strategy for a balanced and polycentric development, the funds are not spent according to a unified way. Macedonia faces the problem of ineffective coordination between nonlinear ministries and the overlapping of responsibilities.

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The justifications by linear ministries for not using the degree of development of the regions refer to the specific area they cover. Therefore, we can say that the Ministry of Health and its programs for drug delivery and treatment of people with diabetes cannot divide their services by regions according to their level of development, but according to a need for therapy for diabetes in a given region or municipality. This is quite true, but there are programs that can include this criterion.

As a conclusion to all of this, the following can be stated: The legal framework is set almost entirely in the country, but it is not fully respected by the linear ministries which have programs for regional development. The institutional framework has strong fundamentals, with established network of institutions implementing this policy and leading the policy from the highest national governing units to the units of local government, which should be the main beneficiaries of this policy. • Since the implementation of the Strategy in 2009, there has been significant progress in the sense of capacity building for the implementation of regional policy and the use of national resources as well as the European funds (this would include IPA). Regional development centres are already starting to be recognized as a serious factor in the use of these funds and the assistance to the local governments for collecting funds for projects.

Strategy for Regional Development 2009–2019 incorporated into local development policies

The Strategy as a strategic national document contains the basic principles and guidelines that are based on regional politics for a period of ten years. All regional and local development documents must be aligned with the documents of the Strategy. This document is a general way to present the principles and goals of local economic development and proposes measures for their implementation, while specific strategies for local economic development in each municipality have worked out in detail these principles, depending on the characteristics of a given municipality. One of the important principles that are based on regional policy in Macedonia according to the Strategy Principle of partnership – cooperation in the preparation, implementation, monitoring and evaluation of the planning documents for regional development between the central government and local governments, economic and social partners and other relevant representatives of civil society and principles of alignment – objectives, priorities and measures in the planning documents for regional development to comply with the objectives, priorities and measures in the strategic development plan at national level and in program documents for Macedonia’s integration into the European Union. The objectives of the regional development in the country is balanced and sustainable development of the territory of the Republic of Macedonia, based on the model of polycentric development, reduced disparities

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 89 Law and Political Aspects of Local Economic and Infrastructural Development between and within regions of the planning and the quality of life of all citizens; Revitalization of development of villages and areas with specific development needs and support to inter and cross-border cooperation of local governments in order to encourage balanced regional development. This paper developed and took into account the characteristics of the planning regions as location and extent of urbanization; development level of planning regions and areas with specific development needs, and special attention is paid to the analysis of the situation in terms of natural resources; natural, cultural and historical heritage, environmental protection, demographic growth, economic characteristics, labour market, social development, living conditions and housing, utility, transport and energy infrastructure. The main objective of regional policy is to stimulate economic growth and reduce unemployment for the whole country. The targeted goal with the policy for regional development by 2019 is to reduce the number of municipalities that are experiencing negative natural growth by two-thirds. Given the long term of the demographic processes, there is also need to improve the health and welfare of the population and its compliance with the demographic changes in the region. The Strategy through basic measures includes demographic revitalization of planning regions and municipalities, greater coverage of regions with spatial planning documentation for urban planning and other segments of the development, reducing the uneven distribution of investment and employment between planning regions (Anon. 2009 : 64). Of great importance is the reduction of the uneven distribution of investment and employment within regions and increasing the capacity of local governments to initiate and implement projects of interest to the development of the region. Indirect results of the implementation of the strategy is finding the appropriate measures to improve the trend of establishment of small and medium enterprises (SMEs) and paying attention to local conditions favourable for the SME sector, and constantly finding ways of improvement. It states that local governments have an important role in the realization of projects for regional development, especially the development projects of areas with specific development needs and development of villages. In order to maximally utilize the available financial resources for regional development, local government needs to realize high mutual coordination and mutual cooperation in the creation and implementation of projects of importance to the region. (According to the Constitution of the Republic of Macedonia the right to local self-government is one of the fundamental values and fundamental rights of citizens. The Law on Local Self-Government (Anon. 2002) has started the process of decentralization, which in Article 22, paragraph 3 states that local economic development – planning local economic development, establishing developmental and structural priorities leading local economic policy, support of the development of SMEs and entrepreneurship at local level and in this context, participation in the establishment and development of a local network of institutions and agencies and promoting of partnership – is a responsibility of the local government.)

90 Local Economic and Infrastructure Development of SEE in the Context of EU Accession B. Davitkovski, E. Davitkovska, V. Gočeva: Institutional Forms and Shapes in the...

Conclusion

Although the European Union is one of the richest places in the world, it spends nearly a third of its budget for the regions that are lagging behind in their development. The most recent recommendations of the European Commission to the Republic of Macedonia for regional policy are concerning the correct allocation of funds under the principle of balanced development and proper implementation of this policy. Statistics show that the funds earmarked for regional development are not shared by the key for balanced development, but most remain in the city of Skopje. The whole economy was (and in great extent is even now) concentrated in and around the city of Skopje. This resulted in unfavourable polarized development, by favouring the development of cities to the detriment of villages and the achieved monocentric development, with the biggest concentration of economic activities in the capital city (Slaveska 2000 : 159). It merely “rapes” the capital, it spreads indefi- nitely and eastern and south-eastern Macedonia is emptied and deserted. In order to be able to endure as a state in the European family, it is necessary and it is required to create similar and competitive regions even before we become a member state. Our budget is modest and limited regarding the funds for regional development, so we should use the pre-accession funds that offer great opportunities for the candidate states for membership in EU. The joint regional economic policy constitutes one of the pillars for achieving the economic and social cohesion between the constitutive parts of the Union.

Although the allocation of funds from the budget is performed by other departments in accordance with the Regional Development Strategy, it still does not guarantee proper implementation of regional policy and should therefore be reconsidered. The institutions involved in the distribution of funds to promote balanced regional development funds are not allocated according to the degree of development of the regions.

The Council for Regional Development of the Republic of Macedonia as the coordinator of this policy could certainly help in proper understanding and execution of the policy and policy coordination between ministries, municipalities and centres as regional level.

The function of the Bureau is marginalized in the Law on regional development. It cannot happen that the body which should be a key player in the field of regional policy is to be stuffed with purely technical work. The Bureau for Regional Development, as implementer of the regional development policy in the country, has to work on improving its effectiveness. In this regard, the Bureau must continue to concentrate on improving the internal functioning in order to continue improving its capacity as an institution, and to continue to work to improve its performance or the quality of its activities in order to achieve functional results in the implementation

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 91 Law and Political Aspects of Local Economic and Infrastructural Development of the regional development policy. Raising efficiency will mean a further transformation of the institution into a modern European institution in the future, the accession of the Republic of Macedonia to the European Union will play an important role in the implementation of EU regional policy and the promotion of regional development.

The Bureau should be given the status of Regional Development Agency, which will no longer be under the Ministry of Local Government, but would be directly under the Government. It would be granted credentials that all regional development agencies in European countries have. It is required that an agency should be composed of highly trained personnel and staff who will be ready to address all the needs of the municipalities, as well as the other requirements of the European Union. It would organize trainings in all the regions from different areas of regional development. It would be the coordinator of the centres for the development of regions, which, on the other hand, would use their experiences for the development of their region. The Ministry is a huge institution and the Agency in this case would be carrying out their functions promptly and efficiently. Then there would be an institution which would derive the policy – the ministry, and a body that implements this policy – the Agency. In addition to this, the Agency will be the trainer and will connect regions. In any case it would have the function of a bridge between local and central government. Knowing the problems of local government, regional development centres would be able to propose laws and acts, which could in practice work well.

Also, according to the needs of the region, it should be left at free disposition of the founder, that the act of establishing a centre is to provide a new and specific jurisdiction as well as specific educational preparation which should be required for the head of the centre, and it should be especially made available for the assets of the local government units that are part of the planning region for themselves to predict the appropriate financing of the centre. In this way, the Centre for Regional Development will result from the needs and specificities of the local government, as legal and organizational form that the founders of the centre prefer and mostly know about the regional development.

All of the abovementioned is an excellent basis for implementation of the regional policy in the right direction and continuation of building the necessary and capable institutions for implementation of this policy.

References

Anon. (1974) Law on National Fund for crediting faster development of underdeveloped areas, Official Gazette, No. 48/74. Anon. (1994) Law on encouraging the development of economically underdeveloped areas, Official Gazette, No. 02/94.

92 Local Economic and Infrastructure Development of SEE in the Context of EU Accession B. Davitkovski, E. Davitkovska, V. Gočeva: Institutional Forms and Shapes in the...

Anon. (2000) Law on Organization and Operation of the State Administration, Official Ga- zette, No. 58/000. Anon. (2002) Law of local self government, Official Gazette, No. 05/02. Anon. (2007) The Law on Balanced Regional Development, Official Gazette, No. 63/07. Anon. (2008) Decision on Classification of the Planning Regions According to the Level of Development for the Period 2008–2012, Official Gazette of RM, No. 162/2008. Anon. (2009) Strategy for Regional Development of the Republic of Macedonia, Official Gazette of the Republic of Macedonia, No.119/09. Anon. (2011) Law on the organization and operation of the administrative bodies, Official Gazette, No. 58/200, 44/2002, 82/2008,167/2010, 52/2011. Clark, G. et al. (2010) The Role of Development Agencies and Companies, Organising Local Economic Development, OECD. Cvetanovska, B. and Angelova, B. (2012) Establishment and organization of regional development in Macedonia. Challenges and perspective, PECOB Portal on Central Eastern and Balkan Europe University of Bologna – Forlì Campus, Bologna. Davitkovska, E. and Stefanovski, I. (2011) Tradicionalen nasprotu nov javen menadžment. Zbornik vo čest na profesor Naum Grizo, Praven fakultet “Justinijan Prvi”, Skopje. (Давитковска, Е. and Стефановски, И. (2011) Tрадиционален наспроти нов јавен менаџмент. Зборник во чест на професор Наум Гризо, Правен факултет “Јустинијан Први”, Скопје.) Davitkovski, B. (2012) Praven status na centarot za razvoj na planskiot region, REGINFO, Skopje. (Давитковски, Б. (2012) Правeн статус на центарот за развој на планскиот регион, РЕГИНФО, Скопје.) Davitkovski, B. (2012) Praven status na centarot za razvoj na planskiot region, REGINFO 2, Skopje. (Давитковски, Б. (2012) Правeн статус на центарот за развој на планскиот регион, РЕГИНФО 2, Скопје.) Goceva, V. (2011) Institucii nadležni za regionalen razvoj – Komparativni iskustva, Jugore- klam, Skopje. (Гоцева, В. (2011) Институции надлежни за регионален развој – Компаративни искуства, Југореклам, Скопје.) Slaveska, T. (2000) Regionalna ekonomska politika na Republika Makedonija, Economy Press, Skopje. (Славеска, Т. (2000) Регионалната економска политика на Република Македонија, Economy Press, Skopje.) Stojanova, V. et al. (2012) Improving Regional Policy in Macedonia – Sharing the German and Slovenian Experience, EFB, New Business Education Foundation, Skopje.

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 93

DOI 10.5644/PI2013-153-05

ROLE OF MUNICIPAL PREFECTS AND MAJORS IN THE LOCAL ECONOMIC AND INFRASTRUCTURAL DEVELOPMENT

Elmir Sadiković* Željko Josić**

Abstract

Local economic development implies maintained and premeditated process in which, beside local authorities, participate other actors, in order to create better conditions for the economic development and growth, and to improve life quality of population within local communities.

Due to their constitutional and legal position local self-governments are an important segment of political system and an important subject of social development. In the local self-government system in Bosnia and Herzegovina, municipal prefects and mayors as the representatives of an executive authority functions are important institutions of the local self- government. Significance of their role in the local economic and infrastructural development is observable not only because of their executive function but also in their role to recommend development policy to the municipal council/city council related to all issues within the local- self-government jurisdiction.

Municipal prefects and mayors create and report economic and development plans to the municipal/city council, they create and report various investment programmes, environmental and urban development strategies and other plans and strategies together with regulatory acts.

Units of municipal self-government, besides delivering basic services, do have obligation to create an environment for expansion of local economic capacities and ensure long and sustainable development. Countries in transitional process such as Bosnia and Herzegovina require time in order to change local business and economic circumstances, to create participative competences and capacitate local actors for the participation in this particular process. On that path, taking into the consideration legal and structural authorities of executive political function of local self-government, it is possible to emphasize that solution of local economic development in Bosnia and Herzegovina is in hands of municipal prefects and mayors.

* PhD, Assistant Professor at the Faculty of Political Science, University of Sarajevo, Skenderija 72, 71000 Sarajevo, Bosnia and Herzegovina, phone: +387 33 203 562, e-mail address: sadikovice@fpn. unsa.ba ** MSc, Mayor of the Municipality Domaljevac, Posavskih branitelja 148, 76233 Domaljevac, Bosnia and Herzegovina, phone: +397 31 716 600, fax: +387 31 716 604, e-mail address: [email protected]

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 95 Law and Political Aspects of Local Economic and Infrastructural Development

Paper has following parts: Introductions, Local Community as the Social Base of Local Self- Government; Constitutional and Legal Position of Local Self-Government Units in Bosnia and Herzegovina; Local Economic Development, Local Economic Development in Bosnia and Herzegovina The Role of Municipal Prefects/Mayors in Creation of Local Economic Development, Conclusion, and References.

Keywords: Local development, Local self-government, Municipal prefect/mayor.

Introduction

Bosnia and Herzegovina has adopted the model of direct election of municipal prefects and mayors since 2004. Local elections were held in October and it was the first time that municipal prefects and mayors were elected in a direct way in Bosnia and Herzegovina. This is how the municipal prefect gained new social position. Based on the election results, hypothesis that mayors of municipal prefects would get more votes directly from citizens than from the political parties’ lists for municipal council members has been confirmed. This manner of direct election proved that citizens recognized their own interest and showed motivation to elect a person who is enjoy- ing a high moral values and integrity, and has the capacity and capability to start and implement development projects. Political party was not a primal factor for their electoral choice. Direct election has offered to municipal prefects new prospects for the local development where they are able to influence more independently, they are able to create and implement more coherent local policies, make efficient decisions at the local level and improve local management. Former analyses show that initiatives for decision making hardly ever come from citizens or their associations, therefore, municipal councils and municipal councillors rarely appear as initiators. As the basic articulator of common interest and creator of decisions with developing character, municipal prefect appears to be the executive function.

Local community as the social base of local self-government

Local self-government as legal, political and system institution emerged in the local community as its natural and social base, representing institutionalized form of fulfilment of requirements and needs of citizens in one or more territorially associated local communities. In the social science theory, local community is defined as certain territorial unit, in which citizens, via their own or mutual resources fulfil most of their life needs. Local community is the form of citizens’ grouping and gathering around their mutual problems, interests, needs and values, interrelating in different social interactions and developing the consciousness of belonging to that community. Mutual needs are represented in local community and they form institutions for the organization of social activities in order for those needs to be fulfilled. One of the

96 Local Economic and Infrastructure Development of SEE in the Context of EU Accession E. Sadiković, Ž. Josić: Role of Municipal Prefects and Majors in the Local Economic and... institutions that was historically developed and formatted as democratic institution of local community is local self-government (Pejanovic and Sadikovic 2010 : 14). In all contemporary democratic societies, local self-government is the category of constitutional law. This indicates that local self-government presents the basic form of achievement of citizens’ political rights to participate in management of public affairs in their local community. In its historical development, local self-government was an expression of citizens’ aspirations to independently manage and participate in public affairs, to determine policy, bring important decisions and value mutual influences in their local communities. Those activities can be performed directly at the municipal and city assemblies (Anon. 2001; Anon. 2008a; Anon. 2008b). This represents direct self-government. However, in nearly every democratic country, citizens elect local bodies, which in their name manage the public affairs. Basic unit of local self-government in all democratic countries is municipality/commune. Municipality/ commune has its own territory, elected bodies and institutions, local jurisdiction that can be used to influence the social and economic local community development. Citizens within one unit of local self-government are able to directly or through their elected representatives manage public affairs that are vital for their needs and interests apart from issues that are legally specific for different level of government. Municipality that historically shaped itself as basic form of political system decentralization represents important political and administrative territorial unit of all democratic countries. Based upon theoretical basic approach, municipality is not defined only as administrative and territorial unit but also as the base territorial community of citizens that directly and indirectly, through their democratically elected representatives, accomplish their political and economic rights, making decisions about all social affairs that are in mutual interest. Every local self-government unit as the political, legal and system institution articulates activities of people directed towards fulfilment of their mutual needs. Based upon citizens’ needs, interests and activities are determined in order for those needs to be fulfilled within institutional structure, which is called the local government. Performance of local government is the essence of local self-government. There are two components: performing of government via elected bodies and indirect participation of citizens (Pejanovic 2005 : 188). In the narrow point of view, local self-government is part of social organization and social processes in local territorial communities that implicit conduction of mutual public affairs in local communities. In wider sense, local self-government signifies not only functioning of the local government but organizing all institutions and forms of relation regulations in local community based upon direct democracy. According to the European Charter on Local Self-Government, local self-government implies the right and capacity of local government to, within law, regulate and conduct major part of public affairs based upon their own responsibility and in interest of local population. Definition of local self-government in political theory implies political right of citizens to directly and via their directly elected representatives participate in conduction of public affairs in local community and that right is guaranteed by the Constitution and law of the country (Anon. 2009; Anon. 2010a;

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 97 Law and Political Aspects of Local Economic and Infrastructural Development

Anon. 2010b; Anon. 2013; Anon. 2013b; Mlinar 2000; Pejanović 2005; Pejanović and Sadiković 2010; Salkić 2011; Zlokapa 2009).

Constitutional and legal position of local self-government units in Bosnia and Herzegovina

Units of local self-government in western European countries became an exponent of social, economic, urban and cultural development of their environment. Together with developed autonomy in financing communal municipality functions, municipalities and towns present the most important forms of governance and conduction of public affairs for all citizens. Collapse of socialist system in Bosnia and Herzegovina in early nineties of the last century required structural changes regarding political and legal concept of local self-government and its role within society and political system in general. Introduction of pluralistic political parties system and market economy also required redefining the status of the units of local self- governance, meaning conceptually different relation between local government and state on one side, and local self-government and citizens on the other side. In former socialist states, which went through the transition process and European Union integration process, units of local self-government have got political and constitutional position that ensured them significant role in economic, social, political and democratic development. However, differing from the most countries which went through transition process in peaceful manner, Bosnia and Herzegovina was exposed to war whose consequences in a great measure determined the position and preconditions for local self-government’s future development. Actually, during the war 1992–1995, enormous changes emerged in the context of ethnical and social structure of local self-government units’ population. Utility structure was destroyed as well as industrial subjects that were major factors of local economic and social development (Pejanović 2005; Pejanović and Sadiković 2010; Salkić 2011; Zlokapa 2009). Therefore, changes regarding territorial organization of municipalities also occurred. War in Bosnia and Herzegovina ended by Dayton Peace Agreement in 1995. In accordance with Dayton Peace Agreement, internal constitution of Bosnia and Herzegovina is based upon two entities: Federation of Bosnia and Herzegovina with ten cantons and Republika Srpska. Town of Brcko received the status of District after an arbitrage process in 1999. Dayton Peace Agreement does not contain any regulations regarding local self-government. Constitutional and legal position of local self-governance in Bosnia and Herzegovina is defined by constitutional and legal regulations of entities. In Federation of Bosnia and Herzegovina, local self- government is defined in addition by constitutional and legal regulations of cantons. District Brcko is separate self-government unit and its status and activities are determined by Statute of District. This is how complicated administrative structure in Bosnia and Herzegovina has been made together with political and legal frame inside which units of local self-government receive their constitutional and legal

98 Local Economic and Infrastructure Development of SEE in the Context of EU Accession E. Sadiković, Ž. Josić: Role of Municipal Prefects and Majors in the Local Economic and... position. State of Bosnia and Herzegovina, regardless of the fact that it is signatory of the European Charter on Local Self-Government, does not guarantee the right to local self-government within its Constitution. Regulation of self-government is entirely in jurisdiction of entities. In post war period, local self-government in Bosnia and Herzegovina, unlike the other countries that went through transition processes, did not receive an adequate treatment from authorities of both entities and state institutions of Bosnia and Herzegovina. Right to local self-government in Republika Srpska is limited by entity laws. Entity bodies take over all activities and tasks, which should be according to the principle of subsidiary within jurisdiction of local authorities. In Federation of Bosnia and Herzegovina, cantons as federal units have wide range of legal jurisdiction and significantly terminate self-governance activities and jurisdiction of local self-government units. In Federation of Bosnia and Herzegovina, cantons have wide range of public affairs performances, especially in the sphere of fiscal policy and urban, environmental planning. This legal position of cantons has restricted the possibility of local self-government development as well as complete autonomy regarding ensuring own sources of financing (Pejanovic and Sadikovic 2010 : 41). In Republika Srpska, due to the high level of centralized government at the entity level, municipalities had no sufficient legal and real base for the whole autonomy of local self-government. Specific problem of successful functioning and development of local self-government in Bosnia and Herzegovina is nonexistence of constitutional guaranties and an adequate legal frame for assurance of local authorities’ financial autonomy (Salkić 2011 : 176). The entire system of local self-government in Republika Srpska and Federation of Bosnia and Herzegovina has been developed during post Dayton period, which is characterized in insufficient legal frames and inadequate relations between institutional structures of entities and state of Bosnia and Herzegovina. Regardless of all the above mentioned, significant number of municipalities and towns in Bosnia and Herzegovina in post Dayton period, mostly thanks to inventiveness and management skills of municipal prefects and mayors, have achieved significant economic, social and infrastructural development. Units of local self-government have extremely important role in achieving conditions that are preconditions for EU membership. Before all, this refers to the level of employment, quality of service provided to citizens in local communities, utility infrastructure and urban planning, protection of human rights and protection of human environment. With accession to the European Council in 2002 and ratification of European Charter on Local Self-Government, Bosnia and Herzegovina took over responsibility to adjust the system of local self-government to the basic principles of European Charter on Local Self-Government. Entities of Bosnia and Herzegovina since 1995 were changing legal frame on local self-government several times, trying to find adequate solutions that would be compatible to the standards of local self-government in developed European countries (Anon. 1985). Bosnia and Herzegovina in the process of transition gradually launches European standards in the context of local self-government in order to accomplish standards for the inclusive membership in the European Union. Implementation of these standards requires

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 99 Law and Political Aspects of Local Economic and Infrastructural Development legal, functional and territorial reform of present local self-government system. Comprehensive reform of the local self-government in the EU integration process of Bosnia and Herzegovina can be achieved by rapid economic and social development of local communities, and thereby of Bosnia and Herzegovina in general (Pejanović 2005; Pejanović and Sadiković 2010; Salkić 2011; Zlokapa 2009).

Local economic development

Many definitions of local economic development can be found in literature. The United Nations Human Settlements Programme (UN-HABITAT) describes local economic development as the participatory process of all sectors in local level together in order to improve economy and create solid and sustainable economy. Local economic development according to the UN-HABITAT represents the tool for attracting capital investment and achievement of quality employment with the aim of improvement of life quality for all people living in particular environment. It encourages public, private and civil sector to establish relations of mutual partnership and through cooperation to find solutions for mutual economic challenges. Local population, through process of local economic development, should be motivated to use entrepreneurships, labour, capital and other local resources in achieving priorities of their own local community. The World Bank defines local economic development as the process through which actors of small and big towns – our communities – work together with public partners, business and nongovernmental sectors in order to create better conditions for economic growth and employment (Anon. 2013a). Through this process, they establish and maintain dynamic trade culture and create new community and business prosperity aiming to improve life quality for all population in community. According to this, major components of local economic development are: Social development (includes improvement of social environment, reducing criminal activities, stronger social engagement of citizens, poverty reduction, fulfilment of basic human needs, mutual responsibility, etc.), Political development (includes efficient government, political consensus of different interest groups, etc.), Cultural development (better life quality in local community) and Economic development (new work places, preservation of already existing workplaces and businesses, increasing economic and business competition, enlargement of business and trade, infrastructure and business activities, increase of income, etc.) (Anon. 2013a).

Definition of the World Bank contains the understanding of local economic development, also presented in other definitions, as continued and planned process, in which apart from local authorities participate other subjects aiming to create better conditions for economic growth and development and improvement of life quality for citizens in local communities. Final goal is sustainable local community development

100 Local Economic and Infrastructure Development of SEE in the Context of EU Accession E. Sadiković, Ž. Josić: Role of Municipal Prefects and Majors in the Local Economic and... and social inclusion. Local economic development planning is initially proactive because it attempts to influence on future of the community by shaping its sustainability. Due to the fact that resources of local community are deficient and less than needs of the community, strategic planning establishes priorities and focus on critical areas. This is participative process including everyone who is required to implement adopted strategy. It provides possibility for determination of desired future community direction and achievement of particular mutual goals (Anon. 2010a : 25; Anon. 2001; Mlinar 2000). Contemporary understanding of local economic development implies conception of development models in which units of local self-government, and not central government, have mayor role and responsibility for their own development. Units of local self-government are required to provide several basic services. Their task is to create conditions for expanding local economic capacities and assuring long term sustainable development and social inclusion. One of the most important reasons for creating “bottom up” development model is economic globalization, which decreased significance of national policies. Traditional instruments of local economic development through “top down” development model appeared to be inadequate and units of local self-government became more influenced by global market. That is why economically developed countries have created local economic development model, which underlines the role of local communities in building their own economic and social development. Basic principle of this economic development model implies that prosperity in local communities depends of favourable local economic and business conditions with the key role of local authorities. Local economic development actually means to create better business environment. It does not mean controlling or conducting particular companies or entrepreneurships. In the last ten decades, fiscal economic development is one of the fastest implemented economic disciplines. Interest for this discipline considerably grows in the countries of Middle and East Europe. “Facing the challenges of introduction of capitalism and collapse of huge industry systems and flagships of planned development, countries of East Europe and other developing countries are searching for the recipe and concept that would put them on track of expedited development. Therefore, the concept of local economic development is attractive to them because it attempts to affirm and integrate aspirations of an individual with aspirations of companies at a specific territory, at the same time denouncing the ghosts of socialist planning and managing from above and striving to attract as much foreign investors as possible” (Zlokapa 2009 : 90).

Local economic development in Bosnia and Herzegovina

Units of local self-government in Bosnia and Herzegovina before the period of market economy did not perceive local economic development in the context of already existing formulation in the countries of market economy. By that time, all economic plans were delivered at the state level including those for local level. Centres of

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 101 Law and Political Aspects of Local Economic and Infrastructural Development political power made decisions regarding what will be done in particular municipality and how it would be performed financially. Units of local self-government had no possibilities to influence economic flows, especially in the sector of small business. Legal structure for private business did not exist, so, there was no need for inclusion of private sector in the activities within local self-government. The role of municipalities was based on administrative services deliverance. Citizens could exercise influence regarding better economic position of local self-government only through political engagement, and in that period, in the only existing political party. Other instrument of citizens’ participation in economic development as we understand it today had not been institutionalised. Development holders were the state companies. After the war and collapse of state companies in Bosnia and Herzegovina, small business started to absorb unemployment. International community influenced on alteration of already existing and adoption of new legal regulations in order to stimulate small and medium size business. Also, international community supported small business through various grants, favourable advances and loans, together with other forms of technical aid. In such a manner, since the beginning of 2001, international community started to promote contemporary concept of local economic development. With adoption of new laws on local self-government (Republika Srpska in 2004 and Federation of Bosnia and Herzegovina in 2006), municipalities in Bosnia and Herzegovina obtained the jurisdictions for development plans and programmes and for creating conditions for economic development and employment. The frame for local economic development in Federation of Bosnia and Herzegovina was provided by Federal Institute for Development Programming in 2008, and similar to other transition countries in the region, this Institute adjusted its activities towards new conditions of market economy. This is how the new concept of local economic development was promoted through the “bottom up” model. As the result of this promotion, a document named Basis for the Strategies of Local Economic Development in Federation of Bosnia and Herzegovina is created and published. These basis were made according to the concept of OECD (Organization for Economic Co-operation and Development), whose assignment is to identify local area for assurance of development process and potential sources which have a clear local content. They are response to the local problems and objectives, initiated and identified by local citizens. The underlined term is the term “development” (general, structural and qualitative) and its capability to generate new activities and inclusion of all local actors who are able to create, develop and implement local development strategies. This is the method of creating sustainable process, stressing out the economic and social dynamics (Anon. 2008; Anon. 2009; Anon. 2013b).

In the end of 2007, United Nation Development Programme in Bosnia and Herzegovina (UNDP), in cooperation with Swiss Agency for Development and Cooperation (SDC) has launched the Integrated Local Development Project (ILDP) with the objective to adjust and create Methodology for Local Development Planning in Bosnia and Herzegovina in order to establish standards, principles and frame for strategic

102 Local Economic and Infrastructure Development of SEE in the Context of EU Accession E. Sadiković, Ž. Josić: Role of Municipal Prefects and Majors in the Local Economic and... planning at the local level. It would contribute towards strengthening of general development functions of local self-government units in Bosnia and Herzegovina. Many actors from all levels of government have participated in this Project, many practitioners from municipalities and nongovernmental sector, and members of academic community. In November 2009, both presidencies of Associations of Municipalities and Towns from both entities have accepted this Methodology and recommended its implementation to all units of local self-government. Also, this Methodology is accepted by Government of Federation of Bosnia and Herzegovina and Government of Republika Srpska. Methodology is unifying mutual conceptual approach of local development planning in Bosnia and Herzegovina, which is adjusted with principles of sustainable development and social inclusion (UNDP 2009 : 9). Sustainable development is defined as development which fulfils needs of present without com- promising the future generations to fulfil their own needs. Sustainable development concept offers comprehensive problem solution within local community through the integration of measures for poverty decrease, social welfare, economic growth and environment protection. This principle ensures rational utilization of existing local resources and takes into the consideration human rights and potential needs of future generations. At the same time, social inclusion is the principle that ensures citizens faced with poverty threat and social marginalization to gain possibilities and resources for participation in economic, social and cultural life and to have the advantages of living standard and benefits considered normal in their society. Therefore, it ensures their stronger participation in decision making process, which influences their lives and access to their basic rights (Anon. 2008; Anon. 2010a; Anon. 2010b; Pejanović and Sadiković 2010; Sadiković 2010).

The role of municipal prefects/mayors in creation of local economic development

Current Law on Principles of Local Self-Government in Federation of Bosnia and Herzegovina determines municipality prefect as the executive body within the municipality. Consequently, municipality prefect represents and presents the self-government unit within determined jurisdiction. Municipality prefect/mayor according to the Constitutional Law of Federation of Bosnia and Herzegovina has following jurisdictions: places and replaces municipality officials, implements municipality policy, performs municipality regulations and jurisdictions of municipality that are relocated from federal and cantonal authorities, reports to the municipality council and public about the municipal policy implementation (Anon. 2003). Prefect/ mayor is responsible for the general implementation of executive and administrative function within entire municipality as the legitimate representative. In the context of Law on Principles of Local Self-Government, municipality prefect/mayor is the most responsible institution of the local self-government for creation of municipality budget, economic, development and urban planning, and for the implementation of

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 103 Law and Political Aspects of Local Economic and Infrastructural Development budget, implementation of local self-government unit’s policy, municipality decisions, laws and other regulations, which are the responsibility of particular municipality prefect/mayor (Anon. n/a). Legal and constitutional position has provided to municipal prefect/mayor a significant authority and responsibility, therefore, specific role for the influence on local community development policy through its function within the organization and work of municipality administration sector, human resources management, creation and implementation of municipality budget, communication with citizens and creation of local economic development.

Guidelines that are recommended to municipal prefects/mayors in Bosnia and Herzegovina via programmes of European Union – such as “Quick Impact Facility” programme, started in the beginning of 2001 in order to recognize importance of local economic development and its incorporation within the local system – include the following measures, which should be undertaken by municipal prefect/mayors: Establishment of municipality office for local economic development. Final goal of this newly established office would be creation of new work places in the private sector and creation of favourable business environment within the municipality. Municipal bodies should take a commitment to create conditions for economic development in private sector and for the functioning of municipal office for local economic development. Establishment of business association. Business or trade associations should be established for business community to express their interests, concerns, wishes and affiliations. This is the way to increase capability of municipal authorities to understand and respond to the needs of business community. Interest of business community, in this sense, is to increase their own capacity to create new wellbeing and capital. Responsibility of business association is to take care of group interests articulated by its members. On the other side, increased activities of business community lead to new work places and bigger tax incomes for local authority. Establishment of partnership between private and public sector. Unit of local self-government has a key role in creating positive business environment, decision making process in communal sector, urban planning, local transportation and local services. Private sector is essential to create economic wellbeing and capital as well as successful local economy development. In order to get through all segments of society, nongovernmental organizations are requisite. The role of civil society is immeasurable for ensuring that the most jeopardized part of population in the society has benefits from local economic development results. Modification of municipal procedures. Procedure for registration of business subjects is very long, expensive and complicated. Successful local economic development depends on growth of business subjects. As much as those subjects are stimulated, level of employment is higher and costs for social intentions of municipalities are decreased. Modification of municipal procedures for registration of business subjects implies rationalization and modernization of registration

104 Local Economic and Infrastructure Development of SEE in the Context of EU Accession E. Sadiković, Ž. Josić: Role of Municipal Prefects and Majors in the Local Economic and...

process in order for the procedure to be easier, less complicated and encourage more business subjects to be registered. Establishment of equal possibilities policy. Economy in which discrimination at work places exists cannot function with its full potential. Establishing an equal possibilities policy means that all citizens will have an opportunity to express their potentials without any prejudices related to religion, nationality, gender, age or any other factor. Local environment that provides an equal possibility to all has a key importance for development and progress of local economies. Carry out an economic assessment of municipality. Essential information for establishing priorities of local economic development strategy should pass through economic assessment of municipality. It provides economic profile of local community, validating the key economic resources and modules, which could be used for economic growth and creation of new work places. Moreover, economic profile implies understanding of issues that have influence on local economic development at present period but also in the future. It is necessary to validate local circumstances that move forward and move back economic development in order to create a responding set of measures and policies for improvement of economic growth. Develop a local economic strategy. Strategy determines specific actions, which enable maximum effect with relatively low costs. Strategy provides an extensive view at local economy and aims to improve complete economic environment in the local community creating optimal regulation, financial, infrastructural and personnel preconditions, which could lead to new business ideas, growth of new work places and increase of incomes in local community. Local government with this strategy gains important instrument of local development management. But, this instrument must be set up in order to react to changes that appeared at the moment of establishing strategy, which could not be perceived (Anon. 2008; Salkić 2011; Zlokapa 2009; Pejanović 2005).

Key determination of contemporary local economic development management is the planning process itself. The purpose of planning process is creation of positive, mutual vision of future for entire community, which will be open for changes and adjustments (Anon. 2010a). Planning and implementation of local economic development should ensure effective coordination of all actors, and achieving given goals. In theory this process is called strategic planning of local economic development. As it is noted in the Handbook of the World Bank, local economic development should start with strategy formulation. Local economic development strategy is the key component of planning process in any community. Drafting of the local economic development strategy is the crown of local government activities, which determines long term sustainability development of their own community. Strategy presents the result of previously taken steps and measures. However, it should be also taken into consideration that an initial activity taken over by municipal prefect/mayor is most often the most efficient. This means that improvement of processes and procedures

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 105 Law and Political Aspects of Local Economic and Infrastructural Development for business subjects should also pass through municipal management. Strategy provides support in choosing desirable direction of economic local development and defines what kind of support local authorities should provide in order to make economic development easier. Strategy should be used for reconsideration of problems and possibilities and represents a planned approach towards local economic development. However, strategy must not contain an intention of interference in everyday activities of companies and behaviour of market and trade factors. The main foundation of strategic process are skills and resources brought by all actors in the process, establishing working relations and structures that will entirely lead everyone interested towards constructive and longer sustainable public-private-nongovernmental partnership (Salkić 2011; Zlokapa 2009; Pejanović 2005; Sadiković 2010). Local economic development is conducted as a partnership between local authorities under leadership of municipal prefect/mayor, business interests and community interests. Importance of public-private partnership is underlined within the preparation of Development Strategy of Bosnia and Herzegovina stressing out that “it is necessary to establish systematic frame for rapid development of different forms of partnerships and public sectors … capital of private sector in the combination with public sector instruments ensures preconditions for success” (Anon. 2010b : 3).

Conclusion

In transitional countries, such as Bosnia and Herzegovina, time is very vital requirement in order to transform local business conditions, create participative capacities, and prepare local actors for participation in this process. However, local authorities bravely undertook this challenge called local economic development. Hence, local economic development in Bosnia and Herzegovina became a field in which municipal prefects/mayors devote great part of their attention. Devotion of municipal prefects/mayors to the local economic development derives from their jurisdiction and responsibility for creation of economic and development plans and programmes. Researches of these issues related to the local economic development in municipalities of Bosnia and Herzegovina show a dominant role of municipal prefects/mayors in relations to the other actors. Prefect/mayors are initiators, creators, proposers and implementers of local economic development strategy document, which is a solution document in local community to determine direction and intensity of development. Due to the legal and statutory jurisdiction, the carrier of executive and political function in the units of local self-government is rightfully stated as a carrier for local economic development. It is the social power and management capabilities of municipality prefect/mayor that are vital for local economic development. This function is directed towards planning of goals and results that should be accomplished, defining organizational structure of municipality administration and selection of human resources, which will facilitate completion of tasks and achieving of goals of local self-government. Creation of economic, environmental and social programmes

106 Local Economic and Infrastructure Development of SEE in the Context of EU Accession E. Sadiković, Ž. Josić: Role of Municipal Prefects and Majors in the Local Economic and... and projects, management of planning tasks achievement and control of work of the whole executive components of local government are constituent and integral part of position of municipal prefect/mayor.

References

Anon. (1985) European Charter on local self-government, Council of Europe, Strasburg. Anon. (2001) Handbook: Local Economic Development, The World Bank, Department for Urban Planning, Washington DC. Anon. (2003) Constitutional Law of Federation of Bosnia and Herzegovina, Official Gazette of the Federation of Bosnia and Herzegovina, No. 1/94, 13/97, 16/02, 22/02, 52/02, 60/02, 18/03, 63/03. Anon. (n a) Law on Principles of Local Self-Government, Parliament of Federation of Bos- nia and Herzegovina, Sarajevo. (http://www.sogfbih.ba/uploaded/pravni_okvir/osnovni/ Law%20on%20 principles %20of%20local%20elf-government%20FBiH.pdf) Anon. (2008a) The First Steps in Local Economic Development, Preparatory for Municipali- ties and Local Business Services Providers in Bosnia and Herzegovina, CARE Interna- tional, Sarajevo. Anon. (2008b) Local Development, CARE International, Sarajevo. Anon. (2009) Methodology for Local Development Integrated Planning, SDC, UNDP, Sa- rajevo. (http://www.undp.ba/upload/publications/MiPRO%20teoretski%20dio%20 drugo%20izdanje%20na%20latinici.pdf, downloaded 12.06.2013) Anon. (2010a) Community Planning, Governance Accountability Project GAP, Sarajevo. Anon. (2010b) Development Strategy of Bosnia and Herzegovina (operational document), Council of Ministries of Bosnia and Herzegovina: Directorate for Economic Planning, Sarajevo. Anon. (2013a) The United Nations Human Settlements Programme, UN-HABITAT, Nairobi. (http://www.unhabitat.org/categories.asp?catid=365, downloaded 25.06.2013) Anon. (2013b) Local Economic and Employment Development, OECD Organization for Economic Co-operation and Development, Paris. (http://www.oecd.org/regional/leed/, downloaded 18.05.2013) Pejanović, M. and Sadiković, E. (2010) Local and Regional Self-Government in Bosnia and Herzegovina, BTC Šahinpašić, Sarajevo/Zagreb. Mlinar, Z. (2000) Local Development and socio-spatial Organization, Urbanistika, Koper. Pejanović, M. (2005) Political Development of Bosnia and Herzegovina in Post Dayton Pe- riod, BTC Šahinpašić, Sarajevo. Salkić, I. (2011) Public Management, BTC Šahinpašić, Sarajevo. Zlokapa, Z. (2009) The Mayor and Local Self-Government: Leadership, Democracy and Development, Centres for Civic Initiatives, Sarajevo.

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 107

DOI 10.5644/PI2013-153-06

LOCAL ECONOMIC DEVELOPMENT AND MODERNIZATION OF LOCAL GOVERNANCE IN BOSNIA AND HERZEGOVINA

Saša Leskovac*

Abstract

The purpose of this paper is to show the correlation between reform of governance in 72 BIH municipalities and local socio-economic and infrastructure development. The paper is a synthesis of eight years of monitoring of impacts the multi-faceted municipal reforms had on the communities undertaking the reforms. The examining period is from 2004 to 2012. The municipalities that are subject of this study are geographically, politically and in terms of size and stage of development equally spread throughout Bosnia and Herzegovina. In the paper we first provide a theoretical basis for understanding of the factors of the local economic development and we discuss several LED indicators. Main avenues of the municipal reform are discussed in the second, analytical section, as follows: modernization of the municipal services, urban permitting and spatial planning, municipal budget and finance and managing the development planning and infrastructure development. In the third section of the paper, we put the described reforms in a correlation with the empirical evidence on socio- economic development, from which we draw conclusions on the reforms’ impact on LED and intensity of its correlation to the selected indicators.

Keywords: Municipal governance, (Indicators of) local economic development, Moderniza- tion of municipal services, Own-source revenues, Participatory planning, Political stability.

Indicators of local economic development: a theoretical outlook

It is a prevailing opinion among the theoreticians that local economic development (LED) is a paradigm of future development of the municipalities. Hadžić states that by employing their internal capacities, above all human capital and material and intellectual potentials, the municipalities are able to attract the prominent businesses which will invest and thus create new jobs and utilize material resources (Hadžić 2010 : 18). In order to examine the effects the modernization of services has on the municipal development, it is necessary to first identify the indicators of the intensity and success of LED. This is where we come to the first stumbling block. There is a lack of theoretical knowledge on the indicators of LED, due to fact that the social and economic sciences have not paid sufficient attention to the problem.

* PhD, associated Professor at the Faculty of Political Science, University of Sarajevo, Skenderija 72, 71000 Sarajevo, Bosnia and Herzegovina, e-mail address: [email protected]

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 109 Law and Political Aspects of Local Economic and Infrastructural Development

Umihanić states that “in Bosnia and Herzegovina there does not exist a specific institutional nor legal framework which would define and regulate the area of local economic development, and that includes the issue of functioning organizations for LED” (Umihanić 2012 : 29). “There are, however, several projects and studies, such as the USAID’s program of certification of the municipalities ‘NALED’, which has developed a methodology for evaluation of the quality of the development-conducive environment in the local communities.” The said program is using the following criteria for certification of the municipalities for their “business friendliness”: 1. A strategic approach to local economic development, 2. Organizational capacity to support businesses, 3. Business participation in local government (Economic Council), 4. Efficient building permits issuance system, 5. Availability of business relevant information, 6. Applying marketing for the purpose of investment promotion, 7. Creditworthiness and financial stability, 8. Employment and human resources promotion, 9. Encouraging public-private partnerships, 10. Adequate infrastructure and reliable utility services, 11. Transparent local fees, taxes and incentives policy, 12. Applying information technologies (NALED 2012 : 3). There are additional significant indicators of the municipality’s potential for LED, such as the existence of industrial parks, business incubators, local policies for supporting growth of small and medium enterprises (incubators, load-guarantee funds), efficiency of local government in providing services and participatory planning mechanisms. In short – we could call this group of business-friendliness or “micro” indicators of LED.

There is a group of substantial indicators – we shall call them “macro” indicators – which indicate the stage of local development. Hadžić states several of them, such as total GDP per capita, amount of investments per capita, unemployment rate, number of newly started businesses, number of businesses discontinued, use of energy, number of pupils, number of schools, number of innovations and registered patents, situation and increase of road infrastructure (Hadžić 2010 : 36). For simplicity, we use only two of the mentioned indicators for this study: GDP per capita and unemployment rate.

Macro indicators of LED GDP per capita

GDP is measure of the total flow of goods and services produced by the economy over a specified time period, normally a year or a quarter. It is obtained by valuing the outputs of goods and services at market prices and then aggregating (Bannock et al. 1992 : 186). Ruffin and Gregory introduce a somewhat more detailed definition, stating that GDP is about market value of all final goods and services produced by the factors of production located in the country during a period of one year (Ruffin and Gregory 1993 : 121). To be able to compare individual municipalities’ GDP, it is necessary to calculate GDP per capita using the following equation, as used by the Federal Agency for Programming of Development: number of the employed persons

110 Local Economic and Infrastructure Development of SEE in the Context of EU Accession S. Leskovac: Local Economic Development and Modernization of Local Governance in... in a municipality, average salary in a municipality / number of the employed persons in an Entity, average salary in the Entity. The estimated GDP is then divided with the estimated number of inhabitants of a municipality. One should bear in mind that such a GDP per capita is an estimation because not all the factors influencing the real GDP were taken into account and because of lack of most current data on the number of inhabitants because census has not been held in Bosnia and Herzegovina since 1991.

Unemployment rate

According to the “Dictionary of Economics”, unemployment is defined as the existence of a section of the labour force able and willing to work, but unable to find gainful employment. Unemployment is measured as a percentage of total labour force out of work (Bannock et al. 1992 : 432). The theoreticians identify four distinct causes of unemployment: 1) Frictional unemployment, caused by people taking time out of work, being between jobs or looking for a job, 2) Classical unemployment, caused by excessively high wages, 3) Structural unemployment, as a mismatch of job vacancies with the supply of labour available and caused by shifts in the structure of the economy and 4) “Keynesian” unemployment, resulting from the existence of a deficiency of aggregate demand which is simply not great enough to support full employment. It is not subject of this paper to identify prevailing causes of unemployment in Bosnia and we are aware that a variety of factors, other than LED, have influence on the unemployment rate in a municipality. However, employment remains as one of leitmotifs of every municipality’s development policy and thus we use it as a relevant secondary indicator for identifying any correlation between the local reform and LED.

Micro indicators of LED Strategic and participatory planning

Participatory planning is the essence of the local economic development and we are not much mistaken to put the equation mark between the two terms. Existence of a strategic plan (strategy) for LED, which was created in a participatory manner, with inputs from all relevant stakeholders taken into consideration, may serve as the first, albeit not the only important, indicator of a community’s potentials for LED. Today it is almost impossible to find a municipality without some sort of a development strategy. However, we must agree with the prevailing opinion by both, scholars and the municipal decision-makers, that most of the strategic documents were not successfully and fully implemented in practice. The reason most often stated, among other, is that the strategies often were not the products of thorough analysis and true partnership of main local economic and societal stakeholders. Recognizing this problem, many of the Bosnian municipalities, assisted by the foreign donors and

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 111 Law and Political Aspects of Local Economic and Infrastructural Development experts, such as UNDP, are currently in a process of participatory development of the local LED strategies, as well as the process of systemic implementation of the priorities already defined within their existing strategies.

Equally relevant for this study is the capital improvement planning process, which has been adopted in 72 Bosnian municipalities as a methodology of participatory planning of the capital projects of utmost importance for the local communities, mostly involving the infrastructure projects. Introduction of a five-year Capital Improvement Plan starts with establishment of a municipal team, consisting of relevant representatives of the main segments of the community (businesses, municipal government, youth, NGOs, local communities, underrepresented gender, etc). The team conducts a public survey for the community priorities and then analyzes the findings and creates the priority list. By doing this, “the municipalities develop municipal government capacity in project cycle management and capital improvement planning to ensure well administered programs and increase the knowledge needed to access EU pre- accession and other funding mechanisms and to improve the quality of municipal governance through better management of capital projects.” (GAP 2013 : 25).

Business parks

As a product of what scholars refer to as “close union between urbanization and development” (Todaro and Smith 2006 : 302), the business parks (or “business zones”, as they are commonly referred to in Bosnian language) are “separate and structured business establishments in which at one location, well connected with other locations, the various types of manufacturing and service activities are developed, on the basis of cluster-like organization principles and by using of the well-developed infrastructure and the accompanying services which are of specific industrial features” (REZ 2007 : 37). Beside the location and clustered position, the parks also provide favourable rents, delayed payment, tax benefits, access to venture-capital, organized marketing approach, assistance in export. Business park is established and managed by local government and various quasi-governmental and other organizations and it has a private status or some other form of organization (REDAH 2008 : 4). Despite their relative widespread presence throughout Bosnia, it is evident that thus far neither relevant governmental agencies nor scholarly community have produced a systemic and thorough analysis on fruitfulness of the business parks in Bosnia. That is why we shall take as an LED indicator only the fact of a park’s existence and not their true impact in a municipality.

Loan-guarantee Fund

Principle no. 6 of the Small Business Act for Europe sets forth: “Facilitate SMEs’ access to finance and develop a legal and business environment supportive to timely payments in commercial transactions.” (EC 2008 : 4). Loan-guarantee fund is 112 Local Economic and Infrastructure Development of SEE in the Context of EU Accession S. Leskovac: Local Economic Development and Modernization of Local Governance in... a guarantee scheme with a goal to secure guarantees to its members for the loans which the members want to take in the bank which is a signee of the agreement. Being a novelty, municipal loan-guarantee funds are still rather under-used tool for fostering local development. In RS there is one entity-level guarantee fund, while in the Federation of BIH the funds exist at the regional and local level.

Business incubators

Business incubator is another tool for fostering LED for which the municipality’s capacity and support of the local actors is of critical importance. It is defined as a “suitable” space where potential entrepreneurs start their business, or where the new (less than six months old) micro-, mini- or medium-sized enterprises continue their business. It features favourable conditions of use of the business premises, advisory services and the assistance provided by the incubator’s management (NBR 2008 : 3). According to the existing Strategy for Development of the Incubators in BIH, there is a total of 27,000 square meters of business space in the form of business incubators existing in Bosnia today, and they operate under various legal arrangements: as a project, as a department within an association, as a separate unit in the local government, public enterprise or a fund registered at the level of BIH.

Municipal governance

One of the principles of the EU’s “Small Business Act” is devoted to public administration and is aimed to “make public administrations responsive to SMEs’ needs, making life as simple as possible for SMEs, notably by promoting government and one-stop-shop solutions. Modern and responsive public administrations can make a major contribution to the success and growth of SMEs by saving them time and money and hence freeing resources for innovation and job creation. E-government and one-stop shops, in particular, have the potential to help improve service and reduce costs” (EC 2008 : 9). In the spirit of this EU principle, we introduce efficiency of delivery of municipal administrative services as a variable and an important feature which affects municipality’s business-friendliness and citizen and business satisfaction with the same.

As importantly, municipality’s management of scarce budget resources is of direct relevance to LED. Depending on how efficient and responsible management of budget and finances is – i.e. generation of own source revenues or ratio of capital versus operational outlays – a municipality will have a potential to more successfully foster LED. Non-tax revenues are the only source of income a municipality can directly collect and control, resulting from the municipality’s own-source revenue generation. As Osborne and Geabler point out, perhaps the safest way to raise non- tax revenue is simply to charge fees to those who use public services. User fees have

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 113 Law and Political Aspects of Local Economic and Infrastructural Development become ever more popular as resistance to tax increases has mounted (Osborne and Geabler 1993). It is assumed that reforms of the municipal services and, especially, the municipal budget and finance management, will lead to an increase of municipal own revenue generation, as measured in total own-revenues as adjusted for inflation. Management and technological innovations assist the municipality to better plan, collect, analyze and store information on the collected fees and their sources, the existing and the prospective ones. Another potential and desirable impact the municipal reforms have in the socio-economic area is increase in the ratio of capital outlays to operating expenses. In other words, as a percentage of total expenditures, municipalities will devote less to their own operations and more than before to capital investments including infrastructure for enabling the business and societal prosperity.

Political stability

We believe that political stability is of a significant importance to LED. Potential investors prefer a predictable, harmonious socio-political environment for their business endeavours. That is why, in order to complete our landscape for studying potential impact the reforms have on local development, we shall add one indicator of a political nature to the group of the mostly economic micro-indicators. Since 2004, there were three direct elections of Mayors in Bosnia and Herzegovina, which gives us sufficient evidence from which to draw the conclusions whether any change occurred in the local voters’ motivation. In order to test this, we shall analyze the electoral success of the Mayors or their parties in 72 municipalities in which reforms of governance took place.

Political actors’ responsibility to the voters is in the essence of modern understanding of political democracy as a “system of governance in which rulers are held accountable for their actions in the public realm by citizens, acting indirectly through the competition and cooperation of their elected representatives” (Schmitter and Karl 1991 : 2). This is a broader understanding than the classical Schumpeterian definition of democracy as “regime in which government offices are filled as a consequence of contested elections” (Schumpeter 1947 : 296). We deem that administration is one of the main tools at disposal of the political actors which enable them to fulfil promises to the voters and make the mentioned sense of “responsibility” work. That is a rationale behind one of our hypotheses that direct correlation exists between modernization of administration and the success of the political actors leading the reforms.

It is, however, important to note that the stated sense of responsibility (“accountability”) can be established only in a consolidated democracy, in a society in which democracy is, as Linz and Stepan point out, “the only game in town.” According to these authors, a democratic regime in a territory is consolidated when (...) a strong

114 Local Economic and Infrastructure Development of SEE in the Context of EU Accession S. Leskovac: Local Economic Development and Modernization of Local Governance in... majority of public opinion holds the belief that democratic procedures and institutions are the most appropriate way to govern collective life in a society such as theirs and when the support for anti-system alternatives is quite small or more or less isolated from the pro-democratic forces (and) when governmental and nongovernmental forces alike, throughout the territory of the state, become subjected to, and habituated to, the resolution of conflict within the specific laws, procedures and institutions sanctioned by the new democratic process (Linz and Stepan 1993 : 6).

Modernization of local governance

In the first section of this paper we analyzed several indicators for measuring the success of LED. Purpose of discussion on the indicators is to enable us to measure what impact modernization of governance may have on municipal development. In this second section we discuss in more detail the reform endeavours that took place in 72 Bosnian municipalities from 2004 to end of the last year (2012) as part of one of the biggest and most systemic donor-funded projects in local governance – USAID/ Sida/EKN Governance Accountability Project (GAP).

Theoretical overview

Modernization of administration and the role the reforms have in fostering of local development can be viewed as an outcome of the one of general tendencies in development of public administration to which Pusić refers as “tendency towards decrease in coercion in governance”. Increase of technical capability of administration is one of critical features of the mentioned tendency. Pusić states that “rise of technical capacity of administration consists of introduction of more and more administrative procedures, which requires high skill, specifically, the procedures which implylex ar- tis, and not the power of force. More comprehensive societal division of labour leads to creation of new administrative services which do not rely on coercion. All new administrative operations stemming from the urban way of life – i.e. city lights, sanitation, transport, sewage, heating, gas, urban planning and many other – in principle, do not presuppose coercion as a principle for their existence” (Pusić 2002 : 104).

Ivanović points out that for a successful application of the information technologies not only a technological maturity is needed, but also an entrepreneurial one; a willingness for reshaping of the whole mode of operations. That is of special relevance for the public administration system and the other public services in which influence of the external factors, which could push the process of application of the information technologies forward, is not clearly defined (Ivanović 2003 : 336). However, Ivanović states, “although we cannot dispute that public administration is still far less than business sector prone to the external demands and risks stemming from

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 115 Law and Political Aspects of Local Economic and Infrastructural Development anticipation of these demands, we are witnessing that the public demands are becoming recently more and more prominent and binding for the administration too, because the public is measuring efficiency of the government by the benefits they are bringing. (...) These pressures, which come in the form of ever higher expectations by the citizens, are taking place at the same time as the requests for adoption of the new technological skills and modes of operation. These two sources of demand for adjustment are intertwined and interdependent, thus creating a need and drive for changing of the old ways of doing things” (Ivanović 2003 : 343).

Three principles of the improved governance

It is often heard that the organizational and technological improvements of governance are bringing more transparency, customer orientation and efficiency. As these three principles are so closely associated with the modernization of governance and administrative service delivery, we shall discuss them in larger detail.

Transparency

Principle of transparency is very often mentioned while discussing the reforms of governance, to the point that its true meaning and importance are inflated. Transparency is one of the goals, and also one of the tools in bringing about the change in governance. To best explain this broadly used term, let us refer to Osborne and Gaebler, two theoreticians who were among the first to conceive the term in the 70s and 80s of the last century, in the eve of the doctrine of “entrepreneurial” government in the US. They point out: “Think of our public systems as an infrastructure – like sewers, water pipes, and electrical lines – and the idea of transparency becomes clear. Customers do not care how infrastructure systems work; they do not want to know what goes on underground. They just want the lights and faucet and phone to work. User friendly, transparent systems are designed to hide the underground pipes and wiring, but to give customers all the information they need about the lights and faucet and phone” (Osborne and Gaebler 1993 : 192).

Customer orientation

Customer orientation is the second principle we discuss in this section. Again re- turning to the roots of its usage, we refer to an example about which we learn from Osborne and Gaebler. Distinguishing the government which is customer-oriented, and not self-oriented they refer to the slogan “Serve people not the budget lines!”, which was an underlying principle behind the rationalization of the New York Employment Bureau, a success story of a customer-oriented public administration. However, the same authors point out that transformation of public administration

116 Local Economic and Infrastructure Development of SEE in the Context of EU Accession S. Leskovac: Local Economic Development and Modernization of Local Governance in... towards the customer orientation specific of private sector remains a challenging and complex task, for the simple reason that public administration, unlike private sector, does not get the funds from their immediate customers. That is why they conclude that “most American governments are customer-blind, while McDonald’s and Frito Lay are customer-driven. This may be the ultimate indictment of bureaucratic government” (Osborne and Gaebler 1992 : 167).

Efficiency Modernization cannot in itself be an indicator of development of administration, or even a reliable indicator of its productivity. While in manufacturing a direct and clear connection can be drawn between technological progress and increase in productivity, in the administration the case is different. As Ivanović points out, in the information-intensive activities, especially in public administration, the productivity is nowadays hardly any higher than it was forty years ago. Despite all the huge investments in the information technologies and office equipment, the civil servants, as staff who process and make the administrative decisions, as well as IT experts of various kinds, are processing approximately a same amount of information and create as much new content per unit of investment, as did their colleagues of previous generations (Ivanović 2003 : 334). That is why we shall search for the impact of modernization in the indicators beyond general measurement of productivity, im- manent to the private sector, and rather seek to establish correlations between modernization and the indicators of LED.

Reform of the local governance in Bosnia and Herzegovina Leading Bosnian scholar of local self-government, Mirko Pejanović, states that reform of the local government in Bosnia and Herzegovina is built on three pillars: First, the institutional reform, establishing a unified and clear legal and institutional framework for defining local and regional governments’ powers, determining the financial and technical resources for the execution of powers and establishing the instruments of cooperation with the higher tiers of government. Second is the functional segment of the reform, consisting of reform of the municipal governance and functioning of the communal services and services to the citizens. Third pillar, according to Pejanović, is the territorial reform, dealing with the necessary alternations of the territorial organization of the municipalities (Pejanović 2006).

The institutional and territorial segments of the reforms have been to a large extent either completed or defined in the Constitution. The third pillar of the reform of local government – functional reform – is continuing to be in focus of the government, citizens as well as international donors. A significant number of municipalities in Bosnia and Herzegovina have undertaken, in the last seven to ten years, the reforms of the municipal administrative services, financial management and planning. By Local Economic and Infrastructure Development of SEE in the Context of EU Accession 117 Law and Political Aspects of Local Economic and Infrastructural Development investing in technological and organizational innovation, municipalities are becoming more oriented towards the end-user, the citizens and the business and local governments are undertaking “incremental changes in the administrative personnel and elected representatives’ approach towards the citizens and many municipalities put the efficient services to the clients increasingly in the centre of their interest. The old model of local governance as a labyrinth of rules and regulations, and discretionary rights of the clerks, makes way for more open and accessible model of service delivery” (Leskovac 2009 : 351). These developments are in line with the trends existing in Europe since the 70s for bigger devolution of political and administrative powers in the developed as well as in the developing countries and the prevailing doctrine of the “new public management” according to which “local governments, similarly to the business firms in a market arena, shall fight for their citizens’ trust” (Rondinelli 1990 : 10).

Improvement of the municipal services

The World Bank is measuring business-friendly environment by using the following indicators: 1) Starting a business, 2) Dealing with construction permits, 3) Getting electricity, 4) Registering property, 5) Paying taxes, 6) Trading across borders, 7) Getting credit, 8) Protecting investors, 9) Enforcing contracts, 10) Resolving insolvency, 11) Employing workers (World Bank 2013 : 17). As can be seen, top five of them are directly within the scope of municipal governance. That is why improving the direct service delivery from the municipality to the customers, including the business, is of the highest importance.

Since 2005, there were 72 modern municipal Citizen Services Centres (also known as One-Stop-Shops) opened in Bosnia and Herzegovina. In the Centres, citizens and businesses obtain the administrative services in a more efficient and transparent manner. Additionally, in the Centre an administrative procedure for more complex administrative matters is initiated and the information on the status of the administrative process obtained. In order to achieve a transparent and efficient service to the end-users, a wide range of improvements is required, ranging from the new, bright and pleasant premises, user-friendly design of the premises and processes, staff trained in customer-orientation skills and the high-end computer equipment, software and communication systems. A very important segment of the reforms is “hidden” from the eyes of an average citizen or a businessperson. By this we mean a complex and demanding preparatory work which takes place in the “back offices”, which is where the administrative cases are processed and the administrative decisions made. This preparatory work consists of various complex and sensitive organizational changes and changes in the management process, leading to a complete re-engineering of the administrative processes. In addition, introduction is needed of the new systems for electronic processing and flow of documents and information – namely, data-processing (registry) software, document-tracking software and information-desk software. Finally, all the administrative data previously available 118 Local Economic and Infrastructure Development of SEE in the Context of EU Accession S. Leskovac: Local Economic Development and Modernization of Local Governance in... and stored only on paper needed to be digitized and fed into databases. For example, in order to digitize the registry records (i.e. on birth, death, marriage) the mentioned 72 municipalities performed over 8 million entries. But this tedious and labour intensive work is highly rewarding and in the case of the mentioned municipalities the reform has resulted in reduction of duration of the registry services from average half an hour to few seconds.

Urban permitting and spatial planning

As every municipal Mayor will prove, the municipal land is the most important resource of the municipal revenues. Reliability and efficiency in urban permitting and spatial planning is of utmost relevance to attracting of investments, opening of the work places and is becoming ultimately a driver of municipal development. However, due to outdated spatial plans and complex and slow procedures as determined by the existing rules and regulations, urban permitting and spatial planning have been an impediment instead of driver of the local development. To remedy this, several municipalities pioneered in introduction of the zoning methodology as a system of application of more flexible principles in urban planning. Staying within the existing legal framework, this new system, with its simplicity and streamlined permitting process, lessens the administrative burden on the end-users, in this case, mostly the businesses.

As in the case of the registry services, streamlining of urban permitting and planning is very demanding and requires complex preparations, one of the most complex being creating the organizational and institutional arrangements for a continuous and smooth cooperation between various stakeholders relevant to the permitting process. Laying down necessary infrastructure for data collection, analysis and sharing has proved to be as challenging. Thousands of hours of training, counselling and practical coaching, and hundreds of software licenses and hardware units (scanners, computers, GPS equipment etc.) was needed for the process of permitting in a GIS surroundings to be put into function. “In Banja Luka, the issuance of a Regulatory Plan Excerpt for areas covered digitally takes only five minutes, whereas before the procedures in the permit centre took twenty-five days on average. Although baseline measurements are not available, reliable analysis indicates that the urban permitting process has been shortened by approximately thirty to sixty business days and efficiency of permitting was significantly increased” (GAP 2007 : 80).

New Budget and Finance System

There can be no efficiency in services provision or development of the communities without an efficient and transparent budget and finance management. That is why – in parallel with the technological and organizational improvements, which

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 119 Law and Political Aspects of Local Economic and Infrastructural Development were predominantly outside-oriented and aimed towards the users of the municipal services – it is necessary to address the internal functioning of the municipal government. Over the last few years, more than 50 municipalities have introduced an integrated accounting and budget system, in order to achieve greater transparency, efficiency and discipline in their budget and accounting management. The backbone of the system is a sophisticated multi-modular software which enables all the financial transactions and other operations relevant to budget and finance to be processed through the “general ledger”, the core module of the software. Consequently, all the aspects of financial management are now integrated, which means that the financial transactions are automatically posted from other modules into the general ledger as soon as they are entered into the system. Given that the software is consistently and continuously used by all the involved stakeholders (i.e. all municipal departments generating or allocating revenue or tracking the expenses) the system improves the municipal financial management practices significantly. Among other benefits, it has helped the mayor develop informed policies and make decisions on budget planning, collection and execution. As for the personnel working in the accounting and finance, the system has allowed swift reporting and information sharing and improved their daily operations immensely.

Structures for managing development and community planning

According to the recent study produced by the LEDnet Project (IPA-funded Bosnian network of the LED-related organizations) the organizations dealing with LED are widespread with around 30 of such organizations existing throughout Bosnia. “They were formed either as the municipal ‘executive’ agencies, the associations of business- people and entrepreneurs or the independent experts’ associations to deal with the challenges of the economical transition through enabling and streamlining of the process of LED and serving as link to the local economic endeavours, especially by providing support to development of the small and medium entrepreneurs or initiating or supporting the implementation of local development projects” (Umihanić 2012 : 22).

These organizations take a special role in supporting the implementation of the LED strategies which were adopted in line with the modern MiPRO methodology (...) this methodology is fully in line with the existing legal framework which defines the development planning at the local level, stipulating that the municipal administration has a leading role in preparation and implementation of the development strategies (EDA 2011 : 8).

Additionally, with aim to achieve durable and sustainable arrangements of inclusion of all relevant local stakeholders in the process of the community planning, 72 municipalities adopted the methodology of capital improvement planning (CIP). Based on decisions of the Municipal Assemblies / Municipal Councils to introduce

120 Local Economic and Infrastructure Development of SEE in the Context of EU Accession S. Leskovac: Local Economic Development and Modernization of Local Governance in... five-year Plans of Capital Improvements, the municipalities formed the coordination teams which conduct the public survey of priorities, assist the municipal management in deciding on the priorities for implementation and monitoring of the same. Often implemented in collaboration with the donors, but with a very significant cost- sharing by the municipalities, capital improvement projects’ importance is twofold. First, there is direct benefit for the citizen and direct or indirect benefit for the business-environment in the shape of the kilometres of road infrastructure, water supply systems and sewage, street lights, renovated civic centres and schools, etc. The second benefit is perhaps even greater. It is the introduction and putting into function of an institutionalized, sustainable and continuous practice of inclusion of all stakeholders into development process as well as mastering methodology of project management – which are tools of vital importance for applying for and implementing of the projects financed from EU pre-accession funds.

Impact of the modernization – An empirical outlook

In this section of the paper we shall bring into correlation the reform endeavours discussed in the second section with the indicators of LED introduced in the opening section of this paper, in order to draw conclusions about whether the local development is proportional to modernization of the municipal administration.

Macro indicators of local economic development

A direct connection between the municipal reform endeavours and the unemployment rate or its trends in the period in which the reforms took place (2005–2010) is difficult to establish. While according to www.mojemjesto.ba, the reform-oriented municipalities such as Banja Luka, Trebinje, Novo Sarajevo, Laktaši, Sarajevo- Centar and Tuzla are blessed with the lowest unemployment rate (25 to 35 per cent), some other municipalities, which also had a significant success in modernizing the administration and increasing citizen and business satisfaction, such as Foča, Gračanica, Gradačac and Cazin, have very unsatisfactory rate (from 55 – 60 per cent). Additionally, a recent study of quality of life in Bosnian municipalities revealed that “given the number of inhabitants, the best situation is in Novo Sarajevo where on three citizens there is one employed person. Banja Luka, Tuzla, Mostar, Trebinje and Široki Brijeg follow with one employed on every four citizens” (CCI 2013). On the other hand, according to the same study, the worst situation – one employed on every eight citizens – is recorded in Livno and Foča, as two municipalities which were among the best examples of success of the reforming efforts we discussed in the section 2 of this paper. Truthfully, since we operate with the data from the period 2005 to 2010, there is an assumption that the unemployment trend lines might have alternated since then – given the fact that the impact of the reform

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 121 Law and Political Aspects of Local Economic and Infrastructural Development takes more time to be fully visible, as well as due to the fact that “labour market adjusts slower than any other market” (Bannock et al. 1992 : 432). The fact that the high unemployment rate diminished significantly from 2005 to 2010 in many of the reform-oriented municipalities, such as Gračanica, Gradačac, Travnik, Goražde, Široki Brijeg or Vogošća, supports this assumption. Ilidža is a leader in this group as a municipality in which unemployment rate fell from 53 to 37 per cent in the course of the five “reform” years. This, however, cannot be established as a rule because in various other “reformed” municipalities, such as Ljubuški, Jablanica, Mrkonjić Grad or Velika Kladuša an increase in unemployment rate was recorded, or as in the case of the reform-minded Bihać and Bosanska Krupa, a stagnation.

In the case of the second macro indicator of LED, GDP per capita, there is a similar case. Rate of success of the reforms does not guarantee any increase in GDP per capita. Similar to the unemployment rate, in the case of GDP it is the numerous other factors that influence the correlation between modernization and development. Although there are numerous examples of an accelerated increase of GDP in the “reformed” municipalities, such as Bugojno, Banja Luka, Bihać, Breza and Široki Brijeg, there is a prevailing trend of a very limited growth or stagnation in the municipalities, regardless of whether they were reforming or not. According to a recent study (CCI 2013), for two years in a row the reform-minded municipalities of Široki Brijeg, Banja Luka and Novo Sarajevo remain the municipalities with the highest index of quality of life, while the lowest index is recorded in Bihać, as we mentioned earlier, also a municipality which reformed its administration and services to business and citizens with highest enthusiasm. This confirms that the macro indicators to large extent depend on other factors and only in a limited or no extent depend on the subjective efforts of a municipality.

Micro indicators of local economic development

Efficiency of governance

The resources and time invested in the above mentioned reform endeavours resulted in significant strides in efficiency of the municipal operations. To illustrate this and to provide the empirical argumentation we shall point out to the findings of the monitoring and evaluation measurement performed by the GAP project. Three main tools were devised for the Project’s monitoring and evaluation system (M&E), as follows: a Municipal Capacity Index (MCI), which measures the capacity of municipalities according to their overall performance over time, Municipal Services Efficiency Index, which measures the level of efficiency in providing municipal services based upon the volume of services and average delivery time for these services over time, and annual attitudinal surveys. As we shall see, the M&E results are varying among the cohorts of the municipalities joining the project, depending on the duration of the reform.

122 Local Economic and Infrastructure Development of SEE in the Context of EU Accession S. Leskovac: Local Economic Development and Modernization of Local Governance in...

As pointed out in the project’s Completion Report, published recently by the USAID (GAP2 2013), the municipalities significantly increased their efficiency in providing municipal services as measured by the Municipal Services Efficiency Index. In particular, 23 municipalities increased their efficiency by 300 percent, 18 municipalities (second group of municipalities which were the project’s partners for a shorter period of time) by 50 percent, 31 municipalities (two groups of partner-municipalities which joined the project the latest) increased their efficiency in providing the municipal services by 30 percent. Waiting times for the municipal services, such as issuing vital records, were reduced to four to five minutes on average compared to the baseline. At the same time, complaints about the municipal issues fell by 26 percent, while the percentage of complaints resolved increased from 26.2 to 57.9 per cent, reflecting significantly improved accountability by local governance among the municipalities.

Municipal Capacity Index was measured in the group of “control municipalities” in which there were no recorded reform initiatives of similar scale. In the beginning, the MCI points were at approximately similar average level as in the municipalities in which reforms were undertaken. While over time the points steadily rose in the reform municipalities, the results in the control municipalities were flat, and in case of several municipalities even falling over time. Specifically, in the area of urban permitting improvement, the baseline values were established for the selected partner municipalities and the group of „control municipalities” in which there were no recorded reform initiatives of similar scale. The average baseline rating was 34.7 per cent of the maximum number of points for the selected municipalities and 35 per cent for the control municipalities. After one year of assistance, selected municipalities’ capacity had increased to 80 per cent, while the control municipalities recorded no improvements (GAP 2013 : 21).

Business parks, Business incubators, Loan guarantee funds

The municipalities which improved their administration and services to the citizens are at the same time leaders in opening and supporting of the business parks, incubators or loan guarantee funds. In particular, out of eleven existing business incubators (Brčko, Jablanica, Mostar, Modriča/Gradačac, Prijedor, Sarajevo, Trebinje, Tuzla, Zavidovići, Zenica and Žepče, source: ED, 2013) and two which are in development (Bugojno and Ključ), ten are located in the municipalities which were the partners of GAP. Out of the four free business zones in BIH, three are located in the “GAP municipalities” (Mostar, Vogošća and Visoko). Out of 29 business parks and two entrepreneurial parks which, according to the records of the Federal Ministry of Entrepreneurship and Trade, operate in Bosnia (Tešanj, Usora, Doboj- Jug, Tomislavgrad, Čitluk, Gračanica, Zenica, Livno, Ravno, Čelić, Vogošća, Bihać, Gradačac, Bosanski Petrovac, Orašje, Domaljevac, Lukavac, Jablanica, Ljubuški,

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Kakanj, Vitez, Sanski Most, Kupres, Žepče, Goražde, Odžak, Usora, Tešanj, Gračanica, and the entrepreneurial centres Mostar and Gradačac, source: Bejić, 2012), 21 of them are located in the municipalities which significantly improved their management and the services to the citizens. Finally, the practice of establishing of the loan-credit is also dominated by the “reformed municipalities”. In two regions we examined – Herzegovina and Northeast Bosnia, loan guarantee funds exist only in the municipalities which were subject to the reform of administration (Mostar, Livno, Prozor-Rama, Vlasenica, Tuzla and Kalesija). Thus, we are able to establish a firm connection between the modernization efforts and number and location of the business parks, business incubators and loan/guarantee funds, as indicators of development.

Non-tax revenues

The municipalities which undertook the reforms maintained steady increase of own source revenues. Analysis of the annual budget execution reports (from 2007 to 2011) of the municipalities which undertook the reforms of services and budget and finance management revealed that the non-tax revenues were steadily rising during the period of examination and by 2011 were nominally higher than the baseline by 24 percent (or eight percent, adjusted for inflation in the four years). This achievement is even more significant in the situation where total budget revenues and tax revenues were falling (and were in the end below the baseline) during the period in question, due to global financial crisis. Additionally, the percentage of non-tax revenues or municipal own source revenue generation as a share of total municipal revenues has risen continuously since the beginning of the reforms discussed here (since the beginning of 2005) and, even during the global financial crisis of 2008 onward, were 30 percent of total municipal revenues.

Capital outlays to operating expenses

With completion of the initial reform endeavours, the ratio of capital outlays versus operating expenses had moved in a desirable direction, rising steadily and at a note- worthy pace from 0.54 in 2005 to 1.06 in 2008. However, the effects of the global financial crisis had a significant impact on municipal budget revenues in BIH in 2009 and 2010. Consequently, the huge impact was recorded in relation to the expenditures, so the capital investments were the first to cut. Thus, after a very promising start, capital investments in all 72 GAP partner municipalities in 2010 were nominally on the same level as in 2009 and the baseline in 2007. In particular, during 2009, the ratio fell to 0.78 and fell further in 2010 (0.73) or below the baseline levels of 2007 as result of the financial crisis. As can be seen, the impact of the global financial crisis on municipal budgets was huge, although the majority of municipalities took

124 Local Economic and Infrastructure Development of SEE in the Context of EU Accession S. Leskovac: Local Economic Development and Modernization of Local Governance in... some recovery measures themselves which were combined with the positive effects of the reform endeavours discussed here. (GAP 2011 : 64)

Participatory planning and infrastructure development

The new municipal mechanisms for the participatory planning and multi-year capital planning had a significant impact on infrastructure development of the local communities in focus. The reforming municipalities, with support of GAP, implemented 179 community infrastructure development projects, worth 22.8 million dollars of which the municipalities contributed 13.4 million or fifty-eight per cent of the total investment. Public participation process and the resulting transparency ensured that all of these projects reflected the compelling local priorities, with the projects dealing with road infrastructure and water supply amounting more than fifty per cent of all the projects implemented. Benefit the infrastructure projects brought to the communities as well as willingness of local governments to share the costs further confirms the reforming municipalities as conducive to the local economic development. Furthermore, out of forty municipalities which currently undertake the most advanced model for participatory planning of LED (MiPRO, discussed earlier) the majority (25, or 62.6 per cent) are the municipalities which also significantly improved their municipal governance and participatory planning.

Citizen and business satisfaction

Similar to the effects the reforms had in respect of the municipal efficiency, the reforms had a significant impact on citizen’s perceptions of the municipal government with a significant year-to-year increase recorded, as can be seen from the following M&E results. The final attitudinal survey that gauged the level of citizens’ satisfaction with municipal service delivery showed an increase of between 14 and 18 index points (depending on the duration the municipalities participated in the reforms) comparing to the baseline. From 80 to 90 per cent of citizens responded with “satisfied” or “very satisfied”. At the same time, in the control municipalities decrease of 10 index points was recorded.

Based upon interviews with thousands of citizens and the municipally registered businesses, before and after the implementation of the citizen service centres and other reform interventions, GAP2’s M&E found an aggregate increase in citizen satisfaction of 14.5 points and business satisfaction of 11.8 points. These measurements are recorded in “basis points”. The actual percentage increase in each case is significantly greater. Specifically, citizen satisfaction jumped from 69.3 basis points to 83.8 or an increase of twenty-one per cent. Likewise, the change in business satisfaction was from 40.5 basis points to 52.3 basis points or an increase of twenty-nine per cent.

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In each case, the changes recorded in the control municipalities were substantially less, with an improvement of approximately seven per cent (GAP 2007 : 78).

Political stability

Studying the electoral success of the Mayors (or their political parties) in the two last consecutive municipal elections reveals that in 72 municipalities, there were 49 (68 per cent of those who ran for the office) of Mayors, or their parties, winning the elections following the significant improvements in functioning of the municipal government and large infrastructural development discussed above. This leads us to the conclusion that, among other factors, the improvements in the municipal governance has a significant influence on the voters’ opinion. However, if we analyze Mayors’ electoral success in the second group of municipalities – those in which significant interventions in improvement of the work of the municipal administration did not take place – we see that 72% of the Mayors who ran also won the elections, which is a few per cent higher percentage than in the first group of municipalities. From this result we could conclude that the improvement of the municipal services, internal management and capital investment does not have impact on sentiment and opinion of citizens in the local communities. However, we saw that it is not true because the previously discussed results of the citizen satisfaction survey showed a significant increase in the “reforming municipalities”, while at the same time in the “control” municipalities a decrease of citizen satisfaction was recorded. This clearly shows that the improvements in municipal administration do have an impact on the citizen satisfaction.

Which brings us to the second possible conclusion – that the citizen satisfaction with the municipal government does not have a fundamental impact on the political attitudes of the voters. This can be confirmed. In the selected number of the municipalities, in which there were no significant improvements in municipal services, the citizen satisfaction has fallen 10 index points in relation to the baseline results but despite of decrease in citizen satisfaction, there was a larger percent of the Mayors remaining in power than was the case in the reform-oriented municipalities (in which the citizen satisfaction increased). This can only lead us to a conclusion that other criteria – i.e. party politics at the higher tiers of government – are dominant in forming the voters’ opinion.

Conclusion

If the findings of our study of correlation between the governance reform and LED and infrastructure development are synthesized, it could be said that correlation is a multifaceted one and that its intensity diminishes gradually with distance between

126 Local Economic and Infrastructure Development of SEE in the Context of EU Accession S. Leskovac: Local Economic Development and Modernization of Local Governance in... the reform efforts and the variables of local development. In particular, the impact of the reforms is strongest in relation to the existence of the institutional arrangements of support to economic activity at the local level (business parks, incubators, loan- guarantee funds) and the features of the municipality’s business-friendliness such as efficiency of the municipal services delivery and citizens’ satisfaction – in other words, the variables which are most closely related to the results of the innovation.

In case of non-tax revenues, correlation is also distinguishable but of a lesser intensity; it is also more prone to the influence of the outside factors (such as economic crisis) which hampers the end-results, but still does not annul or reverse the effects. In the case of ratio of capital versus operational expenditures, a direct impact of the reforms can be detected but the correlation is interrupted easily and the results of reforms significantly undermined by the external factors, such as economic crisis.

In the case of the macro-indicators, we cannot establish a firm correlation with the reforms of the municipal administration. While the micro indicators stand undoubtedly in a correlation with municipality’s entrepreneurial spirit and its reform mindedness towards the LED, the macro indicators do not depend solely on the municipality’s own initiative. There is a myriad of other factors – such as geographical position, infrastructure, politics, tradition and historical heritage of a municipality, its people and the wider region – which affect the macro indicators of municipality’s economic and societal state of affairs.

Finally, correlation is of least significance in the case of political stability, from which we can conclude that local communities in Bosnia and Herzegovina still have a way to go in terms of establishing a sense of responsibility and accountability between the political actors and a median voter.

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128 Local Economic and Infrastructure Development of SEE in the Context of EU Accession ECONOMIC AND INFRASTRUCTURAL ASPECT OF LOCAL DEVELOPMENT

DOI 10.5644/PI2013-153-07

FRAMEWORK FOR SUSTAINABLE LOCAL DEVELOPMENT STRATEGY A CASE STUDY OF SERBIA

Sofija Adžić*

Abstract

Serbia made the first step in constituting a framework for sustainable local development in order to increase the (national) territorial cohesion by adopting the National strategy for sustainable development, Spatial Plan of Republic of Serbia 2010-2020, a number of territorial and sectoral strategies, including the obligation to make the Local spatial plans by the end of 2013. However nothing has been done regarding the implementation plan or on innovation in accordance with the causes and consequences of the spillover of first and second wave of the global financial and economic crisis. A key orientation in this paper is that the problem of constituting a framework for sustainable strategy of local development should be done on the basis of coordination and integration of key sectoral and territorial policies, plans and strategies in line with the creative analysis of the goals and achievements of local development in the EU Member States. The main finding is that the framework for a strategy for sustainable local development needs to establish a clear, precise and transparent relationship between the spatial, urbanistic and environmental local policies, plans and strategies in relation to sectoral plans and strategies, in particular, the strategy of national re-industrialization and transition to the regime of sustainable macroeconomic development. In this context, it is necessary to: (1) Enter the territorial dimension in general sectoral and planning basis, (2) Introduce the clearly defined procedures for coordination in the process of integration of general plans and strategies with local spatial, urbanistic and environmental policies, plans and strategies, and (3) Establish and coordinate the sets of key indicators and criteria for monitoring the implementation of plans and strategies on sustainable development of functional urban areas, municipalities and rural areas.

Keywords: Serbia, Territorial cohesion, Sustainable local development, Planning and institutional framework, Coordination and integration.

Introduction

In this paper, the role of local governments in economic and infrastructural development of Serbia is discussed in the context of creating in-site conditions for balanced territorial development. In the terminology of the European Union, the acronym

* PhD, full-time Professor at Faculty of Economics, Segedinski put 9-11, 24000 Subotica, Republic of Serbia, phone: +381 66 241 987, fax: +381 24 546 486, e-mail address: [email protected]

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 131 Economic and Infrastructural Aspect of Local Development territorial cohesion is used for its marking. In Third report on economic and social cohesion, A new partnership for cohesion convergence competitiveness cooperation (2004 : 27) the territorial cohesion as the third goal of development of European integrations, which was accepted in the Constitution of the European Union (2010), was introduced. The term has no single meaning, but it can be determined as a synthesis of seven phenomena: (1) Socio-economic or regional convergence (where more in the fore comes the problem of convergence at the level of NUTS 3 region, whose role in Serbia is not defined, nor is in the focus of political and professional public), (2)Improving the economic competitiveness, (3) Intensification of polycentric urban development, (4) Coordination of policies at different levels of territorial and sectoral organization, (5) Activation of rural resources, (6) Support to the creation of general added value within the EU Cohesion Policy and (7) Territorial dimension for development sustainability (primarily, improving the spatial planning in accordance with the concept of sustainable economic, social, cultural and environmental development). The implementation is associated with: (8) The concept of polycentric development, (9) Improvement of conditions for endogenous growth (greater activation and use of in-site factors of development and production in relation to external), and (10) Improvement of conditions for developmental convergence. In this context, three main dimensions of territorial cohesion can be determined: (11) the quality of the territory (in terms of high values of all indicators of standards of living in its broadest sense), (12) The effectiveness of the territory (as the synthesis of the efficiency of use of in-site natural resources, competition of in-site economic structure, attractiveness of the territory for life and work, especially in terms of conditions for attracting the external capital and labour with internationally competitive knowledge and skills, transport and telecommunication connections within specific geographical areas, as well as the immediate and distant environment) and (13) Recognition of identity (image) of the territory (as the synthesis of the availability of social capital, entrepreneurial abilities, knowledge, and skills of in-site population, cultural values, climatic and geographical characteristics, etc.). Two things should be noted. The presented concept is the ideal-standard model of (territorial) development management, which is in many ways conflicted with the real model of European Union functioning and its attempts for structural adjustment to the challenges: (1) Globalization, (2) Transition of (global) production system, (3) Current technological and cultural development, and (4) Hyper-competition. The second is that this concept operationalizes very difficult and partially, and only within a small number of the most developed member states. This indicates that the problem of increasing the efficiency of local economic and infrastructural development in Serbia, after all, as in all other countries in the area of South-Eastern Europe (including the Member States of the European Union in this area), is very difficult and challenging, and can be realized only in evolutionary process of transition of the development management system, where these listed elements with appropriate indicators are the set of criteria for evaluation of reforms and policies results to overcome the long- term and chronic developmental crisis and more efficient use of opportunities that opens up the process of European integrations.

132 Local Economic and Infrastructure Development of SEE in the Context of EU Accession S. Adžić: Framework for Sustainable Local Development Strategy a Case Study of Serbia

Serbia adopted the National strategies of development (Study 2002, 2006, 2010, 2011), National strategy for sustainable development (Study 2008), Spatial Plan of Republic of Serbia 2010-2020 (Zakon 2010) and a number of territorial and sectoral strategies, including the obligation to make the Local spatial plans by the end of 2013, and so made an initial step towards the constitution of institutional component framework for sustainable local development in order to increase the (national) territorial cohesion according to the above-mentioned concept. But, it appears that nothing has been done regarding the implementation plan or on their innovation according to the causes and consequences of the spillover of first and second wave of the global financial and economic crisis. The presented matter is based on three hypotheses.

The first is that for Serbia as a small and undeveloped country, affected by radical de- industrialization, the key socio-economic problem is overcoming the developmental entropy in the (former) poles of (balanced) territorial development: industrial districts (which in the European statistical territorial classification, generally coincide with the NUTS-3 regions, for which in the national terminology is used the acronym governing (administrative) district or in the economic sense sub-region) and local industrial centres (which in the European statistical territorial classification overlap with LAU-1 and LAU-2 territorial units, for which in the national terminology is used the term local (city) government) (Adžić 2012 : 180). In reviewing it should be taken into consideration the fact that globalization and de-industrialization, as a first stage and re-industrialization as the second stage of the formation of a new global production system, reduce their role in territorial development of modern market economies. Without going into a broader elaboration, the predominant form of (territorial) structure of production-organizational system in modern market economies are clusters in the form of so-called spatial innovation systems because they allow, by networking and self-organization, more efficient organization of business activities in a globalized economic space (Collection of Works 2008, 2009, 2011). The withdrawals from traditional industries and jobs led to the reduction in the number and size of industrial districts and local industrial centres in all modern market economies. Severe socio-economic consequences (chronic sub-regional and local depression associated with high unemployment and demographic regression, even in areas of high and propulsive agglomerations of economy and population), set up to the territorial, especially local politics a task – by the revitalization of their developmental functions, enable the revitalization of the goals in the domain of: (1) Overcome the problem of high unemployment, (2) Increase the comfort of infrastructure for private investment in new industries and jobs, and in the case of the European Union also (3) Implementation of concept of sustainable economic, social and environmental development, and (4) Creating conditions for internal and external inter-regional and cross-border cooperation. The initial idea was to connect the clustering and problem of industrial districts revitalization, that is, their observation as an element of modern industry structure, which has two faces, one that allows business on the global market, and the second improvement of living and working

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 133 Economic and Infrastructural Aspect of Local Development conditions in a limited geographical area. In the operational level, the public regulation got a task to encourage the establishment of one or two (sub-regional) clusters in the domain of medium and high technologies industries, with the expectation that in this way will start the development of industrial districts from a standstill, and in the next step, by the spillover of effects of production cooperation, human resources, technologies and capital, and associated local industrial centres. However, practice has shown that it is not easy and that the time dimension of expression of developmental effects is longer than expected.

The second and basic hypothesis is that the problem of constituting a framework for sustainable local development strategy should be carried out on the basis of coordination and integration of key sectoral and spatial plans and strategies in accordance with the creative analysis of goals and achievements of local development in the Member States of the European Union, especially those which accepted the concept of New Public Management (NPM) and higher direct participation of citizens in creating and implementation of local strategies and policies and their subsequent modification.

The third hypothesis is the basic task of the framework for a sustainable strategy of local economic and infrastructural development – to establish a clear, precise and transparent relationship between the spatial, urbanistic and environmental local plans and strategies in relation to sectoral plans and strategies, especially the strategy of national re-industrialization and transition to a sustainable macroeconomic development regime (according to the model: Saving = Investment). To establish a coordinated and integrated strategies of local sustainable development, it is necessary to: (1) Enter the territorial dimension in general and sectoral planning basis, (2) Introduce clearly defined procedures of coordination in the process of integration of general plans and strategies with local spatial, urbanistic and environmental strategies, and (3) Establish and coordinate the sets of key indicators and criteria for monitoring the implementation of plans and strategies on sustainable development of functioning cities, municipalities and urban and rural areas.

In this context, the processed matter is, in addition to an introduction and a conclusion, divided into four parts. The focus of the first part is on results of a research of restructuring the territorial component of the inherited production-organizational structure of the national industry in the period of (post)socialist transition. The analysis ends with the overview of reason: Why the current concept of territorial policy has not been successful in the revitalization of its developmental functions? In the second part the focus is on the problems of determining the methodological basis for the improvement of public regulation of local economic and infrastructural development. The focus is on the problem of improving the territorial capital, as the basis to which the concept of sustainable local economic and infrastructural development must be upgraded. In the third part the focus is on the challenges and controversies

134 Local Economic and Infrastructure Development of SEE in the Context of EU Accession S. Adžić: Framework for Sustainable Local Development Strategy a Case Study of Serbia of determining the determinants of framework for sustainable strategy of local economic and infrastructural development. The fourth section, based on the synthesis of the results from first, second and third part of this paper, analyzes the role of mechanism of public-private partnerships in the preparation, realization and exploitation of local territorial capital improvement projects. The basic criterion is that its application should increase the quality of the local business and developmental environment without additional indebtedness of public and commercial factors.

Why territorial policies have failed to revitalize the industrial districts and local industrial centres?

Analysis of the failure of public regulation in creating the conditions for overcoming the causes and consequences of the developmental entropy of industrial districts and local industrial centres as the basis for evaluation of coordination between territorial and sectoral policies, from which in the second step the constitution of framework for successful local economic and infrastructure development should be performed, was carried out in the context of historical heritage, more precisely, the existing state of the territorial structure of production-organizational system with which Serbia has joined the realization of project of restoring the capitalism and the (post) socialist transition. My researches (Adžić 2013 : 311-314) indicates that by the end of the 80s of the last century 24 industrial districts were formed, in which were 4 medium sized industrial centres (with more than 10.000 employees) and 138 small industrial centres (with less than 10.000 employees):

Table 1: Industrial districts, large and medium sized industrial centres in Serbia in year 1990

Industrial Cities (LAU-1) – Municipalities (LAU-2) on day Large and medium district (NUTS- 1/7/2011: industrial centres on 3 region): day 31/12/1990: NUTS-2 Region: AP Vojvodina Novi Sad Bač, Bačka Palanka, Bački Petrovac, Bečej, Beočin, City Novi Sad – Novi Sad, Odžaci, Temerin, Titel*, Žabalj Pančevo Alibunar, Bela Crkva, Kovin, Kovačica, Opovo*, Pančevo Pančevo – City, Plandište, Vršac Sombor Apatin, Sombor – City Sombor Sremska Inđija, Irig*, Pećinci, Ruma, Sremska Mitrovica, Stara Sremska Mitrovica Mitrovica Pazova, Šid Subotica Ada, Bačka Topola, Čoka, Kanjiža, Novi Kneževac, Subotica Senta, Subotica – City Vrbas Kula, Mali Iđoš, Srbobran, Vrbas Agglomeration: Vrbas – Kula – Crvenka

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 135 Economic and Infrastructural Aspect of Local Development

Industrial Cities (LAU-1) – Municipalities (LAU-2) on day Large and medium district (NUTS- 1/7/2011: industrial centres on 3 region): day 31/12/1990: Zrenjanin Kikinda, Nova Crnja, Novi Bečej, Sečanj, Zrenjanin – Zrenjanin, Kikinda City, Žitište NUTS-2 Region: City of Belgrade Beograd Barajevo, Čukarica, Grocka, Lazarevac, Mladenovac, Beograd, Novi Beograd, Obrenovac, Palilula, Rakovica. Savski Agglomeration: Venac, Sopot, Stari grad, Surčin, Voždovac, Vračar, Lazarevac Zemun, Zvezdara – Obrenovac NUTS-2 Region: Šumadija and Western Serbia Čačak Čačak – City, Gornji Milanovac, Ivanjica, Lučani Čačak Jagodina Despotovac, Ćuprija, Jagodina – City, Paraćin, Rekovac*, Agglomeration: Svilajnac Jagodina – Ćuprija – Paraćin Kragujevac Aranđelovac, Batočina, Knić*, Kragujevac – City, Kragujevac Lapovo, Rača, Topola Kraljevo Kraljevo – City, Vrnjačka Banja Kraljevo, Kruševac Aleksandrovac, Brus, Ćićevac, Kruševac – City, Trstenik, Kruševac, Trstenik Varvarin Novi Pazar Novi Pazar – City, Raška, Sjenica, Tutin* Novi Pazar Šabac Bogatić*, Koceljeva, Krupanj, Loznica – City, Ljubovija, Šabac, Loznica Mali Zvornik, Šabac – City, Vladimirci* Užice Arilje, Bajina Bašta, Čajetina, Kosjerić, Nova Varoš, Užice Požega, Priboj, Prijepolje, Užice – City Valjevo Lajkovac, Ljig, Mionica, Osečina, Ub, Valjevo – City Valjevo NUTS-2 Region: Southern and Eastern Serbia Bor Boljevac, Bor, Kladovo, Knjaževac, Majdanpek, Negotin, Bor, Zaječar Sokobanja, Zaječar – City Niš Aleksinac, Blace, Doljevac*, Gadžin Han, Kuršumlija, Niš Merošina*, Niš – City, Prokuplje, Ražanj*, Svrljig, Žitorađa Leskovac Bojnik*, Crna Trava*, Lebane, Leskovac – City, Leskovac Medveđa, Vlasotince Pirot Babušnica, Bela Palanka, Dimitrovgrad, Pirot Pirot Požarevac Golubac*, Kučevo, Malo Crniće*, Petrovac na Mlavi, Agglomeration: Požarevac – City, Veliko Gradište, Žabari*, Žagubica* Požarevac – Kostolac Smederevo Smederovo – City, Smederevska Palanka, Velika Plana Smederovo Vranje Bosilegrad, Bujanovac, Preševo, Surdulica, Trgovište, Vranje Vladičin Han, Vranje *Local governments within which a local industrial centre had not been constituted till year 1990

The formation of industrial districts and local industrial centres, in addition to (logically) rounded structure of production capacities was followed by the development of adequate in-site production infrastructure, primarily logistical facilities (roads,

136 Local Economic and Infrastructure Development of SEE in the Context of EU Accession S. Adžić: Framework for Sustainable Local Development Strategy a Case Study of Serbia railway, river and canal network, ports, warehouses, retail and wholesale trading companies and foreign trade companies) and educational facilities (primarily, vocational education for occupations aligned with the structure of production of concrete industrial districts or local industrial centre)

Over the past twenty-two years de-industrialization radically destroyed this spatial structure of industry (Table 2).

Table 2: Change in dynamics in the number of industrial centres in Serbia 1990–2012

Size of industrial centres by the Number of Number of Difference number of employees in the industrial centres in industrial centres in industry: year 1990 year 2012 with more than 100.000 employees 1 0 -1 with 50.000 to 100.000 employees 0 1 1 with 20.000 to 50.000 employees 8 1 -7 with 10.000 to 20.000 employees 19 4 -15 with 5.000 to 10.000 employees 24 18 -6 with 1.000 to 5.000 employees 114 55 -59 Source: Author’s assessment based on available statistical data and cities’ and local governments’ publications

There are different views of the causes of this phenomenon. From the standpoint of determining the relationship between the coordination of sectoral and spatial policies and balanced spatial development, it is essential that the results of replacing the old industries and jobs in the industrial districts and local industrial centres with new are low. From the aspect of the preparation and implementation of sub-regional and local developmental policies, its task was to provide a framework for a successful organization, preparation and monitoring of sub-regional and local strategies of re-industrialization (in the sense of treating the revitalization project of specific industrial districts or local industrial centre, as a mixture of strategies of infrastructure comfort improvement for private investment in new industries and businesses and support to in-site and external efforts to transform the existing industries and jobs into export, with a combination of goals and mechanisms of local economic policy and policy of partnership development of public and private sectors – note by author), and by training to strengthen the sub-regional and local facilities for their proper preparation, monitoring, and evaluation and correction.

But that does not mean that in Serbia there was no attempt for coordination between sectoral and territorial policies and attempts that the local governments define and implement a more active version of strategies and policies to overcome the state of developmental entropy. After 2000, three instruments were used, at first

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 137 Economic and Infrastructural Aspect of Local Development spontaneously and later socially organized. The first was based on the local initiatives for the establishment of Industrial and Technological parks and cession of the prepared sites to (primarily, foreign) private investors at no charge. The second was based on a system of subsidies to foreign capital from the central budget for each newly created job in the depressed industrial centres. The third and the most ambitious is the revitalization project of the national automobile industry FIAT SERBIA – whose main idea is, based on public-private partnership with one of the key actors of the global automobile industry, to revitalize the (regional) development pole in Kragujevac and build new and activate the existing facilities for supporting industry.

The data about the initiatives for the establishment of Industrial and Technological parks as the basic form of sub-regional and local strategies and policies to overcome the developmental entropy and their results are very different, but a rough picture can be acquired from the review of (more or less) realized initiatives by the end of year 2012 by regions (Table 3).

Table 3: Number of realized local initiatives for the establishment of Industrial and Technological parks by the end of year 2012

NUTS-2 Region Industrial Technological Number of Number of parks parks Industrial centres Industrial with implemented centres without initiative initiative AP Vojvodina 67 1 46 2 City of Belgrade 0 0 0 1 Šumadija and Western Serbia 35 0 20 53 Southern and Eastern Serbia 14 0 12 36 Serbia – in total 115 1 78 82 Source: Author’s assessment based on internal materials of the Association of the founders of Industrial and Technological parks, Regional chambers of commerce and cities’ and local governments’ publications

In AP Vojvodina, only in two industrial centres (Vrbas and Srbobran) there were no initiatives for the establishment of Industrial parks. In Novi Sad, the development of the only (actually existing) Technological Park in Serbia is dynamically progressing. In small industrial centres: Indjija, Stara and Nova Pazova and Pećinci, significant new capacities were built, mainly for various forms of finishing and assembling production for the domestic market. In the centres of industrial districts Subotica and Zrenjanin under commissioning or in the final stages of building are the new capacities for the export industries of low technological complexity.

In the City of Belgrade, there were no official initiatives for the establishment of Industrial and Technological parks. New gravitational industries are located in the border municipalities in AP Vojvodina (Indjija, Stara and Nova Pazova and Pećinci).

138 Local Economic and Infrastructure Development of SEE in the Context of EU Accession S. Adžić: Framework for Sustainable Local Development Strategy a Case Study of Serbia

The main reason is the shortage of suitable land and the fact that the privatizations on the existing industrial sites were performed in order to acquire the land rights for other purposes (construction of apartments, shopping centres, etc.).

The region of Šumadija and Western Serbia is characterized by a (too) big expectation of synergistic effects of national project FIAT SERBIA. The exception is a small industrial centre Svilajnac in which the second Industrial park is opened (since the first one is filled) and partly the industrial centre of Jagodina district.

In region of Southern and Eastern Serbia, the situation is similar. The expectations of the central government are dominant (in the sense that the subsidies to foreign capital will lead to the creation of new jobs in industry), even in Niš, which is the second centre of higher education, and till the year 1990 it was the second industrial centre of Serbia, and which is today practically without industry. The exceptions are the city of Leskovac (as the oldest indigenous industrial centre in Serbia, which was at the early twentieth century labelled as the Serbian Manchester) where were launched the ideas that the exit from transitional depression must be sought by own forces and Eastern Serbia sub-region, where in every industrial centre an industrial park was established and (mostly) prepared.

The results of the applied concept of sub-regional and local strategies and policies to overcome the developmental entropy are not in accordance with the broader socio- economic expectations. The reasons are numerous, starting with the fact that most of the projects were launched just before the first wave of the global financial and economic crisis. However, two facts are evident. Number of local actors in the accomplished projects is very small, and the foreign can be divided into two groups. One is formed by those whose expectations are based on the domestic market, which through various forms of the final, finishing and assembling production create space for improving their position. The others base their expectations on cheap labour and unregulated work protection system (in the sense of weak protection of life and health in the workplace, arbitrary determination of working hours and other employment rights, including in some cases the irregular servicing of salaries and benefits) and they see space to achieve their goals in various types of export-oriented intermediate production of low technological complexity. In this sense, it can be concluded that the realized projects have not been in the function of balanced territorial development of Serbia, especially in accordance with the content of the European concept of territorial cohesion.

Another fact is indicative. The analysis indicates that most of the Industrial parks development projects were realized by construction of new infrastructure. Scientifically recommended policy is that the focus of local strategies and policies should be on mechanisms to support public-private projects of revitalizing functions of existing industrial zones (the number of abandoned industrial zones in Serbia can be

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 139 Economic and Infrastructural Aspect of Local Development estimated at several hundred, while in every industrial centre there is at least one such location). There are two reasons for this approach. The first is a consequence of the decision in the national Privatization law and the second is in local spatial planning policy. Behind these solutions is a constellation of interests of very specific actors who, using this legislation, excluded at least one half of the production capital of Serbia from economic function. However, in the future, the sub-regional and local strategies and policies should incorporate the goals and mechanisms of recovery of destroyed and abandoned industrial zones or their conversion to other uses. In each particular case the time and cost of revitalization or recovery and reuse of space should be determined, as the basis for the promotion of corresponding public-private partnerships projects. The analysis of the causes of the poor results of sub-regional and local strategies and policies of economic and infrastructural development indicates the following:

First, most of the sub-regional and local strategies and policies of economic and infrastructural development superficially analyzed the situation and determined the summary list of project activities with approximate deadlines for their implementation. The emphasis is usually on the part of the program, i.e., the analysis of the current state and the broad definition of vision and mission of the local government in overcoming the developmental entropy and improvement of the existing state (in the industrial district, i.e., local industrial centre), and the demands to increase the efficiency of local production of public goods and public administration services. Usually they do not have a precisely defined sectoral, spatial and budgetary dimension, and cannot be incorporated into spatial and urbanistic plans and sectoral strategies. Therefore, they have almost no practical value, both for potential investors and for the precise, public and transparent control of the execution of local budgets and public trust funds.

Second, in most of sub-regional and local strategies and policies of economic and infrastructural development there is no mention of the authorities, institutions, public enterprises or other direct or indirect budget users – responsible for the implementation of strategic goals. In addition, strategies and policies do not contain a precise and clearly defined network of coordination and subordination between the authorities and other factors responsible for the achievement of goals.

Third, in most of sub-regional and local strategies and policies of economic and infrastructural development there are no standards and indicators for monitoring the implementation (monitoring + evaluation). Therefore, there are no conditions for accurate, clear and transparent evaluation and validation of results of institutions managers responsible for the implementation of goals.

Fourth, most of designers of sub-regional and local strategies and policies of economic and infrastructural development have not recognized the importance of general and specialized public in their preparation, adoption and implementation.

140 Local Economic and Infrastructure Development of SEE in the Context of EU Accession S. Adžić: Framework for Sustainable Local Development Strategy a Case Study of Serbia

In any case, it appears that the political, economic, and most of the professional elite in the past twenty-two years since the restoration of capitalism were not ready or able to face the challenges of the world economy globalization and increasing competition among nations, regional, sub-regional and local entities. In this light, Serbia, with its regions, sub-regions and local communities, found itself in the paradoxical situation where the structural adjustment of the national production system to the challenges of globalization, transition of (global) production systems, technological development and hyper-competition, is more conditioned by finding solutions for errors in the operationalization of the (post)socialist transition, than by the negative legacy of the last economic model, with which, after all, it started.

Methodological approach to the problem of improving the public regulation of local economic and infrastructural development

In considering the ways to overcome the current situation and constitution of a framework for the implementation of the (theoretical) elements of the European concept of territorial cohesion at the local level, three phenomena should be taken into account. The first and crucial to the structure of this paper is that the increase of local competitiveness and development success depends primarily on the types and relationships of integrations of different public and private actors within the respective territorial management, production and social networks. Key types of integration for the local production system are: (1) Technological integration (the ability to develop and improve the production of knowledge, promotion of the role of learning and knowledge in the improvement of company performances, quality and availability of the system for continuous education of entrepreneurs, managers, experts and workers in order to obtain a globally competitive knowledge and skills, capabilities to invest and research and development of local enterprises and the development of cooperation in the development of products and processes to external companies), (2) Local labour market integration (productive cooperation between employees and management in local companies, high level of labour and management mobility between local companies in the same sector, high ability to attract labour from other sectors), (3) Production integration (primarily, the ability to improve the division of labour between the local/sub-regional producers, but accompanied by diversification of production programs and cooperation with external companies to reduce the risks of unilateral business orientation), (4) Territorial integration (improvement of local infrastructure networks, good spatial planning and environmental protection), (5) Social and cultural integration (development of consensus and timely involvement of local communities in the preparation and implementation of developmental projects), and (6) Integration with close and distant environment (primarily, integration of the so-called “soft” components, such as: openness to inter-local, inter-regional and trans-border cooperation, promotion of internationalization of local companies, measures to improve mechanisms of so-called “market area/location”).

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Directly from these groups of factors one can specify the area of sub-regional and local authorities’ actions to improve competitiveness as the basis for establishing a framework for sustainable local economic and infrastructural development. These are: (1) Skills improvement of sub-regional and local (public and commercial) actors to accumulate and attract capital, (2) Seeking solutions to the inclusion in the sub-regional, regional, national, European and global institutions networks for co- financing of investments and development, (3) Reducing the risk coming from the social and environmental tensions and conflicts, particularly those caused by the wrong investments, (4) Activities to improve the institutional environment for export business, investment and promotion of financing the local “small” businesses, small and medium sized enterprises (this activity primarily relates to the efforts to remove and neutralize the appropriate barriers on the higher levels of the executive and legislative power organization in a way that encourages cooperation rather than resistance from those who have the authority to make decisions – note by author), (5) Improving the relationship between business and the community (primarily directing the individual activities for economic growth and development in a way that large groups (“all”, “above average majority”) benefit from it), (6) Application of principles of subsidiary rather than jurisdiction overlapping, (7) Improvement of local and sub-regional system of public, especially secondary education, (8) Measures to increase the efficiency of the local and sub-regional economic policies (primarily in the direction of better exploiting of endogenous factors of production and development, stimulation of the mutual economic dependence of economic activities, especially in the export-oriented productions, equation of conditions for business and investment for domestic and foreign actors), (9) Limitation of territorial, group and individual disparities in income, especially those which do not have support in the development of export business and improving of living and working conditions for the entire population, and (10) Improvement of conditions for public, transparency and accuracy of information about the activities of public and private sector to improve conditions for economic and infrastructural development.

Both groups of factors in mutual interactions lead to the increase of territorial capital. The term “territorial capital” and the term “territorial cohesion” were created in an attempt to predefine the terms “regional (sub-regional, local) potential” or “reduction of regional (sub-regional, local) differences”, which were used for a very long time in the vocabulary of a balanced spatial development. The current “neo-liberal” tone which is prevalent in the appearance and programming of the actions of European Commission and executive power of the key EU member states believe that in the old terms prevail the social sides of economic and infrastructural development, and it is advisable to use the new vocabulary which will indicate more the: (1) needs to improve competitiveness in the global economic, political and cultural competition, (2) orientation to activities aimed at creating comparative advantages by development of the entrepreneurship and improving the performance of human capital and the like. This approach has been accepted by the OECD, and the international economic

142 Local Economic and Infrastructure Development of SEE in the Context of EU Accession S. Adžić: Framework for Sustainable Local Development Strategy a Case Study of Serbia institution which is considered in the financial and business circles and in some parts of professional public as one of the promoting bastions of competition policy as a universal solution for overcoming the negative consequences of these four listed current developmental trends: globalization, global production systems transition, technological progress and hyper-competition. According to the OECD definition (2001), the territorial capital is a separate set of factors of a given geographical area which makes that incomes on some investments are higher than in any other area. This definition has the emphasis on so-called “tangible (objective)” factors of production and development, which can be presented with a specific indicators set, which define: (1) The geostrategic location of the local community or the sub- region or region, (2) Climate, (3) Size, (4) Natural resources, (5) Economic structure, (6) Human capital (entrepreneurship, intellectual capital, human capital of so-called “ordinary” people – due to the underdevelopment of the system for accurate measure, this factor is often classified in so-called “soft (subjective)” components of territorial capital), (7) Quality of life and environment, (8) Development of physical infrastructure, (9) Cultural heritage. Contemporary intentions in the territorial capital also classify the qualitative indicators for which there are no appropriate indicators to measure, but are the products of subjective judgment. These are: (10) Ability to innovate, (11) Ability to reduce transaction costs, (12) Ability for cooperation, assistance, participation and achieving the consensus, (13) Development of strategic thinking, research and management, (14) Ability to prepare, make and achieve democratic and informed decisions about the development, (15) Development of networks for communication and interaction, and the like. This second group of elements of territorial capital is actually an ability of (sub-regional, local) leadership to replace the authoritative decision-making and partisanship with negotiations and democratic and participatory decision-making, leading to a compromise, consensus- making and making good decisions.

Improvement of the territorial capital and its putting into operation of the local economic and infrastructural development should be considered in the context of needs to promote and implement new (national) developmental paradigm with which Serbia should face in order to come out of the chronic developmental crisis. Not going into a more detailed scientific elaboration of its content at this point (for details see Adzic 2009), only two elements will be given, which are derived from the essence of the European concept of endogenous, auto-propulsive and sustainable development, and which are relevant to the conception of this paper. These are: (1) Progressively creating conditions so that savings on all territorial levels (national, regional, sub-regional, local) exceed the investment (S > I) and (2) Creating conditions for the activation of the third factor in the development of endogenous definition of the production function.

How to reach greater savings than investments (S > I)? In Serbia and its regions, sub- regions and local communities for more than six decades there is dominant opinion

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 143 Economic and Infrastructural Aspect of Local Development and action – additional (external, primarily foreign) accumulation is necessary to finance the development, i.e., the key relation is in the model of (national, regional, sub-regional, local, urban and rural) development (S < I). In principle, the external debt is not a problem, if a bigger part is invested into financing of investment in export industries and jobs. However, in the case of Serbia, as well as all other states of the South-East Europe region, most of the imported accumulation was aimed at: the revitalization and new construction of infrastructure, the development of the non- tradable goods sector (real estate, construction industry and retail) and the financing of the current public spending. In the operationalisation level, in order to come to S > I it is necessary to develop new sectoral relations, in which the public sector would lead the S < I policy, and sector of the population and enterprises the S>I, with the fact that the overall result is S > I. The best solution is in the coordination of the goals and mechanisms of the relevant sectoral and territorial strategies and policies. But, How to (gradually) raise the savings S = I in the present circumstances? Scientifically recommended solution is that using the global capital markets should (must?) be restricted to investment in export industries and jobs, and in parallel conditions should be created for activating the third factor in the endogenous production function (based on the criteria that investments should participate with 40%, work with 10% and the third factor with 50% in generating the (in this case, local) developmental thrust). To activate the third factor of development in the endogenous definition of the production function, the theory and European practice recommend three tools: (1) 3T model (Technology, Talent, Tolerance), (2) Triple Helix Model (linking the university, industry and state), and (3) strengthening the inter-regional and cross-border cooperation, particularly by linking the innovation systems.

The submitted elements indicate that the preparation and implementation of sectoral and territorial strategies and policies complex, which should be implemented by the local government and higher levels of executive power to achieve these conditions, should be organized by networking the public and corporative policies and strategies, vertical and horizontal linking of different actors and power holders on, mostly, the informal basis. A large number of networks of public and corporative policies and strategies relevant to this topic can be identified, for example: (1) Export industries and business (these should be de-aggregated to the networks of public and business policies and strategies by the reproduction units depending on the structure of local industry), (2) Agriculture (this should be also de-aggregated by the reproduction, especially export-oriented units, depending on the structure of local agriculture), (3) Energetic (in particular: electricity and natural gas, as a complementary and cross-competing suppliers), (4) Transportation infrastructure (especially: road, rail, possibly water, etc), (5) Communal infrastructure, (6) IT infrastructure, (7) Innovation infrastructure, (8) Environment, (9) Corruption etc. The unifying factor that links them is the good public governance. Ideal-standard model of good public governance has eight basic characteristics: (1) Participation, (2) Rule of law, (3) Transparency, (4) Reliability, (5) Orientation to achieve results, (6) Equality and

144 Local Economic and Infrastructure Development of SEE in the Context of EU Accession S. Adžić: Framework for Sustainable Local Development Strategy a Case Study of Serbia inclusion, (7) Efficiency and cost-effectiveness, and (8) Responsibility. But it is not enough to define the role of local government in this concept of economic and infrastructural development.

The modern concept of public governance at the local level requires also replacing of the hierarchical with the holistic approach. The holistic approach is marked by two characteristics. The first is that defining the key (may be called ultimate) goals of economic and infrastructural development should be lowered on the executive level. Second, the individual goals are harmonized starting from the different perspectives of observation. In fact, the initiatives to connect the strategies are interrelated. For example, the connection between the local industry and agriculture can be seen in the simple example of sugar. Continuity in production requires the removal of sugar production from parcel to parcel since it cannot be sown every year. By defining the crop rotation on a larger number of parcels, the local industrial strategy for export security and the agricultural strategy for food raw materials security are connected. The implementation of the holistic approach to this problem relies on a network of public and corporate policies and strategy composed of four nodes, which in fact represent the four different views of this problem. The first node is the so-called New public management. Its ultimate goals are: (1) Reduction of unemployment by increasing the productive employment, (2) Increase of newly created value p/c, (3) Increase of local fiscal revenues. The second node is the macroeconomic management. Its ultimate goals are: (4) Increase of accumulation and income, (5) Promotion of investment capacities, (6) Reduce of conflicts caused by the market power disproportion between the primary agricultural producers and processors. The third node includes institutions and regulation. The selection of ultimate goals depends on the model of monitoring and control. In this case, its structure is formed by commercial and public part. The top of the commercial part of the institutional system and regulation is formed by: (a) a set of local banks, ultimate goals of which are: (6) Short-dated investments, (7) High interest rates, and (8) Low risks. The public part is composed of: (b) Control of monopolies, (c) Settlement of disputes, (d) Set of local, regional, national and European norms and standards. Its ultimate goal is: (9) Compliance with consumers and environmental standards. The fourth node is formed by a local system of values. Its ultimate goals are: (10) Corruption control and (11) Respect for economic freedoms. For the implementation of holistic approaches two things are needed. The first is the so-called Strategic map, and the second is Balanced scorecard. The first should provide the information about the causal-chronological relationships between the basic causes (in the given example from (1) to (11)) and the second the review of performance indicators, tasks and initiatives.

The presented methodological approach suggests that the framework for a sustainable strategy of local economic and infrastructural development should establish a clear, precise and transparent relationship between the spatial, urbanistic and environmental local plans and strategies in relation to sectoral plans and strategies,

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 145 Economic and Infrastructural Aspect of Local Development especially the strategy of national re-industrialization and the strategy of transition to regime of sustainable macroeconomic development (according to the model: Savings = Investments and transferring the emphasis of public and corporate regulation to the activation of the third factor in the endogenous production function). To establish a coordinated and integrated strategy of local sustainable economic and infrastructural development, it is necessary to: (1) enter the territorial dimension in general sectoral and planning basis, (2) introduce clearly defined procedures of coordination in the process of integration of general plans and strategies with local spatial, urban and environmental strategies and (3) establish and coordinate sets of key performance indicators and criteria for monitoring the implementation of plans and strategies on sustainable development of functional urban areas, municipalities and rural areas.

Challenges and controversies to determine the framework determinants for sustainable local economic and infrastructural development strategy

The above suggests that the framework for sustainable local economic and infrastructural development, within the exogenously determined parameters of the concept of public regulation whose implementation faces Serbia and its local governments in European integration preparation process, should be set in the sign of the concept of management of public affairs and production of public goods, which is called the New public management (NPM). The essence of this concept is the separation of the political, legal and management sector in the system of public regulation. Within this division, the political influence is limited to a determination of general values and providing the basic consensus. The task of the legal sector is to transfuse the general values and basic consensus into legal norms that represent the institutional framework for the effective functioning of (in this case) local government and the relevant part of the production of public goods and public services. Thereby, the legal norms should leave free space to management sector in a way which provides the solving of specific problems on the management principles. Thus, the new public management is in fact an attempt to transplant into the public sector the private sector management techniques developed for the case when the right to manage is separated from the ownership (corporate governance). From the beginning of the eighties of the last century this concept is very widely used within the modern market economies. In accordance with the neo-liberal paradigms, the control of key management holders under this concept is related to the improvement of mechanisms for monitoring and controlling the effectiveness of their activities and results. Initial activities to introduce this concept in Serbia started after year 2000. In fact, the current legal regulation does not prevent or limit the local governments to use this concept of public governance. However, since the political elite usurped the rights to dispose of all public activities and resources based on the division of the spoils defined in

146 Local Economic and Infrastructure Development of SEE in the Context of EU Accession S. Adžić: Framework for Sustainable Local Development Strategy a Case Study of Serbia the coalition agreement – releasing the old and bringing in the new management in the public sector is a task which most often has nothing to do with the efficiency of management. Situation is similar with the use of techniques to create incentive schemes for managers in the public sector. There is very little relevant data about this, but it is common that the top management in the production of public goods and public administration in Serbia have higher incomes than those who set them at these positions!!!

In this context the approach is selected in which the problem to determine the framework determinants for the sustainable local economic and infrastructural development strategy is defined as a process composed of activities that lead to the set of circumstances which cannot be changed, or competently act on everything which can be controlled. Their classification is performed in two groups.

The first concerns the problem of determining the basic domain of framework for the sustainable local economic and infrastructural development strategy. Its task is to initiate, ensure, encourage or discourage certain forms of evolutionary transition of the scope and structure of the territorial capital from current to future state at each point in its territory. By linking this specified postulate with the brief review of the tasks of local government in providing the conditions for territorial cohesion and inclusion in the global economic flaws, it can be seen that in the foreground are the following phenomena: (1) Socio-economic-political structures and mechanisms that regulate the economic and social order, cooperation and behaviour of (sub-regional and local) community members, and which is formed of: (2) Cultural-cognitive, normative and regulative elements (of market, public regulation, communitarian cooperation and group and individual activities in specific geographical areas), which with in-site activities and resources provide a good meaning to economic and social life, by (3) Acting on several levels, from the world (global) to the highly localized interpersonal relationships.

The second group was made based on the retrospective analysis and prognostic research of links between the structure transition, scope and allocation of territorial capital and their implications for the constitution of the framework determinants for the sustainable local economic and infrastructural development strategy. Let’s start from the identification of the key factors of the territorial capital transition success. These are: production of public goods and public services, personal, public and private capital, entrepreneurship, knowledge and practical experience, and the role of the (local) frame is to allocate them into the specific projects, which must consistently respect the norms and standards of the European concept of a sustainable economy. If it is known what kind of territorial capital is needed and what kind of structural factors will be available, with which dynamics and how should specific development projects be started, the key information would be available, namely what kind of framework is needed. The well known facts are the scope, structure and the

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 147 Economic and Infrastructural Aspect of Local Development territorial capital allocation which have been abandoned. On the other hand, there are more or less reliable predictions regarding the development projects which should be realized in the near and distant future.

The repercussion of the proposed approach on the concretization of framework determinants for the sustainable local economic and infrastructural development strategy is a choice between three approaches.

The first one is consciously pursued constitution reforms policy of framework determinants for the strategy of sustainable local economic and infrastructural development – based on the ex-ante set solutions (normative or the intended reforms policy). Problems arise when in the future some ex-ante selected solutions prove to be wrong or ineffective.

The second is based on fine-tuning of some solutions to the current state of needs. The basis is in the assumption that the future is in the present developed, more precise set of rules, norms and standards marked as Acquis Communautaire and other recommendations and requirements of the Common Institutions of the European Union, and that, accordingly, their experiences can be adapted in the selection of specific institutional decisions and arrangements. Unintended result is the possibility to constitute an imitative frame for the sustainable local economic and infrastructure development strategy, which in practice acts contrary to the required and possible.

The third may be defined as the process of growing (proactive, reactive) reforms policy, i.e., as a reforms policy that is achieved despite the absence of intents (of its creators – note by author). Mostly relying on this model can lead to chaos in constitution of the framework for the sustainable local economic and infrastructural development strategy. The main advantage is that in the case of rational behaviour of key actors of management and development under uncertainty (which is the behaviour expected from the New public management – note by author) it comes to uninten- tional state of solution and framework structuring that suits more to the opportunities and demands of (local) economy and population.

These three approaches are extreme, i.e., in real situations can speak about the mix of intended, imitative and escalating reform policy. What are the implications?

First, for the solutions that can be reliably determined or fully managed, their content and implementation mechanisms should be clearly, precisely and transparently defined and, accordingly, the appropriate (sub) structure should be constituted.

Second, for the solution which cannot be determined reliably, the parameters should be defined (for example, the requirements in terms of adaptability, flexibility, rigid- ity, etc.) and, accordingly, the (sub)structure constituted, which, based on the principle of rationality in search for a solution in unstable and uncertain circumstances, 148 Local Economic and Infrastructure Development of SEE in the Context of EU Accession S. Adžić: Framework for Sustainable Local Development Strategy a Case Study of Serbia will develop its characteristics, which in turn in a dynamic context will lead to the transition of strategy realization from the development concept based on a hierarchical approach to the development concept based on a holistic approach.

Third, in both cases, the learning function should be incorporated in the corresponding (sub)structures (in terms of ability to self-learn, in order that the creators of its solutions can promptly take corrective actions).

Fourth, in accordance with (1), (2) and (3), constituting the framework for the sustainable local economic and infrastructure development strategy should be carried out as a combination of the intended (formulated in advance) and growing (responsive, adaptive) reforms policies, which should also incorporate the elements of imitative policies, especially in terms of creative application of European standards in the concretization of some solutions or determination of the moment to approach the reaction.

A key determinant of the presented analysis is that the constitution of the framework for the sustainable local economic and infrastructural development strategy and its determinants in the function of more efficient performance improvements should be defined as a mix of normative and growing reforms policy. Since Serbia is for a very long time in the period of growing uncertainty in respect to the possibility of implementing the scientifically recommended concepts of socio-economic development and the scene of clashes between many special interest groups, the realistic solution is that the development of core follows the concept of the intended reforms policy, and the other parts, the concept of growing reforms policy.

The proposed conception is implicitly based on the approach in which the real world, in which is performed the modelling of reforms’ contents that should support the scientifically correct local economic and infrastructural development, can be described as problematic, while the methodology and the implementation process are systematic. This approach is based on a model of political, economic and professional culture based on participation and broad involvement of those who are in any way involved in the resolution of problem situations. Therefore, at first glance, it appears that the proposed concept is based on the idealistic assumption that cooperation will be achieved without the use of enforcement mechanisms, i.e., its application requires a specific participation culture, which involves a radical change in the values system, limitation of monopolistic behaviour and reducing of party paternalism.

The value of the presented approach in modelling the framework determinants for the sustainable local economic and infrastructural development strategy is the ability to use different corrective actions based on broad participation, with which the partial views and truths are involved in the search for the best solutions to overcome the specific problem. The paradigm learning based on multi-criterion compromise

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 149 Economic and Infrastructural Aspect of Local Development decision-making in the design of goals and actions of reforms should provide the flexibility and robustness in determining the content and implementation ofthe structural adjustment process of this framework, particularly in terms of unaddressed encouragement for cooperation of the actors in the chain of reproduction. However, as open questions remain the problems of: (1) development of multi-criterion analysis procedures, and (2) development of multi-attribute benefit analysis, which would respect the fact that decisions are made based on criteria that cannot be directly measured or compared.

Discussion: how realistic are the scopes of public-private partnership (PPP) to promote the territorial capital?

The basic idea of introducing the concept of New Public Management (NPM) in the practice of local self-government management is the constitution of institutional conditions and mechanisms in order for the private sector to take over the part of the costs for forming the required scope, structure and territorial capital allocation, primarily using the public-private partnership (PPP). Preparation and implementation of specific projects should start from the advantages, limitations and cost of implementation of PPP (Table 4).

Table 4: Advantages and limitations of public-private partnership (PPP) in improving the performance of the territorial capital in local governments

Advantages of PPP application: Limitations of PPP application: The introduction of private capital. Complex legal framework. The efficiency of the private sector in Complex projects and documentation structure. management. High initial cost of preparation. Competition promotion. Requires a large number of experienced professionals in the project preparation and monitoring. Complex and complicated choice of private partner for the project realization. Temporally long and complex structures of PPP monitoring Risk of making unexpected liabilities for public finance. Complicated and expensive way of problem solving.

The presented indicates that PPP is not a universal solution for all situations (Begović et al. 2002 : 121-123), but its features and benefits depend on the circumstances and capabilities of both sectors to successfully organize, implement and realize the specific project. Each project requires a detailed consideration and determination of the optimal model of cooperation (type of contracts, Table 5), and precise risk allocation.

150 Local Economic and Infrastructure Development of SEE in the Context of EU Accession S. Adžić: Framework for Sustainable Local Development Strategy a Case Study of Serbia

Table 5: Potential possibilities of achieving the goals of improving the territorial capital in local governments of public-private partnership (PPP)

Objectives: Type of Investments Investments contract Technical Managerial Business Investment in in economic PPP: expertise expertise efficiency efficiency infrastructure development Project – build 2 1 0 1 2 2 Project – build 2 2 2 2 2 2 – finance – use Build – own 1 2 2 2 2 2 – use Build – own – 1 2 1 2 2 2 use – hand over Buy – build 1 2 2 2 2 2 – own License for use 0 2 2 0 0 0 Just finance 0 2 0 1 2 2 Execution and 20 2 2 0 0 0 maintenance contract

With this in the centre of the considerations of the territorial capital improving performances, problem using PPP is the risk analysis, both for the public and the private sector. The risk should be considered in terms of a wider range of consequences grouped by similarities: (1) The financial impacts on the cost of living and managed affairs, (2) Social consequences, (3) The impact on saving and investments, and (4) The impact on human life and health. The main features of this approach are: (5) The criteria are partly or completely conflicting, and (6) Subject of analysis are the consequences which cannot be directly compared. The following phenomena should be considered:

First, three basic aspects of human behaviour: (1) Rational behaviour, which relies on strictly scientific and verified economic analysis, (2) Emotional or irrational behaviour, which can be explained by psychological and social sciences, and (3) Favouring the personal interest in the process of decisions forming and implementing. Second, Whether the implementation effects of a specific project using PPP mechanisms are quantitatively verifiable or not?Third, the current small benefits are favoured compared to the larger (potential) benefits that manifest in the longer term. Fourth, existing difference between the risk to the decision maker and the risk to the local socio-economic community. Fifth, Whether the risk is imposed by narrow political and/or economic groups or it is accepted on the basis of a broad consensus?

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Sixth, the good and the bad consequences of choice of a particular PPP model manifested with time discrepancy.

Having in mind the overall prior consideration of the role of PPP in the preparation and implementation of a specific territorial capital improvement project, it can be concluded that adequate socio-economic solutions should be found for: First, establishing the multidisciplinary collaboration model on the development of the methodological procedures of multi-criterion analysis and multi-attribute benefit analysis applying PPP instruments in the preparation and implementation of specific projects. Second, increasing the responsibility towards the coming generations and environment. The public awareness of this problem for future generations is present in every case, but for it to come to fore it must be supported by adequate system of (economic) motivation. Third, better communication with the public. Assessment of decision correctness about the specific project and PPP model is a task which, besides the public representatives, officers and official experts, should include a wide range of users and all those who will bear the cost of individual decisions. Thus, in the forefront of the methodology development for determining the particular PPP model, there is a problem of professional ethics of its creators and implementers.

Conclusion

This paper attempts to demonstrate that the hierarchical-deterministic concept, in which the problem of public regulation of local economic and infrastructural development is primarily considered in the context to provide external accumulation (S < I), cannot present the basis for reforms policy in the function to create conditions for territorial cohesion and preparation of Serbia for European integrations. The functioning of the local government as a socio-economic (sub)system within the territorial organization of each state, including Serbia, within the current trends: globalizations, transitions of (global) production system, technological progress and hyper-competition, is at the same time predictable and unpredictable, stochastic and deterministic. In this context, the existential and developmental issues of each specific community can be solved only by a comprehensive consideration of all solutions and by careful selection of the optimal. The key determinant of the presented approach is that a developmental paradigm of radical change (Saving = Investments and transferring the focus of public and corporate regulation to the activation of the third factor in endogenous production function) must be supported at the local level with the measures to improve performance of the territorial capital, as the basis for a sustainable recovery of (local) developmental propulsion by exogenous (global) standards. In line with that, the presented concept is based on the atavistic approach in which the public factor, in accordance with the European approach in the distribution of responsibility for creating the conditions for territorial cohesion, should find good solutions for: (1) Improving the external and internal system of management

152 Local Economic and Infrastructure Development of SEE in the Context of EU Accession S. Adžić: Framework for Sustainable Local Development Strategy a Case Study of Serbia and control of the local economic and infrastructural development, (2) Restructuring the internal organizational structure of the political, legal and administrative sectors for public regulation of local development, (3) Improving the management and improvement of labour quality in all spheres of public management, (4) Withdrawal from all forms of public activities which can be organized on a commercial basis, and (5) Creating the necessary base of financial, personal and private capital for revitalization, modernization and increasing the territorial capital, primarily by applying the mechanism of public-private partnership (PPP) in a manner where the losers will not be the public finances and users of public goods and public services. This provides a high degree of subjectivity to the process of increasing the efficiency of the framework for the sustainable local economic and infrastructural development strategy. In this context, the issue of improving its effectiveness is open and will depend primarily on changes in the perception of political, business and professional elite and progress in the construction of the concept of their economic and social responsibility to the (minimal) European norms.

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Begović, B. et al. (2002) Upravljanje lokalnom zajednicom: putevi ka modernoj lokalnoj samoupravi, Centar za liberalno demokratske studije, Beograd – Smederevska Palanka. Cooke, Ph. (2009) Technology clusters, industrial districts and regional innovation systems. In: Becattini, G., Bellandi, M. and De Propis, L. (eds.), A Handbook on Industrial districts (Collection of Works), Edward Elgar, pp. 295-306. Desai, S., Nijkamp, P. and Stough, R. R. (eds.) (2011) New Directions in Regional Economic Development: The Role of Entrepreneurship Theory and Methods, Practice and Policy. Collection of Works, Edward Elgar. European Communities (2004), Third report on economic and social cohesion, A new partnership for cohesion convergence competitiveness cooperation. OECD Territorial Out- look (2001), OECD, Paris. Karlsson, Ch. (ed.) (2008) Handbook of Research on Innovation and Clusters: Cases and Policies. Collection of Works, Edward Elgar. Karlsson, Ch., Johansson, B. and Stough, R. R. (eds.) (2009) Innovation, Agglomeration and Regional Competition. Collection of Works, Edward Elgar. Posthuma, A. C. (2009) Cluster and industral districts: Common roots, different perspectives. In: Becattini, G., Bellandi, M. and De Propis, L. (eds.), A Handbook on Industrial districts (Collection of Works), Edward Elgar, pp. 172-183. Zakon o Prostornom planu Republike Srbije od 2010. do 2020. godine (2010), Službeni glasnik RS br. 88/10, Beograd.

154 Local Economic and Infrastructure Development of SEE in the Context of EU Accession DOI 10.5644/PI2013-153-08

INTEGRATED METHODOLOGICAL FRAMEWORK FOR FORMULATION AND IMPLEMENTATION OF LOCAL DEVELOPMENT STRATEGY

Dragan Lončar* Đorđe Kaličanin**

Abstract

This paper aims to display basic foundations of Balanced Scorecard methodology, which was used for formulation of local development strategy, and results that arose from its application. The paper starts with explaining basic theoretical pillars of regional development, continues with the methodology basics along with specifics of methodology application at the local level. Then, the concrete example is used to test applicative methodological framework in three phases: 1. diagnosis based on SWOT matrix, 2. visualisation of local community goals with strategy maps, and 3. goals specification through key performance indicators, tasks and initiatives. Finally, the authors pinpoint potential problems in strategy implementation process and give basic features of the software which eases the creation of scorecards and strategy maps.

Keywords: Local development, Balanced Scorecard (BSC), Strategy, Strategy map, Software support.

Balanced Scorecard Methodology and Local Development Strategy

Local communities in Serbia, especially larger cities, have strategic documents that focus on specific aspects of life (for example, General Urban Plans (acronym GUP), Local Environmental Action Plans (acronym LEAP) strategies for the development of tourism, agriculture or entrepreneurship). However, there are not many cities/municipalities with comprehensive local development strategy that considers the links between the development trajectories of different areas important for the overall local development.

* PhD, assistant Professor at Faculty of Economics, University of Belgrade, Kamenička 6, 11000 Bel- grade, Republic of Serbia, e-mail address: [email protected] ** PhD, associate Professor at Faculty of Economics, University of Belgrade, Kamenička 6, 11000 Bel- grade, Republic of Serbia, e-mail address: [email protected]

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 155 Economic and Infrastructural Aspect of Local Development

The specifics of strategy formulation at the local level result from the specificity of how local governments operate in comparison with a typical profit organization. Some of the most significant features of the local communities in our country are the following: a great number of objectives of a local government; a wide dispersion of objectives of local institutions, companies and stakeholders; a high level of bu- reaucratization; focus on daily operational issues; heavy dependence on the Central Government; weak identification of employees with the real interests of the local government and the like (Swinburn and Murphy 2004; Swinburn 2002).

Based on the above, we can pose a question about the specifics of the BSC methodology for the formulation of local development strategies. The main difference, compared to the BSC of profit organizations, lies in the field of formulating strategic themes and strategic perspectives, which in turn derive from the specifics of the mission and vision of the local community. Namely, the specifics of the mission of the local government require relevant modification of the strategy map architecture and the BSC. The increasingly accepted view is that the mission of the municipal/urban community is a community that serves its citizens and economy (Swinburn 2004). In addition to identifying the mission as such, basic elements of the vision are set. Basic elements of the vision (strategic objectives) are the following: ease of investment, ease of work, and ease of life.

When formulating an economic development strategy, the first step is to define conventional strategic themes (Wisniewski and Stewart 2004). Conventional themes may include (OECD 2004; Bigliardi 2011): Local economic development Local social development Environmental protection Creation of new jobs Development of agriculture Development of tourism Development of the small and medium-sized enterprises sector.

1. Local economic development. Local economic development is a conventional theme that is directly related to the ease of investment and ease of operation objectives (Swianiewicz 2005). Local authorities have a responsibility to provide the necessary infrastructure to support the development of businesses in their territory. In addition, local authorities may establish a more direct relationship with the citizens, motivate them more easily and start creating public-private arrangements and partnerships, and thus create an attractive environment for new investment. Therefore, the most important objectives within the conventional theme are the following: sustainable local community development, new jobs, the development of various

156 Local Economic and Infrastructure Development of SEE in the Context of EU Accession D. Lončar, Đ. Kaličanin: Integrated Methodological Framework for Formulation and... economic sectors, the development of public-private partnerships, tax incentives for new investment and new jobs, training for local government officials, and the like.

2. Local social development. Local social development is a conventional theme that includes key development issues for the population in the community related to culture, education, health and social care. Some of the distinctive objectives within this strategic theme are: to increase participation of the citizens in local decision-making processes, to improve social security and health care, to expand the tax base and improve the quality of services of the local government.

3. Environmental protection. Environmental protection is a conventional theme that nowadays, due to rapid degradation of water, air and soil and the simultaneous growth of awareness of the need to mitigate this degradation, is becoming ever more important. Our country as a candidate for accession to the EU must meet very strict standards of environmental protection. Also, companies that wish to sell their products in foreign markets need to adjust their business processes with stringent quality standards, primarily within the ISO 14001 standard series. At the local level, the problem of pollution inhibits the development of other areas of economic and social life. Typical objectives within this strategic theme are: sustainable development of local communities; improving the quality of water, soil and air; the development of renewable energy; attracting donations for the purchase of recycling systems and the creation of new landfills; employment subsidies in the field of environmental protection and improvement of the environment.

4. Creation of new jobs. Creation of new jobs is a conventional theme that directly impacts the fulfilment of the strategic objectives of ease of operation and ease of life. The assumption of future economic development is related to the reduction of unemployment through the creation and commercialization of entrepreneurial initiative. In this sense, there are a number of barriers that need to be removed here so that entrepreneurial ideas could proliferate. Some of them are related to urban development of the city, creating a database of entrepreneurs, but also improving awareness of the entrepreneurs in areas such as business plans, market research, computer literacy, and in understanding legislation.

5. Development of agriculture. Development of agriculture at the local level is a conventional theme that arises from one of the main goals of agriculture in Serbia, which is its integration into the common agricultural policy of the European Union. To this end, it is necessary to improve productivity, change the structure of production aiming towards growing more profitable crops, defragment agricultural land, aim towards food quality and safety, to establish a register of producers and livestock.

6. The development of tourism. The role of tourism in the economic development of local community is reflected in economic valorisation of numerous resources, generator and the integrative functions in relation to other activities, foreign exchange

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 157 Economic and Infrastructural Aspect of Local Development inflows, social and demographic effects, and employment. Namely, tourism mul- tiplier effects are seen in encouraging the development of complementary sectors, primarily, of trade, agriculture, transportation, utilities, crafts and financial services. In non-economic activities, tourism is a powerful generator for the improvement of health, culture and sports. Due to tourism, these activities can significantly en- rich the scope of services which, apart from tourists, may also be used by the local population.

7. Development of the small and medium-size enterprises sector. Development of small and medium-sized enterprises is a conventional theme that directly influences fulfilment of investment objectives of ease of investment and ease of operation. The importance of the small and medium-sized enterprises sector is reflected in its flexibility and responsiveness to customer needs, in the creation of new jobs and rapid changes in economic structure.

In addition to these conventional areas, there are also strategic themes that lead to groundbreaking results, as well as to the achievement of a greater number of targets at the same time (City of Charlotte 2006). Typical strategic themes are: Use of renewable energy resources Development of public-private partnership Development of industrial and agricultural clusters.

8. Use of renewable energy sources. Renewable energy sources are a strategic theme that is directly related to the theme of environmental protection. Energy production is the largest contributor to environmental pollution. Production of energy from primary energy sources has significant negative externalities. On the other hand, economic prosperity cannot be imagined without energy. Limited capacity of primary energy sources and their unequal distribution give a special dimension to the problem. Energy production from renewable energy sources is an important link that connects energy strategies and sustainable development. Key types of energy are: hydropower, geo- thermal energy, biomass energy, solar energy, wind energy and energy from timber.

9. Development of public-private partnership. Another important strategic theme is linked to specific projects of cooperation between the representatives of private capital and representatives of public sector, related primarily to the development of physical infrastructure. Specific projects may include establishment of local companies in the field of municipal infrastructure, development of local traffic, construction of roads passing through the local community, building the institutions of public interest such as schools and hospitals, the construction of a gas pipeline network, and so on. These projects can also be significant generators for the creation of new jobs in local communities.

10. Development of industrial and agricultural clusters. At the local level, there is often a need for association of industrial or more frequently of agricultural producers

158 Local Economic and Infrastructure Development of SEE in the Context of EU Accession D. Lončar, Đ. Kaličanin: Integrated Methodological Framework for Formulation and... in various forms of clusters. The main benefits of this type of association lie in strengthening the bargaining power with the customers, suppliers or distributors, in the exchange of knowledge in the field of production and realization of significant synergies in business. The idea is that some non-core activities are allocated, through the model of outsourcing, to SMEs that would work for a large system, but also for third parties. The priority in employment in these companies would be given to workers who are currently redundant in large business systems.

Each of the aforementioned themes may have its own strategy map and balanced scorecard. However, many objectives are common for a number of themes. Therefore, it is useful to start from a general strategy map that would encompass all the themes.

Before defining a general strategy map, apart from defining conventional strategic themes, it is necessary to concretize strategic perspectives. Perspectives relevant for local community are (Chan 2004): the citizen perspective the economy perspective • the financial perspective the internal processes perspective the learning and growth perspective.

The citizen perspective is new in comparison to the general form of BSC applied in profit organizations. This perspective is positioned at the top because the main function of local government is to provide services that people want. In addition, financial perspective is no longer at the top as was the case with profit organizations. It is important to emphasize that perspectives can be adjusted to some extent depending on the specifics of the local community, but it is an unwritten rule that there should be no less than three and no more than five perspectives.

The citizen perspective poses a question of whether local government provides citizens with the services they expect, and which may be related to the principles of sustainable development, environmental protection, improvement of employment conditions at the local level and improvement of social security and health care.

The economy perspective is trying to provide an answer to the question of how to stimulate local economic development, i.e. is attempting to specify the branches of the local economy that may represent the most significant drivers of future economic development of the municipality or the city. These drivers can be agriculture, tourism, the small and medium-sized enterprises sector or, for example, energy production based on renewable energy sources.

The financial perspective emphasizes the importance of achieving operational efficiency of the local administration. The main objectives within this perspective may

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 159 Economic and Infrastructural Aspect of Local Development be to control the municipal budget, broaden the tax base or perhaps subsidize new investment.

The internal processes perspective deals with the objectives related to internal functioning of the local government. These are leading indicators that affect delayed indicators in the above perspectives.

Finally, the learning and growth perspective enables non-material support for the achievement of all the objectives in the above perspectives. Namely, in order to achieve the objectives of the previous perspectives with a high degree of efficiency, it is necessary to manage the processes which engage human, information and organizational capital.

BSC methodology simplifies the strategy implementation process. It is known that 90% of successfully formulated strategies are never implemented (Kaplan and Norton 1992; Kaplan and Norton 1996). There are various obstacles to successful implementation of local development strategies (Box 1999; Blakely et al. 2009). Firstly, planners often ignore the importance of intangible assets (knowledge, information, organizational competence) in creating value. Secondly, local government officials are often not familiar with the mission and vision of the local community. Thirdly, heads of authorities and secretariats may not have the incentive to implement the strategy in the context of the current system of incentives. Fourthly, leaders of local governments do not devote enough time to strategic issues, dealing mostly with current problems in the operation of local services. Finally, in the majority of local governments, there is a weak link between the finances necessary to implement the strategy and the budget available for this purpose.

The application of the BSC methodology in the formulation and implementation of local development strategies solves most of these problems (Bolivar 2010). This methodology encourages leading people of local governments to devote more time to important strategic issues. Measuring the implementation of objectives through concrete performance indicators, tasks and initiatives provides palpability to “blurred” forms such as vision, mission and strategic goals. Making strategy maps and implementing strategic solutions inevitably lead to a consensus of relevant local stakeholders through teamwork. This helps improve understanding of important strategic objectives of the local government by its officials and employees. Finally, this concept facilitates the process of communicating the results of the strategy to the citizens as the most important stakeholders at the local level.

The main advantage of the BSC methodology in the formulation and implementation of local development strategies lies in the possibility of cascade decomposition of the general objectives of the municipality by defining the objectives of lower municipal subsystems, such as the local community offices and key local institutions

160 Local Economic and Infrastructure Development of SEE in the Context of EU Accession D. Lončar, Đ. Kaličanin: Integrated Methodological Framework for Formulation and...

(Yee-Chin 2004). Namely, local community offices, which belong to the municipality, must have a strategy that is compatible with the strategy at the municipal level. In this way, the implementation of the objectives of the local community office directly affects the realization of one or several objectives at the municipal level. The BSC methodology aims at connecting different hierarchical levels and monitoring their simultaneous implementation.

Cascade procedures for formulating the Strategy through the BSC methodology

In the process of implementing a local development strategy, it is possible to make a cascading breakdown of the strategy of the municipality to lower levels of the local community, i.e. to the most important local institutions or subsystems (Yee-Chin 2004). This means that every local institution, or other subsystems of the local community, can have their balanced scorecards. Depending on the degree of independence of local institutions and the level of diversity in their functioning, there are three approaches to the development of a “cascading” balanced scorecard (BSC): the multiplication approach, the complex local community approach, and the contributions approach.

1. The multiplication approach. This approach is applied when functioning of the local subsystems or institutions is largely identical to the functioning of the local administration. In this case, the lists of objectives of local institutions all look the same for all the observed local institutions and, at the same time, they are identical with the general BSC of the local community (see Figure 1).

Figure 1: The multiplication approach

2. The local community approach. This approach is useful in the situations when local subsystems differ considerably in the manner they function and have a low level of independence in their work. In this situation, a general BSC is established at the

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 161 Economic and Infrastructural Aspect of Local Development community level which, in the form of broadly defined strategic themes, provides a framework for local subsystems and institutions to define their individual scorecards. Single scorecards are used for the formulation and implementation of specific objectives of local institutions which are, albeit in a general form, already comprised in the BSC at the community level (see Figure 2).

Figure 2: The local community approach The local community BSC Local institutions develop their BSC based on general framework in the form of the local community BSC

3. The contributions approach. This approach implies only partial transfer of objectives from general BSC at the local community level to specific scorecard. This means that only one or a few general objectives are accepted by local community, and that this institution can freely supply its scorecard and objectives that are not included in the general BSC. The application of this approach is possible in the situations when a local institution is completely independent and operates in accordance with a specific model see( Figure 3).

Figure 3: The contributions approach

162 Local Economic and Infrastructure Development of SEE in the Context of EU Accession D. Lončar, Đ. Kaličanin: Integrated Methodological Framework for Formulation and...

Implementation of the strategy can greatly be facilitated through the use of custom- ized software applications (Silk 1998). Since the formalization of the idea associated with this methodology in 1992, many consulting firms have attempted to launch their software solutions whose applications have largely been tailored to the needs of a specific client. In 2003, so far the most comprehensive software solution for BSC called Microsoft Office Business Scorecards Accelerator (MSBSC) was launched. This product is the result of many years of cooperation between Microsoft and a consulting firm owned by Robert Kaplan and David Norton – the Business Scorecard Collaborative. The MSBSC is a business intelligence application designed to assist organizations, including local governments, in the process of defining objectives and strategies, as well as follow-up performance indicators that are directly linked to these objectives and strategies. This application is perfectly integrated into the typical Microsoft Office visual environment which facilitates and accelerates the process of familiarization for an average user.

The benefits that a local community may have from using this type of software may be the following: faster, better, more relevant decision making within the local government greater ability to measure, monitor and manage performance of local authorities better balance between local resources and processes with the strategic and operational objectives of the municipality automated balance scorecards management and providing direct link between strategic objectives and strategy maps.

Apart from that, such software can be of great importance for different sectors within local government. Finance departments, planners and decision makers at the top of the pyramid of the local government can better understand and optimize financial performance as well as the performance important for all residents of the local community. Operational staff of municipalities is able to monitor and improve the effectiveness and efficiency of internal processes more easily. Individuals in charge of human resources in the municipal administration can adjust the workforce in accordance with the objectives of the local government. Finally, such software can be extremely useful for improving the flow of information between local government and other relevant local stakeholders, intermediaries and institutions.

In organizational terms, for the implementation of a local development strategy it is necessary to define project teams close to the top of the local government with project managers at the head of each of the adopted strategic themes in the strategy map (Maltz 2003). Each project team makes a strategy map for their strategic theme. A project team includes all those in the local community who hold the levers of power, and core competencies to solve the problem which is covered by the strategic theme.

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 163 Economic and Infrastructural Aspect of Local Development

Proceeding from the established organizational structure of a typical local community in Serbia, a major shift in the formulation of local economic development strategy would be achieved through a unification of local government authorities involved in the same strategic theme, followed by a formulation of a strategy map and a BSC for each of the themes.

In the context of leadership, for successful implementation of local development strategies it is necessary to provide support for the leading persons in the municipality. This means that it is necessary to secure that the top managers of the local community are committed, but it is also necessary to secure participation of all the middle level managers and the employees. BSC implementation involves training and education for those who are to implement the strategy.

Specific methodology framework for the formulation of a Local Development Strategy

The overall methodological framework that includes a current situation analysis by means of the SWOT matrix and a proposal of strategic solutions for the local community in the form of strategy maps and balanced scorecards is best explained through an example of a hypothetical municipality in Serbia.

Figure 4: General SWOT matrix for a hypothetical municipality in Serbia

STRENGTHS WEAKNESSES Natural resources Natural resources Favourable geographic and transport location Considerable pollution of water, air and soil Favourable microclimate Inadequate soil composition for fruit growing and Great variety of natural features and rich vineyards wildlife Large areas of high quality agricultural land Economic resources Economic resources Obsolete production facilities Diversified economic structure Low level of utilization of the installed capacities Strong business links between local companies A considerable share of destroyed capacities Higher wages in economy than the national High unemployment average Bad corporate governance practice Strong institutional support for the development Relatively bad situation in public utilities companies of the SME sector Inadequate accommodation facilities and poor promotion Human resources of tourism High quality staff in agricultural institutes Fragmentation of agricultural land, lack of standardization Developed non-governmental sector for agricultural products, lack of organization with respect Relatively educated staff in major local to trade in agricultural produce institutions Human resources Low level of education of potential entrepreneurs Outdated knowledge in agricultural production Inadequate communication between local government and representatives of public utilities companies Lack of organization of small-scale entrepreneurs

164 Local Economic and Infrastructure Development of SEE in the Context of EU Accession D. Lončar, Đ. Kaličanin: Integrated Methodological Framework for Formulation and...

OPPORTUNITIES THREATS Natural resources Natural resources More adequate use of available water • Neglecting the sustainable development concept potential for irrigation High concentration of industrial facilities close to Waste management based on the 3 R concept populated areas Inadequate pollution monitoring system Economic resources Modernization of technology Economic resources Revitalization of the existing business Slow process of privatization and restructuring of the state systems owned and publicly owned enterprises Faster privatization and restructuring Considerable technological lag processes Great dependence on the import of raw material • Intensified development of agriculture Treating agriculture as additional occupation and tourism accompanied by solving Too high prices for building land and other fees for the environmental problems establishment of new SMEs Bad associations that the agricultural products consumers Human resources have with pollution Association of farmers into clusters and other forms of partnership Human resources Advisory service to help entrepreneurs and Redundant workforce in publicly owned and state owned farmers companies Education for entrepreneurs and farmers Lack of professional personnel in tourism Further improvements in the work of internal Aging farming population local government Compromised health of the population

Before defining specific strategy maps, we should give the strategic positioning of the local community by means of the SWOT matrix (see Figure 4). The SWOT matrix is a diagnosis of the current situation in the municipality and the basic framework for the formulation of strategy through the BSC methodology.

In the comparisons between opportunities and threats, on the one hand, and the strengths and weaknesses, on the other hand, it is possible to identify the following four conceptually different alternative strategies: the mini-mini strategy. This strategy aims at minimising the threats from the environment and the weaknesses of the organisation. the mini-maxi strategy. This strategy aims at minimising the weaknesses and maximising the opportunities. the maxi-mini strategy. The aim is to maximise the strengths and minimise the threats. the maxi-maxi strategy. The organisation should utilise its strengths to the maximum in order to exploit the opportunities available in the environment.

With regard to the indicators and trends presented in the SWOT matrix, it can be concluded that the mini-maxi strategy is optimal for the given municipality. This means that strategic decision makers must strive at minimizing weaknesses such as inadequate technological levels of the capacities, combined with the physical de- struction of important technological stages, the low level of entrepreneurial spirit

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 165 Economic and Infrastructural Aspect of Local Development and environmental concerns, on one hand, and on the other hand, at maximizing the opportunities such as the availability of water potential for irrigation, the ability of technological catch-up and development of agricultural clusters and public-private partnerships in building physical infrastructure.

After completion of the SWOT matrix, the next step is to plot the general strategy map. The strategy map for the local community is obtained through the identification of issues and perspectives and “filling” the perspectives with selected objectives. The strategy map for the hypothetical local community is shown in Figure 5.

166 Local Economic and Infrastructure Development of SEE in the Context of EU Accession D. Lončar, Đ. Kaličanin: Integrated Methodological Framework for Formulation and...

Figure 5: Strategy map for the local community

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 167 Economic and Infrastructural Aspect of Local Development

This strategy map includes all the major objectives of the local government observed from five different perspectives. We should bear in mind that an objective can be found in one perspective only, but that it can belong to different themes.

Based on a detailed diagnosis of the current situation in different spheres of life in the municipality we have selected four themes as the most important for future development of the municipality1. These are: Local economic development Local social development Environmental protection Employment

Upon defining a general strategy map, the next step is to draw strategy maps for selected strategic themes, and to make detailed balanced scorecards for the selected themes.

Based on the strategy map for each theme, it is necessary to go further into the process of detailed explanation of individual objectives by defining the performance indicators, objectives and specific initiatives. The figure below shows the idea of the decomposition of the objective “C5 New jobs” to individual measurements, tasks and initiatives.

Figure 6: Decomposition of an objective to measurements, tasks and initiatives

Indicator Task Initiative 1. The rate of job 7% annually Establishing incubators growth Education programs for workers and managers Loans for the development of Objective: agriculture New jobs 2. The number of new 120 new companies in Grants for the development of companies the next two years entrepreneurship Courses for new entrepreneurs 3. The number of 14% of the total Implementing measures for employed working number of employed creating home-based jobs from home by the year 2008

A detailed list of objectives for individual themes should not be regarded as final strategic recommendations, but only as the first step in the process of formulating final strategic recommendations. Namely, the stakeholders at the local level need to

1 Each city/municipality can have their own set of themes that reflect the specifics of that local community. For example, current themes for the city of Charlotte in the USA are the following: 1. Safety of the population, 2. Relationship between neighbours, 3. Transport, 4. Efficiency of the local government, 5. Economic development (City of Charlotte 2006).

168 Local Economic and Infrastructure Development of SEE in the Context of EU Accession D. Lončar, Đ. Kaličanin: Integrated Methodological Framework for Formulation and... accept these lists only as starting points for further refinement of individual elements based on the micro-information that only they possess. The basic idea is that the relevant local stakeholders must be involved in the formulation of strategies because the success in implementing the strategy will depend on the level of their involvement. In this way, they will be familiar with the chosen strategic directions and considerably motivated to devote time and energy to the implementation of strategic recommendations. The strategy map, with the strategic themes and the BSC should be discussed between the local authorities and representatives of business associations, social institution and other stakeholders so that, through this discussion, a balanced development strategy for local economy is created.

Conclusion

The BSC methodology is an effective means to address a number of specific features and requirements that are placed in the formulation and implementation of local development strategies, such as: the emphasis on qualitative structural development, endogenous development, decentralization, the wide inclusion of different local players (institutions, organizations and individuals), a partnership approach of the local economic development stakeholders, cooperation and participation in creating and implementing a local development strategy.

One of the main advantage of the BSC methodology in the formulation and implementation of local development strategies is the ability to give a cascade breakdown of general municipality objectives to the objectives of lower municipal subsystems, such as the local community offices and key local institutions. The use of the BSC methodology facilitates compliance with the principle of compatibility of the local community offices or key institutions strategies with the development strategy at the municipal level. This allows that the implementation of the local community offices or key institutions strategies leads towards the implementation of the objectives at the municipal level.

Depending on the degree of independence of local institutions and the level of diversity in their functioning, there are three approaches in the development of the “cascading” balanced scorecards (BSC): the multiplication approach, which is applied when the functioning of the local subsystems or institutions is largely identical; the complex local community approach, which is used when the local subsystems differ significantly in the way of functioning and have a lower level of independence in their work; and the contribution approach, which is used when the local institution is independent and operates on a specific model.

In defining, and in particular, in the implementation of local development strategies, an important role belongs to specialized types of software that contribute to a better understanding of the strategic directions of development, optimized performance, Local Economic and Infrastructure Development of SEE in the Context of EU Accession 169 Economic and Infrastructural Aspect of Local Development easier monitoring and improving the effectiveness and efficiency of the process, improving information flow and easier control of actual performance.

References

Bigliardi et al. (2011) Developing balanced scorecards in local authorities: a comparison of experience, International Journal of Productivity and Performance Management, 2(5): 1-16. Blakely, E. J. and Leigh, N. G. (2009) Planning Local Economic Development: Theory and Practice, Sage Publications. Bolivar, M. P. R. et al. (2010) Implementing the balanced scorecard in public sector agencies: An experience in municipal sport services, Academia, 45: 116-139. Box, R. (1999) Running Government like a Business: Implications for Public Administra- tions Theory and Research, American Review of Public Administration, 29: 19-43. Chan, Y. L. (2004) Performance measurement and adoption of balanced scorecards: A survey of municipal governments in the USA and Canada, International Journal of Public Sec- tor Management, 17(3): 204-221. City of Charlotte (2006) Strategic planning handbook, Charlotte’s Model for Integrating Budget and Performance Management, FY 2008 – FY 2009. Kaplan, R.S. and Norton, D. P. (1992) The Balanced Scorecard – Measures that Drive Perfor- mance, Harvard Business Review, January-February: 71-79. Kaplan, R.S. and Norton, D. P. (1996) Using the Balanced Scorecard as a Strategic Manage- ment System, Harvard Business Review, January-February: 75-85. Maltz, D. (2003) Beyond the Balanced Scorecard: Refining the Search for Organizational Success Measures, Long Range Planning, 36: 187-204. OECD (2004) Best Practices in Local Development. Silk, S. (1998) Automating the Balanced Scorecard, Management Accounting, 80: 38-44. Swianiewicz, P. (2005) Local Governments and Development – What Works and What Does Not?, Analysis, Policy Recommendations and Training Materials for Countries of Cen- tral and Eastern Europe: Croatia, Poland, Ukraine – Comparative Conclusions. Swinburn, G. (2004) Local Economic Development: A glimpse at current good practice, World Bank / Bertelsmann Foundation. Swinburn, G. (2004) Reviewing the LED Strategy through Monitoring and Evaluation, World Bank. Swinburn, G. (2002) Local Economic Development Strategic Planning: a Five Stage Pro- cess, World Bank. Swinburn, G. and Marphy, F. (2004) Making Local Economic Development Strategies: A Trainer’s Manual, World Bank. Wisniewski, M. and Stewart, D. (2004) Performance measurement for Stakeholders – The Case of Scottish Local Authorities, The International Journal of Public Sector Manage- ment, 17: 222-233. Yee-Chin, L. C. (2004) Performance Measurement and Adoption of Balanced Scorecards – A Survey of Municipal Governments in the USA and Canada, The International Journal of Public Sector Management, 17: 204-221.

170 Local Economic and Infrastructure Development of SEE in the Context of EU Accession DOI 10.5644/PI2013-153-09

ECONOMIC AND FUNCTIONAL EFFICIENCY OF TERRITORIAL ORGANIZATION OF BOSNIA AND HERZEGOVINA

Ensar Šehić* Jasmina Osmanković** Marijana Galić***

Abstract

This paper presents a comprehensive assessment of territorial organization efficiency of the Federation of Bosnia and Herzegovina. During assessment, an output-oriented Charnes, Cooper and Rhods (CCR) and Banker, Charnes and Cooper (BCC) models have been applied on data representing the financial, demographic and functional capacities.

Furthermore, this paper analyzes the efficiency of the territorial organization of the Federa- tion of Bosnia and Herzegovina through years 1990, 2000 and 2010. Results of CCR and BCC models show that the Local Government Unit (LGU) efficiency has been significantly reduced.

Paper consists of Introduction, Efficiency of the territorial organization of the Federation of Bosnia and Herzegovina, CCR model, Inefficiency of LGU, Conclusion, References.

Keywords: Territorial organization, Bosnia and Herzegovina, the Federation of Bosnia and Herzegovina, Efficiency, Data Envelopment Analysis methodology.

Introduction

Scientific, international, and political influences in Bosnia and Herzegovina constantly point out the problem of the inefficiency of territorial organization in the Federation and the whole Bosnia and Herzegovina. Therefore, this paper establishes a model; scientific, quantitative justification for the territorial organization of the

* PhD, assistant Professor at The School of Economics and Business, University of Sarajevo, Trg Oslobođenja – Alija Izetbegović 1, 71000 Sarajevo, Bosnia and Herzegovina, phone: +387 33 275 900, e-mail address: [email protected] ** PhD, full-time Professor at The School of Economics and Business, University of Sarajevo, Trg Oslobođenja – Alija Izetbegović 1, 71000 Sarajevo, Bosnia and Herzegovina, phone: +387 33 275 900, e-mail address: [email protected] *** Federal Institute for Development Programming, Ćemaluša 9/III, 71000 Sarajevo, Bosnia and Her- zegovina, phone: +387 33 667 272, fax: +387 33 212 625, e-mail address: [email protected]

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Federation. Quantification was performed by applying mathematical methodology of the Data Envelopment Analysis on the Local Government Units in the Federation. This work researches efficiency territorial organization in the Federation. Federation of Bosnia and Herzegovina is administratively regulated so that it includes 10 lower administrative organizational units – cantons, and 79 municipalities. The paper includes analysis of statistical data input and output variables related to years 1990, 2000 and 2010. The data were played for four inputs and three outputs in order to estimate how well Local Government Unit (LGU) in Bosnia and Herzegovina uti- lizes their resources. Output-oriented constant returns to scale of DEA model have been composed for each LGU. Numbers of scientific papers with DEA mathematical methodology have been written so far. It has been used as a tool for testing the efficacy of various areas of management (Emrouznejad et al. 2008). Several models that differ in the type of assumed returns to scale effects (constant or variable returns to scale) are Charnes-Cooper-Rhodes (CCR) model and Banker-Charnes-Cooper (BCC) model (variable returns to scale), focusing on input and output variables. In assessing the effectiveness of operations, the DEA methodology is used in agriculture, education, health, and other areas, which proves its importance and various applications (Coelho 2009; Herrera 2005; Herrera and Pang 2006; Karbowaniki and Kulaii 2011; Koprić 2010; Man et al. 2012; Martić and Savić 2001; Nedeljković and Drenovac 2008; Rabar 2010; Rabar and Blažević 2011; Rahmayantia and Homb 2011; Šeg 2008; Zhang and Zheng 2007). In our literature DEA were very poorly used, only in the banking sector.

Methodology

The first step in modeling the efficiency of LGU is to review the results (outputs) that reflect the desired goals, and major resources (inputs) that are used. Those among them that are the best representative of the process should be singled out. The choice of relevant inputs and outputs is one of the most important and relatively difficult steps in the analysis. Inputs are density, number of teachers, number of physicians and number of employees at LGU. Outputs are GDP per capita, number of students, secondary and primary education, and LGU revenues (Afonso et al. 2008; Arzeni et al. 2002; Benazić 2009; Chobanov and Mladenova 2009; Emrozunejad and Podinovski 2011; Koprić 2010). The choice of relevant inputs and outputs is one of the most important and also the most difficult step, which must reflect the interest of analysts and managers, and justify the implementation of objective analysis. By reviewing the standard functional capacity of the different government levels, it was found that most important inputs and outputs were following (Coelho 2009a, 2009b; Herrera 2005; Herrera and Pang 2006; Karbowaniki and Kulaii 2011; Koprić 2010; Man et al. 2012; Martić and Savić 2001; Nedeljković and Drenovac 2008; Rabar 2010; Rabar and Blažević 2011; Rahmayantia and Homb 2011; Šeg 2008; Zhang and Zheng 2007):

172 Local Economic and Infrastructure Development of SEE in the Context of EU Accession E. Šehić, J. Osmanković, M. Galić: Economic and Functional Efficiency of Territorial...

The set of inputs: • X1 (density) • X2 (number of teachers) • X3 (number of physicians) • X4 (number of employees at LGU)

The set of outputs: Y1 (GDP per capita) Y2 (number of students, secondary and primary education) Y3 (LGU revenues)

CCR model implies constant returns to scale, which means that the value of output variables increases proportionally in relation to the increase in input values.

In this model, the maximum efficiency of the production (DMU) is achieved at maximum weight than the sum of the value of output and the sum of weighted values of inputs.

(2.1.1) restriction:

(2.1.2)

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Results and discussion

Applying DEA ONLINE SOLVER software solutions, we obtained the results on the efficiency of local government of the Federation of BIH. Relatively efficient and inefficient units were tested on CCR model.

Table 1: Results of CCR model focused on output

Results of CCR model focused on outputs 1990 2000 2010 Average relative efficiency 0,9135 0,8532 0,8578 Standard deviation 0,1109 0,1945 0,1539 Lowest value of relative efficiency 0,520079 -0,25859 0,222286 Number of relatively efficient JLS 32 (42.6%) 25 (31.64%) 25 (31.64%) Number of relatively inefficient JLS 43 54 54 Number of JLS which have relative efficiency lower 30 30 38 than average Author’s calculation

Indicator obtained by CCR model assumed a much lower value, unlike the results of the two models which are not negligible even in years 1990 and 2000. So in 2000 the minimum value of relative efficiency as measured by CCR model even has a negative value. Applying CCR model in 2010, the results indicate a significantly lower value than the one in 2000 and 1990. In order to reach the limits of efficiency one should increase output variables by 14.22%, while retaining the same values to the input variables. In the same year the CCR model has detected 32 relatively efficient LGU. To obtain the functionality of independent administrative-territorial organs, it is difficult to decide whether to use constant or variable income securities, which determines whether to apply CCR or BCC model, so the analysis was performed using CCR model.

Number of efficient units measured by CCR model offered the same number of effective units in year 2000 and 2010. Mathematical DEA methodology, in addition to presenting the results for relatively efficient units offers a choice of those units among efficient ones.

In 1990, according to CCR model there were 32 units that can be considered effective and the most efficient among them can be considered Neum and Zavidovići. The reasons for these results were seeking a more detailed analysis of input and output parameters for each unit. For Zavidovići it is found that their effectiveness makes 23% of population density, then the number of teachers participated with 36.2% and the number of physicians with 40%, and the number of employees in the

174 Local Economic and Infrastructure Development of SEE in the Context of EU Accession E. Šehić, J. Osmanković, M. Galić: Economic and Functional Efficiency of Territorial... administration did not take part as a variable in efficiency measurement. On the other hand, in the output side, the GDP per capita as a variable participated with 39.2%, while the number of students with 39.2%, their own incomes did not participate in the formation of the limits of efficiency. In terms of efficiency of Neum, contribution of population density was 40.9% and the number of teachers 59.1%, while in the output the GDP per capita participation was 67.5% and the number of students participated with 32.5%. A detailed overview of the matrix input and output variables indicate how important variable density is, and that in Zavidovići ratio is below average for 1990. The number of teachers is above average, while on the output side the number of students and government revenues are also significantly above average in 1990, while the amount of GDP per capita is slightly lower than the average for the same year. Furthermore, it is necessary to point out that the significance of the inclusion of population density significantly affects the formation of the efficiency level. Most of the units with lower population density are efficient. Municipalities where the population density is very high, like in some Sarajevo municipalities, namely Centre, had inefficient coefficient (0.82663), although other input and output variables were significantly above average in 1990.

Table 2: Sources of efficiency

Variable Zavidovići Neum X1 23.6% 40.9% X2 36.2% 59.1% X3 40.2% 0.0% X4 0.0% 0.0% Y1 39.2% 67.5% Y2 60.8% 32.5% Y3 0.0% 0.0% Author’s calculation

For each of the inefficient units projections have been carried out and they were compared with the empirical values. The causes of inefficiency are established as well as the percentage values for each of the variables, input and output. Larger projected values of deviations of empirical indicators are also higher because inefficiencies identified inefficient units. So for Bihać in 1990 the coefficient of inefficiency 0.765 determined that the variable Y4 (number of employees in administration) deviated by 4.5% more than their composite, or from its effective projection.

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 175 Economic and Infrastructural Aspect of Local Development

Figure 2: Inefficiency sources

Author’s calculation

The number of students and the GDP per capita were 19% lower than the effective projection for Bihać, while its own revenues were lower by 21%. Efficient Frontier

176 Local Economic and Infrastructure Development of SEE in the Context of EU Accession E. Šehić, J. Osmanković, M. Galić: Economic and Functional Efficiency of Territorial...

Bihać had 40% efficient use of Bosanska Krupa variable, 19% of Zvornik variable, 40% of Mostar and 1% of Trebinje.

Figure 3: Relative efficient and inefficient JLS

Note: Number of relative efficient Local Government Unit (LGU). Author’s calculation.

Analyses efficiency over three decades shows how varied the average relative efficiency were. Number of relatively efficiency units decreased from 32 to 25. Number of relatively inefficiency units increased from 43 to 54. And, number of units which had lower efficiency than the Federation average increased from 30 to 38. Given that the newly formed local governments, most of them in the two years analyzed (2000 and 2010), are ineffective, we can conclude that they are unable to effectively perform their function with existing resources.

A further analysis shows that in the period from 1990 to 2010 the greatest transformation in efficiency experienced in Canton Tuzla is in year 1990 (LGUs are fully organized by the later territorial scope of this Canton), which had five efficient units according to calculations by CCR model, and six efficient units according to BCC model. The number of units that have less than average relative efficiency also increased significantly, especially in 2000 and 2010 year, when 38 local governments had a relative efficiency of less than average (Koprić 2010).

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 177 Economic and Infrastructural Aspect of Local Development

Figure 4: Comparison of results by CCR model

Comparison of results CCR 1990 CCR 2000 CCR 2010

Author’s calculation

Efficiency analysis of territorial units which form the Federation indicates that only 34% of local authorities, of the total number that covers the territory of the Federation BIH, are efficient. The analysis shows that Posavina Canton contributes most to the overall inefficiency of the Federation where all three local authorities were inefficient according to both models. Four JLS of West Herzegovina Canton contribute significantly to the overall inefficiency of the Federation, because applying CCR model for 2010 showed that four local authorities have proved to be inefficient, and the BCC model is an efficient different to LGU.

Moreover, next canton that contributes significantly to the overall inefficiency is Bosnian-Podrinje. Tuzla Canton also in its composition had all inefficient local governments according to CCR model, while the BCC model produced one efficient unit. Additionally, it is necessary to point out that in the territory that includes Tuzla Canton, four newly established JLS are ineffective on both models, CCR and BCC. Further analysis showed that the Sarajevo Canton includes 3 efficient local governments. By the number of effective units, Una-Sana Canton follows with six efficient local governments, and finally Zenica with five efficient units. Cantons with the lowest number of effective units are Tuzla Canton, which had only one efficient unit and JLS by applying BCC model, and Canton 10, which according to the results of CCR model also had 4, and according to BCC model 5 efficient units.

Conclusion

According to the CCR DEA model, the average relative efficiency was higher in 1990 than in 2000 and 2010. It can be concluded that according to CCR almost 2/3 of local government is relatively inefficient. Number of inefficient local governments

178 Local Economic and Infrastructure Development of SEE in the Context of EU Accession E. Šehić, J. Osmanković, M. Galić: Economic and Functional Efficiency of Territorial... increased in 2000 and 2010, compared to 1990. Number of local governments that have smaller than average efficiency also increased in 2000 and 2010 compared to 1990. This is evident in increasing number of inefficient JLS.

References

Afonso, A., Schuknecht, L. and Tanzi, V. (2008) Income distribution determinants and public spending efficieny, Journal of Economic Inequality, Springer, 8(3): 367-389. Arzeni, A., Esposti, R. and Sotte, F. (2002) Elementi vizije regionalnog razvoja za županije šibensko-kninsku i zadarsku: metodološki prijedlozi za integralno prostorno planiranje, Svjetska banka. Benazić, A. (2009) Measuring Efficiency in the Croatian Customs Sevice: A Data Envelop- ment Analysis approach. Financijska teorija i praksa: 151-160. Chobanov, D. and Mladenova, A. (2009) What is the optimum size of government, Institute for Market Economics, Bulgaria. Coelho, M. C. (2009) The Effect of Organisational Structure on Education Efficiency: public- private provision and decentralisation, Institute of Local Government Studies – School of Public policy – The University of Birmingham. Comprehensive Text with Models, Applications, References, and DEA-Solver Software, Springer Science + Bussines Media, LLC Emrouznejad, A. and Podinovski, V. (2011) Data envelopment analysis and performance management. Herrera, S. and Pang, G. (2005) Efficiency of Public Spending in Developing Coutries: An Efficiency Frontier, World Bank, Washington. Herrera, S. and Pang, G. (2006) Efficiency of Infrastructure: The case of Container Ports 1, World Bank, Washington. Karbowaniki, B. and Kulaii, G. (2011) Efficiency of public sector at the level of local governments in Poland. (www.eefs.eu/conf/Warsaw/Papers) Koprić, I. (2010) Kriteriji za prosudbu racionalnosti teritorijalne organizacije lokalne i regionalne samouprave. (http://bib.irb.hr/) Man et al. (2012) The Regional Efficiency Differences Analysis of Education Expenditure in China based on DEA Model Advanced, Applied Economics and Finance, 1(1), World Science Publisher, United States. Martić, M. and Savić, G. (2001) An application of DEA for comparative analysis and ranking of regions in Serbia with regardsto social-economic development, European Journal of Operational Research, 132: 343-356. Nedeljković, R. and Drenovac, D. (2008) Primena fazi analize obavijenja podataka u poštanskom saobraćaju, XXVI Simpozijum o novim tehnologijama u poštanskom i telekomunnikacijskom saobraćaju PosTel, 2008, Beograd. Nedeljković, R. and Drenovac, D. (2008) Primena fazi analize obavijenja podataka u poštanskom saobraćaju. In: XXVI Simpozijum o novim tehnologijama u poštanskom i telekomunnikacijskom saobraćaju PosTel, 2008, Beograd. OECD Economic Surveys MEXICO, OECD, 2009. (http://www.oecd ilibrary.org/economics/ oecd-economic-surveys-mexico_19990723) Rabar, D. and Blažević, S. (2011) Ocjenjivanje efikasnosti hrvatskih županija u turizmu primjenom analize omeđivanja podataka. (http://hrcak.srce.hr/?lang=en)

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 179 Economic and Infrastructural Aspect of Local Development

Rabar, D. (2010) Ocjenjivanje efikasnosti poslovanja hrvatskih bolnica metodom analize omeđivanja podataka, Ekonomski pregled, 61(9-10). Rahmayantia, Y. and Homb, T. (2011) Exenditure Efficiency and the Optimal Size of Gov- ernment in Developing Countries, Global Economy and Finance Journal, 4(2): 46-59. Savanović, S. (2009) Finansiranje lokalnog razvoja, Razvojna agencija EDA, Banja Luka. Swianiewicz, P. (2010) Territorial Consolidation Reforms in Europe, Local Government and Public Service Reform Initiative, Open Society Institute – Budapest, OSI/LGI. Šeg, A. (2008) Evaluating shops efficiency using data envelopment analysis: Categorical approach, Zbornik radova Ekonomskog fakulteta Rijeka, 26(2). Zhang, N. Hu and Zheng, J. (2007) Using Data Envelopment Analysis approach to estimate the health production efficiences in China, Higher Education Press and Springer-Verlag.

Internet sites http://www.fzs.ba/ http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/ http://stats.oecd.org/

180 Local Economic and Infrastructure Development of SEE in the Context of EU Accession DOI 10.5644/PI2013-153-10

CONVERGENCE OF LOCAL GOVERNMENT UNITS IN BOSNIA AND HERZEGOVINA

Muamer Halilbašić* Emir Agić**

Abstract

This paper studies the convergence in economic development between different local communities in Bosnia and Herzegovina in 1990–2010 time periods. We are testing the hypotheses that dispersion in level of real per capita income between municipalities decreases over time (Sigma-convergence). We also discuss on possible reasons for the observed trends. Results of this research can be useful for profiling and discussions about more balanced regional development policy, as well as for defining EU programmes and projects to support regional and local development of the county from 2014 to 2020.

Keywords: Convergence, Local government units, Bosnia and Herzegovina.

Introduction

Convergence has a wide application in various scientific and research areas. Special emphasis is on reduction, and ultimately eliminating the gaps in the level of economic development, in order to reduce tensions in the economic, political, environmental, social and other areas.

In this context, we are testing the convergence of local communities in Bosnia and Herzegovina. More precisely we examine following hypothesis:

H1: Dispersion in level of gross domestic product per head between local government units in Bosnia and Herzegovina has decreased in last two decades.

* PhD, assistant Professor at School of Economics and Business Sarajevo, University Sarajevo, director of the Institute of Economics Sarajevo, Trg Oslobođenja – Alija Izetbegovic 1, 71 000, Sarajevo, Bosnia and Herzegovina, phone: +387 33 275 960, fax: +387 33 275 963, e-mail address: muamer. [email protected] ** PhD, assistant professor at School of Economics and Business Sarajevo, University Sarajevo, Ad- dress: Trg Oslobođenja – Alija Izetbegovic 1, 71 000, Sarajevo, Bosnia and Herzegovina, phone: +387 33 275 960, fax: +387 33 275 963, e-mail address: [email protected]

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The spatial framework of the research is therefore Bosnia and Herzegovina, specifically the gross domestic product per capita on the level of municipalities. Testing is based on the data collected by statistical offices in the country. Timeframe of the research is 1990 to 2010. To test the hypothesis we use a combination of summary measures, such as coefficient of variation and Gini coefficients, and analysis of distribution using histogram and cumulative frequency.

We are also discussing about possible reasons for the observed trends in GDP per capita.

Research results can be used to explain the economic sustainability of territorial organization, evaluation of development policies, redefining the territorial matrix, etc.

Theoretical framework end empirical findings

The problem of convergence is widely analyzed and verified in the economic literature. Analyzing the possibilities of dynamizing growth opportunities of poor regions and local communities and improving unfavourable trends in comparison with the rich regions and local government units reveals the complexity of the problem, but also points to efforts that would be necessary to at least partially resolve them.

Theoretical approaches and explanations of convergence are particularly intensified since mid-twentieth century. Researches were trying to find the explanation for the achieved growth rate of developed countries, but also to discover, and eliminate the factors of deviation between developed and developing countries. This has resulted in the construction of neo-classical growth model (Solow 1956). Theoretical explanations of convergence and its practical tests are usually performed under neo- classical growth models (Bogunovic 2001). The concept of convergence is complex and can be defined in different ways. The first approach is based on negative correlation between the rate of growth of income per capita and the initial level of income (Beta-convergence). Second approach assumes that there is dispersion in level of real per capita income between observed areas (community, region and state) but that it decreases over time (Sigma-convergence).

The concept of convergence can be tested at the global, national, regional and local level. At the regional level convergence has been tested on the example of the United States for the period 1880–1990, in the case of Japan for the period 1955–1990, Germany, Great Britain, France and Italy for the period since 1950. Convergence is tested for other countries also. In all the cases convergence is confirmed. It was found that the underdeveloped regions have above-average growth rates and that leads to equalization of inter-regional income distribution (Xavier and Sala-I-Martin, 1996). The European Union pays special attention to the analysis of convergence at

182 Local Economic and Infrastructure Development of SEE in the Context of EU Accession M. Halilbašić, E. Agić: Convergence of Local Government Units in Bosnia and... the level of integration, at national, regional and local level, through implementation of different policies, monitoring and evaluation of the results of these policies (Beckfield 2003).

This kind of testing is particularly important for poor countries, regions and local communities to find the paths of transition and restructuring for more dynamic economic development. This is especially important for creating economic policy in a particular economic space. Prospects of a community depend on improving the welfare of all its parts. Speed of movement towards the steady state is determined by the profile of economic policy, which then determines the speed of adjustment, and selection of mechanisms, measures and instruments of economic policy. Convergence is a process of positive change. Speed of convergence depends on the level of the gap and the relative pace of change, which is influenced by the structure of the economy. It is desirable that all the relevant economic variables converge towards a desired equilibrium state. In that case, integration linkages create positive economic motivation towards favourable results.

Economic development literature often recalls that “rich countries become richer and the poor become poorer”. Comparatively speaking, this phrase is based on the practical situation, such as the fact that there are no developed ideas and strategies that would allow development gap between rich and poor countries, regions and local communities to be minimized and/or eliminated.

Summary measures of disparities: Beta and Sigma-convergence

Beta-convergence refers to a process in which poor regions grow faster than rich ones and therefore catch up on them. The concept of Beta-convergence is directly related to neo-classical growth theory (Solow 1956) where one key assumption is that factors of production, in particular capital, are subject to diminishing return. Accordingly, the growth process should lead economies to a long-run steady state characterised by a rate of growth which depends only on the (exogenous) rates of technological progress and labour force growth. Diminishing return also implies that the growth rate of poor economies should be higher and their income and/or GDP per capita levels should catch up with those of rich economies.

When all economies are assumed to converge towards the same steady-state (in terms of GDP per head and growth rate), Beta convergence is said to be absolute. However, the steady-state may depend on features specific to each economy, in which case convergence will still take place, but not necessarily at the same long-run levels. This will be the case when GDP per capita is supposed to depend on a series of determinants such as factor endowment or institutions, which can vary from one economy to the other even in the long-run. Beta-convergence is then said to be conditional.

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The methodology used to measure Beta-convergence generally involves estimating a growth equation in the following form:

ln(∆yi,t) = α + β ln(yi,t-1) + γ Zi,t + ui,t (1) where

yi,t and ∆yi,t are respectively the level and the growth rate of GDP per capita in region i at time t;

Zi,t includes all other factors supposedly affecting the growth rate;

ui,t is the standard error term; and • α,β and ∆∆ are the parameters to be estimated.

A negative relationship between the growth rate (∆yi,t) and the initial level of GDP per capita (yi,t), i.e. β is significant and negative, is the sign of a convergence process. The estimated value also indicates the rate at which regions approach their steady- state and hence the speed of convergence1.

While Beta-convergence focuses on detecting possible catching-up processes, Sigma-convergence simply refers to a reduction of disparities among regions in time. The two concepts are of course closely related. Formally, Beta-convergence is necessary but not sufficient for Sigma-convergence. Intuitively, this is either because economies can converge towards one another but random shocks push them apart or because, in the case of conditional Beta-convergence, economies can converge towards different steady-states.

A number of limitations of the Beta-convergence approach (see for instance Quah 1993) have led some economists to suggest that the concept of Sigma-convergence is more revealing of the reality as it directly describes the distribution of income across economies without relying on the estimation of a particular model. In addition, the lack of GDP data for many years in 1990–2010 time periods influenced us to concentrate the analysis on calculating just Sigma-convergence.

The most frequently used summary measures of Sigma-convergence are the standard deviation or the coefficient of variation of regional GDP per capita. However, other indices exist and present interesting properties (see for instance Cowell 1995 or World Bank 1999 for a detailed review of the mathematical properties of the most popular summary inequality measures). In this paper as one of the possible measures we also use Gini coefficient.2

1 Results obtained with the previously explained approach strongly depend on the specification adopted (absolute or conditional convergence, variables included in Z, incorporation of spatial effects) and on the observations (period and regions considered, dataset used). It is therefore difficult to draw a single general conclusion from the vast panel of existing studies (see for instance the survey by Eckey and Türk, 2006). 2 Other possible measures are also Atkinson index, the Theil index and the Mean Logarithmic Deviation (MLD). The weighting schemes and implicit welfare functions vary across measures. For example, the

184 Local Economic and Infrastructure Development of SEE in the Context of EU Accession M. Halilbašić, E. Agić: Convergence of Local Government Units in Bosnia and...

The coefficient of variation is a normalised measure of dispersion of a probability distribution. It is defined as the ratio of the standard deviation to the mean. It is often reported as a percentage by multiplying the above calculation by 100 which is sometimes referred to as the relative standard deviation (RSD or %RSD). The coefficient of variation is often preferred to the standard deviation which has no interpretable meaning on its own unless the mean value is also reported. For a given standard deviation value, the coefficient of variation indicates a high or low degree of variability only in relation to the mean value.

For the BIH municipalities coefficient of variation in 1990 and 2010 is as follows:

Comparing the disparities between BIH municipalities in 2010 with those in 1990 we can conclude that Sigma-convergence is not demonstrated. Coefficient of variation actually increased, from 47.26% in 1990 to 61.52% in 2010.

The Gini coefficient is mostly used as a measure of inequality in the distribution of personal income or wealth. By definition, it varies between 0 and 1. A low value indicates more equal distribution (0 corresponding to perfect equality), while a high Gini coefficient indicates more unequal distribution (1 corresponding to perfect inequality where income is concentrated in the hands of one individual). The Gini index is the Gini coefficient expressed as a percentage.

The Gini coefficient can be used to compare income distributions across different populations, in particular countries and regions.3 Under this measure, similarly with the previous one, disparities among BIH municipalities increased from 17.6% in 1990 to 20.3% in 2010.

MLD is more sensitive to changes at the lower end of the distribution, while the coefficient of variation is responsive to changes in tnd of the distribution. The Gini coefficient is more sensitive to changes in inequality around the median. Consequently, these measures may not rank two distributions the same way, nor will time series patterns necessarily be the same for different measures. It is therefore generally required to compute a variety of measures to draw firm conclusions about changes in the extent of disparities. 3 It is important to mention that Gini coefficient is influenced by the granularity of the measurements. For example, a computation based on five 20% quantiles (low granularity) will usually yield a lower Gini coefficient than one based on twenty 5% quantiles (high granularity) taken from the same distribution.

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 185 Economic and Infrastructural Aspect of Local Development

Analysis of the distribution

Summary measures of disparities are extremely useful as they provide a synthesis of the information and are relatively simple to compute. Their obvious drawback is that they do not allow for an in-depth look at the distribution of observations. In particular, they are not suitable for describing movements of observational units (in our case municipalities) within the distribution. However, such movements can add considerable insight to the analysis of local disparities by providing more details about the mechanisms at work in the convergence process. Several methods and instruments can be used to analyse the characteristics and the dynamics of the distribution. One class of instrument is based on visual inspection. Here we are using non-parametric estimation of density functions and cumulative density functions.

The most simple and frequently used non-parametric density estimator is the histogram (see for instance Boldrin and Canova 2001). However, this instrument suffers from two severe limitations. First, histograms are not smooth, and second, they depend on end points of the sub-intervals selected to cover the data values. One way to overcome these shortcomings is to use kernel density estimators. Under this method, each data point is the centre of normalised density function, referred to as the kernel. Densities are then added vertically to produce the estimation of the distribution. If a Normal is chosen as the density function, we obtain a Gaussian (stochastic) kernel density estimation of the distribution (see for instance Barrios and Strobl 2005).

It is of course important to select the most appropriate kernel and in particular the width of the sub-intervals surrounding the data point, referred to as the bandwidth. A common way to determine the optimal bandwidth is to choose one that minimises an optimality criterion which is often selected as the Asymptotic Mean Integrated Squared Error (AMISE). The Gaussian kernel estimation of the GDP per capita distributions for the BIH municipalities and for the years 1990 and 2010 is displayed in the Figure 1. The results are mixed. On one side, frequencies around the mean significantly increase indicating convergence. On the other side, however, frequencies also tend to increase for values below 70% and between 120 and 150% of the BIH average, indicating divergence. In addition, the estimation reveals an evolution from a unimodal to bimodal distribution. This is particularly interesting since it can lead to the conclusion that we are witnessing a polarisation process in BIH. Of course, this is something that requires deeper analysis in the future.

186 Local Economic and Infrastructure Development of SEE in the Context of EU Accession M. Halilbašić, E. Agić: Convergence of Local Government Units in Bosnia and...

Figure 1: GDP/head (BIH=100): Distribution BIH municipalities, 1990–2010, Gaussian kernel estimation

Source: Author’s calculation

Figure 2: GDP/head (BIH=100): Cumulative frequency distribution, BIH municipalities, 1990–2010

Source: Author’s calculation

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 187 Economic and Infrastructural Aspect of Local Development

The cumulative frequency is the percentage of observational units for which the record value falls below a reference value. In general, the steeper the curve representing the cumulative frequency around the mean, the less the distribution features large disparities.

Figure 2 reports the cumulative frequency distributions of GDP per capita for BIH municipalities in 1990 and 2010. Again the results are mixed. Compared to the cumulative frequency in 1990, the frequency in 2010 is slightly steeper around 100. In a way this confirms that some convergence has taken place between these two dates. However, in 1990, the cumulative frequency of the GDP/head level corresponding to 60% of the BIH average was about 0.20, meaning that 20% of the observation (i.e. municipalities) had a GDP per capita below 60% of the BIH average. In 2010, this figure increased to 27%, indicating divergence process.

Possible explanations

Possible explanation for the mixed results in previous analysis is the drastic change in GDP per capita between municipalities in the analysed period. In a number of municipalities there was a significant increase in GDP, while in the second group, GDP fell drastically. Municipalities with the highest drop in GDP per capita ranking are presented in Table 1.

Table 1: Municipalities with the highest drop in GDP pc ranking

Municipality GDP per capita 1990 rank GDP per capita 2010 rank Change Kalinovik 50 87 -37 Jajce 31 71 -40 Zvornik 12 53 -41 Han Pijesak 17 58 -41 Novi Travnik 21 65 -44 Ljubinje 29 74 -45 Trnovo 52 99 -47 Bileća 15 63 -48 Čajniče 38 93 -55 Maglaj 35 92 -57 Bugojno 13 86 -73 Drvar 3 107 -104

Source: Author’s calculation

188 Local Economic and Infrastructure Development of SEE in the Context of EU Accession M. Halilbašić, E. Agić: Convergence of Local Government Units in Bosnia and...

Beside generally turbulent transition process and specific industrial structure, one possible reason for the significant changes in GDP between municipalities if for sure the new administrative division of the country into two entities and ten cantons created as a result of the Dayton Peace Agreement. This new administrative division is dominantly based on ethnic principles and resulted in two almost completely separate economic spaces. Pre-aggression division of the country on four economic regions and local communities was completely ignored (Osmankovic and Pejanovic 2006). Number of municipalities has increased from 109 to 143 and the Brcko District. Many municipalities are divided according to ethnic criteria, and are mainly concentrated on the border between the two entities. For decades formed territorial structure is divided. Link between the municipal centre and its environment is broken. Some of the newly created municipalities were left without key infrastructure, without the traffic and other connections necessary for development. Other areas were left without jobs and population. According to Aganovic (1997 : 80), due to disruption of previously established connections around 40% of development potential is lost.

Confirmation of the above thesis we get if the divided municipalities on the territory of Federation of Bosnia and Herzegovina are extracted and analyzed individually and as a separate group according to different indicators of economic development. The level of development of this group of municipalities in 2010, measured by gross domestic product per capita, was significantly lower than the average of the Federation of BIH. We get a similar picture if we analyse other development indicators (such as unemployment rate, etc.) for this group of municipalities.

Conclusions

This paper has reviewed a number of methods and instruments developed for the analysis of economic and/or social inequalities and that can be used for examining disparities among local government units. One objective of the paper was to assess the convergence process among BIH municipalities using some of these instruments. Another was to show that used instruments can vary in terms of their specificities and qualities and that it is therefore important to be aware of their limits when measuring the extent and evolution of disparities.

More specifically, it has been stressed that while summary measures may be particularly convenient for synthesising complex information, they remain blind to a number of aspects that can be critical when it comes to assessing convergence. In our case, although the summary measures (such as the coefficient of variation and Gini coefficient) were not offered evidence of the convergence process, analyzing the distribution using histograms and cumulative frequency, we found that the results are actually mixed. The justification for these findings, we found in drastic changes in GDP per capita between municipalities. In the case of Bosnia and Herzegovina, one

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 189 Economic and Infrastructural Aspect of Local Development of the causes of this situation, in addition to generally turbulent transition process and specific industrial structure of individual municipalities, certainly lies in new administrative division of the country as a result of the Dayton Peace Agreement. It is dominantly based on ethnic principles and resulted in two almost completely separate economic spaces. As a result, significant part of development potential is lost. Special problem we found in a group of divided municipalities. Existing territorial organization could be subject to further analysis in the context of competitiveness, sustainability, absorptive capacities and capabilities of local communities to deal with the crisis.

References

Aganović, M. et al. (1997) Strategija prostornog uređenja Federacije Bosne i Hercegovine, Federalno ministarstvo prostornog uređenja i okoliša, Sarajevo. Barrios, S. and Strobl, E. (2005) The Dynamics of Regional Inequalities, Economic Papers of the European Commission, Brussels, 229. Beckfield, J. (2003) Income convergence and regional integration in the European Union, Indiana University Working Papers Series. Bogunovic, A. (2001) Ekonomske integracije i regionalna politika, Ekonomski fakultet Sveučilišta u Zagrebu, Zagreb. Boldrin, L. and Canova, F. (2001) Inequality and Convergence in Europe’s Regions, Recon- sidering European Regional Policies, Economic Policy, 16: 207-253. Cowell, F. (1995) On the Structure of Additive Inequality Measures, Review of Economic Studies, 47: 521-31. Eckey, H.-F. and Türck, M. (2006) Convergence of EU-Regions: A Literature Review, Dis- cussion Paper at the Economic Department of the University of Kassel, 86/06, Kassel. Osmankovic, J. and Pejanovic, M. (2006) Euroregije i Bosna i Hercegovina, Centar za lokalnu i regionalnu samoupravu FPN Sarajevo, Sarajevo. Quah, D. (1993) Empirical Cross-Section Dynamics in Economic Growth, European Eco- nomic Review, 37(2-3): 1353-1375. Quah, D. (1996) Empirics for Economic Growth and Convergence, European Economic Re- view, 40: 1353-1375. Solow, R. (1956) A Contribution to the Theory of Economic Growth, Quarterly Journal of Economics, 70(1): 65-94. Xavier, X. Sala-I-Martin (1996) Regional cohesion: Evidence and theories of regional growth and Convergence, European Economic Review, 40. World Bank (1999) Inequality: Methods and Tools, World Bank’s Web Site on Inequality, Poverty, and Socio-economic Performance. (http://www.worldbank.org/poverty/inequal/index.htm)

190 Local Economic and Infrastructure Development of SEE in the Context of EU Accession DOI 10.5644/PI2013-153-11

COMPETITIVENESS UNITS OF LOCAL GOVERNMENT

Marijana Galić* Ensar Šehić**

Abstract

The paper attempts to analyze competitiveness for Local Government Unit (LGU) based on unit labour costs, as well as labour productivity. The main purpose of this paper is to identify those local government units, which are the most competitive, based on unit labour cost that can be considered as indicator for future investments. This paper analyzes local government units during the timeframe 2010–2012 in Federation of Bosnia and Herzegovina. Main hypothesis is that labour costs should not increase faster than labour productivity on a permanent basis.

This paper introduces basic information on local government unit, reviews research methodology, discusses results and finally gives conclusion. The contribution of the paper is LGU productivity and competitive indicator as barrier for future investments.

Keywords: Competitiveness, Methodology, LGU, Bosnia and Herzegovina.

Introduction

This paper introduces basic information on Local Government Unit (LGU), reviews research methodology, and discusses results and the main conclusions of the research. The contribution of the paper is local government unit productivity and competitive indicator as barrier for future investments (Swainiewicz 2010; Porter 1990; Thompson 2003; Thompson 2004).

Basic information

Municipal governments constitute the lowest level of government in Federation of Bosnia and Herzegovina. Municipalities of Federation of Bosnia and Herzegovina

* Federal Institute for Development Programming, Ćemaluša 9/III, 71000 Sarajevo, Bosnia and Herze- govina, phone: +387 33 667 272, fax: +387 33 212 625, e-mail address: [email protected] ** PhD, assistant Professor at the School of Economics and Business, University of Sarajevo, Trg Oslobođenja – Alija Izetbegović 1, 71000 Sarajevo, Bosnia and Herzegovina, phone: +387 33 275 900, e-mail address: [email protected]

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 191 Economic and Infrastructural Aspect of Local Development have considerable autonomy to pursue their own policies and assume significant responsibilities in education, local infrastructure, public safety, welfare, etc. In 1955, after the World War II, a new territorial organization has been established. Bosnia and Herzegovina has 364 communities. The smaller municipalities were integrated into larger municipal territorial units and established 106 (109) municipalities before 1992 (Osmanković 2003).

Number of municipalities varied from about four hundred eighteen municipalities in 1952, up to one hundred and nine municipalities in 1991, or one hundred fifty- four municipalities in 1998 (Osmanković 2002). The Constitution of the Federation, within the definition of municipal government, introduced a provision which specifies that the municipality achieves local governments and municipalities statutes (Pejanović and Sadiković 2010; Osmanković 2002).

Adopting of the constitution new municipalities in the Federation of Bosnia and Herzegovina, ten new municipalities in the Federation of Bosnia and Herzegovina were formed. Municipal authorities were introduced through Amendment XVI to the Constitution of the Federation. This Amendment allows for the two or more municipalities that have been linked territorially to everyday needs of citizens to establish a city as a unit of local government (Pavić 2001; Pejanović and Sadiković 2010; Savanović 2009; Zlokapa 2007; Zlokapa et al. 2008).

Methodology

Competitiveness can be defined and measured in many ways. The main task of LGU’s is to concentrate on elements of competitiveness that could become strategic plan targets. (Porter 1990; Thompson 2003; Thompson 2004; Smith 1988-2005; Nicolas and Firzli 2012). Consultants on this paper focused on two basic elements of competitiveness: labour productivity and cost competitiveness (Jusić 2011; Pavić 2001; Savanović 2009; Swainiewicz 2010; Zlokapa et al. 2008).

Labour productivity and cost competitiveness represent the first measure of the level of competitiveness at the regional level. It takes into account economic aspects, including the factors which describe the short and long-term potential of the economy. A statistical analysis has been used to support and, in some cases, to correct the ideal framework of those two indicators. Results provide a synthetic picture of the level of competitiveness of local government units at the entity level, representing at the same time a well balanced plurality of different fundamental aspects. Unit labour costs are one of the indicators of cost competitiveness.

192 Local Economic and Infrastructure Development of SEE in the Context of EU Accession M. Galić, E. Šehić: Competitiveness Units of Local Government

Figure 1: Productivity 2011

Author’s calculation Note: The boundaries and the names shown and the designations used on these maps do not imply official endorsement or acceptance by the United Nations

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 193 Economic and Infrastructural Aspect of Local Development

Figure 2: Cost competitiveness

Author’s calculation Note: The boundaries and the names shown and the designations used on these maps do not imply official endorsement or acceptance by the United Nations

They show the relationship between the labour costs on one hand and the value produced by person employed, i.e. productivity, on the other. At the same time, they are an indicator of the distribution of income between labour and capital and hence an indicator of profitability. Cost competitiveness is commonly analysed on the basis of real unit labour costs and real effective exchange rates deflated by relative unit labour costs.

194 Local Economic and Infrastructure Development of SEE in the Context of EU Accession M. Galić, E. Šehić: Competitiveness Units of Local Government

Gross domestic product (GDP) is a measure for the economic activity. GDP per person employed is intended to give an overall impression of the productivity of national economies expressed in relation to the European Union (EU27) average (EUROSTAT). If the index of a LGU is higher than 100, this LGU level of GDP per person employed is higher than the FBIH average and vice versa.

Discussion results

Using official data of the Federal Office of Statistics for 2010, 2011 and 2012, it is clear that the productivity in the majority of local governments increased in the observed period. It was noted also that in Posavina Canton all local governments exhibited a decrease in productivity over the analyzed period. The lowest recorded productivity compared to the average of the Federation of Bosnia and Herzegovina was recorded in Usora, while the highest productivity was in Ravno, then Vareš and Foča. In the coming years, units of local government changed their place with regards to lowest productivity as they were analyzed. Žepče took over as the most unproductive local government in 2011 and 2012. Vareš and Foča still retain the role of leader when it comes to productivity. More than 2/3 of local government, 53 of them in 2010 had a higher productivity than FBIH, while the number of them in 2011 or in 2012 fell to 51. (Jusić 2011; Savanović 2009)

Analysis of competitiveness in terms of labour costs indicates that the number of local governments that have had labour costs higher than the average of Federation grew from 42 in 2010, to 44 in the 2011, and that same number in 2012 climbed up to 47. Labour was most costly in Usora in 2010, Doboj-Jug had the highest labour costs in 2011 and Trnovo in 2012.

Figure 3: Trend Bihać labour costs and productivity

Author’s calculation

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 195 Economic and Infrastructural Aspect of Local Development

The upward trend in the average wage does not follow the increase in productivity as can be seen from example of Bihać. Similar situation is with the other LGU in the Federation of Bosnia and Herzegovina.

Conclusion

Since Usora has the lowest recorded productivity compared to the average of the Federation of Bosnia and Herzegovina, this causes reduction in investments, while in the highest productivity LGUs Ravno, Vareš and Foča, investments could increase. It can be concluded that Žepče can also expect reduced investment, after it took over as the most unproductive local government in 2011 and 2012. Vareš and Foča could be the most interesting for investors since they took the role of leader when it comes to productivity. General conclusion is that whole Federation could expect reduced investment, since trend in the average wage does not follow the increase in productivity.

References

Jusić, M. (2011) Procjena budžetske transparentnosti u općinama u Bosni i Hercegovini, Analitika – Centar za društvena istraživanja, Sarajevo. Nicolas, M. and Firzli, J. (2012) Euromoney’s Country Risk Survay. In: Mortimer, A. Coun- try Risk: Asia Trading Places with the West (http://www.euromoneycountryrisk.com/ Home/Return/Analysis/Country-Risk-Asia-trading-places-with-the-west, 5.11.2012) OECD Economic Surveys MEXICO, OECD, 2009 (http://www.oecd ilibrary.org/economics/ oecd-economic-surveys-mexico_19990723) Osmanković, J. (2002) Regionalizacija: teorija i praksa, BETA, Sarajevo. Osmanković, J. (2003) Teorija i politika regionalnog razvoja, Ekonomski fakultet, Sarajevo. Osmanković, J. (2007) Ekonomski razvoj: novi pristupi, Ekonomski fakultet, Sarajevo. Pavić, Ž. (2001) Od antičkog do globalnog grada, Pravni fakultet Sveučilišta u Zagrebu. Pejanović, M. and Sadiković E. (2010) Lokalna i regionalna samouprava u Bosni i Hercego- vini, Bemust, Sarajevo/Zagreb. Porter, M. E. (1990) The Competitive Advantage of Nations, Macmillan, London. Savanović, S. (2009) Finansiranje lokalnog razvoja, Razvojna agencija EDA, Banja Luka. Smith, E. (1988-05) DoD Unveils Competitive Tool: Project Socrates Offers Valuable Analy- sis, Washington Technology. |accessdate= requires |url= (help) Swianiewicz, P. (2010) Territorial Consolidation Reforms in Europe, Local Government and Public Service Reform Initiative, Open Society Institute – Budapest, OSI/LGI. Thompson, E. R. (2003) A grounded approach to identifying national competitive advantage, Environment and Planning, A(35): 631-657. Thompson, E. R. (2004) National competitiveness: A question of cost conditions or institutional circumstances? British Journal of Management, 15(3): 197-218. Zlokapa, Z. (2007) Kocka do kocke – dobro je graditi dobro, modeli organizacije lokalne samouprave, Razvojna agencija EDA, Banja Luka.

196 Local Economic and Infrastructure Development of SEE in the Context of EU Accession M. Galić, E. Šehić: Competitiveness Units of Local Government

Zlokapa, Z. et al. (2008) Dobro je dobro graditi popravke ili prepravka – analiza opcija razvoja lokalne samouprave u BiH, Razvojna agencija EDA, Banja Luka.

Link http://www.fzs.ba/ http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/ http://stats.oecd.org/

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 197

DOI 10.5644/PI2013-153-12

THE EFFECT OF CAPITAL CONSTRUCTION OF POWER FACILITIES ON THE ECONOMIC DEVELOPMENT OF LOCAL COMMUNITIES

Elvedin Grabovica*

Abstract

Construction of new power plants is necessary for the development of the electricity industry, which needs to meet three basic requirements of energy policy as defined in EU strategies: security of supply, sustainability and competitiveness.

These criteria allow for energy independence, respecting environmental aspects and economic growth at the national level, as well as at the level of the local communities where production facilities are located.

This paper analyzes the contribution of production facilities in the electricity sector in the economic development of society as a whole, with special emphasis on the impact on the local community. The effects are analyzed for the period of construction and during operation of various types of power plants. For this purpose, a model was developed for the evaluation and calculation of direct effects and indirect benefits assessment. Some examples of the analysis for the existing power plants and for several new projects are shown.

The analyzes show a significant contribution of the power plants to economic status of local communities in the actual circumstances, but the potential for an even greater share of domestic components in the construction and operation of production facilities as well. This requires establishing long-term national strategies and concrete measures in order to create an incentive environment for development and strengthening of domestic firms.

Keywords: Power sector, Development, Local community.

Introduction

The Public Enterprise Elektroprivreda BiH d.d. – Sarajevo (Electric Utility BIH joint stock company) (EP BiH) is both a public enterprise and a joint stock company, which significantly determines its goals. As a joint stock company it is obliged to operate in accordance with the Company Law, which stipulates that the companies

* PhD, Director of JP Elektroprivreda BiH, Vilsonovo šetalište 15, 71000 Sarajevo, Bosnia and Herzego- vina, phone: +387 33 751 001, fax: +387 33 751 003, e-mail address: [email protected]

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 199 Economic and Infrastructural Aspect of Local Development are established for gaining profit. This definition is incorporated in the Articles of Association of the Company. Gaining profit is a goal that most owners will define as their primary objective (Anon. 2013g; Anon. 2013e; Anon. 2013f).

As a public company that manages the infrastructure and has a monopoly in one part of its activities, EP BiH has a social responsibility and is obliged to fulfill its obligations of electricity supply in accordance with the stipulated terms and conditions of business and in accordance with the Law on Public Enterprises. This responsibility is of special importance because providing of electricity is the key prerequisite for normal life and development of society (Anon. 2008; Anon. 2009a; Anon. 2010b; Anon. 2011c; Anon. 2012c; Anon. 2013i; Anon. 2013d; Anon. 2013j; Anon. 2006a; Anon. 2004; Anon. 1979; Anon. 1985; Anon. 1996; Anon. 2001b).

Social responsibility is gaining weight in the case of BIH, given the recession and the difficult economic and social situation, and the fact that energy resources are one of the significant potentials for growth. Great investment and development potential imposes a liability on EP BiH to provide benefit for society as a whole by launching major investment projects that are generators for the growth of the local economy and creation of jobs.

Therefore EP BiH in its business policies and plans emphasizes the contribution to the economic health and sustainable development and progress of the social community as a whole. Business policy of EP BiH implies commitment and accountability for responsible investment in order to achieve: Security of supply Sustainability Competitiveness (Anon. 2013i; Anon. 2013l; Anon. 2013m; Anon. 2006b; Anon. 2009c; Anon. 2003a)

The realization of these objectives provides energy independence, long-term sustainable and environmentally acceptable development and economic growth.

Such a business policy requires not only financial, but also social capital that is reflected in trust and shared values between the company and all stakeholders. Therefore, in addition to the general guideline that the regular supply of electricity is a prerequisite for normal life and development, it is useful to deepen the understanding of the contribution of power sector to the development of society and local communities. Power facilities are capital intensive and have a long lifespan, so that their contribution is reflected in the domestic component in the realization of investments during the period of preparation and construction, and to an even greater extent in the domestic costs during the period of operation (Anon. 2010a; Anon. 2011b; Anon. 2012a; Anon. 2013h; Anon. 2013l; Anon. 2013m).

200 Local Economic and Infrastructure Development of SEE in the Context of EU Accession E. Grabovica: The Effect of Capital Construction of Power Facilities on the Economic...

This paper analyses the costs of construction and operation of various power plants in an attempt to quantify the domestic component as a direct contribution to economic growth of the general and the immediate community.

Plans of EP BiH

Through a three-year business plan, EP BiH has anticipated launching of a larger number of capital projects to generate electricity. By gradual directing of investments from reconstruction and rehabilitation of the existing production facilities to the new production facilities, it wants to attain timely inclusion of new production facilities in the production portfolio of EP BiH (Anon. 2013l; Anon. 2013m).

The basis for this kind of commitment is the oldness and low efficiency of the existing units in thermal power plants, as well as a strategic commitment to build power plants based on renewable resources. In addition, these investments, in addition to the construction of replacement facilities, tend to increase the installed capacities, to achieve quality standards of delivery in accordance with the General Conditions, safe and stable supply of electricity to consumers, to raise the level of utilization of available resources and energy efficiency and to meet environmental requirements (Anon. 2013l; Anon. 2013m).

The aim of these investments is: growth of electricity production for the continuity of supply of tariff and non-tariff customers, ensuring the continuity in the delivery of thermal energy, increasing capacity and volume of production based on renewable resources, increasing the total installed capacity and production growth, • achieving greater efficiency and a greater share of combined thermal and electrical power generation, providing placement for coal from its own mines, meeting the obligations under the Energy Community Treaty, and EU directives relating to the energy sector (Anon. 2013l; Anon. 2013m).

In the current three-year planning period it is expected to start construction of a larger number of new and replacement power plants. These are power plants based on renewable sources (hydro, wind, and photovoltaic power plants) and replacement units in the existing power plants which would use domestic coal. Furthermore, options are considered for the use of biomass, which is also a domestic resource (Anon. 2013l; Anon. 2013m).

From the economic point of view, taking into account the needs of the mining sector, the most important and priority objective is the realization of the construction of Unit

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 201 Economic and Infrastructural Aspect of Local Development

7 in TPP Tuzla, and thereafter Unit 8 in TPP Kakanj. These are replacement projects for the existing units that certainly must be stopped due to the expiry of life and restrictions regarding environmental standards imposed by EU regulation for operation of thermal power plants after 2017. In addition, without these capacities, the mines would remain without the required placement of coal for thermal power plants, which would reduce the coal production to a level that would prevent the survival of a number of mines and the loss of a significant number of jobs (Anon. 2013l; Anon. 2013m).

Scenario without construction of new facilities or with construction of only renewable energy sources (Figure 1) shows that it is not possible to meet the consumption needs without building new facilities with respect to the expected dynamics of stop- ping the existing thermal power units due to oldness and failure to comply with the environmental constraints.

Figure 1: Long-term electrical power balance of EP BiH

Source: Author’s calculation

In such a scenario, the needs for coal would fall drastically which would practically mean the closure of most of the mining facilities. This shows that there is no alternative to building new facilities, and also that each day of delay in the implementation of new projects can have disastrous consequences on the economy of local communities.

Local component in the costs of the existing power plants in 2012 An analysis of costs and expenses of the production subsidiaries of EP BiH was performed to assess the share of the domestic component in the power plant operation, and to calculate the unit parameters which will serve as a basis and a comparison when creating models for calculation for the new facilities.

202 Local Economic and Infrastructure Development of SEE in the Context of EU Accession E. Grabovica: The Effect of Capital Construction of Power Facilities on the Economic...

For the purposes of this analysis, the notion of domestic component was introduced, that represents all costs/funds that remain in BIH, and the notion of local component that relates to the funds that remain in the municipality where the property is located. Calculation of the share of the domestic component in the total costs, or the proportion of the local component in the domestic component, was made taking into account the legislation when it comes to fees, an approach that costs of labour and materials for the production (predominantly coal) represent the local component, and based on an empirical estimate for other costs where all items were analysed on the basis of the annual report on costs and expenses by seven digit accounts. At the end, the individual items were grouped in the manner and structure that will be used for new facilities, and unit costs calculated or formulae created for future use (Anon. 2013h; Anon. 2012b; Anon. 2013i). A view of this approach for HPPs on Neretva is shown in Table 1, and for TPP Tuzla in Table 2.

Table 1: Costs and expenses of HPPs on Neretva for 2012

Source: Report on operations of JP Elektroprivreda BiH for 2012; Author’s calculation

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 203 Economic and Infrastructural Aspect of Local Development

Table 2: Costs and expenses of TPP Tuzla for 2012

Source: Report on operations of JP Elektroprivreda BiH for 2012; Author’s calculation

The mentioned analysis shows a significant share of the domestic and local components in the actual costs of the production subsidiaries. In HPPs on Neretva, 94% of actual costs in 2012, or 29.5 million KM are funds that have remained in BIH, and 86% of the funds or 27 million KM is the local part of these costs. In the case of TPP Tuzla, the share of the domestic component is 95% or 250 million KM, and of the local 84% or 221 million KM. A similar situation is in the case of TPP Kakanj (Anon. 2013h; Anon. 2012b; Anon. 2013i).

Since 2012 was an atypical year due to unfavourable hydrological conditions and the reconstructions of thermal power plants, the calculation has also been made for the standard balance annual production for all subsidiaries of EP BiH. On the basis of this calculation we come to the view of the individual and overall contribution of the

204 Local Economic and Infrastructure Development of SEE in the Context of EU Accession E. Grabovica: The Effect of Capital Construction of Power Facilities on the Economic... production subsidiaries of EP BiH to the national and local economy, in terms of the normal balance of production. (Anon. 2013h; Anon. 2012b; Anon. 2013i)

Table 3: Costs and expenses for balance production

Source: Author’s calculation

Table 3 contains an overall recap which shows the total contribution to the local community of 465 million KM, as well as the fact that most of the funds are retained at the local level. Such a high level of funds is in the case of hydro power plants due to water charges for the use of reservoirs (14 million KM) and employee revenues. For thermal power plants the main contribution is reflected in the payment for material for production (predominantly coal) to local companies (in total 374 million KM) (Anon. 2013h; Anon. 2012b; Anon. 2013i).

Local component in construction and operation of new power plants

Capital construction of power facilities, in addition to the contribution in the course of their operation, as shown in the example of the existing power plants, has an impact on the economic development of BIH and local communities during the development and preparation of projects and during construction. This paper quantifies only the direct influence expressed through the local share in realization of investment and in operation. However, the overall contribution is much higher because these projects allow the use of domestic resources and enabling of the local economy for sustained engagement in similar projects (Anon. 2013h; Anon. 2012b; Anon. 2013i; Anon. 2013l; Anon. 2013m).

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 205 Economic and Infrastructural Aspect of Local Development

For an assessment of the share of the domestic and local components in power projects, an analysis of investment documentation was performed for some of the current projects (HPP Vranduk, HPP Janjići, TPP Tuzla). The structure of costs and of possible share of the domestic and local components for specific projects during implementation and operation was established, with the ultimate goal to create a model that allows a quick simplified assessment for any project (Anon. 2013h; Anon. 2012b; Anon. 2013i; Anon. 2013l; Anon. 2013m).

For these purposes, in addition to investment documents, we used the data on the costs of the existing power plants, the existing and anticipated legal framework in terms of fees and duties, and the parameters for certain items made in the preparation of current projects (concession fees, duties, contracts with local communities).

In this regard, we can set out the following initial assumptions to determine the formulae, calculation elements and choices when creating models, and relevant regulations, such as: Salaries of employees and other labour costs: are calculated on the basis of unit price taking into account the realization of the existing power plants and the planned number of employees. The existing costs are based on current regulations and industry-wide collective agreement. Material for production and transportation of coal: are calculated on the basis of unit price per MW and the planned annual production. Unit prices are determined in part on the basis of the documentation for the new units, and partially taking into account the existing structure of individual material prices. The resulting unit price is lower in relation to the existing units primarily due to the impact of the increased efficiency. • Fee for reservoir: Fee is defined by the Law on allocation and targeting of a part of income of the company achieved using hydro-accumulation facilities (Anon. 2002a; Anon. 2009b). It is payable in the amount of 10 KM per produced MWh. This fee is paid to the municipality in the area of which the reservoir is located and represents a direct contribution to the local community and depends on the volume of production. Special water fee for water use: The fee prescribed by the FBIH Law on Waters and Decision on the amount of special water fees in FBIH (Anon. 2007). It is payable in the amount of 0.03 KM per m3 of water used by thermal power plants, or in the amount of 1 KM per produced MWh for hydro power plants. These fees, in accordance with the Law, shall be paid in the cantonal budget and depend on the volume of production for hydroelectric power plants, and the use of water for thermal power plants. In 2012, for TPP Kakanj this fee amounted to 333,000 KM. In TPP Tuzla, this fee is not paid directly but is included in the price of industrial water paid by the power plant to the competent company for management of the accumulation lake Modrac (total of 975,000 KM).

206 Local Economic and Infrastructure Development of SEE in the Context of EU Accession E. Grabovica: The Effect of Capital Construction of Power Facilities on the Economic...

Current concession fee: The concession fee based on the FBIH Law on Concessions is defined by an agreement between the concessionaire and the concessionee and amounts to the minimum of 1.5% of annual revenue. Fees are paid to FBIH, canton or municipality, depending on the jurisdiction over the granting of the concession. For the purpose of this analysis, we used the commitment from the new draft FBIH law on concessions under which, regardless of the responsibility for the concession granting, the distribution of funds from concession fees is done in the ratio of 60% for municipality, 10% for Canton and 30% for FBIH. This question is very important because the distribution of these funds should be incentive for the local community and should not depend on the responsibility for the concession granting. In case of HPP Vranduk, the agreed amount of the current concession fee is 2.43% of annual revenue, and this percentage amount is used in the standard model. One-time concession fee: In addition to the current concession fee, the law provides for one-time payment of the concession fee, which is calculated based on the total value of the investment in the minimum amount of 1.5%. In case of HPP Vranduk, the contracted amount is 2,268,964 KM or 1.8% of the investment, which is also the selected percentage amount for standard model. Duties: This item includes costs on several different bases, and given the lack of uniformity of criteria for determining these duties, it was hard to make a consistent calculation and estimation of these costs for a standard power plant, so that the model used is the lump sum, taking into account the unit indicators per MW in relation to investment. The following are the most important: o Fee for air pollutants is determined by the Regulation on the types of fees and criteria for calculating of fees for air pollutants (Anon. 2011a) on the basis of the Law on the Fund for Environmental Protection (Anon. 2003a) It is stipulated that air pollutants, including thermal power plants, shall pay the fee for SO2 emissions – 38 KM per ton, NO2 – 36 KM per ton, and for solid particles 170 KM per ton. Article 25 of the Law on the Fund for Environmental Protection stipulates that the amounts collected on this basis are divided in the ratio of 30% for the Federation of BIH, and 70% for the canton, and the relevant canton is required to allocate an adequate portion from its funds to the local community for carrying out the tasks as stipulated by law. In 2012, these costs for TPP Kakanj totalled 4.62 million KM, and for TPP Tuzla 2.30 million KM. For new thermal power plants these items will not be so significant considering that the emissions will be reduced below the level prescribed by EU directives, so they are not shown separately in the model and are included in duties. o Fee for water protection is defined by the FBIH Law on Waters and the Decision on the amount of special water fee in FBIH and shall be paid into the budget of the canton. It is calculated on the basis of 2 KM per ES. In TPP Tuzla that amount for 2012 was 1.59 million KM, and for TPP Kakanj 21 thousand KM. o In case of TPP Kakanj, there is also a utility fee which in 2012 amounted to 914 thousand KM.

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 207 Economic and Infrastructural Aspect of Local Development

o Among other fees, we can point out the fee for the use of building land which is under the responsibility of local communities and paid on the basis of the Law on Construction Land. In 2012, on this basis, all three production subsidiaries paid a total of 1.56 million KM (Anon. 2013h; Anon. 2012b; Anon. 2013i; Anon. 2013l; Anon. 2013m).

A recap of the most important duties for 2012 is given in the Table 4.

Table 4: Water management fees and other duties in 2012

Source: Report on operations of JP Elektroprivreda BiH for 2012

On the basis of the above mentioned approach, standard models have been designed to display the structure of investment and operating costs, total and for domestic and local component, for hydro and thermal power plants.

The model makes it possible to gain a snap shot of the projects’ contribution to the national and the local community by entering only 6-7 variable elements. So it is enough to enter the power, the annual production, the unit cost of construction per kW, the selling price of electricity, the number of employees and the expected amount for local infrastructure.

The tables below show a model for hydro and thermal power plants.

208 Local Economic and Infrastructure Development of SEE in the Context of EU Accession E. Grabovica: The Effect of Capital Construction of Power Facilities on the Economic...

Table 5: Model for calculation of local component for HPP HPP Installed power 50 MW Annual production 220 GWh CAPEX €/kW 2.800 5.476 KM/kW Investment € 140.000.000 273.816.200 KM KM/ Price 150 MWh Revenue 33.000.000 KM No. of employees 50

€ KM KM/kW share/tot. domestic comp. share/tot. local comp. Construction works 45% 63.000.000 123.217.290 2.464 0,88 180.431.215

Equipment 45% 63.000.000 123.217.290 2.464 0,10 12.321.729

Environment 3% 4.200.000 8.214.486 164 1,00 8.214.486 1,0 8.241.486

Engineering 7% 9.800.000 19.167.134 383 0,50 9.583.567 0,0 TOTAL 140.000.000 273.816.200 5.476 0,51 138.550.997 0,030 8.214.486 One-time concession fee (1,8%) 2.520.000 4.928.692 1,00 4.928.692 0,6 2.957.215 Improvement program for loc. communities 766.938 1.500.000 1,00 1.500.000 1,0 1.500.000 GRAND TOTAL 143.286.938 280.244.892 5.605 52% 144.979.689 4,5% 15.671.701

COSTS AND EXPENSES Total p.e. KM KM/MWh KM/INV structure Employees’ salaries KM/empl. 32,50 1.625.500 7,39 0,6% 21% Other costs of labour KM/empl. 5,00 250.000 1,14 0,1% 3% Fee for reservoir KM/MWh 10,00 2.200.000 10,00 0,8% 28% Special water fee for use of water KM/MWh 1,00 220.000 1,00 0,1% 3% Current concession fee %/revenue 2,43 801.900 3,65 0,3% 10% Duties KM/kW 13,00 650.000 2,95 0,2% 8% Services KM/kW 15,00 750.000 3,41 0,3% 10% Other KM/kW 25,00 1.250.000 5,68 0,5% 16% TOTAL 7.746.900 35,21 2,8% 100%

COSTS AND EXPENSES Domestic component Local component share/tot. KM share/dom. KM structure Employees’ salaries 1,00 1.625.500 1,00 1.625.500 30% Other costs of labour 1,00 250.000 0,95 237.500 4% Fee for reservoir 1,00 2.200.000 1,00 2.200.000 40% Special water fee for use of water 1,00 220.000 0,00 0 0% Current concession fee 1,00 801.900 0,60 481.140 9% Duties 1,00 650.000 0,80 520.000 9% Services 0,80 600.000 0,40 240.000 4% Other 0,40 500.000 0,40 200.000 4% TOTAL 6.846.900 5.503.640 100% 88% 71% Source: Author’s calculation

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 209 Economic and Infrastructural Aspect of Local Development

As can be seen in the period of building a hydroelectric power plant, there is a significant potential share of domestic component (52%) primarily due to a possible engagement in the construction part of the project, installation and various costs during the preparation. On the other hand, the local component has a small percentage (4.5%) and is affected by costs of purchase, fees and duties, and especially by one-time concession fee and funding for the improvement of the local infrastructure.

So for one power plant of power 50 MW and production 220 GWh, a local community could achieve the effect of 12.7 million KM during construction, and during the operation 5.5 million KM annually.

Table 6: Model for calculation of the local component for TPP

TPP Installed power 300 MW Average power 261 0,87 capacity factor Annual production 1.715 GWh Hours of work 6570 0,75 load factor CAPEX €/kW 1.700 3.325 KM/kW Investment € 510.000.000 997.473.300 KM Price 120 KM/MWh Revenue 205.772.400 KM No. of employees Empl/MW 0,65 195

€ KM KM/kW share/tot. domestic comp. share/tot. local comp. Construction works 15% 76.500.000 149.620.995 499 0,80 119.696.796 Equipment 75% 382.500.000 748.104.975 2.494 0,12 89.772.597 Preparations and fees 0,7% 3.570.000 6.982.313 23 1,00 6.982.313 1,0 6.982.313 Other 9,3% 47.430.000 92.765.017 309 0,31 28.757.155 0,0 TOTAL 510.000.000 997.473.300 3.325 0,25 245.208.861 0,01 6.982.313 Improvement 1.533.876 3.000.000 1,00 3.000.000 1,0 3.000.000 program for loc. communities GRAND TOTAL 511.533.876 1.000.473.300 3.335 25% 248.208.861 1,0% 9.982.313

COSTS AND EXPENSES Total p.e. KM KM/MWh KM/INV structure Employees’ salaries KM/empl. 33,50 6.532.500 3,81 0,7% 5% Other costs of labour KM/empl. 6,00 1.170.000 0,68 0,1% 1% Material for production KM/MWh 55,00 94.312.350 55,00 9,5% 78% Transportation KM/MWh 5,00 8.573.850 5,00 0,9% 7% Current concession fee %/revenue - 0,00 0,0% 0% Duties KM/kW 5,00 1.500.000 0,87 0,2% 1% Services KM/kW 8,00 2.400.000 1,40 0,2% 2% Other KM/kW 20,00 6.000.000 3,50 0,6% 5% TOTAL 120.488.700 70,27 12,1% 100%

210 Local Economic and Infrastructure Development of SEE in the Context of EU Accession E. Grabovica: The Effect of Capital Construction of Power Facilities on the Economic...

COSTS AND EXPENSES Domestic component Local component share/tot. KM share/dom. KM structure Employees’ salaries 1,00 6.532.500 1,00 6.532.500 6% Other costs of labour 1,00 1.170.000 0,95 1.111.500 1% Material for production 1,00 94.312.350 0,97 91.482.980 91% Transportation 1,00 8.573.850 0,10 857.385 1% Current concession fee 1,00 0 0 0% Duties 1,00 1.500.000 0,14 210.000 0% Services 0,60 1.440.000 0,45 648.000 1% Other 0,25 115.028.700 0,16 240.000 0% TOTAL 115.028.700 101.082.365 100% 95% 84% Source: Author’s calculation

As can be seen in the period of building a thermal power plant, the possible share of the domestic component is lower than in the case of hydro power plants (25%) due to the different structure in which there is a smaller share of the building part where the largest domestic participation is possible. For the same reason, the local component has a lower percentage (1.0%). From the standpoint of operating costs, the percentage share of the local component is approximately equal to the share of the current power plants, and is significantly higher compared to hydro power plants because of the over 90% participation of local coal in costs.

Table 7: Dynamic view of the local component under the possible scenario of construction by 2030

Source: Author’s calculation

So for a thermal power plant of 300 MW and production of 1715 GWh, during construction the local community could achieve the effect of 10 million, and during the exploitation 101 million KM annually.

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 211 Economic and Infrastructural Aspect of Local Development

Long-term consideration

By applying the previous concept to the schedule for potential construction of new thermal and hydro facilities, we can get the picture of the overall effects that new buildings can have on local communities over time. Table 7 describes one potential scenario of building 9 hydro power plants and 4 thermal power units in the period up to 2030. This plan means building a 1,656 MW with production of 14,576 GWh, which would be an investment operation of 5.86 billion KM over 17 years.

Calculation of the local component shows that during this period the effects on the basis of construction would be 92 million KM, and on the basis of operation the annual level of funding would constantly increase and eventually reach the amount of over 500 million KM annually.

Conclusion

Power facilities are capital intensive and have a long lifespan. Their contribution to the development of the national and local economy is reflected in the realisation of investments of major value during the period of preparation and construction, or through local costs over a very long period of operation. Period of construction is primarily important for the local economy and beside the direct effect in the case of engagement in construction, there are indirect effects in terms of training and acquiring references for new jobs. From the perspective of the local community period of operation is much more significant, as it provides direct revenues from fees, duties and taxes, theem- ployment and growth of standards and the development of local companies for production of raw materials and services. • In addition to the direct financial effects of the construction and operation which can be easily quantified through various fees, taxes, employee benefits and use of domestic raw materials, there is a range of other potential benefits and development opportunities for the local economy and local community. In the case of Bosnia and Herzegovina this in particular comes to the fore because of the possibility for continuous construction of a large number of projects over a longer period of time. This practically means an opportunity for sustained engagement; referencing and further development of the existing domestic companies, as well as the formation of new enterprises in line with the long-term needs of the sector and thereby creation of new jobs. Opportunities are reflected through other ancillary effects of new projects such as the improvement of local infrastructure, versatile use of reservoirs, regulation and protection of watercourses, efficient district heating, use of industrial steam, use of local resources, the development of trade, tourism and

212 Local Economic and Infrastructure Development of SEE in the Context of EU Accession E. Grabovica: The Effect of Capital Construction of Power Facilities on the Economic...

transport, and thus the growth of purchasing power and standard of individual and society as a whole. • There is a potential for a positive development scenario with significant economic growth based on the construction and operation of power facilities. There are sufficient natural resources and raw materials, significant economic and human capacities. Previous experiences in the reconstruction of power facilities show that in cases where the foreign companies were the contractor, local firms were generally hired for certain parts of the projects. This applies in particular to the construction and installation works, the delivery of certain pieces of equipment and facilities (especially electrical and metal industry), monitoring, testing ... Also, with the existing power plants a number of local companies have developed, which perform maintenance and other services related to the operation of power plants, as well as the delivery of raw materials. It can be concluded that the power projects have the potential to contribute to the economic growth of society and local community that goes beyond the interest of the power sector. Therefore, these projects should be one of the most important parts of the development plans for FBIH and the authorities should not only support them with the adoption of formal acts and decisions, but also create a stimulating legal and regulatory framework that will stimulate the implementation of projects and facilitate obtaining the necessary permits. Such an approach would establish stability and predictability which are the key prerequisites for intensifying the investments. On the other hand the local aspect is becoming increasingly important. It is therefore important to create a motivating environment for the local communities that should know in advance the direct benefits of the project and recognize their interest. This means that the largest portion of the different types of fees should belong to the local communities, regardless of the size of the project and responsibility for approval. On the other hand, it is necessary to harmonize the approach when it comes to the direct responsibility of the cantons and municipalities in terms of defining and determining the amount of different duties and fees.

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Anon. (2013k) Energetska efikasnost i emisija CO2 u JP EPBiH, JP Elektroprivreda BIH, Sarajevo. (http://www.elektroprivreda.ba/stranica/energetska-efikasnost-i-emisija-co2- u-jp-epbih) Anon. (2013l) Odluka o odobrenju Indikativnog plana razvoja proizvodnje za period 2014– 2023. godine, JP Elektroprivreda BIH, Sarajevo. (http://www.derk.ba/DocumentsPDFs/ Odluka-o-odob-Indikativnog-plana-raz-proizv-2014-2023-b.pdf) Anon. (2013m) Indikativni plan razvoja proizvodnje 2014–2023, JP Elektroprivreda BIH, Sarajevo.

Laws

FBIH Law on Companies. (http://www.elektroprivreda.ba/eng/page/regulations-laws-policies) FBIH Law on Public Companies. (http://www.elektroprivreda.ba/eng/page/regulations-laws- policies) FBIH Law on Electricity. (http://www.elektroprivreda.ba/eng/page/regulations-laws-policies) Law on Transmission, Regulator and System Operator in BIH. (http://www.elektroprivreda. ba/eng/page/regulations-laws-policies) Law on Establishment of the Company for Transmission of Electricity in BIH. (http://www. elektroprivreda.ba/eng/page/regulations-laws-policies) Law on the Establishment of the Independent System Operator for the Transmission System in BIH. (http://www.elektroprivreda.ba/eng/page/regulations-laws-policies)

216 Local Economic and Infrastructure Development of SEE in the Context of EU Accession DOI 10.5644/PI2013-153-13

ECONOMIC SITUATION IN THE CITY OF KRAGUJEVAC

Petar Veselinović* Jasmina Dimitrijević**

Abstract

Kragujevac economy is mainly based on metal-processing complex, and within it, the production of transport equipment and weapons. Loss of markets and cooperative relationship following the dissolution of the former SFRY in 1991 and the UN embargo in 1992, and the bombing of significant facilities in the business system “Zastava” in 1999, caused a negative impact on the socio-economic development of the city.

In addition to the technological lag behind developed countries, the city was faced with the problem of unemployment, so that in June 2004 it was named one of 13 devastated areas in Serbia.

After that, the city is making significant progress in economic development through the creation of a favourable business environment (adopted Local Economic Development Strategy 2007– 2012, based on modern standards and defined set of stimulus measures for investors in productive activities; infrastructure supplied to industrial zone, support for self-employment and other), which resulted in bringing significant companies (“Fiat”, “Sigit”, “HTL”, “Promo Magnieti”, “Johnson Controls”, “TPV”, “Metro”, “Mercator”, “Idea”, “DIS”, “Plaza”, “Supernova”, “TUŠ” and others) and promoting economic activity in the city. The creation of the joint venture “Fiat Automobiles Serbia” created the opportunity, together with local cooperation, to gradually start the engine of development, not only of the city but of the whole of Serbia.

These results influenced the fact that in 2007, before the arrival of “Fiat”, Kragujevac gained recognition of Club of Business Journalists: “City of the Future” Silver Cup. In 2008 the city was awarded the Golden Cup “City of the Future” and certification as a city with a favourable business environment, which was awarded by the National Alliance for Local Economic Development (NALED) and the Ministry of Economy and Regional Development.

Important economic development objectives of the city of Kragujevac include the following: infrastructure improvements; economic development and entrepreneurship; environment; rural development; improvement of health and social care; promotion of education and culture; development of sport and tourism.

Keywords: Kragujevac, Local development, Economic structure

* PhD, associate Professor at Faculty of Economics, University of Kragujevac, Đure Pucara Starog 3, 34000 Kragujevac, Republic of Serbia, phone: +385 34 303 503, fax: +385 34 303 516, e-mail address: [email protected] ** PhD student at Faculty of Economics, University of Kragujevac, Đure Pucara Starog 3, 34000 Kragu- jevac, Republic of Serbia, e-mail address: [email protected]

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 217 Economic and Infrastructural Aspect of Local Development

Introduction

Kragujevac is the administrative centre of the newly formed macro-region “Šumadija and Western Serbia”. By population this region is the largest in the Republic of Serbia, but in terms of income it comes in the third place.

Kragujevac economy is mainly based on metal-processing complex, and within it, the production of transport equipment and weapons. Loss of markets and cooperative relationship following the dissolution of the former SFRY in 1991 and the UN embargo in 1992 years, and the bombing of significant facilities in the business system “Zastava” in 1999, caused a negative impact on the socio-economic development of the city.

In addition to the technological lag behind developed countries, the city was faced with the problem of unemployment, so that in June 2004 it was named one of 13 devastated areas in Serbia.

After that, the city is making significant progress in economic development through the creation of a favourable business environment (adopted Local Economic Development Strategy 2007–2012, based on modern standards and defined set of stimulus measures for investors in productive activities; infrastructure supplied to industrial, support for self-employment and other factors), which resulted in bringing significant companies (“Fiat”, “Sigit”, “HTL”, “Promo Magnieti”, “Johnson Controls”, “TPV”, “Metro”, “Mercator”, “Idea”, “DIS”, “Plaza”, “Supernova”, “Tuš”, etc.) and promoting economic activity in the city. The creation of the joint venture “Fiat Automobiles Serbia” created the opportunity, together with local cooperation, to gradually start the engine of development, not only of the city but of the whole of Serbia (Anon. 2007; Anon. 2013a; Anon. 2013e; Anon. 2013f).

These results influenced the fact that in 2007, before the arrival of “Fiat”, the city of Kragujevac gained recognition from Club of Business Journalists: “City of the Future” Silver Cup. In 2008 the city was awarded the Golden Cup “City of the Future” and certification as a city with a favourable business environment, which was awarded by the National Alliance for Local Economic Development (NALED) and the Ministry of Economy and Regional Development. Important economic development objectives of the city of Kragujevac include the following: infrastructure improvements; economic development and entrepreneurship; environment; rural development; improvement of health and social care; promotion of education and culture; development of sport and tourism (Anon. 2013f; Anon. 2007).

218 Local Economic and Infrastructure Development of SEE in the Context of EU Accession P. Veselinović, J. Dimitrijević: Economic Situation in the City of Kragujevac

Geographic and geostrategic position of the city of Kragujevac

The city of Kragujevac is the administrative, economic, cultural, educational and health centre in central Serbia. It is located in the central part of Serbia, in Šumadija District, which in addition to the city of Kragujevac is composed of six other municipalities: Arandjelovac, Batočina, Lapovo, Knić, Rača and Topola (Anon. 2013a; Anon. 2013c).

According to 2011 data, the territory of the city of Kragujevac has a population of 179,417 inhabitants, whereby 150,835 inhabitants live in urban area, making it the fourth largest city in Serbia, and the first city according to the percentage of the urban population (Anon. 2013b).

The city is located at 44° 22’ north latitude and 20° 56’ east longitude at an altitude of 185 to 220 m. It stretches over 835 km² and is located 140 kilometres southeast of the capital of the Republic of Serbia – Belgrade. It is built on the banks of the river Lepenica in Kragujevac basin, where it touches the slopes of Šumadija mountains: Rudnik, Crni Vrh and Gledić mountains (Anon. 2013a; Anon. 2013c).

Figure 1: Displaying geographic position of the Republic of Serbia

Source: Spatial Plan of the highway infrastructure of corridor E-75

The city has an irregular diamond shape, with the longer axis in a north-south direction along the 38km line Resnik – Dulene, and short east-west axis with 27 km line Donje Komarice – Donje Grbice. From the east the city of Kragujevac borders

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 219 Economic and Infrastructural Aspect of Local Development municipality Jagodina. The boundary goes through high mountainous land and areas of high Crni vrh (Anon. 2013h).

On the east, on the municipality Rekovac border, there are high elevations of Gledić mountains. In the southwest of the city, stretching over the high elevations of Gledić mountains not far from Dulene, there is the border to the municipality of Kraljevo. In the west is the border with the municipality Knić and northwest is municipality of Gornji Milanovac. On this side the border extends over Gledić mountains and the highest branches of the mountain Rudnik. (Anon. 2013a; Anon. 2013h)

Figure 2: Displaying geographic position of the region

Source: Spatial Plan of the infrastructure corridor highway E-75

Kragujevac is an industrial city, and a city with significant agricultural land. It has total land surface of 83.475ha, of which 63.9% belong to rural area and 36.1% of the territory belonging to urban area. Kragujevac has 57 settlements with an average size of 14.65 km² and 62 cadastral municipalities, with an average size of 13.48 km². Kragujevac has significant infrastructure advantages (Anon. 2013a; Anon 2013h; Anon. 2013c).

Distance from City of Kragujevac: (Anon. 2013a) Hungary 321 km, Bulgaria 150 km, Montenegro 250 km, Croatia 250 km, Bosnia and Herzegovina 150 km and Macedonia 316 km.

220 Local Economic and Infrastructure Development of SEE in the Context of EU Accession P. Veselinović, J. Dimitrijević: Economic Situation in the City of Kragujevac

Kragujevac is linked to 4 main railroad directions: (Anon. 2013a) Kragujevac – Belgrade – Subotica – Budapest, • Kragujevac – Niš – Sofia, Kragujevac, Podgorica – Bar (sea port) and Kragujevac Skopje – Thessaloniki (sea port).

Distance of the most important airports in the surrounding country: (Anon. 2013a) • Nikola Tesla Airport in Belgrade, 140 km • Constantine the Great Airport in Niš 160 km • Future regional airport Lađevci Kraljevo 60 km.

The city is networked into the global knowledge economy through university as a suitable place of employment, life and work of young scientists and is a generator highly skilled and competitive workforce whose competencies match the needs of the economy. The city is a national centre for cultural and historical tourism with highly developed hospitality industry. Intensive agricultural production is the basis for the processing facilities (Anon. 2007; Anon. 2013e; Anon. 2013g; Jovanović 1995).

Kragujevac is a city with modern planning and urban arrangement, and respects the principles of conservation of cultural heritage. The city has a well developed road and railway network, developed utilities and available business infrastructure. Kragujevac is a “green city”, in which residents have a high level of awareness of environmental protection, and infrastructure and utility systems are functioning in accordance with the principles of environmental protection and rational use of energy (Anon. 2007; Anon. 2013b).

Kragujevac is a safe environment to live and work characterized by high degree of tolerance and good human relations (Anon. 2013a).

The formal and non-formal education system in Kragujevac is designed according to modern standards and is in the service of community development, including the need for lifelong learning.

City of Kragujevac, as an integral part of the Euro-region, has developed a network of regional institutions in which public, private and civil society act proactively on the basis of mutually developed partnerships. Local government is modern and updated and effectively cooperates with ministries, donors and investors (Veljković 1998; Veselinović 2009; Jovanović 1995; Jovičić 1994; Obradović 2007; Stojkov 1997).

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 221 Economic and Infrastructural Aspect of Local Development

Economic indicators of Kragujevac

The economic reality of a city can be measured in many ways and through a number of economic indicators. Most frequently used and most reliable economic indicator is gross domestic product per capita (GDP per capita).

Economic aggregate is calculated as the product of multiplication of the total number of employees in one region with the average gross wage per employee. It represents the economic activity of the city. Benefits of economic aggregate as an indicator are very clear, as it is easy to calculate and provides comparability. The main drawback is that it is based on average values (gross wages), and is less accurate than the gross domestic product per capita which is the total production of goods and services per capita achieved at the level of the city, regardless of ownership.

Economic aggregate of Kragujevac in its absolute value has a constant growth since 2005 to 2008, whereas in 2009 it was lower than the previous year. In 2010 and 2011 economic aggregate grew but did not reach the value of 2008. The largest growth of the economic aggregate over the previous years was present in 2007 at both the city level and at the level of the Republic of Serbia (Anon. 2013e; Anon. 2013f).

Table 1: Overview of the economic aggregates of Kragujevac

The average Economic aggregate Index of wage Total number gross wage growth over the of employees In total Index compared to previous year (*EUR) (*EUR) the previous year 2005. 53 985 273 14 737 905 101.8 106.6 2006. 49 015 330 16 174 950 109.7 120.9 2007. 49 044 417 20 451 348 126.4 126.4 2008. 45 265 480 21 727 200 106.2 115.1 2009. 41 192 439 18 083 288 83.2 91.5 2010. 40 037 471 18 857 427 104.3 107.3 2011. 39 497 490 19 353 530 102.6 104 Source: National Bureau of Statistics (* at middle exchange rate of 31.12. for that year)

222 Local Economic and Infrastructure Development of SEE in the Context of EU Accession P. Veselinović, J. Dimitrijević: Economic Situation in the City of Kragujevac

Table 2: Overview of the economic aggregates of Serbia

The average Economic aggregate Index of wage Total number gross wage growth over the of employees In total Index compared to (*EUR) (EUR) the previous year previous year 2005. 2 068 964 308 637 240 912 109.8 108.8 2006. 2 025 627 377 763 661 379 119.8 122.4 2007. 2 002 344 484 969 134 496 126.9 128.4 2008. 1 999 476 516 1 031 729 616 106.5 106.6 2009. 1 889 085 460 868 979 100 84.2 89.1 2010. 1 795 775 521 935 598 775 107.7 113.3 2011. 1 746 138 504 880 053 552 94 97 Source: National Bureau of Statistics (* at middle exchange rate of 31.12. for that year

Graph 1: Comparative average gross income at the city level and the level of Republic of Serbia

Source: National Bureau of Statistics

Looking at the average gross wage per employee in the city, it was below the national average in all the years under review, recording a growth up to 2008. In 2009 there was a decline in earnings of 9% compared to the previous year. Nominal value of the average gross wage in the city during this period increased from 273 in 2005 to 480 euro in 2008, and in 2009 it dropped to 439 euro. After the decline, in the coming years earnings grew and in 2011 reached the highest nominal value of 490 euro (Anon. 2013e; Anon. 2013f).

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 223 Economic and Infrastructural Aspect of Local Development

Economic exchanges with foreign countries

Foreign trade of the city continued to grow since 2005. In 2012 foreign trade reached a value of nearly 490 million, which is 3.5 times more than in 2005. From 2007 to 2009, foreign trade is roughly the same, ranging between 318 (2007) and 334 million USD in 2009. In the first 11 months of 2012 volume of trade increased by 12.84% compared to the previous year (Anon. 2007; Anon. 2013e; Anon. 2013f).

Graph 2: Review of the total foreign trade of Kragujevac (in thousands of USD)

Source: Regional Chamber of Commerce Kragujevac

Graph 3: Review of import/export industry of Kragujevac (in thousands of USD)

Source: Regional Chamber of Commerce Kragujevac

Imports of goods from 2005 had continued growth till 2007; in 2008 there is a slight drop, only to continue to rise in period from 2009 to 2010. The value of imports in 2009 compared to 2005 increased 3.1 times. The highest value of imports was

224 Local Economic and Infrastructure Development of SEE in the Context of EU Accession P. Veselinović, J. Dimitrijević: Economic Situation in the City of Kragujevac recorded in 2010, when it stood at over 285 million USD. In 2011 and first eleven months of 2012 the value of imports decreased compared to 2010 (Anon. 2013e).

Exports of goods during this period grew until the year 2008, and compared to 2008 the value of exports in 2009 dropped by 38.7 million, which is a decrease of 31%. In 2010 there is an increase in exports, but does not reach the value of 2008. The trend in export growth resumed in 2011, reaching 166 million USD. For the first 11 months of 2012 the economy of Kragujevac for the first time in the reporting period recorded a surplus in foreign trade of 36.3 million. The value of exports during this period increased by 5.4 times (Anon. 2013e).

The main foreign trade partner in imports in the period 2005–2011 was the European Union (EU). In period 2009 to 2010, as many as 83% of imports related to the EU, 7% and 6% to the former republics of Yugoslavia excluding Slovenia and only 10% and 11% to all other countries. In 2011 EU imports decreased by 3% compared to the previous year (Anon. 2013e).

The most important trade partner in exports during this period is again EU, which accounted for 51% to 71% in this period. The second most important partner are the former republics of Yugoslavia excluding Slovenia, which participated in the export with 20% in 2005, 28% in 2006, 33% in 2007, 39% in 2008, and 33% in 2009. In the next two years, the share of exports to the former Yugoslav republics excluding Slovenia fell and in 2011 stood at 18%, but the value of exports to the EU grew (Anon. 2013e).

Graph 4: The most important trade partners of Kragujevac Imports for 2011 Year Exports for 2011 Year

The most important trade partners of the economy in imports in the period 2005 to 2009 were: Italy, Germany, Slovenia, Bosnia and Herzegovina, and since 2007 China. As for exports, the most important trade partners for this period are: Bosnia and Herzegovina, Slovenia, Montenegro and Germany (Anon. 2013e; Anon. 2013b).

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 225 Economic and Infrastructural Aspect of Local Development

Largest surplus was achieved with Montenegro and Bosnia and Herzegovina, and the largest deficit with Italy and China. The highest value of total trade in this period was with Italy, Slovenia and Germany (Anon. 2013e; Anon. 2013b).

Graph 5: Total foreign trade by countries in 2005–2009. (In thousands of USD)

Source: Regional Chamber of Commerce Kragujevac

The most important trade partners of the economy in 2010–2011 when it comes to imports are: Italy, Germany, China, Slovenia, Bosnia and Herzegovina, Austria and France. In the past two years, most exports went to: Italy, Germany, Bosnia and Herzegovina, Slovenia, Montenegro and France. Surplus was recorded in trade with Germany, Bosnia and Herzegovina and Montenegro. In 2011 Kragujevac had the biggest surplus with Kosovo (100%) and the value of exports reached nearly $5 million. Also, there was a surplus with Croatia, Norway, Romania, Greece, Cyprus, France, the Russian Federation and the United States (Anon. 2013e; Anon. 2013b).

Graph 6: Total foreign trade by countries in 2010–2011 (in thousands of USD)

Source: Regional Chamber of Commerce Kragujevac

226 Local Economic and Infrastructure Development of SEE in the Context of EU Accession P. Veselinović, J. Dimitrijević: Economic Situation in the City of Kragujevac

Employment trends in the City of Kragujevac

The last decade of the 20th century was marked by economic sanctions from the international community and national economic collapse in almost all sectors of economic activity. Statistics in this period do not record a significant decline in employment, as workers who have actually lost their jobs continue to be registered as formally employed in order to maintain social stability. During 2007 there was a fire in “Zastava education and employment”, which resulted in an even greater decrease in the number of employees. The volume of employment of 55,515 people at the beginning of the period is certainly not a realistic reflection of the state of the economy, given that the number includes a large number of fictitious employees (Anon. 2013b).

Graph 7: The number of employees

In the years that followed, with the exception of 2004, there is a decline in employment. Despite help from the state and local government efforts to revive economic environment and investment activities since 2005, the level of employment has continued to decline again and in 2010 reached the lowest level of 40,037 employees. One reason for the downward trend in employment was intensified process of privatization, especially in 2005 and 2006 (14 privatizations), when the number of employees decreased. A significant number of people were engaged in the area of “gray economy” that official statistics do not include. It is reasonable to assume that the actual level of employment was higher than the official figures (Anon. 2013b).

In 2012, for the first time there is recorded employment growth, so that in September 2012 the number of employees was 41,457 persons, which is 1,960 more than in December 2011. The trend of the volume of employment in the analyzed period, in addition to the nominal employment, was influenced by the global economic crisis, which had a significant negative impact on our economy as well as in the neighbour- ing countries (Anon. 2013b).

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 227 Economic and Infrastructural Aspect of Local Development

Structure of employees

According to the data of the Statistical Office, in late 2011 (data for 2012 were not available) 30,721 people were employed in enterprises, institutions and organizations and 8,776 people in private enterprises (self-employed people and their employees). In comparison to 2001, in 2011 employment in enterprises, institutions and organizations has decreased by 30.3% or 13,375 persons. During the reporting period, the volume of employment in this field is varied. Until 2003 there was a decline in employment, followed by an increase in the next two years, and then again a negative trend (Anon. 2007; Anon. 2013b).

Table 3: Structure of employees in the City of Kragujevac

Staff No. Emp. per 1000 population Employees of enterprises, Persons who Employees of enterprises, Year Women institutions are self- In total In total institutions (%) and other employed organizations and other organizations 2001. 55515 49 44096 11419 306 243 2002. 53509 49.1 41350 12159 305 235 2003. 51448 48.2 38066 13382 293 217 2004 56565 50.3 42013 14552 323 240 2005 53985 46 42090 11895 308 240 2006 49015 42.7 40253 8762 280 230 2007 49044 41.8 39254 9 790 281 225 2008 45265 42.7 34692 10 573 260 199 2009 41192 44 32075 9 119 233 181 2010 40037 45.3 31764 8273 230 182 2011 39497 47.8 30721 8776 227 176 Source: National Bureau of Statistics

228 Local Economic and Infrastructure Development of SEE in the Context of EU Accession P. Veselinović, J. Dimitrijević: Economic Situation in the City of Kragujevac

Graph 8: Comparison of employment by group

Source: National Bureau of Statistics

In the field of private entrepreneurship, employment during this period decreased by 23.2% or 2,643 people. Number of employees in private enterprises in 2001–2004, constantly grew and in 2004 reached the highest level of employment of 14,552 people. In the coming years the volume of employment fluctuated with the tendency to fall and in 2010 the lowest level was recorded with 8,273, and in the 2011 it grew by 6%.

Comparing the initial and final year of the period it can be seen that the proportion of employees in these groups, compared to the total volume of employment, remained almost unchanged. Years 2003 and 2004 were favourable to persons who are self- employed, amounting to 26%. The lowest proportion of employees in private enterprises was recorded in 2006 and 2010, when it was only 18% (Anon. 2013b).

Graph 9: The share of women in employment structure

Source: National Bureau of Statistics

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 229 Economic and Infrastructural Aspect of Local Development

The participation of women in the total number of employees in all the years under review was below 50%, except in 2004 when it was 50.3%. In the years after 2004 the participation of women decreased, and in 2008 fell to 42.7%, which is a decrease of 6 percentage points compared to the base year. The absolute figures are even worse for this population. While in 2001 the number of female employees was 27,202, in 2011 it amounted to 18,880. The fact that employment fell by one third points to the problem of gender inequality and the status of women in the labour market (Anon. 2013b).

Employment by sector of economic activity

According to statistics, the majority of employees in the city belong to the manufacturing sector. The share of this sector has been dominant throughout the period. A slight increase in employment in other sectors could not compensate for a large number of jobs lost in manufacturing. (Anon. 2013b)

Increase in employment, compared to 2001, was recorded in the following sections in 2010: production electricity and gas, construction, trade, transport, financial intermediation, public administration, education, health care and other community services. Looking at the absolute values, the most significant increase was in the public administration sector and education (Anon. 2013b).

Table 4: Employment by sector of economic activity Year In total Agriculture, forestry and water management Mining and quarrying Manufacturing Production of electrical. gas and water electricity, Construction Wholesale and retail trade Hotels and restaurants storage and Transport, communications Financial intermediation Real estate and rental Public administration, Sochi. insurance Education Health and social work Other public., Social and personal services

2001 44096 468 - 20034 1381 1648 3950 996 2404 864 2263 1376 3236 4749 727 2002 41350 358 - 12172 1396 1446 2756 750 1931 582 1495 1433 11420 4889 723 2003 38066 295 - 11210 1438 1408 2504 346 1936 536 1246 1518 10096 4770 763 2004 42013 454 5 11827 1448 1667 4233 306 2378 550 1498 1588 10061 4999 999 2005 42090 429 6 14852 1461 1678 4405 251 2877 610 1199 1635 6649 5029 1011 2006 40253 389 5 16804 1485 1501 3989 262 2815 723 1129 1628 3476 5018 1028 2007 39254 480 5 15666 1460 1531 3683 268 2818 714 1136 1763 3599 5070 1064 2008 34692 358 8 10575 1476 1674 3764 296 2765 692 1258 1801 3676 5224 1128 2009 32075 312 15 8609 1508 1682 3805 323 1898 785 1168 1875 3734 5172 1189 2010 31764 243 16 8026 1519 1452 3729 339 1822 808 1490 2054 3737 5350 1182 Source: National Bureau of Statistics – Municipalities in Serbia

230 Local Economic and Infrastructure Development of SEE in the Context of EU Accession P. Veselinović, J. Dimitrijević: Economic Situation in the City of Kragujevac

Unemployment in the city of Kragujevac

Statistics show that the number of unemployed people varied. During the first three years of the period it increased, and in 2004 declined by 15.3% over the previous year. Already in 2005 unemployment is rising which continues until 2007, when it reached the number of 25,020 people. Over the next three years the number of unemployed falls to 23,711 in 2008 and to 21,660 in 2010. At the end of 2012 the number of unemployed has decreased by 3.6% compared to the previous year and amounted to 21,676. According to the structure of unemployment during the period, the share of first-time job seekers decreased from 67.5% in 2001 to 34.9% in 2011. The number of unemployed unskilled workers recorded an increase in absolute and percentage terms; their share in the total number of unemployed ranges from 6,053 in 2001, 8,361 in 2007, to 6,190 in the last observed year (Anon. 2013b).

Table 5: Unemployment – Structure

First-time job No qualifications Women Per 1000 Year In total seekers population In total % In total % In total % 2001. 19704 13295 67,5 6053 30,7 11692 59,3 109 2002. 23592 14625 62 7527 31,9 13615 57,7 134 2003. 25195 15118 60 8104 32,2 14213 56,4 143 2004. 21351 13509 63,3 6046 28,3 12405 58,1 149 2005. 23514 13127 55,8 7651 32,5 13412 57 134 2006. 24298 12579 51,8 8235 33,9 14385 59,2 139 2007. 25020 11552 46,2 8361 33,4 14406 57,6 143 2008. 23711 10410 43,9 7952 33,5 13658 57,6 136 2009. 23517 11499 48,9 7395 31,4 13517 57,5 133 2010. 21660 11529 53,2 6313 29,1 12246 56,5 123 2011. 22431 7836 34,9 6190 27,6 12484 55,7 129 Source: National Bureau of Statistics, National Employment Service

In the category of unemployed increased participation of women was recorded. It ranges from 59.3% in 2001 to 55.7% in 2011. Looking at absolute figures, the number of unemployed persons in the female population grew. It was highest in 2007, amounting to 14,406, while in the next three years it declined and in 2011 again started slowly growing reaching the figure of 12,484 people (Anon. 2013b).

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 231 Economic and Infrastructural Aspect of Local Development

Table 6: The age structure of the unemployed

Age In total % Women % To 19 years 566 2,5 253 2 20-24 years 2.419 10,8 1.206 9,7 25-29 years 3.190 14,3 1.809 14,5 30-39 years 5.136 22,9 3.125 25 40-49 years 4.987 22,2 3.116 25 50 and more 6.133 27,3 2.975 23,8 In total 22.431 100 12.484 100 Source: National Employment Service

The largest share in unemployment, according to age, constitute unemployed persons of 50 years of age and over (27%), followed by people of 30 to 39 years (23%), 40 to 49 years (22%), 25 to 29 years (14%), 20 to 24 years (14%) (Anon. 2013b).

Table 7: Qualification level of employees

Level In total % Women % I and II degree 6.190 27,6 3.471 27,8 III and IV degree 12.632 56,4 7.102 56,9 V, VI-1 and VI-2 degree 1.926 8,6 834 6,7 VII-1 degree 1.662 7,4 1.063 8,5 VII-2 degree 21 0 14 0,1 VIII 0 0 0 0 In total 22.431 100 12.484 100 Source: National Employment Service

According to the level of education, the highest proportion in the structure of unemployed falls on people with III and IV level of education (56.4%). They are followed by people with first and second level of education (27.6%). Those with higher levels of education have a share of 16% in the structure of the unemployed. If we observe the qualification structure of the unemployed female population, there is also domi- nance of people with vocational qualifications and the first and second level education (Anon. 2013b).

Conclusion

Regions designed and created by people according to the specific characteristics of geospatial. Issues of regionalization and decentralization are concerned because of the

232 Local Economic and Infrastructure Development of SEE in the Context of EU Accession P. Veselinović, J. Dimitrijević: Economic Situation in the City of Kragujevac individual and social groups. To develop the city of Kragujevac is formed Business innovation center, whose powers and functions are reflected in the following: marketing; maintaining existing and attracting new and expanding local business operations; contact and direct support to the local business community; support the strategic planning process; encourage funding; developing workforce.

Of the key recommendations those that stand out are incentives for the creation of new SMEs and to attract foreign investments, as well as regulations (regulations, orders, directives) in economic development.

Regionalization of Serbia is necessary because it has to adjust to the demands of the European Union and harmonize its administrative-territorial organization with NUTS, as was already done in many countries in Central and Eastern Europe.

The problems of regionalization of Serbia – and within it of the Central Serbia – should not slow down the inevitable process, because the future social and economic effects are well above the difficulties that might arise. Special organizational and legal measures are needed to resolve the risk of increasing the administrative apparatus and the potential conflicts of competence with municipalities.

One of the aims of methods and procedures for regionalization and decentralization is to use the regions as objects of development and entities in directing and managing development. In all this, the role of Kragujevac and Šumadija and Western Serbia is irreplaceable in both economic as well as the geo-political aspects.

City of Kragujevac, as an integral part of the Euro-region, has developed a network of regional institutions in which public, private and civil society act proactively on the basis of mutually developed partnerships. Local government is modern and updated and effectively cooperates with ministries, donors and investors. The city has a well developed road and railway network, developed utilities and available business infrastructure.

References

Anon. (2007) Local Economic Development Strategy 2007–2012, Grad Kragujevac, Kraguje- vac. (http://www.kragujevac.rs/Strategija_odrzivog_razvoja_grada_Kragujevca-340-1) Anon. (2013a) O Kragujevcu, Grad Kragujevac, Kragujevac. (http://www.kragujevac.rs/O_ Kragujevcu-38-1) Anon. (2013b) Statistički podaci o Kragujevcu, Grad Kragujevac, Kragujevac. (http://www. kragujevac.rs/Statisticki_podaci-53-1)

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 233 Economic and Infrastructural Aspect of Local Development

Anon (2013c) Prva prestonica moderne Srbije, Grad Kragujevac, Kragujevac. (http://www. kragujevac.rs/Prva_prestonica_moderne_Srbije-54-1) Anon. (2013d) Lokalna samouprava, Grad Kragujevac, Kragujevac. (http://www.kragujevac.rs/Lokalna_samouprava-39-1) Anon. (2013e) Privreda i ekonomski razvoj, Grad Kragujevac, Kragujevac. http://www. kragujevac.rs/Privreda_i_ekonomski_razvoj-41-1 Anon (2013f) Lokalni ekonomski razvoj, Grad Kragujevac, Kragujevac. (http://www.kragujevac.rs/Lokalni_ekonomski_razvoj-55-1) Anon. (2013g) Statistika za grad Kragujevac, Grad Kragujevac, Kragujevac. (http://www. kragujevac.rs/Zaposlenost-79-1) Anon. (2013h) Prostorni plan grada Kragujevca, Grad Kragujevac, Kragujevac. (http:// www.kragujevac.rs/Prostorni_plan_grada_Kragujevca-347-1) Anon. (2013i) Obrazovanje, Grad Kragujevac, Kragujevac. http://www.kragujevac.rs/Obra- zovanje-66-1 Jovanović, B. (1995) Mreža gradova Srbije – model prostorno-funkcijske organizacije, Posebna izdanja GI “Jovan Cvijić”, SANU, knj. 46, Beograd. Jovičić, Ž. (1994) Šumadija – centralna oblast Srbije, SGD, Beograd. Obradović, D. (2007) Model regionalizacije Centralne Srbije, Zbornik radova Geografskog instituta “Jovan Cvijić”, SANU, knj. 57, Beograd. Stojkov, B. (1997) Društveni i privredni značaj regonalizacije Srbije, SANU, Institut “Jovan Cvijić”, Beograd. Veljković, S. (1998) Tipovi regiona i njihova primena u prostornom planiranju, Geografska struktura i regionalizacija Srbije II, Posebna izdanja GI „Jovan Cvijić“ SANU, knj. 53, Beograd. Veselinović, P. (2009) Ekonomski efekti savremenog koncepta regionalizacije u Srbiji. In: Zbornik radova: Šumadija – putokaz za regionalizaciju i decentralizaciju Republike Sr- bije, Centar za strateška istraživanja nacionalne bezbednosti Beograd i Grad Kragujevac, Kragujevac. www.protekta.org.rs www.decentralizacija.gov.rs

234 Local Economic and Infrastructure Development of SEE in the Context of EU Accession DOI 10.5644/PI2013-153-14

LOCAL COMMUNITIES AND REFORM OF TERRITORIAL ORGANIZATION: CASE OF BOSNIA AND HERZEGOVINA

Jasmina Osmanković* Ensar Šehić** Marijana Galić***

Abstract

Interaction between local economic development and reform of territorial organization is the topic of this paper. In this paper we research the problem of negative reflections, quality and instability of territorial organization on the local economic development. Aim is to identify the problem, its input and output. Timeframe is period 1952-2013, with focus on 1990, 2000 and 2010. Spatial frame of the research is Bosnia and Herzegovina and other countries in region. Main hypothesis is: number of local units (communities) is increasing in time of instability. In this paper we used DEA method of analysis and other relevant methods. Paper consists of: abstract, introduction, overview of territorial organization, evaluation of efficiency of territorial organization applying Data Envelopment Analysis, conclusion, and resources. Authors research transformation in territorial concepts from nation building to concessions, interaction of geographical and territorial vision facing the crisis, objective and framework for territorial development in different states, territorial organization and territorial cohesion between expectations, disparities and contradiction, territorial organization of society and territorial structure of a state from state to local level, the quest for new territorial paradigms in an interconnected world economy, and other. Main question in this paper is: Is it possible to give the territorial dimension more relevance for choices of competitiveness, efficiency and sustainable policies?

Keywords: Local community, Territorial organization, Bosnia and Herzegovina, Reform.

Introduction

This paper aims to determine the economic and functional efficiency of territorial organization. The efficiency of the territorial organization of Bosnia and Herzegovina

* PhD, Full-time Professor at The School of Economics and Business, University of Sarajevo, Trg Oslobođenja – Alija Izetbegović 1, 71000 Sarajevo, Bosnia and Herzegovina, phone: +387 33 275 900, e-mail address: [email protected] ** PhD, Assistant Professor at The School of Economics and Business, University of Sarajevo, Trg Oslobođenja – Alija Izetbegović 1, 71000 Sarajevo, Bosnia and Herzegovina, phone: +387 33 275 900, e-mail address: [email protected] *** Federal Institute for Development Programming, Ćemaluša 9/III, 71000 Sarajevo, Bosnia and Her- zegovina, phone: +387 33 667 272, fax: +387 33 212 625, e-mail address: [email protected]

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 235 Economic and Infrastructural Aspect of Local Development is analyzed in the case of municipalities and cantons of the Federation of Bosnia and Herzegovina. Preparing analytical materials on the assessment of territorial efficiency of territorial organization in Bosnia and Herzegovina and the Federation of Bosnia and Herzegovina, could have a functional value in BIH, as well as a global framework in relation to the analysis, evaluation and reform of territorial reorganization. Literature overview with the similar theme of territorial organization (Chobanov and Mladenova 2009; Swianiewicz 2010; Osmanković 2002; Osmanković and Pejanović 2006; EUROSTAT; Leksin 2009; Capuno et al. 2013; Finka 2004; Lu 2009; Schnell 2001, Prezioso, 2013; Prezioso 2008; Cojanu 2012: Pejanović and Sadiković 2010; Koprić 2010; Zlokapa and Damjanović 2008; Rahmayantia and Hormb 2011; Dobrić 2011), was based on the determination of criteria for judging the rationality of territorial organization of local and regional governments. Establishing DEA methodology for evaluating the effectiveness of local governments (municipalities) and the selection of criteria for determining variable analysis will be aimed at an attempt to find the answers (Zhang et al. 2007; Šeg 2008; Rahmaynatia and Hormb 2011; Rabar and Blažević 2011; Nedeljković and Drenovac 2006; Martić and Savić 2001a; 2001b; Karbowniki and Kulaii 2011; Herrera and Pang 2006; Herrera and Pang 2005; Cooper et al. 2006; Koprić 2010). That should be the precondition on which the political entities could avoid the politicization of the most important issues, the territorial organization of the state.

Overview of territorial organization of EU countries

The basic principles of EU local government define the degree of decision-making power between central and local government. Democracy recognizes local government as a political platform and creates opportunities for citizen participation, efficiency and capacity of local authorities to carry out public services to citizens more efficiently (Greer et al. 2005 : 11).

In Denmark, there was a reduction of territorial fragmentation, as the first territorial reorganization began in 1958 and lasted about ten years, where on the basis of voluntary association local governments decreased from 1,386 to 1,098. Having carried out the first major territorial reform in 1970, local governments further reduced to 277 (Swianiewicz 2010; Osmanković 2002; Osmanković and Pejanović 2006; EUROSTAT; Leksin 2009; Capuno et al. 2013; Finka 2004; Cojanu 2012; Pejanović and Sadiković 2010; Sadiković 2010).

In 1974 two smaller local governments were abolished and their final number was 275. Reformation after 2007 resulted that Denmark is divided into five regions, merging 13 counties which were abolished, as well as 98 municipalities which merged previous 270 municipalities. The reform of the territorial organization did not affect 32 old municipalities that were previously united and had more than 20,000 residents, considering that at the end of reforms main municipalities covered 440

236 Local Economic and Infrastructure Development of SEE in the Context of EU Accession J. Osmanković, E. Šehić, M. Galić: Local Communities and Reform of Territorial... km2 and had about 55,000 inhabitants. Five newly formed regions were also significantly greater in size and population than the repealed 13 counties, where the average county had 368,546 inhabitants and an area of 3,261 km2, and the average region had 1,095,158 inhabitants and an area of 8,619 km2. (Swianiewicz 2010; Osmanković 2002; Osmanković and Pejanović 2006; EUROSTAT; Pejanović and Sadiković 2010; Manojlović 2010; Sadiković 2010)

Regionalism and reform of territorial organization are ubiquitous in modern countries, either federal or those with a unitary political system, with a higher degree of autonomy or internal organization. Spain and Italy have recognized their democratic potential in territorial reorganization, where Spain supports the establishment of autonomous communities with different status, in accordance with their capacity and needs, and expands their powers. The level of autonomy of Spanish regions was significantly influenced by the historical context of individual regions. Thus, one can come across regions which are established through the medieval legal norms (for example Navarre and the Basque Country) or those which are reflected in the establishment of cultural identity, such as Catalonia. In this way, they created two distinct regional identities with the highest level of autonomy. Spain also in Article 151 of its Constitution defines other regions, determining for them a high degree of authority, while Article 143 set the other ten regions with slightly lower levels of authority, but gave the possibility to assimilate with other regions (Swianiewicz 2010; Osmanković 2002; Osmanković and Pejanović 2006; EUROSTAT; Pejanović and Sadiković 2010; Sadiković 2010).

The first phase of constitutional reform in Italy has to deal with disproportionality of powers that are assigned to individual regions, where out of fifteen established regions, five of them had a special status and different types and levels of authority. Constitution defines responsibilities in the region, attributed to all other areas of the country, and assigns original legislative powers to regions with special status. In Constitutional reforms since 2001, decentralization was made in accordance with Article 119 which provided for the financial autonomy of the regions and municipalities, as well as the provinces (Swianiewicz 2010; Osmanković 2002; Osmanković and Pejanović 2006; EUROSTAT; Leksin 2009; Capuno et al. 2013; Finka 2004; Pejanović and Sadiković 2010; Sadiković 2010).

Analyzing Sweden, which is one of the most developed countries, it implemented the reform of local government focused on territorial reorganization. It is clear that these activities have been mainly initiated to facilitate opportunities for cross-border cooperation and access to structural funds. Sweden has a simple state with two level system of local government – the counties and the municipalities – where the county level, the local level of government, has very good cooperation with government departments, holds broad powers of local authorities and sufficiently large funds. In 1991 a number of analyses were performed on the necessity to adapt such

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 237 Economic and Infrastructural Aspect of Local Development a process of territorial organization of Sweden. Municipalities have experienced tre- mendous reorganisation where their number was reduced from 2500 of them in 1952 to the current 278. The number of counties remained the same (total of 21) as was in year 1634, although some counties have experienced some changes in organization (Swianiewicz 2010; Sadiković 2010; Osmanković 2002; Osmanković and Pejanović 2006; EUROSTAT; Leksin 2009; Capuno et al. 2013; Schnell 2001; Prezioso 2013; Prezioso 2008; Cojanu 2012; Pejanović and Sadiković 2010).

Even Belgium was not exempt from the reform of the state and its territorial distribution. With the adoption of the law on language in 1962 and 1963, Belgium began reforming and the result was the establishment of linguistic boundaries and the establishment of the territorial principle. The establishment of the three communities, three regions, and four linguistic regions, resulted after four amendments to the Constitution in 1970, 1980, 1988 and finally 1993, where gradually the Constitution allowed institutions of the Flemish Community and the French-speaking community to establish Flemish and Walloon region. Flemish community institutions took over the powers of the region in 1980, after which only north Flemish Council retained its unique powers (Swianiewicz 2010; Osmanković 2002; Osmanković and Pejanović 2006; EUROSTAT; Leksin 2009; Capuno et al. 2013; Finka 2004; Sadiković 2010; Prezioso 2013; Prezioso 2008; Cojanu 2012; Pejanović and Sadiković 2010).

Czech Republic is cited as an example of extreme division of the territory, with 6,250 municipalities with an average population of 1,650, where 80% of municipalities were with less than 1,000 inhabitants. This territorial arrangement suffers from unsustainable financial and administrative inefficiency. One approach to overcoming this problem was the creation of financial mechanisms that will encourage municipalities to merge on a voluntary basis, where the scope of the community gets some self- competence from the municipalities. In addition to this approach, the municipalities themselves have realized the need to create a voluntary association of municipalities, which proved to be much more flexible because it would not necessarily come to the transfer of powers of municipal authorities to association. This type of cooperation has been developed over the last 17 years in over two thirds of municipalities in the Czech Republic (Swianiewicz 2010; Osmanković 2002; Osmanković and Pejanović 2006; EUROSTAT; Leksin 2009; Capuno et al. 2013; Sadiković 2010; Finka 2004; Prezioso 2013; Prezioso 2008; Cojanu 2012; Pejanović and Sadiković 2010).

Regarding the rearrangement of Hungary and its territorial organization, the result is a more comprehensive public service reform initiated in 2002. Successful measures were established in 162 of a possible 164 micro-regional associations, and Hungary opted for a model to overcome the fragmented structure of local government. As a result of these reforms, it seems that the provision of local public services could be improved, and that the local government is satisfied with the ratio of lost power on the one hand, and positive effects on the other. An example of the French territorial

238 Local Economic and Infrastructure Development of SEE in the Context of EU Accession J. Osmanković, E. Šehić, M. Galić: Local Communities and Reform of Territorial... organization serves as a case in favour of development of inter-municipal cooperation as an alternative to the territorial reorganization and as a way of avoiding the negative consequences of amalgamation. The French case can be seen as a form of cooperation of local government units in the area of finance and local democracy (Swianiewicz 2010; Osmanković 2002; Osmanković and Pejanović 2006; EUROSTAT; Leksin 2009; Capuno et al. 2013; Finka 2004; Lu 2009; Schnell 2001; Prezioso 2013; Prezioso 2008; Sadiković 2010; Cojanu 2012; Pejanović and Sadiković 2010).

Regions of the Balkans after 1990

After the declaration of independence of the Republic of Slovenia in 1991, the reform of territorial organization was carried out through the reform of local government, or as part of the overall reform of the administrative system. Reform reasons were at first mainly associated with its separation, and later with Slovenia joining the EU. The new constitutional concept was established in period 1992 to 1996. The demand to adapt public administration began in 1993 with the reform of local government. Today, the Republic of Slovenia has 58 state offices, which territorially reallocated state power and 210 municipalities as the basic unit of local government. Before independence, Slovenia had 65 municipalities kept as commune, much like the Paris Commune actualized federal and state statutory provisions. Such territorial arrangement was established in 1964, as a result of the reforms of 1963. Half of today’s 210 municipalities are with less than 5,000 inhabitants, where an average Slovenian municipality has twice as many inhabitants. Due to the large number of relatively small municipalities Slovenia has developed several institutes linking municipalities in the exercise of their functions (Sadiković 2010; Osmanković 2002; Osmanković and Pejanović 2006; Koprić and Đulabić 2012; Aristovnik 2011).

Croatia has been struggling with the demands for territorial rearrangement of the state for a number of years, mainly after establishing independence after 1993. With cessation of hundreds of large municipalities, which existed since the 1960, 418 municipalities were created and 69 cities, including the city of Zagreb which already in 1991 existed as a unified government. In addition to these units of local government, 20 counties were formed, with a strong centralist rule, organized according to the principles in which they were established in the time of Ivan Mazuranic. Regardless of such an organization, it should be noted that nearly 400 units are with less than 5,000 inhabitants, where half of them have fewer than 3,000 inhabitants. Territorial reorganization of Macedonia in the period after independence entailed inheritance of 30 large municipalities, relatively developed and independent, with a huge bureaucracy. This was one of the reasons for the reorganization carried out in 1995, which created 123 new municipalities out of the previous 30 (Sadiković 2010; Pejanović and Sadiković 2010; Osmanković and Pejanović 2006; Osmanković 2002; Koprić and Đulabić 2012; Koprić 2010a; Koprić 2010b; Rabar and Blažević 2011; Toskić 1998).

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 239 Economic and Infrastructural Aspect of Local Development

The reason for the new reform of territorial organization appeared in 2000 and was the result of interethnic conflict between the Macedonian majority and Albanian minority population. After these events, the number of municipalities in Macedonia was reduced from 123 to 84, following the functional reorganization of the territory. The new territorial division unfortunately follows the ethnic logic and becomes the purpose of creating new homogeneous ethnic communities in newly created local governments (Sadiković 2010; Pejanović and Sadiković 2010; Osmanković and Pejanović 2006; Martić and Savić 2001; Koprić 2010a).

The territorial organization of the Federation of Bosnia and Herzegovina

In 1907 the Law on rural municipalities defined organized rural municipalities, when the Austro-Hungarian government recognized the need of certain villages that had certain preconditions to organize and set up a joint body, i.e. the rural commune. With such a legal solution and heterogeneous territorial division of Bosnia and Herzegovina new states were founded after the First World War, which lasted until the establishment of the municipal government in 1928. That same year, the territory of Bosnia and Herzegovina was divided into 399 municipalities (Sadiković 2010; Pejanović and Sadiković 2010; Osmanković and Pejanović 2006).

The new territorial organization was established by the introduction of the new municipal system in 1955. The smaller municipalities were integrated into larger municipal territorial units and established 106 municipalities, which were kept up to year 1978. Then from 1978, until independence in 1992, the territory of Bosnia and Herzegovina contained 109 municipalities. Number of municipalities varied from four hundred eighteen municipalities in 1952, up to a hundred and twelve municipalities in 1991, or one hundred fifty-four municipalities in 1998 (Osmanković 2002 : 175). The Constitution of the Federation, within the definition of municipal government, introduced a provision which specifies that the municipality exercises self rule on local matters and municipality statutes (Pejanović and Sadiković 2010 : 47). Ten new municipalities in the Federation of Bosnia and Herzegovina were formed through the adoption of the constitution of new municipalities in the Federation. Amendment XVI to the Constitution of FBIH introduced the provision related to municipal authorities, where this provision allows for the two or more municipalities that are territorially linked by the everyday needs of citizens to establish a city as a unit of local government.

Territorial organization of the Federation of Bosnia and Herzegovina does not correspond to the constitutional changes regarding the position of municipalities. There is a noticeable increase in the number of settlements. The reasons for their formation and start of process of formation of new municipalities were mainly ethnically

240 Local Economic and Infrastructure Development of SEE in the Context of EU Accession J. Osmanković, E. Šehić, M. Galić: Local Communities and Reform of Territorial... motivated, initiated mostly from villages in which the mono-ethnic structure was represented. This was done disregarding the criteria for constitution of new municipalities, where one of the regulations for the constitution ties cantons to municipalities through its laws, determining the minimum population for the establishment of the municipality, i.e. specifies the number at 4,000. In addition to the above obligation, the establishment of a new municipality cannot be done in the territory in which more than 50% of people are displaced. Analysis of the financial picture of municipalities indicates that debt and contingent liabilities of municipalities in the Federation on 31 December 2010, including contractual and undrawn credit means (according to the Ministry of Finance of FBiH), amounted to 128.19 million BAM. The debt arising from loans was 92.44 million BAM or 72.10%, and the potential liabilities arising from guarantees issued were 35.75 million BAM or 27.90% (Aganović et al. 1996; Osmanković and Pejanović 2006; Pejanović and Sadiković 2010; Sadiković 2010; Savanović 2009).

Evaluation of efficiency of territorial organization applying Data Envelopment Analysis

Data Envelopment Analysis (DEA) is a nonparametric mathematical methodology for estimation of efficiency of the analyzed units based on the input and output variables.

Formula of efficiency that has been set by Charnes, Cooper and Rhodes (CCR) model in 1978 has undergone its first revision in 1984, when the Banker, Charnes and Cooper (BCC) established BCC model, which assumes variable returns to scale. Unlike CCR model which assumes constant returns to scale and is represented by the direction, BCC model formed the sample unit and the efficiency frontier convex shell.

Table 1: Results of BCC model focused on output

Results of BCC model focused on outputs 1990 2000 2010 Average relative efficiency 0.9342 0.8949 0.8975 Standard deviation 0.0989 0.1583 0.1240 Lowest value of relative efficiency 0.55941 0.058606 0.34258 Number of relatively efficient JLS 37 (49.33%) 36 (45.5%) 33 (44%) Number of relatively inefficient JLS 38 43 46 Number of JLS which have relative 25 26 33 efficiency lower than average

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 241 Economic and Infrastructural Aspect of Local Development

The average relative efficiency by BCC had the lowest value of 0.8949 in 2000. BCC model identifies the minimum value of relative efficiency in 1990 with 0.55941. Number of relatively efficient units significantly changed from year to year. In 1990, according to BCC model there were 37 relatively efficient units and it was the year with most relatively efficient units, almost 50% (49.33%).

Conclusion

Territorial dimension has relevance for competitiveness, efficiency and sustainability of local, regional and state development. This paper focuses on efficiency of local level or local government units. It could be concluded that this paper presents negative repercussions of territorial reforms and instability of territorial organization on local economic development (in the first place in case of Federation of Bosnia and Herzegovina). Most Balkans countries have increased number of municipalities in early 90’s. Results of CCR DEA model have shown how efficiency has been decreasing after 1990. Territorial organization on the local level is very important for research and is a very important political question, especially in the context of strategy and policy of local economic development. Time is for redefinition of territorial structure on the local level in context of efficiency, sustainability and quality of life.

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244 Local Economic and Infrastructure Development of SEE in the Context of EU Accession DOI 10.5644/PI2013-153-15

INFLUENCE OF TERTIARY ACTIVITIES ON LOCAL AND RURAL DEVELOPMENT IN BOSNIA AND HERZEGOVINA

Rahman Nurković*

Abstract

The paper includes a detailed theoretical and practical analysis of spatial processes of tertiary activities in local and rural development in Bosnia and Herzegovina. In recent period, particularly after 1995, in local development of municipalities and, in particular, in rural settlements of Bosnia and Herzegovina big spatial changes occurred thanks to fast development of tertiary activities, which strongly affected the transformation in rural settlements. Our research will be focused primarily on the local, rural development of settlements, expansion of new tertiary activities in rural settlements and on various housing constructions, and arrangement of traffic infrastructure. The mentioned processes strongly affect the contemporary spatial and functional structure of rural settlements in Bosnia and Herzegovina. For analysis of a complex development of tertiary activities in Bosnia and Herzegovina elements of social, economic and physiognomic nature have been taken, which were special and significant for transformation, respectively for the changes of local and rural areas with orientation of spatial development of new economic activities. Bosnia and Herzegovina has significant difficulties in restructuring, but also good prospects to be fast included into the European economic courses.

Keywords: Tertiary activities, Transformation, Rural development, Transition, Bosnia and Herzegovina.

Introduction

Tertiary activities have an exceptionally important role in economic development in many countries. The existing statistics of economic activities cannot perceive its full economic importance and influence. A lack of adequate economic measurements of tertiary activities in local and rural development in Bosnia and Herzegovina often leads to underestimation of the benefit from tertiary activities, particularly with other economic sectors (Spurr 2006). Tertiary activities need to be observed as a set of different activities whose demand is not related only to the tertiary demand. The additional difficulty in measurement of tertiary activities in Bosnia and Herzegovina

* PhD, Associate Professor, University in Sarajevo, Faculty of Science, Department of Geography, Zmaja od Bosne 35, 71000 Sarajevo, Bosnia and Herzegovina, phone: +387 33 723 710, e-mail address: [email protected]

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 245 Economic and Infrastructural Aspect of Local Development originates from characteristics of the tertiary products that are partially intangible and are not easy to measure either by physical or financial indicators (Hara 2008).

Starting from the recognised problems of evaluation of tertiary activities in local and rural development, the purpose of this paper is the establishment and testing of the procedure for estimation of the total contribution of tertiary activities in total contribution to economy in Bosnia and Herzegovina. Evaluation of the total contribution of tertiary activities to economy implies, therefore, linking the satellite account of tertiary activities with different models that may perceive macroeconomic influence of tertiary activities on local and rural development (Alhert 2008).

In contemporary period of economic-geographic development around 43% of rural population live in rural space of Bosnia and Herzegovina. Most of the rural space increasingly takes on characteristics of clear lagging behind in development, which represents a significant negativity of all demographic, socio-cultural and spatial planning indicators. With a change of socio-economic system into market economy, rural space of Bosnia and Herzegovina is facing new challenges. In all this, more and more intensive development of contemporary economic activities is also particularly expressed. For needs of this paper, our focus will, therefore, be shifted away from the wider context of rural changes towards agrarian production as an element that has been deemed a compatible function of rural spaces of Bosnia and Herzegovina.

In this paper, among other, it has been emphasized that each rural area in Bosnia and Herzegovina represents a particular individuality and distinctiveness. The paper itself has been divided into three parts. In the first part, an application of a new institutional theory, in the sense of analyzing the rural space as a product of contemporary economic development, has been discussed. In the second part, a context of development of social and economic restructuring of rural spaces in Bosnia and Herzegovina, as a subject of analysis at the village level, has been discussed. The third part represents a discussion over a process of improvement in transportation in rural settlements, and the method in which the process itself has been shaped by the state and social institutions has also been presented and analysed. Finally, conclusions were made in order to emphasize the role of institutions in an interaction between rural spaces and rural economy, and to stimulate the changes in rural economy of Bosnia and Herzegovina.

Total economic development of Bosnia and Herzegovina was tightly connected to coal and salt production, on which ferrous metallurgy and chemical industry, as the leading branches of industry, have developed. The regional centres of Tuzla, Zenica, Sarajevo, Mostar and Banja Luka are characteristic as they had a fast transformation and the most rapid industrial development. A series of location factors affected the volume of industrial production and its structure, also the basic population structure according to activities, and the spatial distribution of industry of Bosnia and Herzegovina. Among these, the most important factors are: geographic-traffic, demographics, natural resources, historical, microlocation factors and the market.

246 Local Economic and Infrastructure Development of SEE in the Context of EU Accession R. Nurković: Influence of Tertiary Activities on Local and Rural Development...

Bosnia and Herzegovina used to be a significant industrial centre in SFRJ, particularly in machine-tool and chemical industries. (Nurković 2001 : 83-89)

Methods of work and data sources Methodological approach is imperatively adjusted to purpose of this paper, so tertiary activities in Bosnia and Herzegovina have a strong influence on local and rural development. The research has been considered through local and rural development of the areas in Bosnia and Herzegovina. In estimation of economic contribution of tertiary activities to economy quantitative methods in the range from stochastic to deterministic are almost exclusively used. Among stochastic methods, the most commonly used methods are econometric methods based on analysis of time series, cross-sectional and panel data. Deterministic methods include models of gravita- tion (which can partially be stochastic models as well), input-output analysis (Input- output, IO) and social accounting matrix (Social Accounting Matrix, SAM), satellite account of tertiary activities and computable general equilibrium model (Computable General Equilibrium, CGE) (Hara 2008).

With regard to contents and inclusion into a system on social accounting, evaluation of direct contribution of tertiary activities to local and rural development of economy in Bosnia and Herzegovina is a good basis for defining and application of the models that enable consideration of the total contribution of tertiary activities. Namely, with a direct contribution of tertiary activities perceiving the influence of tertiary activities on local and rural development is more complete, as well as extension of the analysis through considering the links between the sectors that directly sell the services and products of tertiary activities and those activities servicing these sectors (indirect effects of tertiary sector); it is also necessary to consider the influence of increase in income on the economy due to consumption of tertiary activities (induced effects of tertiary activities). In the series of the mentioned methods by which it is possible to perceive the total or partial influence of tertiary activities on economy, the models based on input-output analysis are particularly distinguished, as well as the models of computable general equilibrium (Zhao et al. 1997).

Input-output tables are an important indicator of direct and indirect contributions of tertiary activities in local and rural development to national economy (Jurčić 2000), and the modelling of tertiary activities starts from the creation of tertiary activities on the basis of the data from input-output table, and the analysis of multiplicative actions of tertiary activities (DZS 2002).

Input-output analysis is widely applied as the means of estimation of total effects of tertiary activities; however, one should bear in mind also its limitation as the means of estimation of net effects of tertiary activities on economy of local and rural development in Bosnia and Herzegovina. Input-output analysis is based on

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 247 Economic and Infrastructural Aspect of Local Development the assumptions on fixed prices and fixed coefficients and may result in overestima- tion of economic effects of tertiary activities on local and rural development. With input-output analysis only positive effect of tertiary activities on economic activity is perceived, while neglecting the negative effects that may be bigger than the positive ones. The shortcomings of input-output analysis initiated bigger and bigger use of the computable general equilibrium model as a set of equations that describe production, consumptions, trade and country’s activities (Dwyer et al. 2004; Blake et al. 2006). Contributing in different ways to economic understanding of tertiary activities, computable general equilibrium models indicate that, due to influence on prices of factors and real appreciation of course, the influences of tertiary activities on the sectors related to tertiary activities are smaller than it is anticipated by input-output models, and, at the same time, they also enable consideration of negative effects of tertiary activities on other sectors competing for these factors (Blake 2009).

Unequal regional development is a common regularity of development of tertiary activities, which is particularly expressed, in specific developmental stages, in po- larization of economic activities, population and income. On the basis of these, they have a smaller number of employed persons and, on the whole, less developed tertiary activities. Influence of tertiary activities on local and rural development in Bosnia and Herzegovina requires the use of particular methods. Therefore, studying the general methods and the way of methodology of urban and rural geography in a combination with regional geographic approach will be applied. As a basic method of gathering the sources of primary data the interview method was used, i.e. in-depth interview, at which a major instrument was a reminder for interview. About 15 economic activities in Bosnia and Herzegovina were examined. The research was also completed by the analysis of the contents of secondary sources, interpretation and description of the adequate data bases of the Agency for Statistics of Bosnia and Herzegovina.

Processes in the space of the local and rural development

Economy is the next important factor of economic development of the local and rural areas in Bosnia and Herzegovina. At the beginning of the 21st century, about 43% of total population of Bosnia and Herzegovina lived in rural area. With analysing the number of rural population and rural characteristics of Bosnia and Herzegovina, it is also indispensable to analyse the current situation within the wide historical context. Rural areas have been exposed to degradation processes that lead to extinction thresh- old of ruris, a village-basic element of rural area, since the mid-19th century, and particularly during the socialist economic system since the mid-1950s to 1990, with the transition in the past decade, and also in the period from 1922 to 1995. Civilization and historical processes of deruralization, industrialization and urbanization that are present in certain stages of development in all parts of the world had an extremely selective and negative influence on development of the BIH village.

248 Local Economic and Infrastructure Development of SEE in the Context of EU Accession R. Nurković: Influence of Tertiary Activities on Local and Rural Development...

The socialist planned economy has favoured an industrial development in Bosnia and Herzegovina that was subjected to deruralization, as a typical rural country, which became evident after 1955. Due to intensified industrialization and the decline of interest in agriculture, the deruralisation process started i.e. leaving the village as a place of residence. Deruralization has been an accelerated process in the past fifty years. In 2011, over 70% of rural areas in Bosnia and Herzegovina were characterized by obvious regression in development, which indicates to clear negativity of all demographic, socio- cultural and spatially planned indicators. These areas that are often isolated in traffic aspect, with the aging population and the predominant share of older people and women in the total population are deeply in the process of dying out. Concrete measures are to be taken toward the further development of these areas as without interventions they tend to lag behind in development, 40% of rural areas are within the framework of a balanced development, and about 30% experience an expansion (Nurković 2007 : 101).

Increasingly frequently, rural areas do not represent only agricultural-production areas. On the contrary, it can generally be said that the share of agricultural and forest production corresponds to the level of area’s socio-economic development in relation to other functions of rural areas. The more developed, socially and economically, an area is, (in sense of development from rural through industrial into a tertiary society) the smaller is the importance of agricultural and forest production in its total economy, and vice versa. (Crkvenčić 1991 : 5)

The consequence of such development is not only an unequal structure of these activities, but also their territorial distribution. The spatial distribution of tertiary activities most coincides with a spatial distribution of the industrial, respectively urban centres, and less with rural settlements. The depicted relations in economic structure of Bosnia and Herzegovina are even better seen while analysing the share of the active population by sectors in the period from 1961 to 2009. Namely, the biggest share of the active population in Bosnia and Herzegovina was in secondary sector: 74.5%, then in tertiary with 23.3% and primary sector with 2.2% (Table 1 and Chart 1).

Table 1: The share of employment (%) in activity sectors and the share of urban population in the population of Bosnia and Herzegovina, 2001–2011

Year Primary Secondary Tertiary The share of urban population 2001 4.2 39.4 56.4 38.2 2003 3.9 35.4 60.7 40.1 2006 3.1 36.8 60.1 42.0 2007 2.7 32.2 65.1 43.2 2009 2.7 33.4 63.9 46.5 2011 3.1 32.1 65.0 47.3 Source: The State Agency for Statistics of Bosnia and Herzegovina, Sarajevo, 2011

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 249 Economic and Infrastructural Aspect of Local Development

Chart 1: The share of employment (%) in activity sectors and the share of urban population in the population of Bosnia and Herzegovina, 2001–2011

Source: The State Agency for Statistics of Bosnia and Herzegovina, Sarajevo, 2011

In 2009, there were 63.9% of all active inhabitants in tertiary sector of Bosnia and Herzegovina, in secondary 33.4% and in primary 2.7%. The economic crisis, which started after 1981, most expressively reflected in industry, which despite this still had a primacy among all activities. At the end of 1991, closing down the industrial enterprises and dismissal of workers in Bosnia and Herzegovina started. Due to gradual restructuring from the planned to a market economy, the economy of Bosnia and Herzegovina has been experiencing the anticipated problems in the past several years: decrease in volume of production, deteriorated export routes, increase in unemployment, and still insufficiently determined and rapid processes of privatisation and development of new tertiary activities in rural settlements.

In Bosnia and Herzegovina, Sarajevo has got the biggest share with approximately 65% of total number of employed persons in tertiary activities. This is to be expected because tertiary activities are very developed in the capital and the administrative, economic, educational, scientific, cultural, health and sports centre of the country. In the city centre there are eight commercial centres, while at the junctions of the main city traffic lines and in the vicinity of road hubs there are about 20 shopping centres. An unequal regional development is a common regularity of development of tertiary activities, which is particularly expressed, in certain stages, in polarisation of economic activities, population and income. At the same time, particular parts of the country remain on the periphery poorly or insufficiently affected by general development of new tertiary activities. Tertiary activities are generally more developed in larger than in smaller municipal centres in Bosnia and Herzegovina. After Sarajevo, tertiary activities are most developed in Banja Luka, Mostar, Tuzla, Brčko District, Bijeljina, Travnik, Bihać, Tešanj etc. In contrast, they are less developed in smaller centres: in Foča, Goražde, Trebinje etc. The smaller, undeveloped municipality centres have poorly developed tertiary activities, primarily the commerce, insufficient needs for craft and catering services, a small number of residential buildings in social

250 Local Economic and Infrastructure Development of SEE in the Context of EU Accession R. Nurković: Influence of Tertiary Activities on Local and Rural Development... sector etc. On the basis of these, they have a small number of employed persons and, on the whole, less developed tertiary activities. (Griffin and Ford 1980 : 397-422)

In service industry in rural areas, crafts industry is the most common. These are mainly the crafts acting of which, on the basis of wood and iron, facilitated performing of specific agricultural activities. With development of mass industrial production and concentration of that production in the cities, rural areas gradually lost the biggest part of their earlier crafts. Instead of old crafts, new crafts, primarily the service trade enters the rural areas more and more intensely. They appeared as a need for satisfying a higher living standard, respectively the repairs of new farming equipment and gadgets. New crafts have not yet become a substitute for a loss of traditional crafts. The more important tertiary activities in Bosnia and Herzegovina according to share of employed persons in both sectors in 2010, had the following order: catering industry about 35.656 or 10.5% of employed persons, transport and connections about 48.434 or 14.2%, finances about 47.981 or 14.1%, compulsory insurance about 76.623 or 22.5%, education about 64.272 or 19.7% and the field of public health and social welfare 67.272 or 19.7% respectively. The consequence of such development of tertiary activities in Bosnia and Herzegovina is not only an unequal structure of these activities in rural settlements, but also their territorial distribution. The spatial distribution of tertiary activities coincides the most with the spatial distribution of industrial, respectively urban centres (Table 2 and Map 1).

Table 2: Estimation of number of employed persons in tertiary activities of Bosnia and Herzegovina, 2011

Activity Number of employed persons % Catering industry and tourism 35.656 10.5 Transport and connections 48.434 14.2 Finances 47.981 14.1 Compulsory insurance 76.623 22.5 Education 64.751 19.0 Public health and social welfare 67.272 19.7 Total 340.717 100 Source: The State Agency for Statistics of Bosnia and Herzegovina, Sarajevo, 2011

In more developed municipality centres there is a considerable increase in trade and catering industry, dictated not only by the demand of numerous permanent inhabitants but also of those periodically interested, in dependence of importance and function of a given regional or municipal centre. Today, these activities also have a strong influence on transformation of rural settlements and development of new commercial centres, petrol stations, catering establishments and an increased number of employed persons in these activities (Černe 2005 : 125-136).

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 251 Economic and Infrastructural Aspect of Local Development

Today, there is also a bigger share of employed persons in housing-communal activities of the developed municipal centres in Bosnia and Herzegovina. There is a larger number of inhabitants in them, as well as a larger accumulation of funds for housing construction and public utilities. Therefore, the housing construction is more intensive, the number of apartments in private property is bigger, and there are also many different organisations for offering various services for housing and communal construction, urbanism, planning etc. In the smaller and undeveloped municipal centres the situation is opposite. A huge domestic administrative apparatus and insufficient input of foreign capital in Bosnia and Herzegovina are additional problems, which should be solved as fast as possible, since the European Union spreads faster than expected. Our neighbours will naturally know how to make use of it and thus the European Union will become our first neighbour, but with the closed door until the situation changes in accordance with the European principles and other standards.

Map 1: Geographic distribution of tertiary activities in Bosnia and Herzegovina, 2011.

Author: Nurković 2013

252 Local Economic and Infrastructure Development of SEE in the Context of EU Accession R. Nurković: Influence of Tertiary Activities on Local and Rural Development...

Revitalization of rural areas

Rural areas in Bosnia and Herzegovina are affected by economic impoverishment and a lack of communal and social infrastructure. The fragmented and irrationally divided properties are unprofitable and do not offer an opportunity for development of commercial agriculture. Even the properties that are oriented toward quantity production and have necessary preconditions are facing fierce competition in the market. Development and entry of new, non-agricultural activities into the rural areas frequently isn’t a planned process, but the consequence of impossibility of existence from dealing with the activities of primary sector. A social reputation of a peasant has largely declined. This situation was caused by a series of factors that marked the development of a village and the rural area of Bosnia and Herzegovina in the past, primarily from the mid-19th century and abolition of serfdom. Revitalization of a village, in a sense of sustainable and complete development, is an indispensable process of protection of rural areas as the primary production areas of food and other goods, the areas of specific anthropogenic landscape with the pronounced natural, traditional, cultural and historical elements, oases of greenery and ecological balance, and in the end, as the areas of tranquillity and rest from dynamical and stressful urban living. Tourism in rural area is one of the factors that may have an essential role in renewal and sustainable development of a village.

The previous modest scientific research, and also the spatial-planning documents and legal acts show that differences between the rural areas of Bosnia and Herzegovina cannot be neglected. The need for preparation of typology of rural areas is in accordance with the practice of the regional and spatial planning of the European Union. It originates from the hypothesis on non-homogeneity of rural areas, which is reflected in: extremely big differences in number of inhabitants and population density between the suburban rural settlements, spatially and temporally more distant areas, differences in population structures, completely opposite economic processes in different rural areas from the strong economic development exceeding the trends in urban settlements (e.g. development of industrial zones) to economic ruination, differentiated socio-economic structure of population, different level of technical standard and equipment of a household, different perceptions of rural areas – from the rural idyll to backwardness (Woods and McDonagh 2011 : 136-139).

Diversification of structures and functions of the local communities and rural areas of Bosnia and Herzegovina is a consequence of differences in their natural-geographic, demographic and socio-economic characteristics and connection with urban and other central settlements and distance from them, respectively from their position in a network of settlements and nodal-functional organisation of space.

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 253 Economic and Infrastructural Aspect of Local Development

Non-homogeneity of the rural areas is a reflection of their historical development, particularly in crucial moments of development of the BIH village in the second half of the 19th century, and the process of deagrarisation and deruralisation in the second half of the 20th century. Bosnia and Herzegovina was a predominantly agricultural and rural country in the mid-19th century. Three-fourths of the population lived in rural areas, and the existence of more than a half of the total population is based on agricultural production. The complex and interconnected processes of industrialization, urbanization, deagrarisation and deruralisation have resulted in deep changes in the spatial picture of Bosnia and Herzegovina.

In the period from 1953 to 2001, the share of rural population in the total population decreased from two-thirds to 42-49%, and the share of agricultural population decreased ten times, from 56.1 to 5.5%. The culmination of the agrarian exodus, like in other Balkans countries was in the1960s and 1970s, parallel to development of industry and tertiary sector, and the migrations to foreign countries. General and agrarian policies have not supported a private farmer’s estate, which affected, along with the mentioned processes, the social and economic impoverishment of the rural area. As a result, most of the contemporary research emphasizes negative demographic, economic and social characteristics of BIH ruris at the beginning of the 21st century. On the grounds of the performed analysis of the functions in big, medium and small towns, it can be concluded that a level of the subregional centre is a desirable degree of central-local importance of the settlements that are considered to be urban in formal and geographic sense (Vresk 1999 : 87-91).

Table 3: Modified model of separation of urban settlements in Bosnia and Herzegovina in 2011 Nurković, R. applied in working out the typology of rural areas

Size of settlement Share of Share of employed persons in a settlement Degree of (number of non-agricultural of living, except the active agricultural centrality inhabitants) households population 1.500-1.999 50% and less 25% or more subregional centre 2.000-4.999 50% and less 25% or more - 5.000-9.999 - 25% or more - 10.000 and more - - - ndon ions Source: Adapted by the author, 2011

On the basis of the BIH Agency for Statistics, Bulletin 6/2011, most of the population that returned to rural areas is primarily young or old. The results of research of different nongovernmental organizations, groups of activists in rural areas, show that most of the young population consider their staying in rural areas to be temporary and the dealing with agriculture and other activities serves to them only as a way of earning

254 Local Economic and Infrastructure Development of SEE in the Context of EU Accession R. Nurković: Influence of Tertiary Activities on Local and Rural Development... the minimum income, which is being saved for later departure to urban areas and looking for jobs there in other sectors. On the other hand, the elderly rather see the agriculture as a safe source of food and solid income, than as a commercial activity.

Economically the most active population, between ages 25 and 49 years, is the least present in activities on farms. Most of the activities and motivation for development of the farm capacities, for the purpose of achieving high incomes, is usually expected from this group. Such demographic model resulted in low income in rural areas in entire Bosnia and Herzegovina. The number of households also shows that Bosnia and Herzegovina is relatively a rural country. Namely, according to data from 2007, at the level of Bosnia and Herzegovina there were total of 1.054.613 households of which 58.5% in the rural areas. Accurate and reliable data on the rural population and labour markets in Bosnia and Herzegovina are very limited. This is mainly due to the fact that there has been no official census in the country since 1991. In the past 15 years, the country’s demography has changed dramatically. The official data of the Agency for Statistics of Bosnia and Herzegovina from 2007 show that there were total of 3.447.156 inhabitants of which 1.110.770 belonged to working population in Bosnia and Herzegovina.

Conclusion

Economy is the next important factor of economic development of the local and rural areas in Bosnia and Herzegovina. At the beginning of the 19th century about 43% of the total population of Bosnia and Herzegovina lived in rural area. While analysing the number of rural population and rural characteristics of Bosnia and Herzegovina, it is also indispensable to analyse the current situation within the wide historical context. New rural development of the settlements is associated with other smaller towns into an interconnected urban system where each provides services and products for its surroundings, accompanying region and its hinterland. These are followed by specialized shops (banking services. legal services, a large market, diversified labour, extensive public services, car showrooms, computer equipment, furniture, and alike). A strong pressure of foreign and domestic investors lead to poor quality and illegal construction of buildings in rural settlements, which are spreading spatially along the traffic routes.

An unequal regional development is a common regularity of development of tertiary activities, which is particularly expressed in certain developmental stages in polarisation of economic activities, population and income. At the same time, some parts of the country remain on the periphery, poorly or insufficiently included in the general development of the new tertiary activities. Tertiary activities are generally more developed in the bigger than in smaller municipal centres of Bosnia and Herzegovina. After Sarajevo, tertiary activities are most developed in Banja Luka,

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 255 Economic and Infrastructural Aspect of Local Development

Mostar, Tuzla, Brčko District, Bijeljina, Travnik, Bihać, Tešanj etc. In contrast, they are more poorly developed in smaller centres: Foča, Goražde, Trebinje, etc. The smaller, undeveloped municipal centres have poorly developed tertiary activities, primarily the trade, insufficient needs for craft and catering services, a small number of residential buildings in social sector etc. According to these, they have a small number of employed persons and, on the whole, the less developed tertiary activities.

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Local Economic and Infrastructure Development of SEE in the Context of EU Accession 257

DOI 10.5644/PI2013-153-16

LINKING OF THE URBAN AND RURAL TOURISTIC DIMENSION FOR THE PURPOSE OF INCREASE IN ECONOMIC EFFECT OF TOURISM

Šemsudin Džeko*

Abstract

This paper advocates new way of improvement of cooperation between private and public sector by creating strategic plans for integration of urban (existing) and rural tourist products, with an application of the principles of sustainable development, in order to form a unique tourist itinerary. Repositioning of existing urban products by linking with new rural products will result in creation of competitive tourist products, which concurrently include the less valorised areas. Thus, a foundation for extension of tourist stays and increase in income in less developed areas is created. So, the tourism, which has been identified as one of the key branches of economy development in Bosnia and Herzegovina, accomplishes its role of an instrument for poverty alleviation, advancement of local entrepreneurship, renewal of demographic structure and improvement of living conditions in rural communities. The tourist itinerary/product of such quality, which meets the expectations of international tourist and is, at the same time, adjusted with the trends on the world’s tourist market, guarantees a social-economic effect of tourism.

Keywords: Urban tourist product, Rural tourist product, Valorisation of rural areas, Sustain- able development.

Introduction

The contemporary economic development sees in tourism one of the most important activities in Bosnia and Herzegovina. Positive effects of tourism are bigger and bigger from day to day, not only for the regions, but also for entire countries. With its development in Bosnia and Herzegovina, tourism affects the development of new economic activities, particularly those in which the population earns their extra income. Development of tourism affects the regional development and is correlated with other activities. First of all, a new number of the jobs are created in tourism. In addition, it affects the urban and rural development of transport, as well as higher prices of land and its transformation from agricultural to construction land and alike.

* PhD, Udruženje/Udruga turističkih agencija Bosne i Hercegovine, Branilaca Sarajeva 21/4, 71000 Sarajevo, Bosnia and Herzegovina, phone: +387 33 252 900, fax: +387 33 252 901, e-mail address: [email protected]

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 259 Economic and Infrastructural Aspect of Local Development

The abrupt tourist development in Bosnia and Herzegovina is mostly reflected in development of the peripheral rural areas, which are, according to their underdevelopment, far from the developed urbanised centres of Sarajevo, Tuzla, Banja Luka, Mostar and other. The undeveloped areas lag in every aspect behind the developed centres, which results in economic migrations, emigration of labour force from agricultural lands and impoverishment of the village. With tourism development in these areas development of the periphery is achieved, staying the population in native area, improvement of infrastructure and all other activities of which the region, and even the country, have prosperity. This paper aims at showing the influence of tourism on urban and rural development of Bosnia and Herzegovina on the grounds of existing tourist resources, the number of tourists and tourist overnight stays in Bosnia and Herzegovina from the leading European countries, and the world, in the period from 2006 to February 2011 and the number of employed people in tourism. (Cigale 2004 : 68-72)

Methods of work and data sources

For gathering the primary sources of data an interview method has been used, i.e. depth interview, at which the main instrument was a reminder for interview. The interview was made with 200 respondents from urban and rural areas from smallholder farm households, with or without agritourism, workers of local/regional self- management units, Chamber of the Economy in Sarajevo and tourist organizations. The Interview consisted of 20 questions on socio-economic characteristics of the respondents, understanding of agritourism concept, motives, advantages and obstacles in agritourist activity, quality of cooperation of the competent institutions, a trend of demand for agritourism and influence of agritourism on socioeconomic development of rural areas in Bosnia and Herzegovina today and in the future. The questions have been of closed and open-ended type. The obtained results have been processed through the SPSS Programme. (Mikačić 1998 : 78-83)

The research was completed by analysis of the contents of secondary sources, interpretation and description of adequate data bases of the Agency for Statistics of Bosnia and Herzegovina. In the research, a method of interview and tourist valorisation of urban and rural natural-geographic characteristics that was conducted by experts for tourism in Bosnia and Herzegovina was used, which contributes to rel- evancy of data that were statistically processed afterwards. Smallholder households were also covered by the survey and the readiness and big interest in inclusion into the process of offering tourist services were recorded.

Tourist flows in Bosnia and Herzegovina Tourist flows in Bosnia and Herzegovina clearly indicate that Bosnia and Herzegovina is traditionally oriented toward foreign market in tourism. In order to obtain insight

260 Local Economic and Infrastructure Development of SEE in the Context of EU Accession Š. Džeko: Linking of the Urban and Rural Touristic Dimension for the Purpose of... into tourist valorisation of Bosnia and Herzegovina, it is indispensable to present the tourist resources distributed in urban and rural settlements. Tourism of Bosnia and Herzegovina is based on natural and anthropogenic resources. The Review of tourist resources shows that most of the tourist space and attractions have been insufficiently valorised so far. The European countries had a leading role in the world’s tourism in the past fifty years, which was even more intensified by the European integration process. The European tourist industry employs over 45 million of workers, which accounts for more than 14% of labour force. (Anon 2010c; Anon. 2010d). A drop in tourist trade that commenced in Bosnia and Herzegovina in the second half of the 1990s due to economic disturbances began to lessen after 1995, and started rising. High number of foreign visitors is still recorded in all tourist destinations of Bosnia and Herzegovina. Visits are primarily frequent with regard to natural-geographic characteristics and anthropogenic contents in Bosnia and Herzegovina. (Nurković 2004 : 134-18)

This is illustrated by data from 2009, when 17.813 tourists arrived to Bosnia and Herzegovina from Germany, 15.443 from Italy and 13.005 tourists from Austria. With regard to overnight stays of international tourists Germany also leads with 40.944 overnight stays, Italy with 32.685 and Austria with 22.734. Of the non-Euro- pean countries, according to number of tourists the Americans lead with 6.664 arrivals and 19.000 overnight stays in 2009. Of the former Yugoslav countries, the biggest number of tourists in the mentioned period came from Croatia. From this country 50.838 tourists came to Bosnia and Herzegovina in 2009, with 93.601 overnight stays recorded, which made 13.9% of the total overnight stays. (Table 1)

Table 1: Number of tourists and overnight stays in Bosnia and Herzegovina per countries, 2007–2010

Tourists Nights Countries 2007. 2008. 2009. 1/2010. 2007. 2008. 2009. 1/2010. Total 306.452 321.511 310.942 16.452 694.507 718.750 671.128 38.566 Croatia 50.208 53.512 50.838 4.005 108.142 108.233 93.601 8.531 Slovenia 36.353 36.596 34.580 1.861 68.308 68.493 60.762 3.207 Serbia 56.936 60.481 56.221 4.096 131.537 142.811 120.850 10.607 Austria 11.741 12.163 13.005 646 22.544 21.920 22.734 1.049 France 9.629 9.576 9.291 134 19.515 25.881 24.835 264 Netherlands 4.348 4.703 5.124 126 10.685 10.607 11.840 260 Italy 17.599 16.090 15.443 672 33.122 31.826 32.685 1.634 Hungary 4.038 4.193 5.124 126 8.086 7.293 11.404 207 Germany 17.761 17.201 17.813 680 39.635 35.493 40.944 1.474 England 6.213 5.593 5.077 161 14.910 13.536 11.877 320 USA 8.465 7.389 6.664 381 21.852 19.846 19.544 1.059 Turkey 11.276 12.091 13.660 540 29.119 31.081 31.937 1.073 Macedonia 3.792 4.551 4.810 157 7.452 9.256 9.533 335 Montenegro 6.613 8.129 7.848 1.125 13.041 21.123 19.506 4.564 Source: http://www.bhas.ba

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 261 Economic and Infrastructural Aspect of Local Development

Regarding the total income, a moderate growth, not only of the state but also the private incomes from tourism, is noticeable. (Table 2) In the analysed period, the state income had a larger share only in 1996, respectively amounted to KM 41.904 million or 69.4% of total income. Since 1998, the private income has taken over domination in total income and this trend still continues. In 2008, total income amounted to KM 68,899 million, of which private income accounted for 56% of total income. The proportion between the private and state income remained also in 2008, respectively amounted to 58.5% of private and 41.4% of state income, although the total income was lower by 13.4%. Domestic tourist trade in the mentioned period made somewhat more than 40% of total overnight stays. Today, tourist movements toward our country are getting bigger and bigger, and more dynamical. With establishment of a series of service activities the roads to the coast have been opened. These facts, as well as the tourist trends in the world, must be taken into consideration while discussing the previous, current and future development of tourist orientation of Bosnia and Herzegovina.

Table 2: Income from tourism in thousands of KM, 1996–2010

Year 1996 % 1997 % 1998 % 1999 % 2001 % 2010 % State 41.904 69.4 31.591 46,6 30.054 43,6 28.387 42,4 30.294 43,9 25.173 41,4 revenues Family 18.416 30,5 36.116 53.3 38.778 56,3 38.407 57,5 38.588 56.0 35.611 58,5 income Total 60.320 100 67.707 100 68.823 100 66.794 100 68.899 100 60.784 100 Source: Anon. 1997; Anon. 1998; Anon. 1999; Anon. 2000; Anon. 2001; Anon. 2002; Anon. 2003; Anon. 2004; Anon. 2005; Anon. 2006; Anon. 2007; Anon. 2008; Anon. 2009; Anon. 2010a with author calculation

It is necessary to search and determine the main factors that will most affect the future tourism development in Bosnia and Herzegovina. One of the indicators of influence of tourism on urban and rural development of Bosnia and Herzegovina is also a number of employed people in tourist industry. According to data on number of employed people in hotels and restaurants, it is noticeable that tourism is still insufficiently developed and, as such, is of no bigger influence on total economic development of Bosnia and Herzegovina. (Table 3)

Table 3: Number of employed people in hotels and restaurants in Bosnia and Herzegovina, 2006–2/2010

Year 2006 2007 2008 2009 2010 Total number 654.252 100% 687.445 100% 706.088 100% 686.044 100% 699.710 100% of employees Employees 26.649 4,1% 34.880 5,1% 32.408 4,6% 32.844 4,8% 34.072 4,9% in hotels and restaurants Source: http://www.bhas.ba

262 Local Economic and Infrastructure Development of SEE in the Context of EU Accession Š. Džeko: Linking of the Urban and Rural Touristic Dimension for the Purpose of...

Number of employed people in hotels and restaurants, as the leading tourism activities, has been changing quite frequently from 2006 to date. Total number of employed people in Bosnia and Herzegovina in 2006 was 654.252 while in February 2010 it reached 699.710 of employed or 45.458 more, respectively 6.9%. However, the employment level in tourism is below that level, respectively it ranged from 4.1% in 2006 to 4.9% in February 2010. (Chart 1)

Chart 1: Share of employed persons in tourism of Bosnia and Herzegovina, 2006–2010

Source: http://www.bhas.ba

It is necessary to consider it from more aspects, multidisciplinary with further developmental, spatial and process approach. This means that accurate and relevant data must be provided through relevant quantitative and statistical methods and a level of tourism development must be determined. (Cigale 2004) A particular attention should be paid to studying the development of this branch in the future regional development of Bosnia and Herzegovina. Contemporary economic changes in the world are the most evident in this branch and are also expressed through an inevitable process of economic restructuring in Bosnia and Herzegovina. (Mikačić 1998 : 90-96)

Influence of tourism on other sectors of the economy

Tourism is rightfully regarded as a branch that ensures a specific offer and economic valorisation of domestic tourist product in the best way, which is made of elements of tradition and culture, natural heredity and the constructed material culture, and service and production components of local tourist contents. Today, it is a fast growing industry with a growing knowledge and high value-added, which contributes to social prosperity, GDP growth, employment and investments. (Lorber 2006) In contemporary circumstances, tourism in Bosnia and Herzegovina has a significant place as a factor of development and restructuring of the linked activities. A special

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 263 Economic and Infrastructural Aspect of Local Development developmental effect the tourism has in external effects on a series of activities in economy and society, starting from production of food and drinks, road, railways and air transport, development of infrastructure and investments into destination capacities, through development of hotel business, trade and industry of entertainment, to starting the development of a series of financial, marketing and educational services and the changes in rural, environmental in country’s spatial development, and increasing the standard of living. (Chart 2)

Chart 2: Influence of tourism on other economic activities in Bosnia and Herzegovina, 2010

Source: The Federal Agency for Statistics of Bosnia and Herzegovina, Sarajevo, 2011

In the mentioned figure, 19 surveyed activities have been shown with grades from 1 to 3. On that occasion, a level of influence of tourism on the sectors in Bosnia and Herzegovina has been evaluated. Of 19 activities presented, 13 had the highest grade, while only railway transport had a grade 1, which means that this type of transport is the sector on which the tourism development does not have a major influence. On the other hand, 5 activities obtained the grade 2, respectively retail trade, banking services, insurance services, automobile industry and electrical industry. Activities that received the highest grade were, among others: agriculture, production of food and drinks, telecommunications, catering industry, etc. However, despite the huge potentials, tourism in Bosnia and Herzegovina is still in initial stage of development. According to estimations given in Global Report on Competitiveness in Tourism for 2010, it is estimated that tourist industry realises 461 million dollars of GDP, respectively participates in GDP of Bosnia and Herzegovina with 2.9% employing 26.000 workers, and participates in total employment with 2.3%. (Anon. 2010a; Anon. 2010b; Kurtović 2006 : 133-140)

The role and importance of tourism on regional development in Bosnia and Herzegovina were understood by many people, starting from the employees, through

264 Local Economic and Infrastructure Development of SEE in the Context of EU Accession Š. Džeko: Linking of the Urban and Rural Touristic Dimension for the Purpose of... institutes and governments. With this regard, an adequate Strategy for tourism development was adopted, which foresees an accelerated development of tourist capacities and an increased number of domestic and foreign tourists. The need for restructuring the existing and development of new aspects of tourism is one of the first needs for tourism development in Bosnia and Herzegovina. Number of beds should increase with concurrent raising the quality of accommodation in hotels, vil- las and boarding houses. Total investments in tourism development should reach about 1.5 billion EUR. According to estimations of the World Tourist Organisation (UNWTO), travel activities and tourism of Bosnia and Herzegovina for the period 2006–2015 are expected to have the real annual growth of 5.2%. Tourism in Bosnia and Herzegovina is dependant of 4 groups of factors: global, European and regional environment, and the environment made by system of Bosnia and Herzegovina and the Federation of Bosnia and Herzegovina, market factors in the country and the tar- get emitive markets, enterprising factors and their power and motivation for action in a sector of tourism and government. None of these factors can be isolated because all the factors mentioned above can only contribute to tourism development together.

Transport is one of the key factors that influence the tourism development. Bosnia and Herzegovina has a significant position in transport-communication system of the Balkans and South Europe. According to its position, it attempts to join, as quickly as possible, the developed countries of Europe and the world in the field of transport and communications, in which certain results are achieved. In the past few years, considerable funds have been invested into reconstruction of transport capacities, facilities and traffic lines destroyed and demolished by war, and construction of new roads and railway directions is also being planned. The existing traffic infrastructure in Bosnia and Herzegovina is mainly located around the central axis south-north along the rivers of Bosna and Neretva, and in west-east direction parallel to the Sava River. On these directions most of economic and natural resources, as well as of the population of Bosnia and Herzegovina, are located. Recently, the efforts and successes of Bosnia and Herzegovina and the International Community towards a gradual, yet certain normalization of international transport have become evident. (Horvat 2006 : 125-132)

Conclusion

It is noticeable from the mentioned data that tourist resources in the area of Bosnia and Herzegovina are still insufficiently used. The reasons for this are mostly the nonexistence of a tradition of tourism development, insufficient development of transport network and a lack of contemporary hotel accommodation. There are few geographic spaces left in the world which were most affected by location factors for tourism development. That is the first thing according to which Bosnia and

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 265 Economic and Infrastructural Aspect of Local Development

Herzegovina can be distinguished from the others. The past has been continuously keeping anthropogenic resources of human wishes, needs and habits.

In the last fifteen years, number of arrivals and overnight stays has been increasing in Bosnia and Herzegovina. The sending countries are mainly European, i.e. West European countries. The reason for their arrivals is still a very preserved and clean environment, a large number of cultural-historical monuments as well as religious tourism, primarily visiting Međugorje. On the other hand, there are visits to the Winter Olympic Mountains that, truly, are still not in the capacities in which they used to be before 1991. A big number of foreign tourists stay in destinations spa resorts primarily due to sports-recreation needs, spending active holiday as well as for preventive reasons. For the above mentioned, the guests are spatially very mo- bile, which initiated an intensive tourism development in the surroundings of these resort and spa regions (a diverse additional tourist supply, rental of separate tourist rooms or even construction of separate boarding houses and hotels) or even the creation of smaller, additional tourist areas. Tourism is regarded as one of the leading branches of economy in Strategy of development of Bosnia and Herzegovina. Priorities of fundamental developmental directions are the enterprising innovation, linking the tourism products into the frame of destination management, preservation of cultural-historical and natural heritage and promotion of the country. These activities are the basis for a new tourism concept which lies on local values of Bosnia and Herzegovina and the European marketing with a goal of promoting Bosnia and Herzegovina as a new, undiscovered destination for European tourists.

References

Anon. (1997) Statistical yearbook Federation Bosnia and Herzegovina 1997, The Federal Agency for Statistics, Sarajevo. Anon. (1998) Statistical yearbook Federation Bosnia and Herzegovina 1998, The Federal Agency for Statistics, Sarajevo. Anon. (1999) Statistical yearbook Federation Bosnia and Herzegovina 1999, Institute for statistics FBH, Sarajevo. Anon. (2000) Statistical yearbook Federation Bosnia and Herzegovina 2000, The Federal Agency for Statistics, Sarajevo. Anon. (2001) Statistical yearbook Federation Bosnia and Herzegovina 2001, Institute for statistics FBH, Sarajevo. Anon. (2002) Statistical yearbook Federation Bosnia and Herzegovina 2002, The Federal Agency for Statistics, Sarajevo. Anon. (2003) Statistical yearbook Federation Bosnia and Herzegovina 2003, Institute for statistics FBH, Sarajevo. Anon. (2004) Statistical yearbook Federation Bosnia and Herzegovina 2004, The Federal Agency for Statistics, Sarajevo. Anon. (2005) Statistical yearbook Federation Bosnia and Herzegovina 2005, Institute for statistics FBH, Sarajevo.

266 Local Economic and Infrastructure Development of SEE in the Context of EU Accession Š. Džeko: Linking of the Urban and Rural Touristic Dimension for the Purpose of...

Anon. (2006) Statistical yearbook Federation Bosnia and Herzegovina 2006, The Federal Agency for Statistics, Sarajevo. Anon. (2007) Statistical yearbook Federation Bosnia and Herzegovina 2007, Institute for statistics FBH, Sarajevo. Anon. (2008) Statistical yearbook Federation Bosnia and Herzegovina 2008, The Federal Agency for Statistics, Sarajevo. Anon. (2009) Statistical yearbook Federation Bosnia and Herzegovina 2009, Institute for statistics FBH, Sarajevo. Anon. (2010a) Statistical yearbook Federation Bosnia and Herzegovina 2010, The Federal Agency for Statistics, Sarajevo. Anon. (2010b) Strategija razvoja turizma Bosne i Hercegovine, Sarajevo. Anon. (2010c) Eurostat Yearbook, Eurostat. (http://epp.eurostat.ec.europa.eu/statistics_ex- plained/index.php/Europe_in_figures_Eurostat_yearbook) Anon. (2010d) Statistics and Tourism Satellite Account, WTO UN Yearbook, WOT, Madrid. (http://statistics.unwto.org/) Cigale, D. (2004) Posledična navzkrižja in obremenitve slovenskega alpskega sveta zaradi turistične in rekreativne dejavnosti. Doktorska disertacija, Odelek za geografijo Filozof- ske fakultete. Ljubljana. Horvat, U. (2006) Influence of tourism on the regional development on the example of resort places in Slovenia. In: Tourism as a factor of regional development, Proceedings, pp. 125-132. Kurtović, H. (2006) Banjska mjesta u Bosni i Hercegovini – centar zdravstvenog Turizma, Zbornik radova Turizam kao faktor regionalnog razvoja, Univerzitet u Tuzli, pp. 133-140. Lorber, L. (2006) A role of Tourism in Slovenia from its admission in the Europe Union. In: Tourism as a factor of regional development, Proceedings, pp. 61-73. Mikačić, V. (1998) Tourism of Croatia-Position and Perspectives, Croatian Geographical Bulletin, 60, Zagreb, pp. 90-96 Nurković, R. (2004) Some new forms of regional development and basic relations of industry and tourism: The example of the Tuzla vally, South Eastern European Countries on Their Way to Europe – Geographical Aspects, Dubrovnik, Croatia.

Linkovi http://www.fzs.ba/ http://www.bhas.ba http://epp.eurostat.ec.europa.e http://statistics.unwto.org

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 267

DOI 10.5644/PI2013-153-17

STRATEGIC PLANNING AT CANTONAL LEVEL – STEP CLOSER TO EU: CANTON SARAJEVO EXAMPLE

Emir Kurtović* Senad Softić** Maida Fetahagić*** Gordana Memišević****

Abstract

This article is focused on significance and necessity to include Canton Sarajevo into development planning process in Bosnia and Herzegovina as a precondition for accession of our country to EU. Apart from significance and development planning process, special attention is being paid to the need to integrate and include, in organizational-management sense, all cantons in Federation as implementation units in that process. Present strategic planning process in Bosnia and Herzegovina has focused on state and entity level, while in future it is necessary also to include lower governmental levels, especially cantons in Federation of Bosnia and Herzegovina which represents a task of this article. In the article, present process issues and development planning results in BIH are being presented as well as the process of strategic development documents implementation, monitoring and canton level reporting. Additionally, legal framework is also being presented due to the fact that it establishes obligation to create action plans and establish implementation units at cantonal level. The aforementioned legal framework defines Federal Institute for Development Programming as the key coordinator of all activities. Canton Sarajevo’s Action Plan for Strategic Planning is structured in line with strategic development goals determined in state BIH development documents referring to the following areas: macro stability, competitiveness, employment, sustainable development and social inclusion. Significance of action planning is being emphasized in the conclusion but only as a first step in BIH development strategy assuming creation of other relevant development aspects (social, economic and environmental). Also, necessity to harmonize aforementioned aspects with spatial planning documents is being

* PhD, associate Professor at The School of Economics and Business, University of Sarajevo, Trg Oslobođenja – Alija Izetbegović 1, 71 000, Sarajevo, Bosnia and Herzegovina, phone: +387 33 27 59 37, e-mail address: [email protected] ** PhD, assistant Professor at The School of Economics and Business, University of Sarajevo, Trg Oslobođenja – Alija Izetbegović 1, 71 000, Sarajevo, Bosnia and Herzegovina, phone: +387 33 27 59 37, e-mail address: [email protected] *** MSc, Institute for planning of Canton Sarajevo, Branilaca Sarajeva 26, 71000 Sarajevo, Bosnia and Herzegovina, phone: +387 33 258 265, fax: +387 33 209 543, e-mail address: [email protected] **** Institute for planning of Canton Sarajevo, Branilaca Sarajeva 26, 71000 Sarajevo, Bosnia and Her- zegovina, phone: +387 33 258 265, fax: +387 33 209 543, e-mail address: [email protected]

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 269 Economic and Infrastructural Aspect of Local Development emphasized. Sarajevo Canton has been continuously focusing its activities on this segment for a longer time period.

Keywords: Development planning, Canton Sarajevo, Action plan, Development strategy.

Introduction

Strategic planning introduction, according to the modular principle which follows principles of open method coordination being applied in the European Union, represents preparation of development actors at all governmental levels in Bosnia and Herzegovina for implementation of EU joint development goals as well as for implementation of economic and cohesion policies once it becomes an obligation of the country as a full member of the Community. Development actor’s capacities for future implementation of pre-accession funds (especially IPA III, IV, V) and structural funds from the moment when BIH becomes a member of European Union are being built in the frame of the present development planning process at all governmental levels. Practice of all new EU members demonstrates that process of learning and adjustment of development planning to the principles of EU development policies is a long-term process which can lasts for years (7-10). Thus, it is necessary to start with those processes as soon as possible in order to timely build capacities for EU funds absorption. The first step in this process represents adoption of joint strategic development framework and introduction of open method of coordination that has been started in BIH based on preparation of BIH Development Strategy and BIH Social Inclusion Strategy 2010–2013.

Present strategic planning process in BIH has been focusing on state and entity levels while in future it is necessary to include lower governmental levels in this process, especially cantons in FBIH.

BIH Directorate for Economic Planning (DEP) is competent body for process coordination at state level and towards entities, while Federal Institute for Development Programming as an entity coordinator in FBIH, based on decision of Government of Federation of BIH, is also competent for coordination of process of cantonal level inclusion to the development planning process in BIH.

Process of inclusion of cantons in development planning of BIH is being financially supported by Swiss Agency for Development and Cooperation – SDC. The aim of the project of implementation of Development Strategy (DS) and Social Inclusion Strategy of BIH (SIS) that has been implemented in year 2012 is to establish a function of a coordinator for implementation of DS/SIS. This assumes creation of pilot action plans, training and qualifying for preparation of cantonal annual reports as well as education of staff included in working groups.

270 Local Economic and Infrastructure Development of SEE in the Context of EU Accession E. Kurtović, S. Softić, M. Fetahagić, G. Memišević: Strategic Planning at Cantonal...

Overview of present development planning process and results in Bosnia and Herzegovina

Bosnia and Herzegovina has started with introduction of modular strategic development planning process, which is in line with EU methodology of open method of coordination (OMC)1, in order to introduce European standards at the mere beginning of BIH introduction process. Those standards will provide synchronized inclusion of all relevant development actors in BIH into the process of strategic planning and process of implementation of policies and activities in order to realize it. Due to the complex governmental structure in BIH which includes different decision making levels, it is necessary to include a large number of public actors and civil society actors at different governmental levels in order to realize successful implementation of strategic planning process. Thus, introduction of joint standards in the process of creation of development documents, creation of its implementation plan as well as monitoring and reporting represent a long-term process. Therefore, entire time period, from year 2010 to 2013, which refers to BIH Development Strategy and BIH Social Inclusion Strategy needs to be viewed as a period of learning and establishment of necessary infrastructure for development planning at existing BIH political system levels as well as time period for gradual adoption and implementation of joint EU relevant standards. (Anon. 2000; Anon. 2010a; Anon. 2010b)

BIH economic and social development strategies should enhance consensus in BIH community on necessary joint directions for economically effective, environmentally sustainable and socially fair development in the interest of the present and future generations. Additionally, those strategies should animate all key development actors to contribute to aforementioned directions in accordance to its competences and capabilities respecting the highest level of responsibility, transparency and searching for possible inter-synergies. Respecting of three dimensions is at core of the consensus: environmental dimension, economic and social that should be equally respected in the frame of local, and entity/cantonal sustainable development strategies as well as in the frame of the action plans for effective realization of defined BIH strategic development goals.

Existing strategies in BIH will serve as a base for preparation of strategic framework for implementation of EU IPA programme that would support realization of

1 In 2000, EU Council (made of all presidents of governments) adopted a new methodology of development programming coordination in EU called Open Method of Coordination – OMC as a key mechanism for successful coordination of development planning and implementation of jointly adopted strategic development priorities at EU level. According to OMC in order to realize jointly adopted strategic goals, each and every EU member country should clearly define bodies and institutions that would at different governmental level in each and every country and in different phases of strategic planning, provide the following: (1) political decisions and responsibility for the implementation, (2) those that would provide technical-administrative capacity for process conducting, as well as (3) mechanism of coordination with nongovernmental sector and social partners in all phases of development planning process.

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 271 Economic and Infrastructural Aspect of Local Development development priorities. Furthermore, implementation plan assumes that Bosnia and Herzegovina during the period of strategies implementation, will gain status of a EU candidate country thus undertaking obligation to prepare joint European directed strategic documents such as: Memorandum on social security development and improvement of social inclusion of vulnerable groups (JIM) as a joint EU and BIH strategic document and preparation of Strategic Coherence Framework – SCF2 as a framework for implementation of European development policies on national level and creation of operative programmes (OP)3 at state and entity level (including cantons in FBIH) in line with their competencies in the process of implementation of economic and social policies. Also, strategies represent framework for coordination and direction of development assistance by donors and international development institutions during the time of its implementation.

Entire process of introducing of strategic planning is professionally and financially supported by international community (DFID, ECD, ADA and SDC).

Process of implementation of strategic development documents, monitoring and reporting at cantonal level

Broader goals of BIH Development Strategy and BIH Social Inclusion Strategy have been adopted at all governmental levels (BIH, FBIH – including here representatives of cantons/RS/BD). In line with general modular approach, strategies represent joint direction for operative interventions that would be undertaken at each and every governmental level in accordance to the specific needs, possibilities and priorities.

Purpose of action planning is to operationalize jointly agreed goals and policies for the realization of development priorities. So, action plan (AP) should translate priorities and measures determined for each and every sub goal (or goal SIS) into specific, timely defined and financially planned activities that take local conditions into consideration (needs, resources and priorities). Action plan defines carriers of

2 National Strategic Coherence Framework – SCF represents a strategic document (in case of pre- accession funds for IPA funds components) and is being created based on national development strategy and multiyear indicative planning document (MIPD). The aim is to ensure consistency between IPA programme components and national and European priorities (especially Lisbon goals). SCF represents a framework for operative programmes that furthermore elaborate defined priorities. 3 Operative programmes (OP) represent operationalization of action programmes in the sense of financial support to the implementation. In the context of structural funds and instruments of cohesion policy, it represents a document that is made by member country and approved by Commission for implementation of Framework for Community support/ national strategic coherence framework. It contains consistent chain of priorities made by multi annual measures. It can be conducted by using of one or more funds, and by using of one or more financial instruments as well as via EIB. NOTE: OP contains measures requesting financing and different finance sources that support implementation of measures are being stated (domestic, donors, EU funds, private sources).

272 Local Economic and Infrastructure Development of SEE in the Context of EU Accession E. Kurtović, S. Softić, M. Fetahagić, G. Memišević: Strategic Planning at Cantonal... activities and points at institutional partners for conducting of activities. Due to the fact that strategic goals as defined in SD and SIS are of inter-sector nature, action planning includes a large number of actors at each and every level. Thus, here we speak about a complex venture that requires harmonized and checked methodology and efficient coordination. Monitoring of implementation and regular reporting contributes to the transparency of conducting of adopted activities. In the area where key indicators of development trends are being followed for BIH, as a community (annual report on BIH development), for entity (annual report on development of FBIH, RS, BD) as well as for cantons (annual report on cantonal development) they show achieved results in the frame of strategic development goals. In this part, they should demonstrate clear picture of activities in all parts of BIH as well as development direction. Therefore, reports would serve as a professional/expert base and incentive to the work of the governments. Thorough guidelines for creation of system of monitoring and reporting at cantonal level will be elaborated in the frame of the second step upon finishing of action planning process. In this phase, cantonal governments should prepare pilot versions of action plan (AP) of DS and AP of SIS for time period 2012–2013, when strategies’ duration officially ends. Purpose of entire process is primarily to build capacities and competences necessary for introduction of OMC method in BIH and to prepare synchronized approach for implementation of new iteration of development planning that should refer to the following time period 2014–2020. In order to successfully conclude first phase of introducing of cantons into the process, that is, in order to successfully conduct action planning for realization of DS and SIS at cantonal level, it is necessary to conduct following steps: (Anon. 2000) Establishment of a function of implementation coordination at cantonal level; Preparation of basis for working groups activities as well as training and education of working groups members; Creation of working groups for preparation of AP DS and AP SIS in each and every canton; Coordination of the preparation process regarding AP DS and AP SIS in each and every canton.

Methodology

Goal of the implementation of Development Strategy and Social Inclusion Strategy of BIH is to establish a function of a coordinator of implementation of DS/SIS in each and every canton. This assumes creation of action plans, training and qualifying for preparation of annual cantonal reports as well as training and education of the staff that would be included in working groups.

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In accordance to the general modular approach4, BIH strategies represent a joint direction for operative interventions that would be undertaken at each and every governmental level in line with specific needs, possibilities and priorities.

Purpose of action planning is to operationalize jointly agreed goals and policies for realization of development priorities. Action plan (AP) should translate priorities and measures determined for each and every sub goal into specific, timely defined and financially planned activities that take local conditions into consideration (needs, resources and priorities). Action plan defines carriers of activities and points at institutional partners for conducting of activities. Due to the fact that strategic goals as defined in SD and SIS are of inter-sector nature, action planning includes a large number of actors at each and every level.

Purpose of entire process is primarily to build capacities and competences necessary for introduction of OMC method in BIH and to prepare synchronized approach for implementation of new iteration of development planning that should refer to the following time period 2014–2020.

Canton Sarajevo Action plan for strategic planning for year 2013 has been structured in line with strategic development goals determined by development documents of Bosnia and Herzegovina, which are: Macro stability; Competitiveness; Employment; Sustainable development and Social inclusion.

At the state and entity level, working groups have been based on strategic goals and sub goals of DS or SIS goals as shown in table below. Process coordinators have provided a moderator for each and every working group. Moderator’s task has been to professionally direct work and to define priorities and measures. Thus, 18 working groups have been established (as shown in table below) which performed a function of preparing of strategic documents.

4 Modular approach in strategic planning process assumes that each and every governmental level in Bosnia and Herzegovina represents a separate module in the frame of development strategic planning system. In this regard, module is comprised of: BIH, Federation of Bosnia and Herzegovina (FBIH), Republic of Srpska (RS) and Brčko District (BD), while in the frame of FBIH there are cantons and local communities. Modular approach means that while creating development strategies starting points are: strategic documents of particular modules, defined joint goals, sub goals, priorities, measures and activities which refer to entire BIH, that is, to whole modules and specific measures and activities for particular modules.

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Table 1: Goals and sub goals of chosen action planning areas

Goal Sub goal Public finance Macroeconomic External sector stability Financial market development Clusters Human resource competences Competitiveness Development of scientific/technological and business infrastructure Single economic space Agriculture, food production and rural development Sustainable Ecology and energy potential development development Transport and communication Development of SME and job creation Labour market functioning and active employment measures Employment Improving of skills available at labour market, professional education and training Social policy in function of employment To improve condition of families with children To improve education Social inclusion To improve health protection To improve retirement policy To improve condition of disabled persons Source: Guidelines for establishment of units for process coordination and preparation of cantonal action plans to support realization of BIH Development strategy and Social inclusion strategy of BIH, BIH, Federation of Bosnia and Herzegovina, Federal Institute for development programming, Sarajevo November 2011 to November 2012.

Based on conclusion of Government of FBIH, cantonal governments are being for the first time included (in regulatory sense) in the process of strategic planning in BIH. Namely, at its regular 157. Session held on September 21 2010. Government of Federation of Bosnia and Herzegovina gave its support to the Development strategy of BIH (DS BIH) and Social inclusion Strategy BIH (SIS BIH) and passed decision to include cantons into this process by establishing of implementation units in cantons. (Anon. 2010a; Anon. 2010b) Government also appointed Federal Institute for development programming as a coordinator. Following activities should be conducted by cantons: To create its action plans where aforementioned strategies will be supported at cantonal and local level and To form implementation units that will perform monitoring, evaluation and reporting on conducted activities at annual level. Federal Institute for development programming must be informed on aforementioned activities.

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Canton Sarajevo Government passed the Conclusion on determination of implementation unit as well as Decision on establishment of team for preparation and creation of Canton Sarajevo Action Plan for strategic planning (Anon. 2012c; Anon. 2012d)

Action Plan for strategic planning of Canton Sarajevo for the year 2013 represents a starting document of a unique strategic planning process that is being implemented in the entire territory of Bosnia and Herzegovina and whose implementation will be conducted until 2014. Action plan encompasses activities which Canton Sarajevo will be conducting in future in order to implement strategic development guidelines of Bosnia and Herzegovina.

Based on decision of Canton Sarajevo Government, Institute for Development Planning of Canton Sarajevo is defined as unit for implementation of the Action Plan for strategic planning of Canton Sarajevo. In this way, Canton Sarajevo entered into functional system of development planning in FBIH and BIH (Anon. 2012c).

Institute for Development Planning of Canton Sarajevo is in charge for preparation of methodology and method of coordination as well as for involvement of all governmental bodies, authority organizations and other institutions of Canton Sarajevo in the process of creation and implementation of Action Plan, that is, in the process of preparation of proposals for solutions on forming of Team for preparation and creation of action plan for strategic planning of Canton Sarajevo (Anon. 2012c).

Team for preparation and creation of Action Plan for strategic planning of Canton Sarajevo has been formed based on strategic goals determined by development guidelines of Bosnia and Herzegovina. Apart from a coordinator, it is being comprised of three working groups: I Working group for strategic goals: macro stability and competitiveness; II Working group for strategic goals: employment and social inclusion; III Working group for strategic goal: sustainable development.

Methodology and manner of involvement of all governmental bodies, authority organizations and other institutions of Canton Sarajevo, as well as of all external associates, is based on the following: Development Strategy of Bosnia and Herzegovina and Social Inclusion Strategy of Bosnia and Herzegovina, Determined strategic goals, sub goals, priorities and measures in Action Plan of Development Strategy of Bosnia and Herzegovina, Guidelines for establishment of units for process coordination and preparation of cantonal action plans in order to support realization of Development Strategy of BIH and Social Inclusion Strategy of BIH (Federal Institute for Development Programming); • Canton Sarajevo’s competences defined by Constitution of Canton Sarajevo;

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Cantonal bodies’ competences (ministries and authorities), independent cantonal authority organizations defined by Law on Organization and Scope of Authority Bodies and Authority Organizations of Canton Sarajevo (Anon. 2012a). Preparation and creation of working material “Canton Sarajevo Action Plan for strategic planning for the year 2013”, has been conducted through several key activities. Such specific activities are the following ones: (Anon. 2012f) Holding of workshops for entire team, organized by the coordinator – Federal Institute for Development Programming and external consultants for strategic planning (Creation of Action Plan for DS/SIS in Canton Sarajevo FBIH, April 24, 2012); Overview of conditions in the area of action plans creation, linking of AP to the budget planning, creation of report on DS/SIS implementation in Canton – November 19, 2012; Creation of wide Situation Analysis of Canton Sarajevo 2010–2011. as a base for preparation of Action Plan conducted by Institute for Development Planning of Canton Sarajevo in consultation with Federal Institute for Development Programming; Individual work of the Team members and joint work on PESTLE analysis; Constant contacting and holding of working and operative meetings with Team members and Institute for planning; Constant coordination with Federal Institute for Development Programming in regards to the providing of expert assistance.

Working material “Canton Sarajevo Action Plan for strategic planning for the year 2013” is a result of team work in course of several months of joint work. It is a result of the team work of the Team for preparation and creation of Canton Sarajevo Action Plan for strategic planning and Canton Sarajevo Institute for Development Planning with expert, professional consultant assistance from Federal Institute for Development Programming and its experts for strategic planning (Anon. 2012f).

AP passed procedure of draft creation and plan proposal. It was adopted by Canton Sarajevo Government.

In the following lines we will illustrate an example of relatively good strategy for strategic goal competitiveness, sub goal 1 – cluster development and priority 1 – constant improvement of enterprises productivity:

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Table 2: Example of relatively well defined activity ACTION PLAN

STRATEGIC GOAL COMPETITIVENESS Sub goal 1 Cluster development PRIORITY 1 Constant improvement of productivity of enterprises

MEASURE 1: TO SUPPORT BUSINESS MODERNIZATION AND STANDARDIZATION

Activity Type of activity Type Source of activity Goal and Expected activity results Institution Carrier of the activity) of competence Type Implementation period Source of financing YES/NO)

To map key S A To recognize which are I 2013 Budget possible clusters of the key clusters that Ministry of small and medium require assistance in its Economy (will be enterprises in the further development and provided canton internationalization in 2013) To adopt multi S AP Adopted programme Ministry for KO, 2012 annual programme of linking of scientific Education, IO for linking institutions and private Science, Culture of scientific sector in the field of and Sport in institutions science and research cooperation and private with Ministry of sector through Economy and research projects other institutions and flexible at the federal programmes of level, University lifelong education To prepare a S AP Improvement of Ministry for KO, 2012. handbook for business quality as well Education, IO continuously economic subjects as of product and service Science, Culture and provide quality and increase of and Sport, availability of all efficiency and business Ministry of necessary expert competitiveness in at Economy and assistance for plant least 30% of enterprises other competent modernization via institution in the introducing of ISO Introduced voucher for canton and CE standards increase of availability of expert assistance to enterprises

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To adopt multi IO Increase of investing in Ministry of KO, 2012. annual incentive innovations, research Economy; IO programme for and development, Ministry for commercialization introducing of new Education, of scientific technologies; Science, researches in order Culture and to link scientific Sport, Ministry and economic of Finance, subjects as well University as providing of financial and legal support in order to achieve enhanced inclusion of science in product and service market Source: Guidelines for establishment of units for process coordination and preparation of cantonal action plans to support realization of BIH Development Strategy and Social Inclusion Strategy of BIH, BIH, Federation of Bosnia and Herzegovina, Federal Institute for Development Programming, Sarajevo November 2011 to November 2012.

Conclusion

Special challenges, suggestions and solutions in the process of creation, monitoring and evaluation of AP are:

Carriers of legislative power and executive authority, governments and cantonal assemblies, must primarily understand significance and necessity of strategic planning and development guiding not only because of development of Canton and better and more pleasant citizen’s life, but also because of creation of strategic commitments that result in concrete projects which tomorrow will create opportunities for application to EU funds (that is opportunities to withdraw significant means from EU funds); Establishment of real framework for realization of projects and programmes determined in the Action Plan, harmonized with DOB and cantonal budget; • Suggestions and solutions laid down in AP for which no financial support is required should be placed in special priority and carriers of those guidelines should be specifically emphasized during the implementation process; Regarding projects that represent a base for application to EU funds, a fund at FBIH level should be established which would guarantee support in co-financing of projects accepted by EU side.

Hence, based on analysis on preparation and creation of cantonal Action Plan it can be concluded that it represents a huge step forward in introducing of strategic planning in cantons and its involvement in strategic planning system in Bosnia and

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Herzegovina. However, the biggest problem is that there are no development strategies of cantons or they are created based on various methodologies. Based on development strategy and recognized priorities in development, canton can be positioned in FBIH and it can harmonize itself with development priorities of FBIH and BIH.

In the end, conclusion is that creation of action plan represents the first step in involvement of canton, especially of Canton Sarajevo, in strategic planning process. However, this document (AP) does not reflect development strategy but it is more focused on aspects of social inclusion of inhabitants into this process which gives a completely different dimension to the entire approach. Considering actual economic situation in the country and the Region this fact is emphasized even more. So this document even more represents instrument for “fire fighting” than a document with strategic dimensions. Besides, action plan is based on five strategic goals which do not encompass other relevant areas and competencies of Canton Sarajevo (culture and cultural heritage, sport, art, tourist potentials, demographic and land policy, security and utility area). In this sense, we believe and propose an urgent approach regarding creation of general, comprehensive development strategy of Canton Sarajevo which should encompass all relevant aspects, primarily economic, social and environmental ones. Of course, balanced approach to creation of aforementioned strategy is implied here. The strategy should also incorporate and harmonize aforementioned aspects with spatial development planning documents. Canton Sarajevo is continuously working on and improving those documents. Only in this way it is possible to expect faster and more qualitative development of Canton, Federation and Bosnia and Herzegovina as entire state.

References

Anon. (2000) Open Method of Coordination – OMC, EU, Brussels. Anon. (2009) National Strategic Coherence Framework – SCF represents a strategic document, DEP, Sarajevo. Anon. (2010a) Development Strategy of Bosnia and Herzegovina 2010–2014, DEP, Bosnia and Herzegovina, Sarajevo. Anon. (2010b) Social Inclusion Strategy 2010–2014, DEP, Bosnia and Herzegovina, Sara- jevo. Anon. (2010c) Situational Analysis of Strategic Planning at the Cantonal Level, Federation of Bosnia and Herzegovina. Anon. (2010d) National Development Strategy and Multi-Annual Indicative Planning Docu- ment (MIPD), DEP, Sarajevo Anon. (2012a) Guidelines for establishment of units for process coordination and preparation of cantonal action plans to support realization of BIH Development Strategy and Social Inclusion Strategy of BIH, Federal Institute for Development Programming, Sa- rajevo. Anon. (2012b) Creation of Action Plan for DS/SIS in Canton Sarajevo FBIH, April 24, 2012.

280 Local Economic and Infrastructure Development of SEE in the Context of EU Accession E. Kurtović, S. Softić, M. Fetahagić, G. Memišević: Strategic Planning at Cantonal...

Anon. (2012c) Canton Sarajevo Government passed Conclusion on Determination of Imple- mentation Unit, Official Gazette of Canton Sarajevo, No. 5/12. Anon. (2012c) Decision on establishment of team for preparation and creation of Canton Sarajevo Action Plan for strategic planning, Official Gazette of Canton Sarajevo, No. 14/12. Anon. (2012e) Implementation of Development Strategy and Social Inclusion Strategy, IDS/ SIS BIH, DEP, Sarajevo. Anon. (2012f) Canton Sarajevo Action Plan for strategic planning for the year 2013, Canton Sarajevo and Federal Institute for development programming, Sarajevo. Anon. (2013a) Action Plan for strategic planning for the year 2013 – Proposal, Canton Sa- rajevo, Sarajevo. Dimova, M. (2010) Integrated Local Development Project (ILDP), UNDP, Sarajevo.

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DOI 10.5644/PI2013-153-18

OPPORTUNITIES AND RESPONSIBILITIES OF LOCAL SELF-GOVERNMENT IN ENVIRONMENTAL ASPECTS OF THE EU INTEGRATION PROCESS FOR BIH

Tarik Kupusović* Arijana Huseinović**

Abstract

The EU environmental policy does not address consequences resulting from various segments of development, but their harmonization with environment, which is a milestone of every economic, social and cultural development. The EU environmental policy has been implemented on different levels. Therefore, harmonization and implementation of legislation in BIH is an indicator of good government, as well as local self-government. Every decision, regulation and conclusion issued at any level should be characterized by short-term, mid- term and long-term effects relating to the right of present and future generations to the equal use and management of limited natural resources. Although environmental policy has been identified as one of the priorities in the EU integration process, and legislation substantially harmonized with the EU legislation has been implemented in BIH, it is still insufficiently applied. The control level of implementing environmental permits and environment protection in general is relatively low. The responsible entity and cantonal (in the Federation of BIH) institutions insufficiently implement the required political, legal and institutional reforms in order to develop this framework. Neither national nor entity levels have undertaken significant steps for implementing programmes and strategies required by the signed agreements and contracts between the EU and BIH. Only few local communities show some dynamics and ability to join contemporary European trends in the environmental aspects of public utility infrastructure development and take advantage of existing opportunities that have been significantly increased after the Stabilization and Association Agreement EU – BIH has come into effect.

Keywords: Environment, Local self-government, Environmental infrastructure, EU – BIH.

Introduction

Local self-government presents a particularly important element regarding the support to the development and association of BIH to the EU. Citizens are most familiar

* PhD, full-time Professor at the University of Sarajevo and Director of Hydro-Engineering Institute Sarajevo, Stjepana Tomića 1, 71000 Sarajevo, Bosnia and Herzegovina, phone: +387 33 212 466, fax: +387 33 207 949, e-mail address: [email protected] ** Candidate for Master of Arts at the Faculty of Political Sciences University of Sarajevo

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 283 Economic and Infrastructural Aspect of Local Development with this level of government; positive improvements and reform consequences are also more prominent. In the post-war period, local self-government in BIH has been exposed to the series of problems. In addition, the needs and achievements of local self-government have been limited by partitioned political structure in BIH. Local self- government, or Municipalities in BIH, has been motivated to improve its operation, particularly within the EU integration process, but also and particularly as a consequence of the Stabilization and Association Agreement (SAA) from 2008. The right to local self-government has been guaranteed by the Laws on Local Self-government adopted in both entities. However, disadvantages in the area of municipal administrative services have been very noticeable. Some municipalities in BIH do not have capacities for monitoring, planning and ensuring their revenues and implementing budgets; neither for the implementation of necessary projects in order to motivate and improve development of their local communities. Therefore, the potential contribution of local government to the improvement of standard of living and sustainable development, without engaging new capacities, has been very limited. In July 2003, Bosnia and Herzegovina became a potential candidate for joining the EU after the completed negotiations at the meeting of the Council of Europe in Thessaloniki. On 16 July 2008, Bosnia and Herzegovina signed the Stabilization and Association Agreement (SAA). SAA has been ratified but it has not come into effect yet. This agreement forms a basis for cooperation between Bosnia and Herzegovina and the European Union. One of the cooperation segments, mentioned in SAA in Article 108, is environment: “The Parties shall develop and strengthen their cooperation in the environmental field with the vital task of halting further degradation and start improving the environmental situation with the aim of sustainable development. The Parties shall, in particular, establish cooperation with the aim of strengthening administrative structures and procedures to ensure strategic planning of environment issues and coordination between relevant actors and shall focus on the alignment of Bosnia and Herzegovina’s legislation to the Community acquis. Cooperation could also centre on the development of strategies to significantly reduce local, regional and trans-boundary air and water pollution, including waste and chemicals, to establish a system for efficient, clean, sustainable and renewable production and consumption of energy, and to execute environmental impact assessment and strategic environmental assessment. Special attention shall be paid to the ratification and the implementation of the Kyoto Protocol.”

Administrative capacities of BIH in the field environmental protection are very limited. In the European Commission Staff working document: Bosnia and Herzegovina Progress Report, the necessity for forming an agency for environment protection has been stressed. Its responsibilities will include monitoring and reporting on the state of environment in the entire country, since the existing administrative capacities – within the institutions responsible for environment – have been limited due to the partition of authority both vertically and horizontally. Environmental concern has been still limited in other sectors as well.

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EU Environmental Policy and Local Self-government

Objectives and Principles of the EU Environmental Policy

The EU environmental policy objectives have been defined in a few provisions of the Treaty on the Functioning of the EU and the Treaty on the EU and it is necessary to interpret them in the segment of total objectives of the EU. The most clearly formulated objectives in the field of environmental protection are to be found in the provision of Article 191 of the Treaty on the Functioning of the EU, where it is stated that environmental policy of the Union has to contribute to achieving the following objectives: conservation, protection and improvement of environment, protection of human health, rational use of natural resources, promoting the application of protection measures at the international level in order to resolve regional or global environmental issues (Čavoški 2007 : 14-22).

The environmental policy principles have been based on the following international law principles of the environmental protection, commonly accepted principles and the best world practice. These are the following principles: Principle of natural resources protection/preservation – includes monitoring and application of existing environmental standards; Principle of precaution – includes human factor, i.e. the impact on the quality of environment and human health; Principle of hindering/prevention – refers to the activities of hindering negative environmental impacts instead of repairing damage, careful and economical use of environmental components along with the slightest possibility to cause environmental damage. Although majority of environmental policy has been directed towards mitigation or removal of adverse effects, it is much more simple and cheaper to prevent adverse environmental effects. Principle of substituting an activity possible to cause adverse environmental effects with another activity producing much less damage – includes the areas requiring the measures for solving problems. One of the examples of this principle is the application of BAT1 techniques in large (and small) industrial companies. Principle ‘polluter pays’ – includes the polluter’s obligation to compensate the costs of removing consequences of adverse environmental effects or damage compensation, i.e. charging the polluter for the environmental damage in the form of a penalty or a motivation not to do that again; Principle of cooperation, joint action and sharing the responsibility of all subjects for the purpose of environmental protection; Principle of integrated approach – it means that all environmental protection demands have to be taken into consideration while forming and implementing all types of the EU policies. This principle includes taking into consideration the

1 BAT – Best Available Techniques

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life-long cycle of substances and products, predicting potential consequences in all environmental components, implementation of measures to correspond with consequences; Principle of subsidiarity – this principle is the general EU principle stating that the EU does not undertake any actions, unless they are more effective than actions undertaken at national, regional or local level. The objective is to ensure effective decision making at the government levels closest to citizens; Principle of participation of public and enabling the approach to all citizens and organizations interested.

These principles have been defined by the Treaty on the EU and present examples, prototypes, in both defining environmental policies and issuing and implementing decisions with a possibility to have direct impact on environment, natural resources and human health at the national, regional or local level.

Environmental EU legislation

The EU approach regarding environmental protection has been changed a lot in the last 20 years. The basic EU objective is to preserve, protect and improve environment in member states, increase measures for solving environmental issues at the international level, identify common principles of environmental policy, and identify common decision making process on the environmental policy. The EU enacts measures on the basis of the decision of the Council, at the suggestion of the Commission and after consultations with the European Parliament.

The Treaty of Rome from 1957 does not specify any provision on the environmental protection. Only in the beginning of the 1970s was it perceived that environmental issues present a threat to the EU economy. Thus, in 1971, the first detailed plan regarding the EU environmental protection policy saw the light of day. In 1972, member states agreed on adopting environmental policy. According to this policy, economic growth has to be achieved along with the improved quality and standard of living (Črnjar 2002).

The Single European Act from 1987 contains special provisions on environment; the Maastricht Treaty from 1992 defines environment in more details; the Amsterdam Treaty from 1997 additionally determines the position of environment in the EU legislation; the term ‘high level of environmental protection’ is also introduced. In the Amsterdam Treaty, sustainable development has been incorporated in the EU objectives, while the environmental protection policy has been given a priority in relation to other EU policies.

European environmental legislative framework includes three key competency levels: European, national, and regional/local level (Anon. 2001; Anon. 2006b; Anon. 2009).

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Every above-mentioned level presents a significant segment for the successful application and implementation of the EU environmental policy. When a legislative act is adopted at the EU level, member states take on obligation to harmonize national legislation with the act, and have to ensure the effective implementation in practice as much as possible. This transposition does not oblige only member states. It also concerns countries with a status of candidate for the EU membership (Anon. 2001; Anon. 2006b; Anon. 2009; Anon. 2012b).

Every country with a goal to become the EU member has to make transposition of the EU legislation. Acquis communautaire is a collection of rights and obligations referring to all member states of the EU and the countries that want to become members.

The EU environmental policy does not address consequences resulting from various segments of development, but their harmonization with environment, which is a milestone of every economic, social and cultural development. The EU environmental policy has been implemented on different levels. Therefore, harmonization and implementation of legislation in BIH is an indicator of good government, as well as local self-government (Anon. 2001; Anon. 2006b; Anon. 2009).

To be more precise, every decision, provision, conclusion issued at national, regional or local level should be characterized by short-term, mid-term and long-term effects relating to the rights of present and future generations to the equal use and management of limited natural resources.

European Charter of Local Self-government

Local governments have been promoting their interests since 1957 through a special representative body at the level of the European Community – the Congress of Local and Regional Authorities of Europe.2 Proposed by the Standing Conference of Local and Regional Authorities, member states of the Council of Europe adopted the European Charter of Local Self-government in Strasbourg on 18 October 1985 (Anon. 1985).

The objective of the European Charter of Local Self-government is establishing common European standards for identifying and preservation of rights of local governments, closest to the citizens, and offering the citizens a greater possibility for active participation in a decision making process about public affairs directly related to their interests (Anon. 1985).

2 CLRAE – The Congress of Local and Regional Authorities of Europe. The Council of Europe formed the Congress of Local and Regional Authorities of Europe in 1994 as an advisory body instead of the former Standing Conference of Local and Regional Authorities of Europe. The Congress helps new member states with practical issues in relation to their activities for creating effective local and regional self-government.

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Therefore, the European Charter of Local Self-government commits signatories to apply basic rules guaranteeing political, governing and financial independence to local governments. The European Charter of Local Self-government consists of a preamble and three sections. Basic premises of the Charter are presented in the Preamble: vital contribution of local self-government in the development of democracy, efficient governance and power decentralization, the significance of the role of local governments in the process of creating Europe, the necessity for democratic constituting of local governments that will enjoy widely comprehensive autonomy (Anon. 2003a).

The European Charter of Local Self-government identifies local government bodies as one of the pillars of every democratic society, promotes the citizens’ right to participate in the public affairs management, the fact that this citizens’ right is to be exercised most directly at the local level, as well as the fact that existence, development and strengthening of local self-government in the European countries is an important contribution to creating Europe based on the principles of democracy and power decentralization (Anon. 1985; Anon. 2003a).

European Standards of Local Self-government and experiences of Member States and States involved in the Stabilization and Association Process

Regarding the European experience of organizing local self-government, it is important to emphasize a few elements: European government area, the principles of good rule and government, convergence, harmonization of local self-government in Europe, impacts, experience and learning, and development and codification. Regarding the models of the European self-government tradition, the following models exist: French centralistic model; German model (federation, principle of subsidiarity, detailed regulation of local affairs); British model (unwritten constitution, the parliament sovereignty, legal doctrine ‘ultra vires’); and Scandinavian model (large local units) (Anon. 2003a).

Common features of all above-mentioned models are europeanisation, harmonization, learning, while tradition and cultural difference represent their divergence.

Local self-government pursuant to the EU standards includes: European Charter of Local Self-government; Organization of public utility services in a metropolitan area (cooperative institutions, financial problems, the position of users, the liberalization policy...);

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Social services (social habitation and social assistance, health services, education, culture, sport...); Urban aspects (spatial planning, regulation of construction, development of settlements); Economic development; • Financing peculiarities (typical fiscal forms, bonds, public-private partnership, etc. – an entrepreneurial city); Adequate relations between integration and internal decentralization; Strengthening of local-political government capacities; Harmonization at all national levels (performing activities of national government at the territory of local self-government units, dividing public activities, authorities and responsibilities, financing); • Strengthening relations with citizens (legitimating deficits, direct election of a mayor, other forms of participation); and Legal standards (public procurement, protection of citizens’ rights – tax payers, public availability of contracts and information...) (Anon. 2003a).

Role of Local Self-government in environmental aspects of the EU integrations

Local self-government, i.e. local self-government units, is one of environmental protection subjects. In their scope, local self-government units regulate, organize, finance and improve environmental protection affairs of local/regional importance. The role of local self-government in environmental protection also reflects through establishing environmental protection programmes for local area. The EU environmental protection policy has been based on the prevention principle requiring the measures of environmental harm prevention to be employed at the locations of harm occurrence3 (Anon. 2012b).

It is normal that the role of local government is greater in the areas where it is possible to eliminate the causes of environmental risks through local activities and with the lowest cost, before the risks become national or international issue. Although transposition of the EU environmental regulations is completely the task of central government, by adopting laws and bylaws, the enforcement and application of national regulations meeting the EU membership obligations is usually divided between different governmental levels (Anon. 2012b; Anon. 2010; Anon. 2009).

A successful local government is reflected in how it coordinates its activities with other participants in a community, in order to improve the efficiency of its policy and minimize activities that are not closely related to the achievement of major strategic goals (Anon. 2012b).

3 Article 191, paragraph 2 of the Treaty on the Functioning of the EU.

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In this respect, it is also important to emphasize that there are some environmental achievements at the local level in a region at the level closest to citizens, which often present the first step of the global problem solving (Anon. 2005 : 135-164). Therefore, it is important to mention the Troyan Environmental Action Programme which started in 1992. This programme is one of the first programmes of local activities in the Central and Eastern Europe. Precisely on the principles of this programme, Local Environmental Action Programmes (LEAPs) have been developed and implemented to a certain degree in the majority of countries in the Central and Eastern Europe, including BIH as well. The Troyan Environmental Action Programme showed that local community, including active participation of citizens and effective planning methods, is able to turn environmental issues into priorities, develop economic strategies for solving these issues and create new partnerships in order to implement planned activities. The city of Troyan rehabilitated over 70 damages on the underground pipeline network and replaced almost one kilometre of pipeline, resulting in saving circa 10% of water (Anon. 2012b; Klasing and Kraemer 2002).

Preparation of guidelines for the sustainable development of the Municipality of Jelsa in Croatia is also an example of good practice. This example shows how important the process of planning is, along with the participation of public where local community has a proactive role, which is still not the common practice in the region. Very often, projects and programmers are developed; they will not be implemented since citizens do not consider them as their ‘own’ plans because they were not involved in the planning and decision making process and their various opinions, approaches, values and ideas have not been taken into consideration (Črnjar 2002). In the process of planning in Jelsa, a vision was defined. Afterwards, this vision was introduced to local government and, thus, the first step – usually the most difficult step – was made towards planning sustainable development.

The example of comprehensive waste management in the city of Ramnicu Valcea in Romania has shown the successful practical solutions for public waste management, one of the biggest problems regarding environmental protection in the region and beyond. Opening the first information centre for waste management in Romania has also improved communication between citizens, public administration, local government, and all participants at the local and national level. Results obtained through this project were crucial for decisions to award the city of Ramnicu Valcea the “City towards EU Compliance Award” three years in a row for an extraordinary success in the areas of waste management, water and air quality, and providing environmental information. This example has already been recognized and acknowledged at a summit in Johannesburg as one of the six successful practices from the Central and Eastern Europe in the area of urban technology of environmental protection (Črnjar 2002; Klasing and Kraemer 2002).

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Another example from Romania, the city of Campeni, has emphasized technical and economical advantages in using wood waste as a fuel for central heating. Therefore, it represents a significant step forward in relation to environmental protection, reducing fuel consumption, and saving energy. The project also has a great potential for application in numerous urban areas with the wood industry and central heating system.

Furthermore, before joining the EU, Croatia achieved a lot regarding the compliance of national legislation with the EU environmental legislation. For instance, in the National Environmental Action Plan of Croatia, every area and every measure is stated, but also their relations with the EU legislation. In this document, primary focus is given to the analysis and harmonization of Croatian legislation with the EU legislation with the cost estimate. In addition, Croatia requires all new regulations to be in compliance with the EU regulations, and there are also mechanisms integrating environmental issues into other sectoral policies in accordance with the Article 6 of the Treaty on the EU (Črnjar 2002; Klasing and Kraemer 2002).

The experiences of candidate countries and member states show that the success of the EU integration process depends on the extent of involvement of national government and local self-government in this area, as well as the success of coordination at national and international level. In order for entire process to be as simple as possible, candidate countries have been directed towards regional cooperation and the use of technical-financial help of the EU. All this should result in a better environmental state in BIH and also greater wellbeing of citizens (Črnjar 2002; Klasing and Kraemer 2002).

Local Self-Government in BIH and EU integrations

Environmental management at the local level in BIH

Environmental management at the local level in Bosnia and Herzegovina is a very complex issue. Federation of BIH consists of 10 cantons and their authorities are defined by the Constitution of BIH. Every canton has its own government that adopts cantonal laws compatible with the federal laws.

What is particularly significant is the fact that there is no single form of organization or policy for ministries involved in environmental issues at the cantonal level.

Cantons in the FBIH (10 cantons) include 79 municipalities. Organization of work, as well municipal authorities, has been regulated by the Law on Principles of Local Self-government in the Federation of Bosnia and Herzegovina (Anon. 2006a). Article 8 of the Law on Principles of Local Self-government in the FBIH is particularly

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 291 Economic and Infrastructural Aspect of Local Development significant. According to this Article, “individual authorities of the units of local self- government ... include a policy of spatial planning and environment, water management, waste management and natural resources management at the municipal level”, as well as some other self-governing authorities regulated by law (Anon. 2006a).

Local self-government unit has its own responsibilities defined by the Constitution and law. Every local self-government unit is independent in making decisions on issues belonging to its own authority, which cannot be limited and denied by federal or cantonal governments, except for the cases defined by the Constitution and law.

The Republic of Srpska includes 63 municipalities and their authorities have been regulated by the Law on Local Self-government (Anon. 2004). According to Article 12 of this Law, municipalities in RS have individual, independent authorities concerning the provision of public services, for instance, environmental protection and water management.

Municipalities in both FBIH and RS execute their environmental authorities through different sectors within Municipalities, such as sectors for public utility affairs, spatial planning, urbanism, development, inspections, etc.

Environmental Legislation in BIH

The Federation of BIH and the Republic of Srpska enacted a set of environmental laws 10 years ago, because previous legislation was inconsistent. These laws are mostly harmonized with the EU legislation and there are six of them: Law on Environmental Protection; Law on Air Protection; Law on Water Protection; • Law on Nature Protection; Law on Waste Management; Law on the Fund for Environmental Protection.

The above-mentioned set of laws was the first set of laws in Bosnia and Herzegovina regarding environment. It was prepared with financial and technical support of CARDS4. The purpose of this set was harmonization with the EU directives, as well as cohesion within both entities and the Brčko District.

Both entities, FBIH and RS, have enacted a new Law on Water, which annulled the above-mentioned Law on Water Protection. FBIH enacted the Law on Water in 2006 as a result of the Project on Institutional Strengthening of Water Sector in BIH. This

4 CARDS – Community Assistance for Reconstruction, Development and Stabilization is an EU programme providing help to communities in terms of reconstruction, development and stabilization.

292 Local Economic and Infrastructure Development of SEE in the Context of EU Accession T. Kupusović, A. Huseinović: Opportunities and Responsibilities of Local... law is predominantly harmonized with the provisions of the EU Water Framework Directive.

Environmental protection strategy of the FBIH has been prepared pursuant to the Law on Environmental Protection and it is based on the principles of sustainable development. In accordance with the Law on Environmental Protection, Ministry of Environment and Tourism of the FBIH is responsible for preparing a proposal of the Federal Environmental Protection Strategy for the period of ten years. Ministry of Environment and Tourism of the FBIH signed a contract with the selected consultants regarding the preparation of the Federal Environmental Protection Strategy in December 2006 (Anon. 2009).

The Strategy is to be implemented for the period 2008–2018. The consortium hired for the preparation of the Strategy consisted of: Bosna-S Oil Services Company, Hydro Engineering Institute of the Faculty of Civil Engineering Sarajevo and IPSA Institute. Constituent segments of the Federal Environmental Protection Strategy are the following: (Anon. 2009 : 13) • Federal Nature Protection Strategy; Federal Air Protection Strategy; Federal Waste Management Strategy; Federal Water Protection / Water Management Strategy, prepared separately.

Detailed analysis of the legislation of BIH, entities and the Brčko District has resulted in a conclusion that environmental legislation in BIH is very limited, particularly considering environmental legislation at the national level.

Deficiency in the national legislation has been reflected in the fact that Bosnia and Herzegovina does not have a law on environmental protection at the national level, although its adoption is one of the requirements for the EU integration. It is very important to emphasize that the same law is mentioned as one of the priorities in the Mid-term Development Strategy of Bosnia and Herzegovina.

A great effort has been made to form boards for preparing Draft Environmental Law in BIH. However, everything has remained as an effort without results.

In terms of vertical harmonization, there have also been many deviations and incompatibilities between entities and the national level, as well as between the Federation of BIH and cantons. In addition to horizontal, there is also a vertical incompatibility, i.e. incompatibility between the Republic of Srpska, the Federation of BIH and the Brčko District. Furthermore, analogue laws do not prescribe the relation between one entity and another; nor relation towards the national level regarding international relations and cooperation.

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One of the problems of environmental legislation in BIH is the lack of certain secondary legislation prescribed by the above-mentioned environmental laws. Therefore, it is necessary to adopt a lot of secondary legislation in order to implement the prescribed measures.

Deficiency in the Self-governing System in BIH

Development of local self-government in BIH has occurred through two separate and substantially different subsystems, in the Republic of Srpska and the FBIH. Therefore, it can be concluded that different treatment of local self-government results from differences between entities.

This is particularly expressed through the authority of Municipalities as self-governing units in relation to local and higher government levels, and in relation to exercising entrusted authority. It is important to emphasize that the Constitution of BIH does not contain any clearly defined provision on local self-government. Only Article 3, paragraph 3b, mentions territorial organization of BIH, as well as obligation of the entities and their administrative units to comply with the Constitution and general provisions of the international public law.

In almost all developed countries, local self-government is treated as a citizen’s right guaranteed by the Constitution and law, with further detailed definition of local self- government. However, this is not the situation in BIH. There is no single provision in the Constitution of BIH guaranteeing the citizens’ right to local self-government.

This was also addressed by Trnka in his book “Constitutional Law”, stating that the Constitution does not contain a single general norm guaranteeing human right to local self-government. BIH is a signatory of the European Charter of Local Self- government since 1994 (Trnka 2006 : 385). It means that the Charter is engraved into the BIH legal system, although not all constitutional and legal solutions in BIH are completely harmonized with the Charter. Since entity constitutions and laws define different provisions regarding authority, functioning and the number of municipalities, cities and other units of local self-government, it can be stated that two different systems of local self-government exist in BIH. Entity legislation determines normative framework; however, functioning and organization of local self-government is a long-term process (Trnka 2006).

Local self-government in the entities is very similar, although both models have their pros and cons. Major similarity is a problem common for both models. It is insufficient autonomy of local self-government, reflected in its normal functioning. Therefore, it is essential to implement a reform of local self-government in order

294 Local Economic and Infrastructure Development of SEE in the Context of EU Accession T. Kupusović, A. Huseinović: Opportunities and Responsibilities of Local... to create a successful model of local self-government and achieve progress in the above-mentioned areas relevant and significant for the EU integration.

There are three basic and equally important segments of the reform of the local self- government system: • Reform of legislative and normative position of local self-government – modifica- tions of constitutional, legislative and statutory formation of the position of local self-government in order to be harmonized with the principles of the European Charter of Local Self-government; Functional reform – this segment of the reform covers projects and solutions for a greater level of quality in providing services to citizens, and the segment of construction and maintenance of public utility infrastructure; and Reform of the territorial organization of municipalities – this segment of the reform presents dynamic category looking for solutions from politological, economic, legal, social and other fields, although with an objective of optimal solutions in territorial organization, in order for all municipalities to have demographic, spatial and economic background for self-sustainable development.

Reform of local self-government is an important segment of the process of the EU integration; in particular due to the fact that local governments have extremely important function in meeting conditions for the association, such as: employment level, quality of providing services to the citizens, development of the public utility infrastructure, spatial planning, life quality in local communities, functioning of public utility institutions, created systems of the humans rights protection and standards of environmental protection and preservation.

Towards new, European policy in BIH

Current state and activities undertaken for the EU Integration

It is difficult to determine actual environmental state in BIH. Its peculiarity, compared with other European countries, is reflected in the fact that some environmental segments, such as quality of forests, fresh water streams, but also air, are much better ranked than in other European countries; while other segments, such as waste, wastewater, mined areas, are significantly below the standard of other countries of Europe. Environmental issues are not sufficiently institutionalized, which also contributes to the imbalanced environmental state. Namely, in accordance with the Constitution of BIH, environmental management is the entity authority.

Both entities have one ministry responsible for environment: Federal Ministry of Environment and Tourism in the FBIH, and the Ministry of Spatial Planning, Civil Engineering and Ecology in the RS; in the Brčko District, it is a responsibility of the

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Sector of Spatial Planning and Property Rights. Environmental management at lower levels in the FBIH belongs to cantonal ministries and municipalities, while in the RS there is only municipal level. The Federation and cantons are jointly responsible for environment. Due to the complex political situation after the war, there was very little concrete cooperation between the entities regarding environment. In relation to the names of these ministries, it is clearly visible that that these institutions are not responsible only for environment; it is only one segment of their responsibility. However, in terms of water protection, as well as other aspects of water management, it is a responsibility of water management sectors in these ministries, which in both entities include both agriculture and forestry (Anon. 2012b).

In the past few years, environmental management system was created in BIH, based on the principles applied in the EU. Programmes of international help, including CARDS, have had a significant role in the implementation of this system. As a result, a set of environmental laws, entity laws, mentioned in the previous paragraphs, was prepared within the project “Preparation of Environmental Laws and Policies in BIH (BH 99-03)”. These laws are based on the key EU environmental directives. In addition, inter-entity National Environmental Action Plan for BIH (NEAP) has also been adopted. Significant contribution to capacity building of environmental management has been provided by the project REReP as well.

As stated in the EU Integration Strategy of Bosnia and Herzegovina, in terms of horizontal legislation, rulebooks regulating the procedure of issuing environmental permits have been enacted (Anon. 2006b : 120). Institute for Standards in BIH has enacted more than 200 BAS/ISO201 standards, out of which majority of standards are EN202 standards.

Development of Environmental Policy in BIH in the EU Integration Process

Although environmental policy was set as one of the priorities of the EU integration process, the legislation not completely enforced has been into effect. The level of environmental protection has been relatively low. The majority of responsible institutions have been insufficiently involved in the implementation of required legislative, legal and political reform in order to develop this framework. Financial limitations also pose a significant problem. Neither national nor entity levels have undertaken significant steps for developing programmes and strategies defined in the contracts and agreements BIH has signed (Anon. 2012b).

Stabilization and Association Agreement has indicated major priorities in the association process regarding the energy and environmental sector. Article 107 states: “Cooperation shall focus on priority areas related to the Community acquis in the field of energy, including, as appropriate, nuclear safety aspects.” This cooperation

296 Local Economic and Infrastructure Development of SEE in the Context of EU Accession T. Kupusović, A. Huseinović: Opportunities and Responsibilities of Local... will be based on the Energy Community Treaty, and developed with a purpose of gradual integration of BIH into the European energy markets. The Agreement emphasizes that contracting parties have to develop and strengthen environmental cooperation and establish cooperation in order to strengthen institutional structure and procedures, which would ensure strategic planning of environmental protection issues and coordination between relevant actors; it would also harmonize laws of Bosnia and Herzegovina with the Community acquis.

The cooperation is also going to be directed towards preparation of strategies with an objective of substantial reduction of local, regional and cross-border air pollution, including waste and chemicals; then towards establishing a system for efficient, clean, sustainable and renewable production and use of energy, as well as towards preparing Environmental Impact Assessment and Strategic Environmental Assessment. Particular attention should be directed towards ratification and implementation of the Kyoto Protocol (Article 108, SAA). “European Partnership” is a document emphasizing key steps for BIH during the association process: Adopt national environmental legislation for harmonized environmental protection; Continue with the implementation of legislation on environmental impacts; Ratify and begin the implementation of relevant international conventions, including the Arhus and the Espoo Conventions; Establish and ensure functioning of national and entity environmental agencies; Continue with strengthening administrative capacities of the environmental institutions, particularly at the national level; and Improve communication and coordination between these institutions.

Final observations

In a developed and democratic society, environmental awareness has become crucial part of the general social awareness and political orientation. Environmental protection has been increasingly becoming a criterion, objective and paradigm of the social actions.

Within the EU environmental policy, for local and regional authorities, effective environmental legislation and promotion of sustainable development are very important. Preparation of legal acts on environmental protection has to be modelled on the EU legislation. Moreover, particular attention has to be directed towards local units. This means that acts have to be equally applicable at all government levels since units of local self-government have different impacts on environment. They create preconditions for full development of the community, including environmental policy and the programme for sustainable development (Anon. 2012b; Anon. 2009; Anon. 2012a).

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Inadequate and imprecise authority distribution between different government levels is a particular trait of the self-governing system in BIH and presents a difficult situation during the EU integration process. Territorial structure of local self-government is very inhomogeneous; there are significant oscillations regarding the size, or territorial coverage, of units of local self-government; all of them are characterized by a monotypic authority structure that often results in inefficient services, misunder- standings and conflicts in practice. Therefore, differences in legal status of the units of local self-government barely exist; however, differences in terms of development, urbanization level and infrastructure are very prominent, contributing to the deho- mogenization of self-government in BIH. The reform of local self-government is an essential process regarding the progress of BIH on its way to join the EU integrations because local government has a particularly important function in meeting association criteria, such as standards for environmental protection and preservation. It is also important to state the necessity for the reform of constitutional structures. It is necessary to enact a law on environmental protection at the national level, which could be applied to the lower government levels to the largest possible extent (Anon. 2012b; Anon. 2012a; Anon. 2010).

Due to the inhomogeneous structures and non-harmonized activities of the BIH institutions at all levels, it is necessary to upgrade legislation and strengthen capacities and the personnel structure, along with enabling organizational and institutional development in accordance with the European practices of decentralized countries (Anon. 2012b; Anon. 2012a; Anon. 2010).

Furthermore, BIH legislation is very often – just like existing strategies and recommendations – too general. Therefore, elaboration of existing acts is urgently needed, as well as urgent enacting of the acts for the fields characterized by the lack of these acts. Transposition of the EU legislation is an essential feature of the EU integration process. Environmental policy at the entity level is partially harmonized with the EU acquis communautaire, and, thus, it is important to continue with upgrading the BIH environmental policy that will be based on the principles of sustainable development of BIH, along with the assistance from the EU institutions (Anon. 2012b; Anon. 2012a; Anon. 2010).

Environmental protection enables complete preservation of water quality, air, land, preservation of natural habitats, rational use of natural resources and energy in a manner most adequate for environment, as a basic precondition of sustainable development. The way an institution, body, company or any other organization or even an individual acts nowadays in relation to the environmental standards and sustainable development results in long-lasting consequences on the life quality of current and future generations (Anon. 2012b; Anon. 2012a; Anon. 2010).

298 Local Economic and Infrastructure Development of SEE in the Context of EU Accession T. Kupusović, A. Huseinović: Opportunities and Responsibilities of Local...

The European Union and more successful developing countries have already successfully integrated environmental acquis communautaire in almost all other sectors. This is an excellent indicator of a direction for BIH too, as well as the requirement in the process of joining the EU. It is important for BIH to join conventions and proto- cols it has not joined yet, following the best practices from the region.

Conclusion

Environmental protection policy presents a new field of the European legislation. In the EU, healthy environment is an indicator of a progress for a country, improvement of life quality, and it presents a basis for economic development. In order to join the EU, a candidate country has to meet regulations of acquis cummunautaire; environment is one of its segments.

Environmental policy of the EU stresses the necessity to harmonize legislations between member states and candidate countries in the sector of environmental protection, which reflects economical, social and cultural development and indicates efficient government, i.e. self-government. This paper emphasizes the fact that transposition of the EU environmental regulations is entirely the task of BIH and entity governments, while implementation and application of national regulations fulfilling the requirements regarding the EU association is the task of different government levels. The necessity of transposition of the EU legislation into the BIH legislation at the state level is also emphasized.

Local self-government within the EU is characterized by the fact that it is based on the principles of the European Charter of Local Self-government. This is not the case with BIH. Just like the issues regarding environment, the sector of local self- government is not separately defined by the Constitution of Bosnia and Herzegovina. It is based on entity laws that are not based on the principles of the European Charter of Local Self-government, which is one of the features of the EU association process. Local self-government has been differently treated in entities, resulting in their asymmetry.

There are many deviations and incompatibilities between entities and the national level, as well as entities and lower government levels. There is no unique set of laws applicable at all government levels. There is no single organization or institution at the national level to deal only with environmental issues, which are not sufficiently homogeneously institutionalized.

Efficient local self-government can provide substantial flow of EU grants through well-developed planning, identification of sustainable development strategies, waste management strategy, reduction and removal of environmental issues, development

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 299 Economic and Infrastructural Aspect of Local Development of local infrastructure and development of projects. This would significantly contribute to the recovery and progress of BIH.

Environmental issues must not be an obstruction to the development. On the contrary, actual development is feasible only with adequate environmental protection measures. Therefore, policies in all sectors, particularly those sectors substantially related to environment; have to incorporate the environmental protection policy as well.

References

Anon. (1992) Constitution of the Republic of Srpska, Official Gazette of the Republic of Srpska, No. 19/92, Banjaluka Anon. (2001) European Governance: A White Paper, Brussels: COM (2001) 428; Brussels. Anon. (2003a) European Charter of Local Self-government, Council of Europe Office, Brus- sels. Anon. (2003b) OSCE Mission in BIH, Preamble, Sarajevo. Anon. (2004) Law on Local Self-government of the Republic of Srpska, Official Gazette of the Republic of Srpska, No. 101/04, Banjaluka. Anon. (2005) Kako potaknuti razvoj na lokalnoj razini; handbook with the examples of the best practice in the Southeast Europe, Friedrich Ebert Stiftung, Zagreb. Anon. (2006a) Law on Principles of Local Self-government of the Federation of Bosnia and Herzegovina, Official Gazette of FBIH, No. 49/06, Sarajevo. Anon. (2006b) Directorate for the EU Integration (2006): EU Integration Strategy of Bosnia and Herzegovina, Sarajevo. Anon. (2008a) Constitution of Bosnia and Herzegovina, Official Gazette of BIH, No. 27/08, Sarajevo. Anon. (2008b) Constitution of the Federation Bosnia and Herzegovina, Official Gazette of the Federation of BIH, No. 88/08, Sarajevo. Anon. (2009) Environmental Protection Strategy of the Federation of Bosnia and Herzego- vina 2008–2018, PD – 28/5/2009., DN 26/10/2009, p.13. Sarajevo. Anon. (2010) Treaty on the Functioning of the EU, 2010/C 83/01, Brussels. Anon. (2012a) Bosnia and Herzegovina 2012 Progress Report, European Commission, Sa- rajevo. Anon. (2012b) Enlargement Strategy and Main Challenges 2012–2013, Brussels. Čavoški, A. (2007) Osnovi ekološkog prava Europske unije, Pravni fakultet Univerziteta Union, Službeni glasnik, Beograd. Črnjar, M. (2002) Ekonomika i politika zaštite okoliša, Ekonomski fakultet Sveučilišta u Rijeci i Glosa, Rijeka. Klasing, I. H. and Kraemer, R. A. (2002) Structure and working methods of the European Union. Background paper for the Baltic Environmental Forum, Ecologic, Institute for International and European Environmental Policy. Trnka, K. (2006) Ustavno pravo, Sarajevo.

300 Local Economic and Infrastructure Development of SEE in the Context of EU Accession DOI 10.5644/PI2013-153-19

EUROPEAN UNION REGIONAL POLICY: LESSONS FOR BOSNIA AND HERZEGOVINA

Alisa Mujkić* Jasmin Jusić** Damir Šaljić***

Abstract

European Union regional policy has fundamental importance in elimination of existing disparities between regions, making conditions for increasing economic growth and achieving full potential of each region. Common policies have proved to be the most complex area of European integrations, particularly in funding and the allocation EU funds. Bosnia and Herzegovina has the same practice that, as pointed out by representatives of Directorate for European Integration (DEI) and Directorate for Economic Planning (DEP), has not developed regional policy or strategic approach to the funds allocation. Object and aim of this research will be identification of lessons that the EU led, leads or will lead for implementation of regional policy that BIH could use in its further development, especially for the period 2014–2020. The document could be used as development document for DEI and DEP, and as a document that would be used as the basis for further programming of funds (obtaining for period 2014–2020), aiming to regional involvement. The necessary methodology in completing this work encompasses using the historical method, method of analysis and synthesis, comparative method and the actual researches overview enriched with secondary data sources. Primary data sources will be collected through semi-structured interviews with representatives of DEI and DEP, and with other relevant institutions’ representatives. EU Regional Policy course is for the first time available course at Doctoral program within the Bologna concept of study at the School of Economics and Business Sarajevo in cooperation with University of Vienna and Faculty of Economics, University of Ljubljana, which is of special significance for this research.

Keywords: EU, EU regional policy, Regional development.

* PhD candidate at School of Economics and Business Sarajevo University of Sarajevo, e-mail: alisa. [email protected] ** PhD candidate at School of Economics and Business Sarajevo University of Sarajevo, e-mail: [email protected] *** PhD candidate at School of Economics and Business Sarajevo University of Sarajevo, e-mail: [email protected]

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 301 Economic and Infrastructural Aspect of Local Development

Introduction

Regional policy of the EU plays a significant role in reducing economic, social and other disparities between current and future EU member states. The main goal of regional policy is to reduce current regional disparities and to prevent future imbalance within regions through the financial instruments of the EU – structural and cohesion funds. EU regional policy does not aim to replace national regional policies. On the contrary, EU regional policy supports aims to solve their regional problems through their national regional policies (Europedia 2011).

In the case of Bosnia and Herzegovina, the question of regional policy represents a problematic issue. A complex constitutional environment, historic happenings in the last 30 years and slow economic progress have resulted in the politicization of every question which is of importance for ethnic groups which live in Bosnia and Herzegovina. In the process of accession to the EU, Bosnia and Herzegovina can have numerous opportunities such as developing constant and balanced economic growth, maximizing the wellbeing of its citizens and overcoming political and systematic issues. The main goal of implementing EU’s regional policy in Bosnia and Herzegovina should be economic growth and lowering the unemployment rate, which in the case of Bosnia and Herzegovina is 45.9% (ARZ, 2012). The reasons for a relatively easier implementation of EU’s regional policy in other countries could be the full awareness of the benefits, which come from the accession, and pre-accession funds. Even with these stimulants, Bosnia and Herzegovina has not managed to fulfil the tasks that were assigned by the EU (Savić, interview, 23 April 2013).1

An integral part of this paper is the overview of available literature, which deals with the topic of EU regional policy, its goals, financial institutions and mechanisms. The paper provides a historic overview of the development of EU’s regional policy. The third part focuses on regional policy of Bosnia and Herzegovina in the context of potential lessons that can be drawn from the EU and other countries. The goals of this research are: to offer an overview of literature on the topic of EU regional policy, to present the developing phases of EU’s cohesion policy and to elaborate potential lessons for Bosnia and Herzegovina, that are based on the experience of other countries that could help BIH in the exploitation process of all benefits that will come with EU’s regional policy.

The paper is based on qualitative research, mainly though the evaluation of available literature on the topic of regional policy. That includes an analysis of available data on official websites of the EU, and of websites that deal with the topic of regional policy, such as: European Parliament, Council of Ministers, European Social Found, etc. Semi-structured interviews were conducted with the Directorate for European Integration (DEI) and Directorate for Economic Planning (DEP), which

1 Nevenka Savić holds the position of chairmen of the Direction for European Integrations BH.

302 Local Economic and Infrastructure Development of SEE in the Context of EU Accession A. Mujkić, J. Jusić, D. Šaljić: European Union Regional Policy: Lessons for... are responsible for the implementation and coordination of requests and policies of the EU. A historical method was applied when the developing phases of EU’s regional policies and institutions were identified. The comparison method was used while identifying potential lessons for Bosnia and Herzegovina. For this purpose, results of EU’s cohesion policies were analyzed on the example of other countries, which went though the phase of implementing EU’s regional policies.

Literature review2

So far published works can be systematized as a theoretical (books, textbooks, articles) and empirical work (studies, research, legislation, policies, reports, debates, discussions). Special attention should be given to the way this topic is studied in the first, second and third cycle of studies in the EU, and other sources (Dall’Erba 2003; Barca 2009; Ertugal et al. 2011; Komšić 2007; Mirić 2009; Shankar et al. 2003; European Parliament 2009; The Council of the European Union 1988; European Council, n.d.; European Commission 2011).

The EU began to consider regional economic development a lot more seriously in order to achieve the creation of a Single European Market. Next to the customs union, agricultural policy, common market, monetary union and competition policy, regional policy (in the literature also cohesion policy, hereafter also Policy) is one of the most common policies of the EU (Komšić 2007). European Commissioner for Regional Policy, Johannes Hahn in the report “The Role of Regional Policy in the Future of Europe” states that the Commission has expressed its full trust in regional policy to contribute to the recovery of Europe’s economy.

Cohesion policy is a development policy whose aim is to mobilise the potentials (the future), and not compensate for the deficiencies (the past) (Mirić 2009 : 89). Considering objectives of regionalization, Komšić (2007 : 147) lists the following: “political objectives, possibly in connection with the ethnic or cultural features, economic objectives and rationalization and modernization of government structures”. The aim of cohesion policy is to support key areas such as infrastructure (mainly transport and environment), productive investments (support to small and medium- sized enterprises, research and technological development and innovation) and investment in human resources (Mirić 2009 : 68).

The effectiveness of cohesion policy, as with any place-based development policy, depends on the balance between conditionality and subsidiarity of its multilevel governance system (Barca 2009 : 162). Although there are plenty of advantages and disadvantages of cohesion policy (Barca 2009 : 110) and different attitudes on this

2 Author: Jasmin Jusić, PhD Candidate, Teacher of Economic group subjects at the High Economic School in Sarajevo

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 303 Economic and Infrastructural Aspect of Local Development issue (Komšić 2007 : 65), certain conclusion can be presented: “evaluation and its implementation are the basis for bringing the conclusions on the effects of cohesion policy” (Mirić 2009 : 65). At the macro level, there is visible influence of regional policy on the development of system of multilevel governance, negotiations between the EU member governments are becoming open for the participation of other corporate levels and the cooperation of all of them greatly intensifies and is becoming legally binding (Trnski 2006 : 80). In that purpose, the European Commission has given guidelines for areas which potential members need to improve: public procurement, organizational structure and inter-ministerial coordination, financial management and control, accounting, adequate number of professional and trained personnel, negotiations on programmes, preparation of projects, partnership, including relevant economic and social actors in programme design, monitoring system and national co-financing sources (Mirić 2009 : 111).

In document of Council of Europe, “Regionalisation and its effects on local self- government” (1988 : 11) regionalism corresponds to the definition of “the region as a set of human, cultural, linguistic or other features which justify turning it into a body politic requiring a greater or lesser degree of autonomy”. Regions within EU countries and the potential member have a key role in the integration process into the European Union. Through timely participation in the process of convergence and integration, regions can improve integration process of the potential members in the European Union.

The trends towards greater regionalisation, even in narrow sense, which indicates the development of the territorial structure of the intermediate level, do not necessarily lead towards the creation of new territorial units but rather can imply customizing existing institutions: regionalization can take place in countries where intermediate level of authorities already exists, with new assignment of responsibilities and duties; and theoretically, regionalization can in certain cases lead to a suppression of lower intermediate level (Komšić 2007 : 168) Shankar et al. (2009 : 2) in their paper have a question: should regional development follow a paternalistic approach where a strong centre decides and implements what is in the best interest for regions or should the centre take a hands-off approach and let decentralized regional governments take the lead for their own economic development? Large regional disparities represent serious threats as the inability of the state to deal with such inequalities creates potential for disunity and, in extreme cases, for disintegration (Shankar and Shah 2003 : 1421).

Regionalization inevitably results in consequences for local authorities’ position and intermediate sub-regional authorities, if such authority exists. These consequences appear in relation with the scope of jurisdiction of these authorities and their relationship with the state and the regions (Komšić 2007 : 177). Komšić (2007) lists the following problems related to local authorities: territorial reform and authority

304 Local Economic and Infrastructure Development of SEE in the Context of EU Accession A. Mujkić, J. Jusić, D. Šaljić: European Union Regional Policy: Lessons for... levels; relations between levels of government and the allocation of responsibilities; the level of democracy in local institutions.

Financial solidarity is the basis of EU regional policy, and the evidence for this is that part of the contribution of member states for the EU budget is intended for underdeveloped regions and social groups. The main instruments available to European Commission to provide direct aid to regions are Structural Funds and the European Regional Development Fund (ERDF) established in 1975 and the European Social Fund (ESF) established in 1958 (The World Bank 1995) and the Cohesion Fund, established after the entry into force of the Maastricht Treaty from 1993 (IIE, n.d.). The European Regional Development Fund includes programs to support the development of general infrastructure, innovation and investment to create and safeguard sustainable jobs. The European Social Fund is focused on vocational training and to support employment and create new jobs. The Cohesion Fund finances activities in categories of environment, and projects related to energy or transport (Kesner-Škreb 2009 : 104).

Although it has complex organization, it can be noticed that BIH is not a “desert is- land” in terms of regional organization and problems of any country in same process. Ertugal et al. (2011 : 1195) state that the domestic impact of the EU is particularly important in the area of regional policy reform, which challenges the existing territorial governance in candidate countries, most of which have centralised and unitary state structures.

The European Commission in reports provides analysis and gives some guidance in terms of regional policy. In the latest report on regional policy the European Commission adopted the following conclusions: There is clear and growing evidence of programmes delivering across many policy priorities and Member States; • Cohesion policy programmes have shown that they have the flexibility to respond to the crisis but with much still to be delivered and risks in some strategic areas; • The Commission is willing to consider reductions in national co-financing; There are important lessons to be drawn from the past and the current programmes and evaluation and use of indicators needs to be strengthened; and better programming is needed for the future (European Commission 2013).

Development and the results of EU Regional Policy3

European Union and its regional policy have a very long tradition and still are under the effect of both positive and negative criticism. Five development timelines of Policy are mostly under a highlight in literature, with the first one that begins by signing of the Treaty of Rome. However, it is important to mention its roots that can

3 Author: Alisa Mujkić, PhD Candidate, Teaching Assistant at The School of Economics and Business Sarajevo

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 305 Economic and Infrastructural Aspect of Local Development be found even before 1957 and go back to the period after the Second World War. Regarding this, first written public mentioning of united Europe is attributed to the former British Prime Minister Winston Churchill in 1946 in Zurich: “We must create European family and provide the structure within which we can live in peace, safety and freedom. We must build some kind of United States of Europe and the first step to it should be the partnership between Germany and France” (Historiasiglo 2003).

In further gradual development of EU and its regional policy, very important role was played by Robert Schuman, French Minister of Foreign Affairs, who recom- mends uniting German and French industry of coal and steel. That resulted with Western Germany, France, Italy, Belgium, Netherlands and Luxemburg signing the Paris Agreement in April 1951, which was used for establishment of European Coal and Steel Community (ECSC). The mentioned countries signed the Treaty of Rome in 1957 and formed the European Economic Community (EEC) and European Atomic Energy Community (EUROATOM), which represents the first development timeline of EU (Dall’Erba 2003).

So, the first phase begins with signing the Treaty of Rome in 1957 (that was ratified in 1958) by the six members of the Community of those days, and it ends in 1957 (European Commission 2012.). In the preamble of the Treaty, the need for promoting the Community trough harmonious, balanced and sustainable development of the economy was highlighted, and there is also the need for reducing the existing regional disproportions. However, there are no concrete measures or instrument needed for balanced and harmonious development, which implies insufficiently developed strategy of regional development (Mirić 2009). The attention is mostly dedicated for encouraging the trade between the member countries and developing mutual agricultural policies. With that purpose, EU formed the European Social Fond (ESF) and European Agricultural Rural Development and Guarantee Fund (EAGGF). Trough loans from European Investment Bank, ESF placed the financial resources for professional workforce development and their facilitated movement towards other areas of work and business. On the other side, the efforts of the EAGGF were provision of agricultural grants while modernizing the equipment and working process, with the aim of developing the rural areas (IIE n.d.). In 1968 the General Directory for regional policies was formed, and in 1972 regional policy is marked as the main factor in empowering the Community (Mirić 2009). During this period first institutions are being formed in EU, and those are European Commission and European Parliament, Council of Ministers and the European Council (Treaty of European Union, act. 15, 1992).

The second phase of development of the regional policy implies its forming and encompasses the period from 1975 to 1986. The oil crisis in 1973 has reduced the economic growth within the European economy, calling for even bigger need for development of regional policies in the EU, especially after accepting three new

306 Local Economic and Infrastructure Development of SEE in the Context of EU Accession A. Mujkić, J. Jusić, D. Šaljić: European Union Regional Policy: Lessons for... members: Great Britain, Ireland and Denmark. These countries have brought with them not only problems of regional development, but also the new experiences that could help the Union in solving their problems. Furthermore, in 1975 the European Regional Development Fund (ERDF) is founded and it has the task of distribution of the funding in those regions that have been characterized as the poorest. ERDF at the same time is also the first institution that has the exclusive focus on regional disparities. With Greece joining in 1981, the need for further development of the cohesion policy has been marked, and especially when Spain and Portugal joined in 1986. During this period, 85% of the ERDF projects were intended for improving the infrastructure, considering the fact that 91% of the budget was directed to the poor regions of Germany, France, Greece, Italy and Great Britain (The World Bank 2009).

The third phase, that encompasses the period from 1986 to 1999, is characterized with signing of the Single European Act in 1986 that is being considered as the basis of regional policy, because the problem of regional development is first mentioned here as a separate title (Mirić 2009). Also, signing of this Act meant the opening of the path for forming the single market, with free movement of people, as well as goods and capital between the member states (FER 2012). The Act served for modi- fying the Treaty of European Economic Community, where the new competencies of the Union are being defined, such as social policies, economic and social cohesion, researching and technological development, etc. (Europe 2010).

European Union is formed with signing of the Maastricht Treaty in 1992, which comes into force on 1 November 1993. According to Article 1, “the Treaty represents new phase in the process of making more firm Union between the people of Europe”, while the Article 3 of the Treaty quotes that “the Union is setting the economical and monetary union with the euro currency”. With the Treaty, besides the economical and monetary union aims, the aims of the common external, internal and safety policies are being defined, as well as close cooperation within the justice system (Treaty of European Union 1992). The Maastricht Treaty created two instruments of the cohesion policy, Cohesion Fund for four poorest countries (Greece, Ireland, Portugal and Spain) and European Investment Fund for the poorest regions. The purpose of the Cohesion Fund was to help these countries stabilize their economy, so that they could have the possibility to qualify themselves for the approach to economical and monetary union. The funds of the Fund were also being used in other regions of the member countries, so that, for example, France and Great Britain got 35 million euro as support in this period (IIE, n.d.). As an addition to the Maastricht Treaty, in 1997 the member states signed the Treaty of Amsterdam that enters into force two years after. With this Treaty, political and institutional prerequisites are formed, so that the EU can face with the globalization process and their impacts, such as unemployment, fight against crime and terrorism as well as problems related to saving the environment (DEI 2009).

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The fourth phase of the development timeline of the EU and its regional policy encompasses the period from 2000 to 2006 that is marked with the reform of structural funds and new rules of the Policy. In this period the biggest expansion of the EU happened, with accepting ten new members, which brought even greater need for a substantial reconstruction of the funds and policies. Considering the fact that with this expansion the differences in the amount of income per capita changed as well as the unemployment rate, new members were included immediately in all the aims of the Structural funds and the aim of the Cohesion Fund with their entrance in the European family. The budget of regional policies for this period was 213 billion euro (Mirić 2009), while trough the ERDF an investment of 123 billion euro was made. The evaluation of this period brings the key aims which are achieved through these financial funds, which include: 1.4 million working places created, 2,000 km of roads built, 4,000 km of railways, 14 million of people got access to clean water and 38,000 projects were supported (European Commission 2011). In Great Britain, over 256,000 working places were created, more than 295,000 small business were supported and more than 1.200 hectares of brownfields were revitalized (European Commission 2011a). On the other side, the Ireland experience shows the raise of GDP of 6% per year, 555 km of highways, lightning and the expansion of the railway traffic and many other benefits from other areas (European Commission 2011b). Guided with experiences of implementation of the funds, the evaluation brought the key messages that should be respected for the following periods of development of regional policies in the EU. In terms of the period from 2000 to 2006, there is a conclusion that the following period should especially empower the strategic focus on policies, meaning that greater attention should be put on the strategic planning of the infrastructure that is strategically significant for development of the specific area. Furthermore, conclusion has been made that the funds are concentrating too much, so that only specific region of the undeveloped region is developing, while the other parts are being unconsidered, so larger attention must be put towards the results, not spending of funds (European Commission 2011).

With the budget of over 347 billions of euro, regional policy represents the most important and the biggest source of financial funds in support of the economic growth and creating new working places for the period from 2007 to 2013. That is the fifth phase of policy development (Mirić 2009). In this period it is noticeable that the countries such as Great Britain and Ireland had excellent progress and achievement of aims of the regional policies, which implies focus of their governments towards raising the national wealth. Great Britain managed to invest, trough cohesion policy, 4.5 billions in research and development and innovations, so that the scientific work and research can be promoted, as well as the knowledge transfer and commercialization. In order to empower the small and medium business, the support focus to that sector was 1.8 billion euro, while 1.6 billion was invested in the environment (European Commission 2011a).

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Lessons for Bosnia and Herezgovina

From all mentioned in previous Chapters of this research it becomes clear that regional policy has an important role in Europe’s political efforts, not just for Bosnia and Herzegovina, but also for the European Union in general. By analyzing the historic development of regional policy, we can conclude that these policies will become one of the priorities in BIH’s effort to become an EU member state, which will have direct consequences for Bosnia and Herzegovina.

From the two conducted interviews with the Directorate for European Integration (DEI), and the Directorate for Economic Planning (DEP), it became clear that EU regional policy plays an important role in the work of these two institutions. It is important to state that these two institutions are the two most credible interlocutors when it comes to the relations between Bosnia and Herzegovina and the European Union, which also includes EU regional policy. Despite all problems that these two institutions face, they manage to coordinate and implement certain requests of the European Union. Time showed that the success rate of these institutions is more dependent on political circumstances in Bosnia and Herzegovina then on technical issues in the implementation and coordination process. A complex constitutional environment of Bosnia Herzegovina determines and narrows every effort of these institutions. The ethnic groups in Bosnia and Herzegovina, which are almost exclusively grouped in homogenous territorial units makes it harder to implement EU’s regional policy in its full capacity, with respect to all norms, ideals an rules that they bring.

This unique situation forces these institutions into questionable compromises, when it comes to the implementation, recommendation and coordination of certain requests. One of such compromises was made in the regionalization process of Bosnia and Herzegovina, which was almost identical to the present constitutional territorial framework. It is questionable how much these solutions respect the cultural, sociological, economical, political and even natural laws of logic, which are defined in form of goals and missions of EU’s regional policy. This results in slow adaptation process of necessary legal frameworks and development of strategic documents, which would deal with regional policy. Such a situation is determined by: prohibition of any intervention in the territorial integrity of the local territories, even when it comes to regional policy of the European Union; • expected benefits of ethnic groups and local territories from the EU accession and pre-accession founds; the inability of achieving any adequate compromise solution which would satisfy the primal goals of EU’s regional policy on one side, and achieving a solution which would respect the will of ethnic groups in Bosnia and Herzegovina on the other side.

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In the interview process, these two intuitions made it clear that any implementation in the sense of EU’s regional policy is primarily and almost exclusively achieved through political processes within Bosnia and Herzegovina. It became obvious that every reform and every request from the EU is a subject of political leverage, which ethnic representatives use to achieve their goals.

The redistribution of power and administration capacity is one of the goals of EU’s policy in general, but avoiding any geographical and economic logic in their existence will serve only to the satisfaction of local political leaders in achieving their own and ethnical satisfactions. Such a state won’t lead to cultural, economic and political sustainability. Quah (1996) claims that physical logic and geographical overlapping (intra-territorial regions) must be more important than macro factors in the process of forming regional distribution. If we assume that the political factors are more similar within nations, then it becomes clear that the market environment is more important than the political one. Quah (2006) also claims that geographical factors are more important than political. Such claims lead to the conclusion that Bosnia and Herzegovina, in the process of a successful implementation of EU’s regional policy, must reach a compromise, which will not threaten the main funda- ments of EU’s regional policy. The conditional weakening of central governments and strengthening local communities in the adaptation process of EU’s regional policy is certainly one goal. However, maintaining geographical, economical and other logics cannot be overruled.

Reaching a compromise between these two goals is a key in BIH’s success in a successful implementation of EU’s regional policy and a maximal exploitation of benefits which come with such a process. Such benefits are not only reflected through the exploitation of accession and pre-accession founds. More importantly, the goal is to create and develop sustainability in the long term. This goal can only be achieved if geographical and economical criteria are applied in the regionalization process of Bosnia and Herzegovina.

This is the only way, which will serve future generation in achieving sustainability in local communities and developing a fair redistribution of benefits.

The focus of BIH’s governments must be on solving social and economic problems. Implementing adequate regional policies will provide a chance for creating long-term sustainability and development. Compromise political solutions are the only way for a successful implementation of EU’s regional policy. However, these compromises must fulfil the cornerstones of EU’s regional policy, with the final goal being creating sustainability in the long-term.

Besides all political problems, it is of crucial importance to analyze the topic of regional policy on a scientific and objective level. The specific problem of Bosnia

310 Local Economic and Infrastructure Development of SEE in the Context of EU Accession A. Mujkić, J. Jusić, D. Šaljić: European Union Regional Policy: Lessons for...

Herzegovina can be generalized into the centralized vs. decentralized debate in dealing with regional policy. If political conditions would be similar to other EU countries, then it would be possible to develop a debate upon economic arguments, whether to implement a centralized approach or to handle the topic of regional policy in a decentralized manner. Shankar et al. (2009) debated about this issue on a cross literature basis, and developed significant arguments for both approaches. The debate of centralized vs. decentralized approach in implementing and dealing with regional policy was a conversation topic in most EU countries. The arguments for both approaches are significant. Shankar et al. (2009) states the following arguments for the centralized approach: • The first problem is that less developed regions have fewer resources and therefore less capacity to attract investments. It is argued that the central government is needed to overcome the gap between highly developed regions and less developed regions. The paradox is that highly developed regions are able to attract investments due to their negotiation power, infrastructure, etc., and that they are not willing to give away this position. On the other hand, less developed regions do not posses such capacity and they are not able to attract investments in order to achieve high growth rates. In this sense, the liberal market mechanism proves inefficient, and this phenomenon is called the financing gap approach. The second argument is that less developed regions have lower administrative, institutional and technological capacities (Shankar et al. 2009). The argument is that these regions are not able to cope with the challenges of development and to overcome the gap between them and highly developed regions. It becomes clear that handling investments must come from a better-equipped central government (Shankar et al. 2009).

These two arguments are mainly used to debate this issue. In the case of Bosnia and Herzegovina, this approach can represent the tool how to overcome regional imbalance, and more importantly political issues. Shankar et al. (2009) developed the following arguments for the decentralized approach (bottom-up approach): Regions should be responsible for themselves. The theory is that regional governments should best know the specific problems of their regions. Central governments will follow policies, which are in the best interest of the overall nation. Sometimes that can mean concentrating investments in already developed regions (Shankar et al. 2009). In other words, if central governments must choose between overall economic growth and curing regional imbalance, they would choose the first option. The second argument is that local governments have better information about the needs and problems of their communities. This is a significant advantage when implementing regional policy. The third argument is that strong central redistribution may create moral hazards. The fourth reason is that centralized policies create reverse accountability especially if central transfers come with strings attached (Shankar et al. 2009).

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Shankar et al. (2009) provide evidence in favour of the bottom-up approach. It is stated that there is evidence that countries with a decentralized approach have lower inequalities in the sense of regional policy. All these arguments should be considered as valuable in the debate of regional policy and Bosnia and Herzegovina. Learning from these lessons could lead to an optimal solution for Bosnia and Herzegovina. It is clear that there must be a certain centralized approach, at least in the starting phase of implementing regional policy. This approach may be applicable in the phase of defining policies, strategic documents and other important matters like the regionalization process of the country. On the other hand, the decentralized approach brings clear advantages too. Allowing local governments to lead the process of regional policy might be the key to success. These levels of government should be able to react best to the needs of their regions. It seems that there is a middle way in dealing with regional policy, and that Bosnia and Herzegovina might be the country in which this middle approach between centralized and decentralized regional policy could lead to success.

If we ignore political factors, which determine the implementation of EU regional policy, Bosnia and Herzegovina will face other problems, which will determine the implementation of regional policies. From the example of countries in the region, and from other examples of demographically similar EU countries, we can conclude lessons which might be of importance for Bosnia and Herzegovina. If we focus on the countries within the region, Slovenia must be mentioned and its experiences with the regional policies. For the period from 2007 to 2013 Slovenia got over 4 billion euro from the financial funds, and its development priorities were implemented trough three programs. The first one was the program for “Empowering regional development potential”. The funds were ensured from the ERDF. This program was to improve competitiveness, with aim in creating new working places, encouraging the premiership, development of the information and communication technology, improving the innovations and technological development. The other program was marked as a program for “Developing human resources” financed from ESF (focus of this program was investing in creating better skills and training with the aim of support to employment and development), while the third one was defined as a program for “Protection of the environment and development of the traffic infrastructure”. Slovenia’s experiences, but also of other countries, prove their conscience and mark it as the one that has the crucial meaning in creating the conditions for developing the network with other regions: creating networks urges the cooperation and changing of experiences between regions and can be very important factor in the process of dynamic development process (European Commission 2011c).

On the other hand, Mirić (2011) states problems which the Republic of Serbia faces while implementing regional policies of the EU and provides advices. From his paper, it becomes clear that defining a national strategy is of key importance fora

312 Local Economic and Infrastructure Development of SEE in the Context of EU Accession A. Mujkić, J. Jusić, D. Šaljić: European Union Regional Policy: Lessons for... successful and long-term sustainable implementation of regional policies. The national strategy for regional policy in the Republic of Serbia identified three goals: determining the level of development, categorization and typology of areas, as well as the statistical regionalization of the country; • defining the development policies for regional development purposes; forming institutions responsible for the implementation of strategies.

Furthermore, it is stated that the formation of statistical regions must be done strategically and with long-term orientation, with the final goal of balanced regional development and a focused effort in helping the poorest regions. In the sense of available financial instruments, a country must have the following goals: maximizing the consumption of available resources, which would lead to fulfilment of deadlines for their spending; minimizing the return of resources through superior applications and adequate preparedness of applicants; • maximizing the efficiency and effectiveness of resource consumption.

Shankar et al. (2009), in their research about the implications of regional policies and a comparative analysis of states, which implemented EU’s regional policy, offered the following advices for a successful implementation of EU’s regional policy and regional policy in general: erasing any barriers for trade, work-force, know-how and technology is very important for national and European regional policies; minimizing the central redistribution of subventions could help the regions that are least developed; making sure that investments that are managed from the “top” are redistributed to the regions which need them the most; to make sure that regional governments lead the process of regional development and regional policy; the role of national and supra-national governments must be limited.

EU’s regional policy holds an important place in Europe’s general political ambi- tions. Overcoming imbalances between EU countries and regions within these countries might lead to a more stable and prosperous EU. This should be reason enough why political structures in Bosnia and Herzegovina should reopen the dialogue when it comes to regional policy. As for the EU, a well-implemented regional policy in Bosnia and Herzegovina might lead to stability and prosperity within the country, with respect to the general constitutional framework of Bosnia and Herzegovina. It seems that the first step must be to recognize the importance of regional policy for BIH’s long-term stability and prosperity. Although Bosnia and Herzegovina experiences problems in the accession negotiations with the EU – and with that in the implementation of regional policies as well – the chance is that lessons can be learned from countries that went through that process. Such an opportunity could lead to a

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 313 Economic and Infrastructural Aspect of Local Development sustainable implementation of regional policies. It must be remembered that implementing these policies has to start simultaneously at every governing level, with a special focus on the least developed regions.

Based upon previous research, and the specific issues of Bosnia Herzegovina, we can summarize the following lessons: The dialogue about regional policy in Bosnia and Herzegovina must be conducted on objective and scientific arguments, which doesn’t mean that the political reality of Bosnia and Herzegovina has to be ignored. In order to fulfil the goals of regional policy, strategic documents must be developed which will define future strategies and policy approaches for this topic. Only this can create a sustainable long-term regional policy. • The specific problems of Bosnia and Herzegovina should be generalized into the centralized vs. decentralized debate. By doing so, it would be possible to start a debate upon objective and scientific arguments, which could lead to a superior solution when it comes to regional policy. It is clear that Bosnia and Herzegovina is a highly decentralized country, with strong constitutional responsibilities on regional levels. Besides, the multiethnic composition of Bosnia and Herzegovina would suggest that a decentralized approach should be adapted. However, previous research suggest that in other countries national governments were better able to take advantage of EU’s single market then regional governments (Shankar et al. 2009). In their research, Shankar et al. (2009) argued that there is a presence of national convergence and an absence of regional convergence in EU countries. Shankar et al. (2009) provide examples whereby countries like Ireland, Spain and even Greece managed to achieve high growth rates and to catch up with highly developed countries of the EU. Most of the reasons for a fast and continuous growth can be found on the national level. Their countries managed to implement monetary and fiscal policies, which enabled them to exploit the single market conditions of the EU and to attract significant foreign direct investments to their countries. The arguments used to explain such a state are that regional governments in the EU have less authority and responsibility to implement regional policy and qualitatively use EU’s structural funds. However, it is questionable if this is applicable for Bosnia and Herzegovina were BIH Entities and Cantons have jurisdictions which are typical for national governments in some EU countries. Nevertheless, the foundation of regional policy must be built on the national level. Questions like the regionalization of Bosnia and Herzegovina must be conducted on the national level with respect to EU’s goals of regional policy. The third important issue for Bosnia and Herzegovina is the statistical regionalization of the country, which is the fundament for regional development and regional policy in general. As already stated by Quah (1996), physical location and geographical spillovers matter more than national factors in the regionalization process. This means that geographical, physical and economical logics must be employed in the regionalization process. All this is ignored in Bosnia and

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Herzegovina. The statistical regionalization is purely done on political arguments, which could lead to a poor convergence in the future. However, Quah (1996) states that market environment matters more than political environment only if we assume that political conditions are more similar within the country then across nations. It is clear that this is not the case in Bosnia and Herzegovina. A compromise must be established between the political reality of Bosnia and Herzegovina and the scientific and objective nature of regional policy.

All this suggests that Bosnia and Herzegovina will face many challenges while dealing with EU regional policy. The most important lesson is that no one should for- get the importance of regional policy and its long-term implications for Bosnia and Herzegovina.

Significance, implications and conclusions of the research

This work contributes to the understanding of the importance of EU regional policy, which occupies a very important place to the potential and current member states. Certainly it can be argued that regional policy defines the essence of the European Union implementing its goals and achieving social and economic cohesion, which is evident from the example of the countries mentioned in the paper. It should be noted that the EU and its cohesion policy is not a threat to national government policies which all countries should be aware of. It seeks to state, independently and in accordance with its constitutional organization, form and implement regional policies.

A lot of countries are faced with the problems of regional policy implementation, as is the case with Bosnia and Herzegovina, and there is a wide range of evidence for that. One of them is absence of strategy for regional development and stable institutions with harmonious coordination: implementation of strategies must begin at all levels simultaneously with a special focus on the least developed regions. The main objectives of balanced regional development should be maximizing the consumption of available resources, minimizing the return of resources through superior applications and adequate preparedness of applicants and maximizing the efficiency and effectiveness of resource consumption.

The next, but no less of a problem, is a complex constitutional environment of Bosnia and Herzegovina. Solving social and economic problems should be in focus of BIH’s governments instead of political problems – that is the only way to create national prosperity. Also, it is necessary to develop stable institutions that guarantee democracy, rule of law and protection of human and minority rights. Successful examples of other countries, presented in this paper, should serve BIH as a starting point for the implementation of regional policy. Those examples have valuable lessons and experience from others can be extremely useful for BIH.

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It is very important to keep in mind the fact that EU regional policy provides the ability to create sustainable development in many spheres of society. It supports the creation of competition, offering funding to those areas in which a nation can achieve competitiveness and membership in the European family. Competitiveness can be achieved through strengthening critical areas that prevent the general progression of BIH. For example, encouraging of small and medium entrepreneurship is completely neglected and should be one of the important items. Just one look at statistics can show extremely high number of unemployed or uneducated persons and it is one more critical point in creating BIH’s competitiveness.

BIH should use programs of regional policy as a tool for developing and maintaining comparative advantages. Besides, fact that regional policy is particularly important for EU, with the goal to reduce disparities between regions in EU, provides opportunity for BIH to build a connection in the development with the EU countries. On the other hand, it must be remembered that EU has clear and strict rules for countries willing to participate in the programs of regional policy. Thus, BIH in the forth- coming period faces further reconciliation, but also strengthening of its institutions in order to take advantage of all the benefits of regional policy, primarily through financial assistance.

The main limitations of the research could be found in every stage, starting from deficit of literature on regional policy with BIH’s examples. Since there is no interest for regional development among current governments that results with absence of written evidence. That means that the first step – formulating a strategy – for a proper implementation of EU regional policy is not conducted.

The paper gives an opportunity to open debate on importance of regional policies in BIH, especially through the prism of BIH’s future in EU context. Also, this research may be a cornerstone for all future scientific researches, especially because of the fact that the works on this topic do not exist. This step could mean a lot for Bosnia and Herzegovina, particularly because of the increase of awareness of the regional development importance, which could cause plenty of positive changes that Bosnia and Herzegovina urgently needs.

References

Agencija za rad i zapošljavanje BiH (2012) Statistički informator, 26, Sarajevo. (Retrieved on 10 June from http://arz.gov.ba/publikacije/statisticki_informatori/default.aspx?id=824& langTag=bs-BA) Barca, F. (2009) An Agenda for a Reformed Cohesion Policy. (Retrieved on 7 June from http://www.europarl.europa.eu/meetdocs/2009_2014/documents/regi/dv/barca_report_/ barca_report_en.pdf)

316 Local Economic and Infrastructure Development of SEE in the Context of EU Accession A. Mujkić, J. Jusić, D. Šaljić: European Union Regional Policy: Lessons for...

Consilium (n.d.) Council of the European Union. (Retrieved on 11 June from http://www. consilium.europa.eu/council) Council of Europe (1988) Regionalisation and its effects on local self-government. (Re- trieved on 19 June from http://www.openisbn.com/preview/9287135444/) Dall’Erba, S. (2003) European Regional Development Policies: History and Current Issues. European Union Center, University of Illinois, Champaign Illinois. (Retrieved on 10 June from http://www.euc.illinois.edu/_includes/docs/dallerba2.pdf) Direkcija za evropske integracije (2009) Ugovor iz Amsterdama. (Retrieved on 14 June from http://www.dei.gov.ba/dokumenti/?id=4890) Ertugal, E. and Dobre, A. (2011) Dynamics of Regionalisation and the Impact of the EU: Comparing Regional Reforms in Romania and Turkey, Europe-Asia Studies, 63(7): 1195-1222. (Retrieved on 19 June from http://web.ebscohost.com/...) Europa (2010) The Single European Act. (Retrieved on 12 June from http://europa.eu/legisla- tion_summaries/institutional_affairs/treaties/treaties_singleact_en.htm) Europa (n.d.) European Council. (Retrieved on 12 June from http://europa.eu/about-eu/institutions-bodies/european-council/index_en.htm) Europarl (n.d.) European Parliament. (Retrieved on 9 June from http://www.europarl.europa.eu/aboutparliament/en/00b3f21266/At-your-service.html) European Commission (2011) Panorama – inforegio. 2020 The role of Regional Policy in the future of Europe. (Retrieved on 18 June from http://ec.europa.eu/regional_policy/ sources/docgener/panorama/pdf/mag39/mag39_en.pdf) European Commission (2011) Cohesion Policy 2000–2006: what has been achieved? (Re- trieved on 16 June from http://ec.europa.eu/regional_policy/sources/docgener/evaluation/expost_reaction_en.htm) European Commission (2011a) European Cohesion Policy in the UK. (Retrieved on 10 June from http://ec.europa.eu/regional_policy/sources/docgener/informat/country2009/ uk_en.pdf) European Commission (2011b) European Cohesion Policy in Ireland. (Retrieved on 13 June from http://ec.europa.eu/regional_policy/sources/docgener/informat/country2009/ ie_en.pdf) European Commission (2011c) European Cohesion Policy in Slovenia. (Retrieved on 16 June from http://ec.europa.eu/regional_policy/sources/docgener/informat/country2009/ sl_en.pdf) European Commission (2012) History of the Policy. (Retrieved on 19 June from http:// ec.europa.eu/regional_policy/what/milestones/index_en.cfm#1) European Commission (2013) Cohesion policy: Strategic report 2013 on programme implementation 2007–2013. (Retrieved on 14 June from http://ec.europa.eu/regional_policy/ how/policy/doc/strategic_report/2013/strat_report_2013_en.pdf 22.6.2013) Europedia (2011) EU Regional Development policy. (Retrieved on 19 June from http://www. europedia.moussis.eu/books/Book_2/5/12/?all=1) FER (2012) Nastanak i razvoj EU. (Retrieved on 18 June from http://www.fer.unizg.hr/_ download/repository/1.Nastanak_i_razvoj_EU.pdf) Historiasiglo (2003) The History of the European Union: The Origins 1945–1957. (Retrieved on 9 June from http://www.historiasiglo20.org/europe/anteceden2.htm) Institute for International Economics (n.d.) The European Union and its Cohesion Policies: An Evaluation. (Retrieved on 12 June from http://www.piie.com/publications/chapters_ preview/331/3iie3284.pdf)

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 317 Economic and Infrastructural Aspect of Local Development

Kesner-Škreb, M. (2009) Regionalna politika Evropske unije, Institut za javne financije Za- greb, Financijska teorija i praksa, 33: 103-105. (Retrieved on 10 June from http://hrcak. srce.hr/index.php?show=clanak&id_clanak_jezik=56881) Komšić, J. (2007) Principi evropskog regionalizma, Asocijacija multietničkih gradova jugoistočne Evrope – Philia, Novi Sad. Marchis G. (2011) Romanian Regional Policy and the New Pattern of European Cohesion Policy, Hyperion International Journal of Econophysics & New Economy, 4: 217-227. (Retrieved on 5 June from http://web.ebscohost.com/...) Mirić, O. (2009) The Regional Policy of the European Union as an Engine of Economic De- velopment, Evropski pokret u Srbiji, Beograd Shankar, R. and Shah, A. (2003) Bridging the Economic Divide Within Countries: A Score- card on the Performance of Regional Policies in Reducing Regional Income Disparities, World Development, 31(8): 1421-1441. (Retrieved on 12 June from http://siteresources. worldbank.org/PSGLP/Resources/BridgingtheeconmicdividewithinNationsShankar- Shah.pdf) Shankar, R. and Shah, A. (2009) Lessons from European Union Policies for Regional Devel- opment, World Bank Institute, Poverty Reduction and Economic Management Division. (Retrieved on 2 June from http://wwwwds.worldbank.org/servlet/WDSContentServer/ WDSP/IB/2009/06/22/000158349_20090622133035/Rendered/PDF/WPS4977.pdf) Quah, D. (2001) ICT Clusters in Development: Theory and Evidence, LSE Economics De- partment, pp. 85-100. (Retrieved on 18 June from http://econ.lse.ac.uk/~dquah/dp-01eib. html) The World Bank (2009) Lessons from EU Policies for Regional Development, World Bank Institute, Poverty Reduction and Economics Management Division. (Retrieved on 9 June from http://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/ IB/2009/06/22/000158349 _20090622133035/Rendered/PDF/WPS4977.pdf) Trnski M. (2006) Prošlost u sadašnjosti: Lipset-Rokkanov model rascjepa i regionalna politika EU, Politička misao, 43: 69-83. (Retrieved on 8 June from http://hrcak.srce.hr/index. php?show=clanak&id_clanak_jezik=31994) Ugovor o Evropskoj uniji (1992) Prečišćeni tekst Ugovora o Evropskoj uniji. (Retrieved on 8 June from www.cso.gov.me/.../FileDownload.aspx?...UGOVOR%...)

318 Local Economic and Infrastructure Development of SEE in the Context of EU Accession FINANCING LOCAL ECONOMIC AND INFRASTRUCTURAL DEVELOPMENT

DOI 10.5644/PI2013-153-20

PPP TOOLS AS AN INNOVATION ELEMENT FOR THE QUALIFICATION OF THE PUBLIC PROCUREMENT SECTOR IN THE EU POLICY FRAMEWORK FROM A REGIONAL POINT OF VIEW. EMILIA- ROMAGNA POLICY AND A CASE-STUDY, WITH AN ASSESSMENT ON PPPS IMPACTS AND ADDED VALUE AT A REGIONAL SCALE

Elena Tagliani*

Abstract

In the European and Italian policy contexts, the evolution of PPPs instruments was characterized firstly by the interest for the anti-cyclical aspects, and afterwards for the high innovation potential these tools can bring to the public procurement market.

Italian Regions are in charge of many territorial development policies; not only are they policy owners, but also a key factor for the success of any development strategy.

Emilia-Romagna Region presents a local policy for the promotion of PPP tools in the regional context; moreover, the Region published in 2013 a case study, with an analysis of the main PPP aspects which can bring positive impacts to the regional economy.

The study concludes that PPPs can become a real value for money for a regional authority, mostly when a PPP is operating in a regional strategic framework and in a coherent regional system. In that case, PPP is an instrument to enhance the quality in the public-private relationship, not only regarding the project’s outputs, but also regarding the possible outcomes for the economy and the social inclusion.

Furthermore, in a solid regional policy context, public and private partner can build/create added value for all, making sure that the right conditions for success are put in place, and that the PPP instrument is the best suitable for the specific territorial need it’s aimed at.

Keywords: Innovation in procurement, Territorial dimension, Regional policy, Sustainable development and territorial strategic planning.

PPP is considered as a powerful, not yet fully explored, leverage for innovation and performances enhancement in sustainable development strategies. This paper presents a regional policy for the promotion of PPPs, and a case study, which proposes

* Regione Emilia-Romagna, Unit Forward Studies and Cross-sector-policies, Viale Aldo Moro 52, 40127 Bologna, Italy, phone: +39 051 527 3609; e-mail address: [email protected]

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 321 Financing Local Economic and Infrastructural Development a regional answer to the question why PPPs should be chosen to reinforce and innovate the public procurement market.

Since their first appearance in the European policy context, in 20041, PPPs were considered as a mere alternative to the traditional public procurement practices. First experiences in the European context revealed some complexity aspects in the PPP nature and structure. These aspects were seen as critical points in comparison to the traditional public procurement practices. However, PPPs kept increasing their importance, because of their undeniable potential in terms of innovation, through the improvement in the quality, efficiency and efficacy, not only referring to public procurement performances, but also to the whole Single Market. Therefore, Europe kept conceiving and implementing policy measures to promote PPPs. Researches were carried out to find out a common PPP’s definition, to harmonize the rules and impacts all over Europe, when possible, by collecting best PPP practices, and specifying what’s the PPP’s value for money2, if any.

In the aftermath of the renovation of EU Treaties, with the aim to find out the best performing tools to recover from the crisis, Europe got progressively more and more familiar with PPP features and characteristics. In 2009, Europe started to focus on

1 For the details of the PPPs evolution, with reference to the European and Italian contexts, see the Regione Emilia-Romagna study La dimensione territoriale del PPP – 16 casi per indagare gli effetti alla scala territoriale del PPP in Emilia-Romagna, Bologna 2013, particularly the first chapter. Among the key EU regulatory and interpretative acts: Green Paper on PPPs and Community Law on Public Contracts and Concessions, Brussels, 20. 04. 2004, COM (2004) 327 final; European Commission Communication to the European Parliament, the Council, the Economic and Social Committee and the Committee of the Regions on Public-private partnerships and the Community law on public procurement and concessions, COM (2005) 569 def; European Commission Interpretative communication on the Application of Partnerships (IPPP) Community law on Public Procurement and Concessions to Institutionalized Public-Private Partnerships (IPPP), Brussels, 05.02.2008, C (2007) 6661; Commis- sion Communication on Mobilizing private and public investment for recovery and long term structural change: developing Public Private Partnerships, Brussels, 19.11.2009, COM (2009) 615 final; Com- munication from the Commission to the European Parliament, the Council, the Economic and Social Committee and the Committee of the Regions Towards a Single Market Act For a highly competitive social market economy. 50 proposals for improving our work, business and exchanges with one another COM (2010) 608. Green Paper on the modernization of EU public procurement policy. Towards a more efficient European Procurement Market COM (2011) 15 final. Commission Communications on A Stronger European Industry for Growth and Economic Recovery, Brussels, 10.10.2012, COM (2012) 582 final. 2 In the Emilia-Romagna study above mentioned, the chapter 3 presents the theoretical background of the PPP tools. Among the others: Van Ham J.C., Koppenjan J. (2002). Building Public-Private Part- nerships. Assessing and managing risks in port development. Public Management Review. Austral- ian Government, National PPP Guidelines. Overview, October 2008. Kappeler A., Nemoz M. (2010), Public Private Partnerships in Europe – Before and during the recent financial crisis, Economic and Financial Report n. 4, European Investment Bank. Among the studies carried out in the Italian context: Iossa, E., Antellini Russo, F. (2008), Potenzialità e criticità del Partenariato Pubblico Privato in Italia, Rivista di politica economica, 98(5-6): 125-158. Antellini Russo, F. (2011), Il Partenariato Pubblico Privato in Italia tra efficienza e vincoli di finanza pubblica, LUISS – Libera Università Internazionale degli studi sociali.

322 Local Economic and Infrastructure Development of SEE in the Context of EU Accession E. Tagliani: PPP Tools as an Innovation Element for the Qualification of the Public...

PPPs, as an instrument to enhance quality in procurement sector. Actually, a change is required in European public procurement policy, in order to keep the pace with the evolution of the economic and social context, and to answer more efficiently to the expectations of businesses and citizens. Innovation is a key for the modernization of the sector, and a new approach to the relationships between private investors and public decision makers is needed. The involvement of private investors in programming and projecting for the territorial development became also a keyword to recover from the crisis, and is expected to improve quality in public procurement, and foster efficacy and efficiency.3

Public Private Partnership Tools as an Innovation Element

During the lasts years, PPPs have been increasingly used, with the aim to rule various form of cooperation between public authorities and private investors, in order to qualify infrastructures and services. These instruments started competing more and more with the traditional forms of public procurement. In the European and international vision, PPPs have a high potential to increase the quality in works or services

3 Directives 2004/17/EC and 2004/18/EC aim at opening and modernizing the market of public procurement, through the enhancement of the competitiveness and transparency principles. The European Union set up a wide policy to harmonize all national legislative frameworks. The goal is to offer equal conditions for all entrepreneurs operating in Europe, in order to guarantee an easier and simpler access to the public procurement market, which each year amounts to the 18% of EU GDP, and to strongly support the creation of the Single Market, whose public procurement is a central asset. With the 2004 reform, actually, the public procurement seems to be expected to give an answer not only to the protection of the public interest in the public choices for territorial development investments, but also to the competitiveness needs of the EU entrepreneurial sector and to the compliance with the EU competition policy objectives. In 2005, a debate raised about the need of a clearer EU definition of public procurement and concessions, and about ruling the publicity for tenders, in order to encourage the enterprises participation. The EU Commission stressed the need for a further assessment of the PPPs prerogatives, to find out the PPP’s EU added value, in comparison to the traditional public procurement practices. In 2009 the Commission kept promoting the PPPs, as an anti-cyclical tool, to mitigate the recession impacts on the economy. The focus is on the big infrastructures, public services, and the main keyword is innovation, as a lever for European industry to exit the crisis effects, regaining competitiveness, by recurring to these market sectors with a high potential in terms of growth and occupation. A trust increase in the PPPs tools is still combating a relatively low incidence on the total public investment amount; so the Commission provided BEI funds devoted to this topic. In the 2010 another EU Commission made 50 proposals to strengthen the Single Market, and a new consultation was launched, with the aim of renewal of the public procurement framework. In 2011, a Green Paper on the modernization of the EU policy for the public procurement market and the improvement of the efficiency of the Single Market was published. A deep renewal of the approach to the public procurement is now required, on the basis of the efficiency and transparency principles. A better, more efficient way to spend public money and improve the competition quality, through simplification of the procedures, rules more flexible, a better coherence and consideration of the specific needs, and a better results – costs ratio. In the last years the social pillar of the Europe 2020 strategy has gained momentum, and the Green Paper focused also on the support public procurement should offer to other cross-cutting, inclusive policies: environment, energy efficiency, climate change, innovation and quality in life conditions in urban areas, poverty reducing measures, etc.

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 323 Financing Local Economic and Infrastructural Development provided, to guarantee more efficacy, to improve competences and skills, and to foster the recovery from the crisis, by enhancing the infrastructural stock at a national and regional level. PPPs are now intended as instruments to innovate the approach to public procurement, for instance by combining the public interest purposes with the possibility for the private investor to be remunerated directly with the tariffs of the service provided to the final users.

Phenomena which affected the world in the last decades, as, for instance, the privatization processes, globalization and the consequent market opening, stressed the need for innovation and technology in public procedures, in order to raise the economies’ competitiveness, to answer to the need for sustainability in national macroeconomic policies and to support the European policy for a reinforcement of the macro-economic and fiscal governance (Stability Pact), vs. the continuous increase of the demand for infrastructures.

But, even if we consider the PPPs in an anti-cyclical light, some questions remain partially unanswered: for instance, why a public authority should waive to part of its discretionary power (programming, projecting, monitoring, managing powers related to a public tender for an infrastructure or a service)? Why should it opt out for a PPP to invest for territorial development purposes, instead of using traditional public procurement tools? What’s precisely the value for money, for both, private and public, parties?

So far, literature answered that for public partners a significant reduction of the costs, an improvement in the quality of the services for final users are expected, while for private investors there can be the opportunity to raise the quality in management and technology skills during all phases of the partnership, and of course to get an economic advantage. PPPs should allow to reduce or eliminate critical points linked to the traditional procurement practices, for instance, difficulties and delays in decisional processes, non-efficiency in organizational aspects, scarcity in competitiveness approach. In the meantime, the PPP’s approach should allow to overcome the lack of consideration of the public interest by the private partners, and to get a more balanced consideration of the public interest and more quality in the whole operation.

Private investor will finance works and management, obtaining a reimbursement through tariffs requested from the final users; in that way, public expense will not be raised, and delays will be avoided according to the entrepreneurial approach. Final users, as clients, will receive better services. Risks will be shared between private and public partners. It’s already clear that there could be many positive aspects when choosing a PPP for territorial development purposes, but there are also many critical ones to be taken into account.

324 Local Economic and Infrastructure Development of SEE in the Context of EU Accession E. Tagliani: PPP Tools as an Innovation Element for the Qualification of the Public...

For instance, the high participation costs could reduce the access to these instruments for many private investors, and the risks consequent to frequent changes in the public decision-makers strategic frameworks could affect the completion of the works. Moreover, the above mentioned complexity in the PPP structure and functioning may make the PPP choice not the best one in some cases; and complexity in the needed economic and financial analysis of the project sustainability may bring the risk for public administrations to bear the burden of wrong forecasts.

Nevertheless, PPPs remain a valid alternative to traditional public procurement proceedings, even though there’s still need to investigate more in depth the possible outcomes on the ground, and to find out what could be the perspectives in the future development policies for this instrument.

Given the current budgetary restrictions and economic difficulties, European public procurement policy must, more than ever, ensure the optimal use of funds in order to foster the growth and to create job opportunities, helping to achieve the objectives of the Europe 2020 Strategy4. The revision of the public procurement Directives is only a part of the European Union commitment for the modernization of public procurement, and of the whole Single Market5. This will include also a Directive on concessions, until now only partially addressed by European regulations.

Indeed, the efficiency of public tendering has become a priority for all Member States, in view of the current budgetary constraints. We therefore need flexible, simple instruments which allow public authorities and their suppliers to conclude transparent, competitive contracts as easily as possible, and at the best value for money. The modernization of the European rules on public tendering is expected to raise the quality and efficiency standards, through a new approach to the existing tools and instruments. One of the reform’s main objectives is to simplify rules and procedures and make them more flexible. At the same time, there’s a focus on the qualitative approach, to improve outcomes of public procurement by ensuring greater consideration for social and environmental criteria.

Other reform aspects include the above mentioned Directive on concessions, to complete the legal framework for European public procurement6, by including in it service concessions, the only type of concession not yet governed by secondary leg-

4 Communication from the Commission on Europe 2020 A strategy for smart, sustainable and inclusive growth – COM (2010) 2020 final 5 The reform of legislation on public procurement is one of the twelve priority actions set out in the Single Market Act adopted in April 2011 (IP/11/469). 6 The proposed Directive on concessions covers the partnership agreements between a body which is generally public and a business which is often private, where the latter assumes the operative risk linked to maintenance and development of infrastructures (ports, water distribution, car parks, toll roads, etc.) or to the supply of services of general economic interest (energy, health, water supply and treatment, waste disposal, etc).

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 325 Financing Local Economic and Infrastructural Development islation. The proposed rules aim to establish a clear legal framework, to ensure the necessary legal certainty for public authorities when performing their duties. That is important to guarantee equal access opportunities to the concessions market for all European businesses, including SMEs, and could thus help to further stimulate the development of public-private partnerships, for which concessions constitute a tool of choice.

In the 2014–2020 perspective, the Common Provisions Regulation fits the PPP’s theme into the “innovative financial instruments”, for which art. 32 provides a framework discipline. Therefore, PPPs, as we already know them, will be joined by other instruments: the long-term equity funds Marguerite, for projects in the infrastructure, transport and climate change fields, and InfraMed, devoted to the Mediterranean area, and other guarantee schemes, and not to be forgotten is the project bonds offer. PPPs are also part of the EU new financial outlook 2014–2020, for instance within the Connecting Europe Facility for cross-border infrastructure projects in energy, ICT and transport sectors, the Risk-Sharing Finance Facility (RSFF) or the Loan Guarantee Instrument for TEN-T projects (LGTT). The same financial sources will contribute to co-finance PPP’s operations, for instance through private-public partnerships on Structural Funds using the JASPER, JESSICA, JEREMIE and ELENA initiatives; through BEI and FEI funds, under the supervision of EPEC, to further strengthen the organizational capacity in PPP’s partnerships; and through the financial instruments for the TEN-T network, and the new research and innovation programme Horizon 2020 (Kollatz-Ahnen 2011; BEI 2012).

The interest toward PPPs performances remains therefore high, and the European institutions favour for the policy is testified also in the new Regulations for Structural Funds, where the EU resources for the cohesion policy and the territorial development and innovation, research and technology transfer policies are intended to be integrated in a thorough way, with a wider use of PPP cooperation tools, in order to overcome market failures which hamper the access to the credit; and with a focus on innovative multi-level, multi-fund cooperation instruments as the community-led local development (Article 28-30 of the proposed Common Provisions Regulation) and the integrated territorial investments (Article 99 of the proposed Common Provisions Regulation).

The Committee of the Regions says7 that the so-called InFI Innovative Financial Instruments, wisely combined with public subventions, can contribute to a costs and risks reduction in important projects and investments, and invites the local and regional authorities to “be creative”, by combining different instruments with the aim to support investments in their territories (EIB long-term support actions, framework loans, loans for structural programmes, etc.).

7 Opinion of the Committee of the Regions on Synergies between private investment and public funding at local and regional levels – (2013/C 139/02), April 2013.

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As PPPs include several patterns of cooperation, each of them characterized by different rules, different kinds of works or services to be put in action, different financial and territorial dimensions and purposes8, every Member State needs to transpose the PPP policy in its legislative framework and economic context. The attempt to integrate these instruments with the already existing procurement policies and rules can therefore bring as a consequence that the PPPs available in each national context may vary significantly, and indeed this aspect increases the complexity aspects and may reduce the territorial cohesion.

In Italy, PPPs have been introduced in the national framework by the means of many legislative transposition acts; Italy’s regulatory and cultural context required many updates in the national law, in order to make it compliant with the European one, to guarantee equal access to all European enterprises to the market, and to get the best impacts on the economy. Institutions had to try to define a national PPP’s concept, able to fit to the Italian market peculiarities and weaknesses, to give the best answer possible to the public decision makers and market operators’ needs.

The experience at a national level in Italy was characterized by the difficulties en- countered in harmonizing the Italian regulatory framework of public procurements, concessions, and PPPs with the European one.

PPP tools, and in particular the project financing, are characterized by a significant procedural complexity, due to the merging of the subjects’ competences and activities during the various phases of the project. PPPs gather in one big procedure programming, projecting, managing and monitoring activities, gathering the public interest and the private investor’s economic advantages into the same partnership platform; therefore, this platform has to be tailored to the specific features, competences, roles and requirements of both parties to guarantee to all of them a sound added value. Meanwhile, PPPs regulatory framework is quite rigid, and does not take into account the wide range of options and expectations on the ground; so that here’s a clear element of complexity in this tool, that made PPPs to be seen with a bit of diffidence in the Italian public procurement market. The many control checks required under the Italian rule add to the complexity in conditions and regulatory framework, which made the PPPs less attractive than they could be for business operators and public administrators (the Authority for public contracts, the assessment of public interest, the Stability Pact checks).

In spite of these difficulties, since 2002 PPPs started significantly increasing their presence in the Italian market, even though in the aftermath of the crisis, between

8 Some examples can include The Eurotunnel, the Spata airport, the bridge on the Tago, and in Italy the Venice Hospital and the line 5 of the Milan underground and the line D of the Roma underground.

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 327 Financing Local Economic and Infrastructural Development

2008 and 2011, the investment quota for public works decreased by 24% and it is expected to further decrease from 2011 onwards9.

The budgetary restraints, in particular towards the local authorities’ budgets, made it very difficult for public authorities to programme and to finance public works and public services with own resources, by using the traditional public procurement instruments. That’s why in recent years PPPs started to be chosen by Italian public authorities in many cases; so we can say that the anti-cyclical aspects and the rationalization of the public expense are the main causes for the first diffusion of PPP patterns in Italy10.

However the Italian macro-economic context strongly needs further support policies to promote private-public cooperation, not only as a tool to recover the public investment sector, but also to innovate it and keep the pace with Europe.

At the moment, the so-called Third Decree11 (Legislative Decree 152/2008) is the main legislative instrument framing a national discipline for PPPs. The Third Decree did modify the Public Contracts Code (Legislative Decree 163/2006), completely redesigning the PPP’s discipline, with particular reference to the project financing PPP form, which was supposed not to be in line with the EU-level legislative framework12.

9 Project Financing – Osservatorio Nazionale, 2011, 10 anni di Partenariato Pubblico privato in Italia, Cresme Europa Servizi. In 2002, the traditional forms of public procurement represented the 97% of the total tenders, and the 72% of the total amount of investment in Italy; in 2011, the figures decreased respectively to the 74% and 32%. In more detail, PPP’s forms represent the 44% of the total public works tenders amount, the 17% of the total amount of investments, and project financing is the 40% of the whole Italian market. 10 The CRESME Observatory data on the PPPs in the Italian context reveal a growing trend for the number of tenders and for the amount of the procurements; PPPs are seen by public authorities as an instrument to fight the budget constraints in the investment field, mostly in Energy efficiency field. 11 The Legislative Decree 152/2008 introduced new procedures for public works through the so-called project financing instrument. The Decree modified significantly the articles 153, 154 and 155 of the Code for Public Contracts, which includes the project financing discipline. Public administration can choose between two types of procedures, and a third one is allowed when the public decision maker is not able to act directly. The main condition to activate private financing in public works in Italy remains the need for a triennial programming activity lead by the public sector. A feasibility study can be the tools to merge the PPP project into the existing programming document; the study, which can be made also by the private partner, is the basis for tenders to be set up. Therefore, also private partners can ask public administration to take into account private projects for works or services aimed at fostering the territorial development; public administration is free to open to a dialogue with the private investor, or to refuse to insert the project proposal into the programming document. 12 The Public Contracts Code so defines PPPs in the art. 3 comma 15-ter: “contratti aventi per oggetto una o più prestazioni quali la progettazione, la costruzione, la gestione o la manutenzione di un’opera pubblica o di pubblica utilità, oppure la fornitura di un servizio, compreso in ogni caso il finanziamento totale o parziale a carico di privati, anche informe diverse, di tali prestazioni, con allocazione dei rischi ai sensi delle prescrizioni e degli indirizzi comunitari vigenti”.

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Presently, Italian regulatory framework allows both contractual PPPs (project financing, the only one which enables partners to join forces in order to carry out a public work; concession of public works, concession of services and public leasing) and institutional ones (public-private companies and S.T.U.s – urban qualification companies).

But the economic context in Italy has to take into account that the Constitutional Chart entitles Regions to a huge capacity, so that many public works and services providing procurements are of regional and infra-regional competence. So what about the regional level of government, how do Regions transpose, if they do it, the PPP policy in their economies?

Sustainable development policies are designed, implemented, monitored and evaluated at various levels of government. The idea that every strategy of policy for the benefit of the EU territories has to base itself on a solid territorial dimension was discussed, since 2004, when the Lisbon Strategy required an intense reshaping action. The Kok report13, and afterwards also several Committee of the Region’s opinions, made it clear that no growth and jobs strategy would have any chance to be effective, without an adequate policy ownership by the local and regional authorities. The Lisbon Treaty in 2011 chose to include in its leading principles the subsidiarity and proportionality ones, and put besides the social and economic cohesion also the territorial cohesion14.

The Europe 2020 Strategy for an inclusive, smart and green growth in European economy did not duly take into account the territorial dimension, by including European Regions in the strategic decisional process as actors; therefore, we can already see the first signs of a new failure in the strategy, for instance in the difficulties for the Commission to monitor and manage the European semester and structural reforms programmes (NRP) without participation of the Regional authorities as part of the strategy15.

The programming framework for the public expense of the structural funds for 2014/2020 shall be more results-oriented than in the past experience, (as the Barca Report firstly stated) 16 in order to be able to guarantee effective and measurable

13 This report is available at: http://europa.eu.int/comm/lisbon_strategy/index_en.html, found on July 29th 2013. 14 The T.U.E. Treaty on the European Union, article 5 for subsidiarity and proportionality, and article 5 comma 3, for the economic, social and territorial cohesion, and solidarity among Member States as guiding principles for the European Union. 15 See the studies published by the Europe 2020 platform of the Committee of the Regions, in http://cor. europa.eu/en/activities/networks/Pages/europe-2020-monitoring-platform.aspx –found on July 29th 2013. 16 The new approach to regional and cohesion policy is explained for the first time in the so-called Barca Report: An agenda for a reformed cohesion policy A place-based approach to meeting European Union challenges and expectations, an independent Report prepared at the request of Danuta Hübner, Com- missioner for Regional Policy to contribute to the debate on the future of the cohesion policy in 2009.

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 329 Financing Local Economic and Infrastructural Development impacts on the territories. The European Regions, being the main beneficiaries of the structural and cohesion funds, have to own their structural reform programmes and development strategies, not only to be involved in the implementation of single projects coming from EU and national level strategies; for all strategies aimed at the territorial development are supposed to produce long-term positive impacts on the regional territories17, and therefore territorial needs and assets have to be taken into account firstly in the decision-making, not only during the implementation phase.

Regions already play a crucial role in the European policies implementation, as a Structural Funds and cohesion policy main beneficiaries. But European and Italian Regions should be enabled also to influence the making of the strategic framework for the territorial development policies of all levels of government, to give a sound contribution to implementation, monitoring, and evaluation of the strategies. Moreover, Regions have the capacity for designing and organizing their own place- based regional strategies for territorial development. But there’s a lack of coordination and merging of the multi-level strategies from the various tiers of government, and this could seriously hamper the potential for positive impacts on the territory. A broader, integrated, results-oriented vision is necessary, if we really want to improve durably our society and economy. That’s why European institutions recommend to Member States to take into account in their National Reform Programmes for the achievement of Europe 2020 Strategy also the development strategies put in place by the Regions.

If Regions are policy owners, then Regions should be considered as actors in the cohesion policy design, in order to guarantee a policy harmonization and to avoid the overlapping in Europe 2020 achievements; and in general, to make territorial cohesion become a fact, and not only a hope, by harmonizing and integrating the multi-level strategies for sustainable development. Furthermore, Regions long time ago started playing a crucial role in many of the strategic key fields; among them, for instance, they worked hard on the efficacy of the public expenses, and tried to innovate the policies by using a territorial approach, bringing local needs to the attention of the European decision maker. So Regions could offer a valid contribution to help demonstrating the increasing PPP’s importance, as an alternative to the traditional public procurement market, and a solid leverage to bring innovation and quality also in the decision making for territorial development purposes.

Innovation is one of the keywords to achieve the Europe 2020 Strategy goals, and an important leverage to succeed in regional development and cohesion policies. Innovation in public procurement field is even more crucial than in other sectorial policies, because of the need for the regulatory framework to keep the pace with societal and market changes. It’s therefore likely to be examined and evaluated every

17 Outlook Opinion of the Committee of the Regions on The Lisbon growth and jobs strategy, CdR 245/2008 fin EN/o, rapporteur Mr. F. Delbono, November 26th, 2008.

330 Local Economic and Infrastructure Development of SEE in the Context of EU Accession E. Tagliani: PPP Tools as an Innovation Element for the Qualification of the Public... new proposal to improve public procurement efficacy, and to qualify the participation of private investors in the territorial development schemes. The efficiency of a policy instrument may significantly vary, according to the different governance choices made.

Regions are aware that a comparison between traditional and alternative patterns for public procurements and concessions may lead to a reasoned policy choice, helping to shape tools, procedures and activities according to the territorial area needs, which should become the common goal for a public-private sustainable development action. The added value, in terms of quality of life for population and positive impacts in policy outcome, will depend mainly on the appropriateness of the instrument chosen.

Emilia-Romagna Region

Emilia-Romagna Region can boast a good experience in the PPP’s field, and recently took out some interesting policy measures to promote PPPs in the regional context and to assess PPP’s impacts on the regional procurement market, and in general on the regional economy.

Emilia-Romagna owns a regional strategic framework for a coherent and sustainable territorial development; the framework includes several strategic documents, like D.P.E.F:, P.T.R., D.U.P.18, and sectorial plans in transport, environment, energy, agriculture, SMEs, simplification, digital agenda, education, social inclusion and welfare, international relations. The Region can count on a high territorial cohesion degree, because of its well-structured intra-regional system, connecting public entities of Municipal, Provincial, Regional level and private stakeholders. Participation and negotiation in development programming are leading principles for this system. The Regional development strategies are proposed and organized by the region, but the decisional process deeply involves local authorities, organizations, trade unions, chambers of commerce, and private territorial stakeholders. One of Emilia-Romagna’s most important best practices is in programming field: the regional law n. 30/1996 sets out as a general rule the negotiated programming methodology, where development priorities are targeted specifically on a provincial area, and Municipalities and Provinces contribute to the policy choices. 19

18 The Document of Economic and Financial Programming DPEF can be found in http://www.regione. emilia-romagna.it/dpef/; the Territorial planning document – P.T.R. can be found in http://territorio. regione.emilia-romagna.it/temi/programmazione-territoriale/il-piano-territoriale-regionale, the Uni- tary Regional document for programming – D.U.P. can be found in http://territorio.regione.emilia- romagna.it/entra-in-regione/strumenti-di-programmazione/documento-unico-di-programmazione. all sites found on July, 29th, 2013. 19 Factbook Emilia-Romagna. Quaderni di Statistica / a cura del Servizio Controllo Strategico e Statis- tica della Regione Emilia-Romagna – Bologna: Centro Stampa Regione – Emilia-Romagna, 2010, 170

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 331 Financing Local Economic and Infrastructural Development

Emilia-Romagna Region has created the Osservatorio Regionale del Partenariato Pubblico Privato dell’Emilia Romagna – Regional Observatory on PPPs, which consist in a ITC system to monitor the policy trends and outputs at a local and regional level. The Observatory gathers many data and indicators in an internet portal devoted to the topic and provides an updated multi-level regulatory and policy framework for the economic operators and public institutions. A complete database highlights the PPP calls and tenders within the regional and intra-regional context, and the PPPs already active, and could be used to investigate how they impact on economy, and what the territorial outcomes are20.

Thanks to the Regional Observatory, we know that in Emilia-Romagna public works market PPPs in the last 10 years increased their importance, even though in 2011 they stopped growing for a while. Emilia-Romagna trends are in line with the Italy’s ones. In 2002 traditional public procurements were about 97% of the total, and 77% of the total amount of the investment for development; while in 2010 these quotas lowered to respectively 43% and 26%. PPPs in 2010 were used for the 47% of the public works carried out, and they represented about the 74% of the total market in the region. In 2011, PPPs stabilized at about 36% of the total public tenders and 56% of total amount of investment21.

Considering the tenders made in 2011 all over Emilia-Romagna, about 24% of the tenders were in the Modena Province, for about 30% of the total amount of the investments for regional development. Regional Observatory data reveals also that the Emilia-Romagna public works market sees a strong presence of the Municipalities in the demand side. 76% of total tenders come from Municipalities (149 tenders, €121 million, 60% of the total amount of investment). Provinces are less important in this market segment, with only 5 tenders for less than a million Euros in 2011. Concerning the sector of interest for setting a PPP, there’s a significant interest for the energy sector, and the buildings and services concessions for sport purposes, while transport infrastructures are not affected by the phenomenon. Utilities networks’ market share is 26% of the total (€52 million). Other sectors are handicrafts and commerce, with 24 tenders and 41 Million Euros.

p. – ISBN 978-88-96724-01-9. The Regional territory covers 22.452,78 square km., the population is 4.377.487, and there are at present 9 Provinces and 348 Municipalities. 20 www.sioper.it, found on July 29th, 2013. The Observatory is managed by the Region, in cooperation with CRESME and the Unioncamere, the Regional Association of the Chamber of Commerce. 21 A partial cause of such a decrease, after a decennial growth for PPPs, has been probably the launch of the “Quarto Conto Energia” – fourth energy package, a national level measure to incentivize the energy savings and efficiency, and the RES, which did intervene in an already complicated regulatory framework, generating even more law uncertainty in an economic context affected by the crisis. Last SIOPER periodical report for Spring 2012 seems to confirm that PPPs are getting slower in the Region; it’s important to invert this trend right now, because of the high request for public infrastructure investments, as a consequence of the need for a recovery from the seism of May 2012.

332 Local Economic and Infrastructure Development of SEE in the Context of EU Accession E. Tagliani: PPP Tools as an Innovation Element for the Qualification of the Public...

The Observatory is for sure a useful tool to orient and support a smart regional governance of the PPP’s phenomenon at a regional scale. With this tool, and paying a constant attention to the PPPs trends on the ground, the Region can contribute to give its own answer to the question on what could be the territorial impacts of a PPP policy, and what could be the regional added value of PPP tools, not only as a mere alternative to the lack of public funding in the traditional public procurement practices, but also with the aim to innovate and qualify the market sector.

Emilia-Romagna Region follows and monitors the PPP’s policy also promoting a better, deeper knowledge of these instruments and their potential, and of their impacts at a regional scale. Recently the Emilia-Romagna Region – Unit for the Assessment of public investment, with the collaboration of the Modena-Reggio nell’Emilia University, Department of Communication and Economy, investigated the local and regional impacts of the PPPs, and in 2013 the study La dimensione territoriale del PPP – The territorial dimension of PPPs – was published.

The study starts from the following hypotheses: a PPP approach can reinforce the public administration programming, projecting and managing skills, and can make the evaluation of conditions, and the sharing of risks, more effective PPPs can also enhance the public administrations’ capacity in terms both of technological and governance – related skills • PPPs allow to accurately measure and control the benefits on the regional community and the positive impacts on social aspects of a public service PPPs reinforce the public administrations’ capacity in terms of governance of the territorial policies.

The study’s outputs will be useful to support the empowerment of the Region, when performing its soft law prerogatives in the public procurement field, according to the Italian Constitutional Chart (main tasks are coordinating, guiding, orienting local policies and merging them into a regional strategic design for common public interest purposes).

A first chapter represents the evolution of PPP policy and experiences throughout the Europe. A second one analyses the Italian regulatory framework for the PPP promotion in public procurement market. The third chapter includes literature on the topic, in particular on studies comparing and evaluating the effectiveness of PPPs in relation to the traditional public procurement practices. The fourth chapter describes the methodology approach adopted to run the interviews, and highlights 16 case studies, assessing them in relation to the study’s goals. The fifth chapter aims at illustrating the analysis results, grouped by 5 thematic areas: Organization and implementation of procurement procedures Effects within the public administration structure

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 333 Financing Local Economic and Infrastructural Development

Effects related to p.a. improvement Effects on private partners Effects on the local system (regional economy and society).

The chapter contains also 16 files, each one referred to a territorial experience; the 16 projects are assessed by applying a specifically designed analytical framework, and by comparing them against each other. The aim is to identify the different recurring effects and outcomes, and the interrelation with other territorial development instruments. The sixth chapter matches the reasons and the conditions that lead a regional public decision taker to opt out for a PPP tool, to demonstrate that the conditions (technological, juridical, economic and so on) are not irrelevant for the achievement of positive effects at a local scale. PPPs at a regional level can generate a wide range of effects, different and more effective impacts on the regional economy and development trends. But in part, the positive impacts depend on whether PPP is chosen just to mitigate a decrease in public funding sources, or as a part of a broader regional strategy. Regional strategy is tailored to get territorial cohesion outcomes, as for instance a better quality of services for final users and stronger solidarity, or a solid relationship network among the public decision takers, the private economic operators and the local community and territorial stakeholders. A PPP choice is worth of it in a regional context, when there’s a regional strategic framework orienting the private-public activities towards innovative quality outcomes.

The study proposes also a regional point of view on what does innovation mean in public procurement sector when the choice for a PPP tool is made. Innovation and efficiency/efficacy in regional public procurement market consists in a broad and transparent involvement of the private investors. This involvement should concern not only the setting up of the partnership, but also the evaluation of consistence with the strategic design. PPPs should therefore be chosen both to merge public and private financial sources, in order to set up public works and services when public resources are not sufficient to invest properly for the territorial development, and to enhance quality and efficacy in the procurement and services providing cycles.

Innovation elements are easily found with reference to investment related to energy saving policy, sustainable transport and urban renewal interventions fields. Moreover, PPPs can bring innovation at a regional scale also in terms of improvement of the social conditions, with clear reference to the inclusive pillar of the Europe 2020 Strategy. PPPs are sometimes able to improve the quality of life of final users and citizens, the accessibility of services of public interest and other social aspects of the sustainable development policies.

The study results say that in order to obtain positive impacts and benefit from PPPs, not only in terms of economic recovery, but also of social welfare for the community, each time a public-private tool is chosen, the choice has to be made with an adequate

334 Local Economic and Infrastructure Development of SEE in the Context of EU Accession E. Tagliani: PPP Tools as an Innovation Element for the Qualification of the Public... consideration of the pre-conditions for succeeding. The PPPs should be the best tools available in relation to the specific objective to be reached.

Public administration must take into account all factors and economic interests, making a thorough evaluation and opting out for the more convenient option within the range make/buy. Public-private partnership is a good alternative for a public work or service, not only when the economic and financial requirement are ascertained, but also when there are opportunities to get social advantages and a real value for money for the final users (in terms of raising of the efficiency, efficacy and quality in services provided).

Conclusion

Once the assessment of the main economic and social requirement is made, PPPs need an adequate institutional context and regulatory framework, to ensure the public sector commitment, but also the law certainty and the reliability and transparency principles are key principles. These all are conditiones sine quae non for a wide interest and participation from the private investors sector, together with the presence of adequate enforcement mechanisms for contracts and smart solutions for the disputes that may eventually arise.

What can a regional economy expect from PPP instruments, in other words, what is the added value of PPPs, in relations to a regional scale?

PPPs did contribute so far to the development of a new approach to competition policy and the public procurement market. In a traditional economy, tenders were organized, managed and controlled only by the public authorities, according to the principle of separation between public decision maker, in charge of the public interest, and the private investor, with the profit as a main mission. Government was the leading principle, and the public hierarchy was a mandatory requirement for public investment; when the public decision maker financed the project only with own resources, therefore any risk related to the public work or service was a public authority concern. From a government-led system, PPPs did help to shift to a governance one. In a governance system, public authorities maintain a guiding role, but they can choose whether to open to a private partner or not, and share some or all risks with the private investor. Private partner is in charge of many of the project activities, and can get concrete economic benefits through the investment reimbursement. Last but not least, every partner has a clear opportunity to contribute to raising the quality of the public work or service, to increase the public administration technological, governance and overall skills, to better involve the private stakeholder in local development policies.

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Considering the same starting conditions, the same public-private instrument can produce very different results and impacts on the local and regional economy. The regulatory framework for PPP instruments is not really flexible, neither in relation to the type of investment, nor to the financial dimension. Furthermore, public administrations from all levels of government can choose to put in place an investment through a PPP scheme, but conditions for the partnership should vary, accordingly to the territorial level and the powers of the public decision maker. The Emilia- Romagna study conclusions demonstrate that in a regional economic context the same PPPs instruments, and the same framework, can generate positive effects on the territorial system in at least four different ways. The conditions set up by the partners, in particular by the public one, while defining the partnership for a work or service, are able to affect significantly the PPP incidence on qualitative aspects. The added value for a PPP in a regional context, including benefit for public and for private sector, both as parts of a whole territorial system, is in how partners do behave, how they share not only the operation risks, but also the overall quality objectives, and how much they learn reciprocally from the PPP experience.

Every time a public administration chooses a PPP as a part of a wider, integrated, place-based development strategy, the public decision maker can get the opportunity to involve the stakeholders in the decisional process, and to create together with them the right conditions for the partnership, to succeed in the overall goal of improving the social and economic context.

All the mechanisms of the regulatory framework and the public-private interests and skills are combined to overcome the crucial procedural aspects: the risks assessment, the evaluation of the potential for a private investment to become value for money, and how to deal with the programming framework, making the investment an economic and even social asset for the whole regional collective. All information and requirements, all conditions for setting up a dialogue between public and private partner are in place; this is the best starting point possible to make the investment fruitful for all.

If the public partner has inside its organization enough skills to evaluate in a correct way the economic and financial conditions, and the capacity to estimate the service demand and assess the risks, then it’s easier to define exactly what it takes to set up a PPP. What should be the public partner contribution, and the private partner’s one, what should be the responsibilities and the actions to get efficacy and efficiency as goals for public-private action. Another component of innovation embedded in a PPP tool can be considered also the potential for the generation of positive effects on the governance system at a local and regional scale.

Therefore, innovation aspects in public-private partnerships should be considered crucial assets when comparing PPPs to traditional public procurement proceedings;

336 Local Economic and Infrastructure Development of SEE in the Context of EU Accession E. Tagliani: PPP Tools as an Innovation Element for the Qualification of the Public... the quality aspects brought in the procurement market by PPPs may overcome their complexity and critical points, if these instruments are used for the benefit of the territorial cohesion, the quality in services provided to final users, the improvement of the local social context, the qualification of the public administration management and technological competences and skills.

The study argues that public guidelines, or standardization of partners’ behaviour in PPPs, are not the best way to reach the above mentioned qualification objectives. Instead, it would be better to focus on the territorial programming activities led by the local and regional public administration, targeting the investments on the real territorial needs and requirements, to open up to a wider participation and a deeper dialogue with stakeholders on the development choices and priorities. This can be done by raising awareness of the real opportunities offered by PPPs, following an integrated and place-based approach to the territorial development issues.

In other words, standard forms, procedures and harmonization of the public and private partners’ behaviour are not the best measures to innovate and qualify the procurement market; the key word is the enhancement of skills and capacities by reciprocal learning, with the aim to orient all the public and private partners activities towards common goals, jointly decided, in the framework of a coherent public programming for development. When PPP is chosen not as a mere surrogate of the public financing, but as an element of innovation in the public policy making, and of qualification of the private investors involvement in the development interventions, then PPP will answer in the best way to the needs of the collective.

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Local Economic and Infrastructure Development of SEE in the Context of EU Accession 341

DOI 10.5644/PI2013-153-21

POTENTIALS OF THE EU PRE-ACCESSION ASSISTANCE IN FINANCING OF LOCAL ECONOMIC AND INFRASTRUCTURE DEVELOPMENT: EXPERIENCES OF MONTENEGRO IN MFF 2007–2013

Gordana Đurović*

Abstract

The main aim of the EU instrument for pre-accession assistance (IPA) is to support and assist the candidate countries and potential candidate countries in aligning with the Acquis Com- munautaire, democratic and economic reforms in countries including infrastructure development, strengthening of local economic development, institutional building including administrative and absorption capacities of local self-government, and improving of regional and cross-border cooperation. IPA support in MFF 2007–2013 will amount to some €11.46bn or €103 per capita in the beneficiary countries (Western Balkans, Turkey and Iceland). For Montenegro, the per capita levels of funding are higher than for the other countries, reflecting a minimum level of funding needed for building adequate central and local administrations, irrespective of the size of the country. Consequently, the EU became the biggest donor in the Western Balkans countries on annual basis.

Through the pre-accession assistance based on co-financing principle, the Union significantly supports infrastructure projects, which represent the driving force of the regional and local development. The existence of adequate infrastructure enhances economic development, trade, competitiveness, productivity, economic and social cohesion, as well as better standard of living for the inhabitants of the Western Balkans region. This paper is focused on analysis of IPA programmes in Montenegro in the area of infrastructure and capacity building on local level in the MFF 2007–2013. Main infrastructure projects are defined in the transportation sector (roads, railways) and the environment (water supply, wastewater treatment, and solid waste management) in each IPA budget year, such as support for strengthening of local self-government (capacity building, small infrastructure grants). Based on lessons learned from the previous implementation period it is possible to define challenges ahead for the next 7-years programming period and to define areas of specific interest for future economic development and better regional infrastructure networking.

Keywords: IPA, Infrastructure projects, Local development, Co-financing, Montenegro.

* PhD, full-time Professor at the Faculty of Economics, University of Montenegro, Jovana Tomaševića 37, 81000 Podgorica, Montenegro, phone: +382 69 070 452, e-mail address: [email protected]

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 343 Financing Local Economic and Infrastructural Development

Introduction

The Instrument for Pre-accession Assistance (IPA) is the means by which the EU supports reforms in the “enlargement countries” with financial and technical help. The purpose of this instrument is to assist beneficiary countries in facing the challenges of the European integration, to implement the reforms needed and to lay dawn the foundations for fulfilling the requirements for achieving the EU membership (the Copenhagen criteria). The IPA funds build up the capacities of the countries throughout the accession process, resulting in progressive, positive developments in the region. The main aim of the EU instrument for pre-accession assistance is to support and assist the candidate countries and potential candidate countries in aligning with the Acquis Communautaire, democratic and economic reforms in countries including infrastructure development, strengthening of local economic development, institutional building including administrative and absorption capacities of local self-government, and improving of regional and cross-border cooperation (IPA Regulation 2006 : 84-85). The preaccession funds also help the EU reach its own objectives regarding a sustainable economic recovery, energy supply, transport, the environment and climate change, etc. In the EU budget support for the enlargement countries has been included into the priority budget line called “EU global player” (Djurovic and Jacimovic 2012 : 122-123).

EU preaccession funds make political and economic reform easier in the beneficiary countries and prepare them for the rights and obligations that come with EU membership. In mentioned context, IPA projects strongly support institution capacity building at all levels including local communities, such as investments in local economic and infrastructure development. With the EU’s technical assistance, citizens in the enlargement countries can enjoy better opportunities and overall conditions. However, it is up to enlargement countries how effectively they can use this support and benefit from joint projects. This paper is focused on analysis of effective use of IPA project for local economic and infrastructure development in the Multiannual Financial Framework 2007–2013 (MFF) which is based on Montenegrin experiences and lessons learned.

Data and methodology

This paper contains (statistical and analytical) data that generally rely on official sources (The European Commission/DG Enlargement official data on the Instrument for pre-accession assistance statistics, the European Statistical Office data about GDP, population and related indicators about candidate and potential candidate countries, and official statistical and analytical data from different reports and documents about the IPA support from the Montenegrin Government/Ministry for Foreign Affairs and European Integration responsible for IPA programming, monitoring and reporting). Within this paper we attempt to present data that are consistent in definition and division of IPA components, with special focus on the co-financing principle implemented

344 Local Economic and Infrastructure Development of SEE in the Context of EU Accession G. Đurović: Potentials of the EU Pre-accession Assistance in Financing of Local... in the Montenegrin infrastructural and local development project. It is important to mention complex structure of co-financing mechanism which includes the Central Government budget/capital budget, local municipalities’ budget, and loans from the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD). Heritage Foundation Index of Economic Freedom is also used.

Author’s calculations are focused on following: calculation of average indicators of the EU pre-accession support by countries, total IPA/per country and IPA per country/per capita indicators (to analyze structure of pre-accession support and explain the fact that Montenegro has the most favourable IPA/pc indicator because it needs ‘relatively’ the greatest support for strengthening of the necessary administrative capacities for the process of integration and planned reforms); detailed breakdown of the IPA assistance per component and years for Montenegro and calculation of average co-financing for IPA I component per years, IPA support in comparison of the Montenegrin GDP per years and for total MFF 2007–2013 (structure in GDP), and calculation of average co-financing in total value of projects based on available data for contracted IPA programming years 2007–2011 (to analyze structure of the Montenegrin pre-accession support in the context of co-financing principle); special attention is given to calculation of project value using co-financing method – amounts and sources of financing for Montenegrin selected infrastructural projects (to explain that national co-financing in the case of Montenegro, i.e. sources of funding for IPA projects are significantly greater than the proposed minimum of national co-financing for investment according to IPA regulation – 25%); and, calculation of co-financing for so-called small grants for local economic and infrastructural projects.

Official statistics and economic and financial data, produced by mentioned EU institutions and Montenegrin government, provide an empirical basis for descriptive economic research, for assessing the reliability of empirical findings and for use in decision making as to economic policy (recommendation).

Good economic data are a precondition to effective macroeconomic management that also includes (in this paper) analysis of actual IPA management in the enlargement countries in order to define lessons learned from MFF 2007–2013 financial period and to propose set of recommendation for policy makers for the next financial perspective.

IPA 2007–2013: Beneficiaries and Components

The IPA was designed so as to address the needs of the beneficiary countries within the context of pre-accession policy in the most appropriate way. Its main aim is to support institution-building and the rule of law, human rights, including the fundamental freedoms, minority rights, gender equality and non-discrimination, both

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 345 Financing Local Economic and Infrastructural Development administrative and economic reforms, economic and social development, reconciliation and reconstruction, and regional and cross-border cooperation.

IPA funding will amount to some €11.5bn over 2007–13 (total national components €9.94bn, Multi-beneficiary IPA €1.18bn and Support expenditures €0.35bn). (EC, IPA revised MIFF 2012 : 6-9). The beneficiary countries are: Albania, Bosnia and Herzegovina, Croatia, the Former Yugoslav Republic of Macedonia, Iceland, Kosovo1, Montenegro, Serbia, and Turkey.

To ensure targeted, effective and coherent action, the IPA is made up of five components, each covering priorities defined according to the needs of the beneficiary countries. Two components concern all beneficiary countries (EC, MIFF 2011 : 3-4): The “support for transition and institution-building” component (TAIB), aimed at financing capacity-building and institution-building; Component I covers all institution-building actions and the investments related to the acquis, it helps beneficiary countries to build up administrative and judicial capacity and addresses, according to priority, cooperation measures not expressly covered by other components. It supports the transition to a democratic society and market economy. It helps strengthen democratic institutions, administrative and judicial capacity, and civil society. The “cross-border cooperation” component (CBC), aimed at supporting the beneficiary countries in the area of cross-border cooperation between themselves, with the EU Member States or within the framework of cross-border or inter- regional actions. Component II also covers the participation of IPA beneficiaries in EFRD trans-national cooperation programmes. Essential for promoting good neighbourly relations and regional cooperation and working towards a sustainable economic, social and territorial development of border regions. It prepares the countries for managing the Structural Funds, once they become EU members.

The other three components are aimed at candidate countries only, to prepare them for the programming, implementation and management of Structural, Cohesion and Rural Developments Funds upon accession by approximating, to the greatest extent possible under External Aid rules, the implementation methods of these funds: The “regional development” component (RegDev), aimed at supporting the countries’ preparations for the implementation of the Union’s cohesion policy, and in particular for the European Regional Development Fund (ERDF) and the Cohesion Fund; Participating in such programmes should help beneficiary countries to use EU regional funding more effectively once it becomes available (after they become EU member states). For investment in transport, environment and economic cohesion, and associated technical assistance. The “human resources development” component (HRD), which concerns preparation for participation in cohesion policy and the European Social Fund (ESF) in

1 This designation is without prejudice to positions on status, and is in line with UNSCR 1244 and the ICJ Opinion on the Kosovo declaration of independence.

346 Local Economic and Infrastructure Development of SEE in the Context of EU Accession G. Đurović: Potentials of the EU Pre-accession Assistance in Financing of Local...

the framework of the European Employment Strategy; Supports the development of human capital and helps reduce social exclusion. IPA assistance in this area contributes to improving work skills, creating more and better jobs, and increasing social inclusion and equality. The “rural development” (RurDev) component, which concerns preparation for the common agricultural policy and related policies and for the European Agricultural Fund for Rural Development (EAFRD). Contributes to sustainable rural development. Assistance for restructuring agriculture and adapting it to EU standards (EC and MIFF 2011 : 3-4).

According to revised Multi-annual indicative financial framework for 2013, structure of IPA support per countries and components in MFF 2007–2013 is given in the table below:

Table 1: IPA support per countries and components in MFF 2007–2013 (excl. MB IPA)2

Component HR MK IC ME TR SR AL BA XK2 IPA IPA WB TAIB 277.4 244.1 29.8 166.5 1667.5 1307.5 529.2 621.4 627.6 5471.1 3773.9 CBC 98.0 30.3 30.3 20.6 78.1 65.3 34.1 7.8 364.5 343.9 RegDev 344.9 200.4 22.7 1778.4 2346.5 568.1 HRD 94.4 54.4 5.6 474.1 628.5 154.4 RurDev 182.9 85.6 10.5 854.6 1133.7 279.1 Total IPA 997.6 614.9 29.8 235.7 4795.2 1385.7 594.5 655.5 635.4 9944.3 5119.3 per country in% 10.0% 6.2% 0.3% 2.4% 48.2% 13.9% 6.0% 6.6% 6.4% 100% 51% Population 4.412 2.057 0.318 0.620 73.723 7.276 2.832 3.843 1.794 96.876 22.83 (2011. Eurostat) in% 4.6% 2.1% 0.3% 0.6% 76.1% 7.5% 2.9% 4.0% 1.9% 100% 24% IPA 226 299 94 380 65 190 210 171 354 103 224 countries/ per capita Source: EC, 2012, pp. 6-9 with Author’s calculations.

The table 1 provides the figures in current prices and in Euro. It shows the allocations by country and by component, i.e. allocation of national IPA per countries (without the multi-beneficiary programme – MB IPA, as kind of joint support for horizontal and vertical activities of the beneficiaries, such as without support expenditures). In 2013, the EU is dealing with 5 candidate countries and 4 potential candidates.

2 “XK” is used by some international organisations as a temporary country code for Kosovo. HR – Croatia, MK – Macedonia, IC – Iceland, ME – Montenegro, TR – Turkey, SR – Serbia, AL – Albania, BA – Bosnia and Herzegovina.

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 347 Financing Local Economic and Infrastructural Development

Croatia will officially join the Union by July 2013. Candidate countries are FYRoM, Turkey, Montenegro and Serbia. The accession negotiation with Turkey started in 2006, with Montenegro in June 2012, with Iceland in July 2010 (but was temporar- ily frozen by Iceland), while accession negotiation with Serbia will probably start in early 2014. The accession negotiation process with Macedonia is blocked because of country name dispute with Greece. The European perspective for Albania, Bosnia and Herzegovina, as well as Kosovo is confirmed. Albania has the Stabilisation and Association Agreement in force and expects candidate status soon. Bosnia and Herzegovina also has signed SAA and will achieve its implementation and candidate status after realisation of set of defined political criteria. Kosovo is focused on preparation of SAA negotiation process after signing of Belgrade-Pristina agreement in April 2013 and adoption of an Action plan for its implementation).

Socio-economic indicators show that, with the exception of Iceland, enlargement countries are still well below the EU average (GDP/pc in PPS is between 25 to 61 of the EU average) and even below the level of the weakest Member States. This low level of socio-economic development calls for substantial investments to bring these countries closer to EU standards and allow them to take on board the obligations of membership and to withstand the competitive pressures of the single market. In addition, the countries in the Western Balkans are still relatively young states formed after the disintegration of the former Yugoslavia. Political stability, the full establishment of the principles of democracy and respect for human rights and good governance – all fundamental values of the EU – still need to be strengthened. Most lack the capacity to finance by themselves the institutional reforms and public investments necessary to stabilize their societies and economies and put them onto a sustainable development path (Proposal of IPA II 2011 : 2-3).

According to 2013 Heritage’s indicators of economic freedom, rank of the countries are as follows: 1. Iceland is only enlargement country located in the group of mostly free countries (from 79.9 to 70) on 23 position and score of 72.1; 2. in the group of moderately free countries (score 69.9-60) are: FYRoM – 43 position with score of 68.2, Albania – on 58 position with score of 65.3; Turkey – 69 position with score of 62.9; Montenegro – 70 position with score of 62.6; and Croatia – 78 position with score of 61.3. 3. In the group of mostly un-free countries (59.9-50) are Serbia on position 94, score 58.6 and Bosnia and Herzegovina on position 103 with score of 57.3. Kosovo is not ranked (Heritage Foundation 2013). All above mentioned stress the importance of IPA technical assistance to the Western Balkans as valuable EU financial instrument to support deeper integration.

348 Local Economic and Infrastructure Development of SEE in the Context of EU Accession G. Đurović: Potentials of the EU Pre-accession Assistance in Financing of Local...

Figure 1: National IPA per country in MFF 2007–2013

Source: EC, 2012, pp. 6-9 (Table 1)

The global breakdown of funds between countries (Figure 1) has been respected according to defined criteria in IPA legislation package. National IPA for Turkey, taking into account the size and absorption capacity of the country, presents almost half of the total amount. As for Iceland, the degree of its alignment with EU legislation through the European Economic Area Agreement and its level of economic and social development make the country an exception among candidate countries. For this reason it was agreed that the country will receive IPA assistance exclusively under component I, managed by the Commission. The funding covers three years and began in 2011. The following graph presents figures for average level of national IPA per capita for mentioned period. For Montenegro, the per capita levels of funding are higher than for the other countries (€380 in Montenegro in comparison with €103 of average IPA/pc level; at the same time, average national IPA/pc for the Western Balkans is €224), reflecting a minimum level of funding needed for building adequate administrations, irrespective of the size of the country.

Figure 2: National IPA per country per capita in MFF 2007–2013

Source: EC, 2012, pp. 6-9 (Table 1)

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 349 Financing Local Economic and Infrastructural Development

The EU pre-accession assistance in financing of local economic and infrastructure development: case of Montenegro

Montenegro is receiving EU financial assistance by the Instrument of Pre-Accession Assistance that has the aim to support the reform process in the country in the context of European integration with a focus on institution building, introduction of the EU acquis and improvement of socio-economic conditions as well as environmental protection and sustainable development.

For the mentioned period (2007–2013) Montenegro is receiving support in the amount of €235.7mn which represents 1.1% of Montenegrin GDP on annual level, while the national institutions are providing co-financing.

Table 2: IPA support for Montenegro per components in MFF 2007–2013 (excl. MB IPA)

Component 2007 2008 2009 2010 2011 2012 2013 Total TAIB 27.5 28.1 29.8 29.8 29.8 16.3 5.1 166.5 CBC 3.9 4.5 4.7 3.7 4.3 4.6 4.7 30.3 Reg. Development – – – – – 8.0 14.8 22.7 Human Resource D. – – – – – 2.8 2.8 5.6 Rural Development – – – – – 3.3 7.3 10.5 Total national IPA 31.4 32.6 34.5 33.5 34.2 35.0 34.6 235.7 for Montenegro Co-financing for IPA 18.3 13.1 23.6 18.3 13.8 n.a. n.a. 34% I component (average co-financing 2007–11) GDP of ME 2,680 3,086 2,981 3,104 3,234 3,276 3,446 – /mn €, current prices, ME Statistical Office/ IPA as % of 1.17% 1.06% 1.16% 1.08% 1.06% 1.07% 1.00% 1.10% ME GDP (average)

Source: EC, 2012, pp. 6-9, GDP data from the Montenegrin Statistical Office /www.monstat.org/, with Author’s calculations.

In the period 2007–2011 around 85 different projects are contracted, co-financing is almost 34% of total value of projects, while IPA support is about 66%. In comparison with the region, this structure of co-financing presents strong commitment of Montenegro to proposed joint projects, not only from State capital budget but also from international financial institutions (loans).

As it is presented in Table 2, annual IPA support is gradually raised per year in this financial perspective. Montenegro had access to the first two components (TAIB 350 Local Economic and Infrastructure Development of SEE in the Context of EU Accession G. Đurović: Potentials of the EU Pre-accession Assistance in Financing of Local... and CBC) till 2011. In the programming period 2012–2013 EC decide to re-allocate amount of €38.9 mn for preparation of future development and infrastructure projects in components III, IV and V.

Priorities for infrastructural and local developments and co-financing principle in national IPA for Montenegro Dynamic European integration process in Montenegro in previous period is realised partly due to the significant IPA support in different areas related to the fulfilment of political criteria, social and economic development (including infrastructural and local development) and EU standards. At the same time, all operations receiving assistance under IPA, in principle, require co-financing by the Beneficiary and the Union, unless otherwise agreed upon in a Sectoral Agreement or Financing Agreement. In this part of our research we are focused on analysis of IPA support i.e. impact of IPA project on infrastructural development in Montenegro. Following table presents main infrastructural project supported by IPA in mentioned period.

Table 3: IPA support for Montenegrin infrastructural development: selected projects

Social and economic Project EU % MNE Co-financing % Total development – priority area IPA (€ mn) investment IPA 2007 Transport Bypass 4 19% From Budget 17.2 81% 21.2 Podgorica IPA 2008 Environment – Waste Municipality 3.5 28% Loans – EIB 8.9 72% 12.4 water treatment Niksic Border-crossing with Municipality 2.45 74% Budget 0.85 26% 3.3 Serbia Bijelo Polje IPA 2009 Transport Reconstruction 5 33% Loans – EIB 7 and 10 67% 15 of the railway EBRD 3 mn Environment – Waste Municipality 4.8 47% Loan – EIB* 5.5 53% 10.3 water treatment Berane IPA 2010 Transport Reconstruction 5 42% Loan – EIB 7 58% 12 of the railway Environment – Waste Municipality 3.5 32% Loan – EIB (part 7.5 68% 11 water treatment Pljevlja of) + Municipal Win. MB IPA (1,5) IPA 2011 Environment – Waste Municipality 6.8 51% Loan – EIB 9.4 49% 19 water treatment Cetinje and Bijelo Polje plus MB IPA 2.8 Source: Ministry for Foreign Affairs and European Integration, Government of Montenegro, 2013, with Author’s calculations. Note*: EIB loan for Waste water treatment in Berane is not realized due to problem with location. IPA 2009 grant is redirected to purchase of equipment for Utility companies in the Northern region of Montenegro.

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 351 Financing Local Economic and Infrastructural Development

Priorities are defined between Montenegrin government as beneficiary and the Commission. In IPA 2007 programming period, the most important investment was in the transport (Bypass Podgorica, with national co-financing achieving 81% in total investment due to previous investment of Podgorica municipality, calculated in total investment of this project). If we calculate only phase IV of this investment, national co-financing could be much smaller. In IPA 2008 programming period, the most important investments were in the environment – wastewater treatment and in the area of integrated border management – building of Border-crossing near the border with Serbia. Wastewater treatment in Niksic municipality is realized with strong support of EIB loan (72% of national co-financing) instead of State budget support. In IPA 2009 programming period, co-financing in infrastructural project is also high: 67% in transport through loans of EIB and EBRD and 53% in planned building of waste water treatment in municipality Berane. Unfortunately this environmental investment is not realized due to problems with location of WW-treatment and reaction of local community. Grant was redirected to purchase of equipment for Utility companies in the Northern region of Montenegro. In IPA 2010 programming period, co-financing in infrastructural project was also high and fully realized through loans of EIB for transport and environment. In IPA 2011 programming period infrastructural projects in the area of environment still dominated with same model of national co-financing through loans. Building of wastewater treatment in two Montenegrin municipalities is supported with additional direct grant from Multi-beneficiary IPA (€2.8mn).

Potential risks in implementing of IPA projects for infrastructural development

Based on previous analysis, it can be concluded that the national co-financing in the case of Montenegro, i.e. sources of funding for IPA projects were significantly greater than the proposed minimum of national co-financing for investment according to IPA legislation (25%). At the same time, national co-financing is substantially covered by loans from IFIs. This model of financing of infrastructural project carries the following risks: Risk of premature withdrawals of IPA in the case of unprepared projects (“n+2” rules is final date for contracting following the date of signing of annual financial agreement) – risk of late contracting or “disappearing” of grant. Possible reasons for delay are following: unregulated ownership relations on project location, inadequate location for building of some wastewater treatment plants, lack of technical documentation and feasibility studies for the projects, lack of financial support in State capital budget, etc. These potential problems are just some of the reasons that could postpone realization of the project. Risk of automatic de-commitment of IPA funds in “n+2” rules occurs after three years of initial commitment (signing of annual financial agreement).

352 Local Economic and Infrastructure Development of SEE in the Context of EU Accession G. Đurović: Potentials of the EU Pre-accession Assistance in Financing of Local...

Mismatch between withdrawn EIB/EBRD credit lines with the project realization dynamic – continues to have a negative impact on overall management of public debt and planning of future infrastructural and local development projects. Lack of harmonization of project priorities and available financial resources for them. • Possible risk of request for return of IPA funds in cases of their misuse – beneficiary country is obliged to keep full accurate and systematic record and accounts of the activities implemented under IPA projects. Such records must be kept for 7-years period after the last payment made under the project. Misuse of fund or failure to maintain such records constitutes a breach of obligations and will result in the termination of EU funding or request for refund of part or all funds to the Commission (Djurovic 2012 : 201-202).

The Commission proposed additional support to beneficiary countries to avoid time lag between programming and implementation dynamic of infrastructural projects. In other words, project preparation for bigger infrastructural project is realised with support of IPA. In national IPA components project preparation is supported by Technical Assistance and Project Preparation Facility (TA&PPF) and Support Measures Facility (for public institutions only). Furthermore, under Multi- beneficiary IPA special instruments are also created for project preparation, for so- called “bankable” infrastructure projects: Western Balkans Investment Fund (WBIF) and Municipality Windows.

Priorities for small infrastructural projects on local level for municipalities in national IPA for Montenegro

Strengthening of administrative and financial capacities of Montenegrin local government is also important part of jointly defined priorities in pre-accession support and, at the same time, it is important area for fulfilment of Copenhagen criteria at local level for all potential candidates and candidate countries in current enlargement cycle. For mentioned priority areas analysis is focused on two IPA projects: IPA 2008 “Support to local government reform” (€4.3 million EC contribution, €1.75 million national contribution, i.e. co-financing) and • IPA 2010 “Support to local self-government for implementing the National training strategy (NTS) and provision of grants to municipalities” (€3.5 million EC contribution, €0.44 million national contributions).

“Support to local government reform” project is designed to help improve the legal framework for the decentralisation of powers to local government. It also helps to build municipal administrative capacity, fight local level corruption and upgrade the local public investment programmes. Under decentralisation, municipalities have been given important devolved powers (e.g. education, primary health care and social welfare) but the sectoral laws need to be amended to reflect that new reality.

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 353 Financing Local Economic and Infrastructural Development

Similarly, financial resources need to be transferred to municipalities to enable them to deliver the services they have now become responsible for. And municipalities – particularly those in the poorer central and northern regions – need to improve their administrative capacity and gain access to additional funds in order to invest in key local public infrastructure.

IPA package, i.e. concrete IPA project, before signing of a financial agreement, should be accepted from both sides – the Commission and the Beneficiary. Based on that approach, the following project activities are jointly defined in mentioned IPA 2008 project: 1. Supporting the harmonisation of local government and sectoral legislation, through providing assistance to the legislative working groups, as well as training and awareness building on fighting corruption at local level. There will also be support to strengthen the Coordination Committee for Local Self-Government Reform in its role of distributing competences and resources between the central and local levels. This grant is directly awarded to the Council of Europe to implement this part of planned activities in cooperation with the major stakeholders, addresses the local democracy problems in line with CoE recommended criteria. CoE should ensure continuity and coherence of actions thanks to previous successful cooperation with Montenegrin municipalities. Grant contribution to CoE for €0.15 million and a technical assistance contract of approximately €0.65 million. 2. Training and advice for the Union of Municipalities and individual municipalities in identifying priority investment projects; preparing proposals, economic feasibility studies and environmental impact analysis; financial and investment planning, etc. in order to be better able to attract investments from IFIs and others. 3. Preparing and monitoring a call for proposals for municipalities, to be launched by the EU delegation. Exploring the possibilities for setting up a trust fund (to operate in tandem with Ministry of Finance’s own Equalisation fund) which would be able to receive EU funds for municipal investments once Montenegro is granted decentralised implementation system (DIS). A grant scheme for municipal small infrastructures and investments should be managed by the ECD. There will also be grants for an amount of €3.5 million for the small municipal infrastructures, expected to be launched later, together with additional IPA project in 2010. Co- financing will be provided by Ministry of finance out of the existing Equalisation Fund and/or Municipalities, up to €1.6 million for investments and €0.15 for institution building (Financial proposal 2008: 2-3).

IPA 2010 “Support to local self-government for implementing the National training strategy (NTS) and provision of grants to municipalities” presents the continuity of support to local self-government reform and support to local economic and infrastructure development thought small grants. Beneficiaries are Montenegrin municipalities, Ministry of internal affairs and public administration, Union of municipalities of Montenegro (UoM) and Human resources management authority (HRMA).

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The purpose of the projects was to support UoM and its members in implementation of capacity building programmes in line with the NTS and its Action plan, while continuing support to priority municipal investment in line with EU best practice in local governance (Financial proposal 2010 : 5-6).

The EU Delegation and Montenegrin Government created very ambitious plan which should be realised in three cycles – call for proposals under the grant scheme for small infrastructural projects for municipalities. They established Municipal Development Grant, fully committed for quality projects in line with the municipal strategic plans. Total EU contribution for small grants is integrated from IPA 2007 and IPA 2010 programming years (approximately €3.5 and €5.5 million). The first call for proposals was launched in June 2010. National co-financing is planned to be covered by Ministry of finance, instead of municipality’s budget (approximately €0.75 million annually in next two fiscal years – 2011, 2012).

Realisation of this project is still ongoing, but same important small infrastructural grants are realised till fiscal year 2013, which is presented in the following table:

Table 4: Endorsed small grants to municipalities in the period 2010–2012

Small grants Priority areas Total IPA % of IPA National % of nat. for local investment in total co-financ- co-financing economic and investment ing in total infrastructural investment development 14 Local 7,852,008 5,453,585 69% 2,398,423 31% municipalities transport, (11 Environment municipalities (waste water from the treatment, Northern sanitation), region, Old Social Royal Capital infrastructure, Cetinje, Tourism Danilovgrad and Ulcinj) Source: Ministry for Foreign Affairs and European Integration, Government of Montenegro, 2013, with Author’s calculations.

Most of the projects are realised in the Northern region of Montenegro (14 municipalities are awarded with small grants). Average amount of endorsed small grant is € 560.00 per project. Implementation of the EU small infrastructure projects is great experience for municipalities and could serve as solid base for preparation and implementation of other projects, including IPA CBC projects.

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 355 Financing Local Economic and Infrastructural Development

Based on the analysis of existing challenges in realisation of above mentioned projects/small grants on local level (in the context of serious economic and financial crisis), it can be concluded that main problems in realisation of small grants for municipalities were following: • Co-financing problems for the grants to municipalities due to fiscal problems (budget deficit on national and local level, reducing of capital budget, saving measures due to serious economic crisis, lack of financial resources); risk of possible reduce of co-financing obligations; Lack of prepared project for local infrastructure (need to re-allocate part of grant for project preparation and technical work); Lack of administrative capacities for project preparation and project management on local level (including lack of English language knowledge and computer skills).

In addition to presented IPA project, in 2011 IPA programming period, support to UoM is planned for further realisation of the National training strategy for municipalities (€1.9 million from IPA and €0.13 million national co-financing). During project preparation, municipalities received support from special technical support team, Union of Montenegrin municipalities and trainer’s team (mentorship).

Capacities of Montenegrin municipalities to participate in cross-border cooperation projects

European integration process is not exclusively in the competence of central authorities of the country, despite its level of decentralization and/or regionalization. Participation of local authorities in generation of national policies and establishment and implementation of local policies with EU standards and norms is called “Horizontal Europeanization” (Capacities of Montenegrin municipalities 2011 : 2-3).

Montenegro participates in six neighbour programs within second IPA component (five bilateral programmes with Croatia, Bosnia and Herzegovina, Serbia, Kosovo and Albania and one multilateral programme – Adriatic Neighbourhood Program) and two trans-national programs financed also from EFRD (South East Europe – SEE and Mediterranean Space – MED).

The main goal of regional and cross border cooperation is to harmonize differences among neighbour countries and to stimulate cultural, social, economic and scientific cooperation among local and regional communities. Within Western Balkans, this program has an aim to promote good neighbourly relations, strengthening the stability and prosperity of respective countries as well as connection of the people in bordering regions through joint projects on sustainable development. More concrete

356 Local Economic and Infrastructure Development of SEE in the Context of EU Accession G. Đurović: Potentials of the EU Pre-accession Assistance in Financing of Local... goals are defined based on specific needs of every (country) cross border program. Generally speaking, Montenegro participates in programs with following goals: Stimulation of cross border initiatives in area of social development, economy and environment protection in border regions; Promotion of legal and administrative cooperation; People to people activities.

Number of municipalities involved in bilateral CBC projects is growing. In 2012, there are 36 bilateral neighbour projects (first cycle), 16 trans-national projects and 17 projects in programme Adriatic, with total amount of €16.62 million (Djurovic 2012 : 217). 7 municipalities have participated in IPA CBC projects as well (out of 38 projects endorsed for all five CBC programs. Municipalities Andrijevica, Berane, Bijelo Polje and Pljevlja participate in implementation of more than one IPA-financed project in the same time (small infrastructure projects and cross border cooperation projects). However, data on number of endorsed projects do not address the question about success of the project implementation. Number of municipalities that are lead project applicants could help in this anticipation, because leading applicants usually put more effort in project preparation. Municipalities of Pljevlja and Berane are the only leading applicants in projects endorsed by first round (CBC Montenegro – Serbia). Still, municipality of Berane received significant support during project preparation from international organizations, i.e. UNDP and SNV.

In next part of the paper we will present an overview of endorsed projects in which municipalities are participating:

Cross border program Montenegro – Albania: Capital City Podgorica participates in project “Building roads for tourist cooperation, through development of handicraft products”. Project goal is “contribution to revitalization, development and promotion of traditional, local art production in bordering area”. Leading applicant is from Albania.

Cross border program Montenegro – Bosnia and Herzegovina: we can say that municipalities were more active in this program. Municipality of Kotor participates in project “Sustainable waste management in border area of Bosnia and Herzegovina and Montenegro”. Goal of the project is “to promote joint sustainable development and increase efficiency of the waste management in border area, through- capac ity building activities and establishment of joint institutional networks in business, public and civil sector”. Municipality of Pljevlja participates in project “Growing Sustainable Practices for protection, promotion and management of natural resources” with goal to “contribute to protection, promotion and capacity building for sound management of selected areas of outstanding nature value, aimed to increase tourist offer and other alternative activities”.

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 357 Financing Local Economic and Infrastructural Development

Cross border program Montenegro – Croatia: municipality of Bar was the most successful one. It is partner in project “Olive production as part of cross-border tourist offer”. Leading applicant is SNV – Development agency from Netherlands. Goal of this project is to “create joint platform for cooperation in olive and tourist sector, in border area, through capacity building of olive growers and tourist workers, in order to increase economic potentials in respective sectors”. Project, also, has to “promote existing and create new tourist offer, including small infrastructure interventions, as well as development of joint promotion and marketing of olive products that represent unique sense for location and tradition”. Town Library Kotor is leading applicant in project “Dubrovnik and Kotor – towns and books”.

Cross border program Montenegro – Serbia: in this program municipalities showed the best creativity. Municipality of Berane is leading partner in project “Sustainable tourism for equal opportunities”. Project activities include procurement of IT equipment for tourist organization Berane, production of photo album with tourist potentials of Berane, catalogue of joint tourist values of respected area and maps based on GIS as well as publication etc. Municipality of Andrijevica participates in project “Zlatibor – Kom pastures” aimed to contribute to milk production. Three experimental centres for buying up milk will be equipped with IT and laboratory (milk analyze). The centres will analyze thousand of samples in order to increase quality. Municipality of Bijelo Polje participates in project “Without borders, for the sake of children” aimed toward establishment and development of participatory network as source for poverty reduction, creation of conditions for experience exchange, increasing the level of social activity of marginalized children and youth, joint activities of youth, raising awareness on poverty as Human Rights category. Municipality of Pljevlja is leading applicant in project “Sustainable development of bicycle sport” aimed toward development of infrastructure for mountain motor and bike sport in Pljevlja and Kraljevo, to promote mountain motor and bike sport as new tourist offer, and to raise awareness of public, especially youth, on bicycle sport advantages. Within this program, Public Communal Enterprise from Nikšić is leading applicant in two projects with Public Communal Enterprise from Užice (Capacities of Montenegrin municipalities 2011 : 24-25).

Cross border program Montenegro – Kosovo: projects will be realised in the framework of programming period 2012–2013.

Beside municipalities, other local stakeholders took part in IPA CBC projects. They are as follows: Public Communal Enterprise Nikšić, Mountain Rescue Service Nikšić, Cultural Centre Pluzine (leading applicant), and Town Library Kotor. In transnational programmes 3 municipalities are involved (Ulcinj, Cetinje and Niksic).

For better evaluation of the results in first call for intra Western Balkans CBC projects, it is valuable to add some results of NGO surveys. Activists of NGO Citizen Information and Education Centre had interviews and polling with local government 358 Local Economic and Infrastructure Development of SEE in the Context of EU Accession G. Đurović: Potentials of the EU Pre-accession Assistance in Financing of Local... civil servants. Based on their information, 3 out of 21 local governments haven’t participated in first call for IPA CBC proposal: Kolašin, Danilovgrad and Šavnik. Some of answers led to the conclusion that there were no enough capacities for project preparation but some stated that all IPA components are pure “boredom”. Arguments were given as follows: CBC programs are too complicated, project preparation is time and energy consuming and funds are small. Therefore, from the point of view of some local governments, participation in CBC projects is irrational, especially in comparison with funds for infrastructure projects from first IPA component (Capacities of Montenegrin municipalities 2011 : 27).

The significance of these projects is undoubtedly remarkable, but not sufficient. Local governments must further develop their absorption capacities for EU funds in order to achieve targeted goals of local economic development.

To conclude, implementation of projects under IPA CBC program remains great challenge for municipalities with lack of previous experience in cross-border project implementation, according to EU system of public procurement.

Conclusions from Montenegrin pre-accession assistance experiences in MFF 2007–2013

Lessons learned

This analysis shows that there is a quite strong link between strengthening of administrative capacities of all level for IPA management and effectiveness of selected project, i.e. their impact on local economic and infrastructural development. Based on lessons learned from the current financial perspective in using IPA funds as incentive for faster local development, we can conclude the following: • The overall IPA envelope for Montenegro in the Multi-annual financial framework 2007–2011 is €235.7 million which represents about 1.1% of Montenegrin GDP (average); • Co-financing of the IPA projects (institution building and investment) are realized significantly above proposed minimum (for institution and for investment 10 and 25% of public expenditures respectively); In some cases co-financing is more than 70% which confirms importance of selected project for infrastructural development of Montenegro; Infrastructural projects in transport and environment are followed by credit lines from EIB and EBRD; EU became main donor in the Western Balkans region and in Montenegro with leading role in donor coordination initiatives; Main administrative structures for programming of IPA projects are established, such as their monitoring in a decentralized management system;

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 359 Financing Local Economic and Infrastructural Development

First CBC projects are realized, on bilateral and multilateral level; The Joint Consultative Committee (JCC) between the Committee of the Regions (CoR) and Montenegrin local authorities is established and held its second meeting in June in Podgorica with focus on effective use of pre-accession assistance and area of wastewater investment; • Good regional cooperation in the field of IPA management coordination is established; Accreditation process for decentralized management system of pre-accession assistance is in final phase; Great number of trainings are realized, including trainings for programming and project management; methods of multi-annual programming and monitoring of project cycle are developed; Till now, there are no detected misuses of IPA funds in Montenegro and disburse- ment dynamic is in planned framework (gradual raise of absorption capacities); Serious economic crisis, since 2009, strongly reduced State capital budget and questioned numerous infrastructural projects at local level; almost all Montenegrin municipalities entered in the era of financial insolvency and indebtedness; At the same time, priorities in the Multi-annual programming document are too general and not enough number of projects is prepared for next programming period.

Recommendations

Accreditation for DIS – European support is of great importance for beneficiary countries. In the same time, managing of the support (funds) is a great challenge for public administration as well as local governments, civil society organization and business. Establishment of above-mentioned structures, setting up rules and procedures are necessary to obtain EC accreditation for decentralized management of IPA. It is very complex and demanding task for Montenegro.

Administrative capacities of municipalities – Local Governments are not obliged to establish new administrative (accredited) structures. European integration process supports municipalities to better perform their roles. However, building local capacities is not a new task for local governments. On the contrary, it is local governments’ genuine necessity in order to be a service to the citizens. EU Integration process serves as a catalyst for better recognition of necessity for capacity building activities and its better implementation.

Financial and fiscal capacities of municipalities and central government budget – After the short-lived recovery, Montenegro ended up in recession again in 2012. Although the government expects the output growth rate of 3.0-3.5 percent over the medium term, supported by FDI in energy, tourism and construction, there

360 Local Economic and Infrastructure Development of SEE in the Context of EU Accession G. Đurović: Potentials of the EU Pre-accession Assistance in Financing of Local... are substantial downside risks to the government fiscal and macro framework. Montenegro’s public debt, including guarantees, has risen rapidly since the crisis, from 32.4 percent of GDP in 2008 to over 61 percent in 2012. State debt is 51.1 percent and guarantees are 11.2 percent on spring 2013, with serious risk of KAP guarantees activation because of possible opening of programming bankruptcy procedure in company in July. It will cause problems with co-financing for IPA programmes, together with raising level of Montenegrin public debt including issued public guarantees (World Bank 2013 : 3-5).

Further regional development analysis and regionalisation – Strategy of regional development of Montenegro, adopted in 2010, followed by Law on Regional Development in 2011, perceive Montenegro as one statistical region (NUTS 1, 2 and 3), but three geographical regions: maritime region (Ulcinj, Bar, Budva, Tivat, Kotor, Herceg Novi and Cetinje), middle (Podgorica, Cetinje, Niksic and Danilovgrad) and continental region (Šavnik, Žabljak, Plužine, Pljevlja, Kolašin, Mojkovac, Berane, Bijelo Polje, Rožaje, Andrijevica and Plav). In order to better utilize EU funds for regional development, it would be important to perform additional analyzes on needs and possibilities for definition of more detailed statistical regionalisation. In addition, increasing quality and accessibility of statistic data on local level would support strategic planning process in local governments.

Having in mind poor capacities of smaller municipalities, it would be necessary to think about establishment of regional development agencies. Their task would be to support process of development planning and project preparation in several municipalities with one geographical (or, eventually statistical) region. Development of local capacities, to prepare and implement IPA funded’ projects, is very important issue. Therefore, Government of Montenegro should consider possible options for additional support to municipalities in project management.

Inter-municipal cooperation needs to be promoted as a tool for compensation of missing resources.

Strengthening of the local human resources – Concept of human resource development in local government was usually based upon ad hoc trainings, organized by donors. The lack of quality implementation of National Training Strategy for Local Government (2008) supports this statement. It is very important to ensure preconditions for implementation of above-mentioned strategy. Therefore, it is necessary to develop modern, merit-based human resource management system on local level.

Preparation of CBC projects in future – Experiences of municipalities that received grants from first call for proposals are valuable to other municipalities for preparation of IPA project proposals. Therefore, it would be good to establish model of information exchange and exchange of best (or eventually bad) practices. In addition,

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 361 Financing Local Economic and Infrastructural Development it is necessary to determine CBC potentials and to include them in strategic development plans, budgeting and implementation of these plans.

Local Government Development – It is necessary to introduce innovated methodology and strategic planning concept in all municipalities. In addition, it is necessary to ensure participation of business and civil sector in local planning processes, and to define strategic local priority issues that can be addressed through support of EU funds. Municipalities need to improve process of planning and coordination of activities with cross border partners, in order to harmonize development’ plans, to choose priorities and to adopt planning documents.

Union of Montenegrin Municipalities (UoM) – Ministry department in charge of local government and UoM should put more effort in strengthening human, organizational, technical and financial capacities for effective planning, preparation and implementation of cross border cooperation projects. Local governments should be more active in process of programming of EU pre-accession funds, with support of UoM.

References

Capacities of Montenegrin municipalities to participate in CBC projects (2011) Fund for an Open Society, Podgorica. Council Regulation (EC) No 1085/2006 of 17 July 2006 establishing an Instrument for Pre/ Accession Assistance (IPA), OJ L 210, 31/7/2016; Articles 1-2. (http://eur/lex.europa.eu/ LexUriServ/LexUriServ.do?uri= OJ:L:2006:210:0082:0093:EN:PDF) Djurovic, G. (2012) Evropska unija i Crna Gora: ciljevi ekonomske, socijalne i teritorijalne kohezije, Ekonomski fakultet, Podgorica. Djurovic, G. and Jacimovic, D. (2012) Montenegro’s Integration Perspective in a Time of Crisis, GSTF Journal on Business Review, 2(2): 120-27. European Commission (2012) IPA Revised Multi-annual Indicative Financial Framework for 2013, COM (2012) 581 final, 6-9; (http://ec.europa.eu/enlargement/instruments/ overview/index_en.htm, found 30/6/2013). European Commission (2011) Instrument for Pre-Accession Assistance (IPA), Revised Multi-annual Financial Framework for 2012–2013, COM 2011, 641 final, Brussels, 12.10.2011. (http://ec.europa.eu/enlargement/pdf/how_does_it_work/miff_12_10_2011. pdf, found 30/6/2013) Financial proposal for the National programme for Montenegro under the IPA transitional assistance and institution building component for 2010, Annex, Signed on 8. November 2010, Brussels. (http://ec.europa.eu/enlargement/pdf/montenegro/ipa/2008/national_ programme_montenegro_2008_en.pdf, found 30/6/2013) Financial proposal for the National programme for Montenegro under the IPA transitional assistance and institution building component for 2008, Annex, Signed on 23. January 2009, Brussels. (http://ec.europa.eu/enlargement/pdf/montenegro/ipa/2010/ fd_ipa_2010_component_i_.pdf, found 30/6/2013) Heritage Foundation (2013) Index of Economic Freedom, Country Ranking; (http://www. heritage.org/index/ranking, found 1/8/2013)

362 Local Economic and Infrastructure Development of SEE in the Context of EU Accession G. Đurović: Potentials of the EU Pre-accession Assistance in Financing of Local...

Ministry for Foreign Affairs and European Integration, Government of Montenegro (2013) IPA opisi projekata 2007–2011. godine. (http://www.mip.gov.me/index.php/Dokumenti- prirucnici-prezentacije-i-publikacije/dokumenti-prirucnici-prezentacije-i-publikacije. html, found 30/6/2013) Proposal for the Regulation of the European Parliament and of the Council on the Instrument for Pre-accession Assistance (IPA II), European Commission, COM (COM 2011) 838 final, Brussels, 7/12/2011. (http://ec.europa.eu/enlargement/pdf/highlight/20111207_ipa_ final_en.pdf, found 30/6/2013) World Bank Group – Montenegro Partnership, Country Programme Snapshot (2013) World Bank, April 2013. (http://www.worldbank.org/content/dam/Worldbank/document/eca/ Montenegro-Snapshot.pdf, found 30/6/2013)

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 363

DOI 10.5644/PI2013-153-22

THE ROLE OF R&D AND INNOVATION IN LOCAL ECONOMIC DEVELOPMENT

Maja Bučar*

Abstract

The paper looks at the issue of R&D and innovation first from the overall impact on economic growth and development and discusses questions of national innovation system and its constitutive elements. From there we focus more precisely on the concept of innovation capacity, which is a prerequisite for a specific environment if R&D and innovation efforts are to result in economic development. The build-up of innovation capacity depends on the development of innovation infrastructure, R&D capacity, diffusion and assimilation of innovation as well as the level of market development. Each of these elements can be influenced by appropriate innovation policy and a set of innovation support measures provided by the state, regional or/and local government. The ability to successfully implement innovation support measures depends on governance capacity, which is one of the most critical issues in many transition countries, including Bosnia and Herzegovina.

Keywords: Innovation policy, Support measures, Governance capacity, R&D.

Introduction

When discussing R&D1 and innovation, we usually refer to the national context, especially since the common analytical framework is the national innovation system. Yet important role in promoting R&D and innovation can be played by regional or local level of authorities as well, especially through creating favourable circumstances

* PhD, associate Professor at Faculty of Social Sciences, University of Ljubljana, Kardeljeva ploščad 5, 1000 Ljubljana, Slovenia, phone: + 386 1 5805 115, fax: + 386 1 5805 109, e-mail address: maja. [email protected] 1 According to the Frascati Manual (OECD 2002), R&D “comprise creative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of man, culture and society, and the use of this stock of knowledge to devise new applications.” R&D generally covers three types of activities: basic research, applied research and experimental development. Basic research focuses on exploration of different phenomena and observable facts with the objective to acquire new knowledge without any particular practical objective. The aim of applied research is to acquire new knowledge with a specific practical objective. Experimental development covers “systematic work, drawing on existing knowledge gained from research and/or practical experience, which is directed to producing new materials, products or devices, to installing new processes, systems and services, or to improving substantially those already produced or installed” (OECD 2002).

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 365 Financing Local Economic and Infrastructural Development for the business development. In many contemporary economies we see the level of business investment in R&D and innovation as one of the main determinants of the competitiveness and of the dynamics of economic growth.

The paper looks at the issue of R&D and innovation first from the overall impact on economic growth and development and discusses questions of national innovation system and its constitutive elements. From there we focus more precisely on the concept of innovation capacity, which is a prerequisite for a specific environment if R&D and innovation efforts are to result in economic development. The build- up of innovation capacity depends on the development of innovation infrastructure, R&D capacity, diffusion and assimilation of innovation as well as the level of market development. Each of these elements can be influenced by appropriate innovation policy and a set of innovation support measures provided by the state, regional or/ and local government.

Design and implementation of the R&D and innovation policy depends on adequate level of innovation governance. As we will describe in the paper, the public authorities have the opportunity and the responsibility to provide support to innovation, both to public as well as business entities. A set of different policy measures through which the government may/can provide support to innovation is presented.

In many environments, be it at national, regional or local level, we find inadequate capability of innovation governance. This is most commonly reflected in inappropriate policy design, selection of measures which are insufficiently adapted to the local needs and abilities and especially poor implementation of the policies and measures. Developing appropriate innovation governance capability is a task for all levels of government: state, regional or local. The paper shows that this is very likely the most difficult process for the transition countries, which face many challenges: from adaptation to the market economy model, to the changes in educational system, and most complex: changes in value system and culture. This complexity of processes makes the transition to knowledge based economy/society, which today is associated with the successful, developed environment, so difficult that catching-up is more of an exception than a rule.

From national innovation system to national innovative capacity

In economic theory as well as in policy the importance of innovation as one of the key determinants of long-run economic growth is widely recognized. The concepts like national innovation system (Edquist 1997; Nelson 1993; Lundvall 1992) and national innovative capacity as the ability of a country to produce and commercialize a flow of innovative technology over the long term (Furman et al. 2002) receive significant attention. In their ambition to secure long-term sustainable economic and

366 Local Economic and Infrastructure Development of SEE in the Context of EU Accession M. Bučar: The Role of R&D and Innovation in Local Economic Development social development, the countries are looking also at the national innovation systems in an attempt to develop R&D and innovation capacities as important sources and determinants of economic growth.

According to Furman et al. (2002), the national innovative capacity is the ability of a country as both a political and economic entity to produce and commercialize a flow of new-to-the world technologies over the long term. What is particularly relevant for their definition is that the innovative capacity is not only the level of innovative output per se i.e. number of different innovations, but reflects more fundamental determinants of the innovation process. This by itself makes the development of innovation capacity a more complex endeavour, since many more factors need to be developed to the level of providing adequate support to innovation activity.

Figure 1: National innovation capacity framework (Radošević 2010)

First, innovative capacity depends on a strong common innovation infrastructure which includes overall science and technology policy environment, the mechanisms in place for supporting basic research and higher education, and the cumulative “stock” of technological knowledge upon which new ideas are developed and com- mercialized. It is important to note, however, that R&D activities are but one input into the complex system of generating and diffusing innovation.2 Still, the attention paid to R&D and also to policies aimed at raising R&D intensity is justified by two principal reasons. First, there is a widespread consensus on the recognition of R&D as the main engine of long-run economic growth. In particular, the objective of R&D activity is the generation of new knowledge (invention), which may then

2 Innovations are based on a number of scientific, technological, organisational, financial and commercial activities. Oslo Manual (2005) explains that “innovation comprises a number of activities that are not included in R&D, such as later phases of development for preproduction, production and distribution, development activities with a lesser degree of novelty, support activities such as training and market preparation, and development and implementation activities for innovations such as new marketing methods or new organisational methods which are not product and process innovations. Innovation activities may also include acquisition of external knowledge or capital goods that is not part of R&D.”

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 367 Financing Local Economic and Infrastructural Development be transformed into commercially-viable innovations. In addition, the diffusion process (through adoption by consumers and imitations by firms) induces the long term positive effect of R&D activity on economic growth. R&D has important features which make it different from other types of profit-motivated investments. In particular, the additional “technological uncertainty” embedded in the innovation itself, together with the common “market uncertainty” faced by firms acting in markets, makes R&D activities highly uncertain and risky from a firm’s perspective. In turn, such uncertainty may generate constraints for a firm which aims at accessing external financing. Moreover, R&D is characterised by indivisibilities and economies of scale that create strong incentives for firms to monopolise markets. Finally, returns to R&D investment are partially non-excludable which gives rise to the “appropriabil- ity problem”. This undermines the incentives of private firms to invest in research activity (Dasgupta and Stiglitz 1980; Spence 1984) and paves the way to the role of government policy in promoting R&D to its socially desirable level.

Second, a country’s innovative capacity depends on the more specific innovation environments present in a country’s economy. The microeconomic environment in which the firms compete has a significant impact on how innovative they need to be: in the conditions of limited competition, a need for innovation is less pronounced. Yet with increased globalisation and open markets, the competition is rarely local, so innovation becomes an essential element of competitiveness. Innovative capacity depends on existence of industrial clusters – not clusters in a formal institutional sense, but clusters as Porter (1990) defined them. Porter highlights the microeconomic underpinnings of innovation in industrial clusters, including the interaction between input supply and local demand conditions, the presence and orientation of related and supporting industries, and the nature and intensity of local rivalry. For the innovation capacity, existence of such clusters is of crucial importance.

Third, innovative capacity depends on the strength of the linkages between the common innovation infrastructure and specific industrial clusters. For example, a given common innovation infrastructure results in a more productive flow of innovative output when there are mechanisms or institutions, such as a domestic university system or established funding sources for new ventures, which encourage the commercialization of new technologies in particular clusters.

The key task of successful innovation policy is to increase the innovation capacity. As we observed above, this capacity is not dependant only on the development of science and the outputs of the research system, but very much also on the strengths of country’s business sector and the mechanisms and institutions supporting their interaction. The complexity of innovation system requires adequate policy response through well designed innovation support measures.

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Innovation support measures

Providing support to innovation is one of the major elements of country’s innovation policy. In theory and practice a wide variety of measures exist, addressing the innovation in different environment, at different stages of economic development of the country or life span of the enterprise. Most commonly, innovation support measures’ main objective is to promote innovation activity in business sector, but since many different factors affect the innovation activity, the scope for intervention is broad. Innovation policy support will have to involve many dimensions and should be understood as a set of instruments. These aim at improving access to financing in support of innovation, at creating an innovation friendly regulatory environment and demand for innovation as well as at reinforcing the activities of institutions relevant for innovation, including the links between research institutions and industry (INOVO 2013b).

Particularly in small economies, market systems by themselves will not provide the full range of support processes that innovating firms require if they are to innovate successfully or to survive unsuccessful innovation projects. Even from a theoretical point of view, public intervention to support business innovation processes may be justified if the existing activities and interactions in the private sector do not result in optimal outcomes from a societal point of view (EC 2009).

In economic theory, there is a case for public support if private activities and interactions lead to too low investments in innovation. This refers to the concept of market and systemic failures, which defines the conditions under which public intervention may be justified in order to improve the efficiency of markets and to overcome practical barriers for innovation. Systemic failures refer to structural, institutional and regulatory deficiencies, which lead to sub-optimal investment in knowledge creation and other innovative activity. Systemic failures may justify government intervention in order to pragmatically address weaknesses of the innovation system (EC 2009).

Due to their risky nature R&D investments thrive disproportionately more under stable and favourable economic environment than in unstable and volatile conditions which increase the risk-aversion of potential investors. Therefore a proactive innovation policy of the country (state/region) is expected especially in the cases where we are faced with unstable conditions, often faced by the transition countries.

Innovation policy focuses on all types of innovation activities and processes in enterprises (at all stages in their development from a business idea to a mature firm seeking to renew its product range, etc.) and not only on R&D or technological innovation (Reid and Peter 2008). Thus, under this definition, the final beneficiaries or targets of innovation policy are, first and foremost, enterprises (together with entrepreneurs seeking to set up an enterprise), although the authors note that, increasingly,

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 369 Financing Local Economic and Infrastructural Development actors from the not for profit and public sectors may also form the targets of innovation policy (Cunningham et al. 2008).

On the one hand, R&D enhances a firm’s innovative potential (thus increasing directly the rate of TFP growth); on the other hand, it improves the absorptive capacity of firms and industries, thus facilitating the adoption of existing technologies and spurring TFP convergence. The idea of absorptive capacity was first discussed by Cohen and Levinthal (1989) who stress that besides facilitating the adoption of existing technologies, absorptive capacity also concerns the “firm’s overall ability to be aware of, identify and take effective advantage of technology”.

At the enterprise level, innovation involves the integration of a range of activities, which must be carried through more or less simultaneously. These activities include market exploration, search for finance of innovation projects, personnel development and training, the acquisition, adaptation and operation of new capital goods, research and development, prototype development and testing, and scaling up from testing to production. In each of these areas, enterprises need to make significant tangible and intangible investments, often in situations of considerable uncertainty. Firms deal with these problems with their specific knowledge and competence bases, but there is no guarantee that the resources they bring to the task will be adequate. There is, therefore, room for public assistance to improve the access of, particularly innovative, SMEs to external sources of financing. Policy measures can be targeted at improving framework conditions (e.g. tax and regulatory environment, IPR regime, demand from potential users of risk capital) or at specific financing instruments. However, it needs to be ensured that public support is, as far as possible, non-distorting, time-limited, non-bureaucratic and regularly evaluated (EC 2003).

According to the PRO INNO approach, three forms of innovation policy measures/ mechanisms may be identified based on the types of resources employed: • financial, human and organisational resources – deployed through or on behalf of innovation-oriented programmes and projects; the provision of new information (vision, strategy, coordination, best practice) which is geared towards innovation activities; new institutions (legal acts, rules) designed to explicitly affect the innovation process.

This typology is reflected also in the definition of the innovation policy measure, applied by the Trendchart/Erawatch project, where member countries’ innovation policy and the measures are monitored3:

“An innovation policy measure is any activity that mobilises: resources (finance, human resources, organisations), information (road-mapping, technology diffusion activities, best practice dissemination) and formal and informal institutional processes

3 http://erawatch.jrc.ec.europa.eu/

370 Local Economic and Infrastructure Development of SEE in the Context of EU Accession M. Bučar: The Role of R&D and Innovation in Local Economic Development

(legal and regulatory) to achieve public policy objectives in the area of innovation. It will do this with some percentage of public funds. Finally, it will predominantly be for the benefit of enterprises.”

There are different ways of structuring/categorising innovation support measures. They can be categorised according to their modality of operation or their targets. Modality of operation is concerned with how measures are implemented, whether through the provision of direct financial and/or structural support, and through the generation and/or transfer of knowledge. The following table shows how the principal mechanisms for the provision of support relate to aspects of the innovation system (Cunningham et al. 2008).

Table 1: Categorisation of innovation support measures

Modality Description R&D funds Provide direct support for innovative activity. Legal framework The laws and regulations bearing on innovation Tax and Financial Incentives The provision of financial benefits to encourage innovative activity Coordination and These relate to the ways in which innovation related policy Transparency measures are formulated and implemented, and the steps taken to improve efficiency and effectiveness, and clarity. Infrastructural Development Activities such as the establishment of dedicated intermediary organisations to facilitate technology transfer, and which complement other structural modalities. The Mobility of Personnel Mechanisms to encourage individuals to work, frequently on a temporary basis, within other organisations, with a resulting exchange of knowledge and information. Transfer and Exploitation Mechanisms to diffuse and support the application of research in of Research Results innovation. Information Diffusion Mechanisms aimed at more general awareness of scientific and technological opportunities, and of related support schemes. Demonstrator Projects A more direct mechanism to diffuse and promote the adoption of innovations. Networks and Clusters The establishment and development of inter-organisational pathways used in the transfer of knowledge. Adopted from Cunningham et al. (2008).

Another approach is to classify the support measures according to the level to which the support is directed. This kind of “mapping” has been carried out by the European Commission.

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Table 2: A Mapping of Policy Actions in Support to Innovation

Activity level Firm level Sector level Market level – Statistical and – Innovation – Sectoral industry – Standardisation stakeholder based benchmarking policy initiatives and certification analysis and technology in specific – Legal and on innovation foresight sectors, including regulatory performance – Business innovation framework for – Support to public incubation – Specific cluster innovative RTD – Innovation policies and/or activities Specific – Facilitation of management initiatives in – Better support knowledge transfer training and support specific sectors regulation/ policies – Promotion of ICT for protection of liberalisation of use (e-business) intellectual property specific markets – Market replication (IP) – Lead market projects, such as on – Access to finance initiatives on new eco-innovation – Interactions markets with other firms or research bodies / universities – Tax incentives Entrepreneurship – IPR policy – Internal Market – State aids policies for start ups – Sector-specific – Trade and Horizontal – Public procurement – Mobility standardisation, competition support – Education and programmes such as in ICT policy, including policies training – Public merger controls procurement (EC 2009 : 12)

Probably most elaborate specification of the support measures is the one applied by the ERAWATCH project, where each stage of the innovation activity is captured as well as research and development aspects of the country’s policy. This was designed with the intention of producing a single over-arching and comprehensive framework under which policy measures for both the research domain and the innovation domain could be co-located. This approach is the reflection of developments in innovation system’s definition, where a broad, all-encompassing approach has gained in importance in theory and practice.

For the enterprise-focused innovation support measures, it is useful to arrange the schematic overview of the measures along the life span of an enterprise: from the support to start-ups to the support provided to “adult” enterprises in specific phases of the innovation process. This enables the policy makers to relatively quickly identify the missing measures in their support schemes and respond with design of a new, targeted measure(s), if so decided. We can identify three major stages in the life-span of an enterprise where different types of support are welcome. Certain measures can be applied across more than one stage.

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Table 3: Classification of innovation support measures according to the life span of an enterprise (example of selected measures per category)4

Types of stages Seed stage Start-up stage Development and Types of measures growth stage Support environment University/ business Innovation centres Technology centres/ incubators platforms/ networks Technology parks Clusters Innovation vouchers Innovation vouchers Innovation vouchers4 Internationalisation support Introduction of innovative business models Financial support Venture capital Financial subsidy for establishing an enterprise in innovative environment (incubator, innovation centre, technology park) Subsidised credit for investment in new equipment/ technology R&D subsidies Guarantee schemes R&D tax subsidy Human resources Young researchers from business sector Support to strengthening R&D capacities of enterprise Students’ innovation/ entrepreneurial trainings Mobility schemes Competition of “best idea” type Jaklič et al. 2012.

As we can observe, there are numerous possible measures to support innovation and entrepreneurship which can be applied at the national level or at the level of region or local community. It is important for the policy makers to coordinate the policy solutions adopted at different levels with clear demarcation what is best achieved at which level. For example, the introduction of tax subsidy is the issue of centralised

4 In the literature and practice of different countries, many different types of measures are labelled the same. Innovation vouchers can be very different in their set-up: in the “seed” stage they may help potential entrepreneur to cover costs of advisory services, in start-up stage and adult stage, cover part of R&D costs or intellectual property protection costs (for example, co-finance patenting costs).

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 373 Financing Local Economic and Infrastructural Development government decision, but support for various trainings and build-up of suitable human resources can be a measure at all levels, each aiming at specific action.

Innovation governance capability

Adequate innovation governance capability is essential for the successful adoption and implementation of innovation instruments and innovation support measures. The effectiveness of influencing the innovation capabilities and behaviour of enterprises relies on the “governance” of these policies (EC 2003). Innovation governance incorporates a broad set of mechanisms, instruments and institutions in the field of R&D, education, and entrepreneurship. It focuses on the interplay between the various actors that together determine the priorities, strategies, activities and outcomes in innovation (Boekholt 2004). Successful governance requires, among other things, coordination and interaction across different organisations affecting innovation capabilities: we talk of horizontal and vertical coherence of innovation policy. Horizontality of innovation policy in practice means that all the measures introduced in other policy areas (for example in fiscal policy or in educational policies) are checked for their impact on innovation. On the other hand, the vertical coherence relates to coordination of policies among different levels of actors (national, regional) in the field of innovation. The concept of good governance assumes openness, participation, accountability, effectiveness and policy coherence among different participating actors (stakeholders).

The practice, especially in transition countries (and BIH can be named as such as well) often reveals that the awareness of the need for coherent innovation policy among politicians is low, leading consequently to insufficient allocation of resources for the R&D and innovation support measures, lack of coordination of policies within the government and poorly understood issue of horizontality of the policies (Bučar and Stare 2010). The insufficiently developed governance capability can be detected in the introduction of overlapping policy schemes, insufficient transparency of measures or of poorly adjusted mechanisms, transferred from other countries. Lack of coordination is problematic not only because of limited financial and human resources available, but also since it on one hand lowers the transparency of the government led activities and on the other makes the creation of synergies impossible.

In assessing innovation governance capability, ERAWATCH country reports5 of the EU-15 member states (which are transition countries) pointed out significant dis- crepancies from the policy papers adopted by the governments to the actual practice: while in various strategic papers innovation is highly praised, the public budget allocation seldom follows this praise. This results in the so called “implementation

5 http://erawatch.jrc.ec.europa.eu/

374 Local Economic and Infrastructure Development of SEE in the Context of EU Accession M. Bučar: The Role of R&D and Innovation in Local Economic Development deficit”, where even well-designed innovation support measures never become operational.

One of the most significant characteristics of innovation and R&D systems in transition countries is poor cooperation between public research sector and the business sector, which could not be resolved by the newly formed bridging institutions, partly due to their novelty and lack of experience and partly due to the conflicting policies in other areas. In many transition countries the level of investment of business sector in R&D and innovation is low and support measures inadequately developed, giving more attention to the public research institutions than business sector. Business sector has to rely more on technology solutions from abroad or innovates at a much slower pace, which makes it less competitive. Closer links between public research organisations with business sector and more focus in academic and R&D institutions on the business needs could channel some of the business sector R&D investment in the public sector and help in more dynamic technological restructuring. This would contribute to higher growth and revenue, both for business and R&D sector.

The improvement of innovation governance capability is a central task for the administrations in transition countries. As long as the staff of various governments, from local to state level, have only limited governance capability, the design and implementation of innovation strategy and support measures depend largely on external expertise and is insufficient to provide the necessary break-through for more dynamic economic development.

Innovation capacity of BIH as a source of economic growth

An important index assessing innovation performance is the Global Innovation Index, the result of the collaboration between INSEAD and the World Intellectual Property Organization (WIPO)6. In 2012 the GII model includes 141 economies, which represent 94.9% of the world’s population and 99.4% of the world’s GDP (in current US dollars). In 2012 Report, Bosnia and Herzegovina’s overall innovation index is 34.2(0-100)7 and the rank 72nd out of 141 countries. According to innovation input sub-index, BIH index is 44 and the country is at 44th place of the 141 countries. Yet the innovation output index is 26.6 and the ranking 66th. Innovation efficiency index is negative for the country and lists BIH among underperformers. Of particular concern is the assessment of the business environment, where the rank of the country is as low as 101, right after Syria and in front of Guyana. While one can debate the methodological approach of such rankings, still the indicators reveal the major bottlenecks the country is facing in its attempts as a prospective member to catch-up with the EU members.

6 http://www.wipo.int/export/sites/www/freepublications/en/economics/gii/gii_2012.pdf 7 The lower the score, the better country is appraised.

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Since no statistics is available on R&D indicators at the state level, no valid evaluation of the research capacity, a key component of the basic innovation infrastructure can be made. Overall science and technology environment in BIH can be assessed according to several partial sources as modest. Partly, this is due to the fact that already limited human resources (as reflected in staff numbers of the research institutes, identified in our survey), involved in research and development activity at higher education institutions are primarily involved in teaching and perform research on top of their teaching commitments. Partly this limited capacity is caused by the available funding for R&D projects, which suggests (estimated on the basis of the average grant) insufficient resources for basic research (INOVO 2013a).

BIH has moved from “relatively developed industry R&D oriented RTD system towards decimated and dominantly HES oriented research system” (Radosevic 2010) with all negative consequences this brings for the innovation capacity. The research at the existing institutions (universities, institutes) is not seen by the business firms as relevant for their needs and therefore as potential partners in innovation process- es8. Similar attitude to the relevance of public research organisations as source of information for innovation was found in the pilot survey on innovation activity, carried out by the Statistical Institute of RS (Innovation survey of RS 2008–2010). Partly, the reason for such attitude can be found in lack of information on the research potential of the public research organisations, but often the research priorities at universities are not geared towards topics relevant for local business.

One of the significant deficiencies of BIH R&D system is the absence of business sector as an investor in R&D/innovation. No official data exist but estimates provided by the Entities (RS and FBIH) in their strategies support this statement. The low level of technological capabilities and of industrial research in BIH resulted in rather weak ties between science and industry. The low levels of the technology, the innovative and absorptive capabilities of the companies as well as their financial restrictions, seem to be main reasons for this weak private sector involvement in research policy-making.

During the transition process to a market economy, the industrial R&D sector was largely destroyed. Prior to 1990 BIH had an economy in which industry was significant, with important industrial companies that had established their international competitiveness on a technological basis (Energoinvest was the most prestigious and important). These companies had created and developed large research laboratories with hundreds of researchers each. Almost all this technical expertise disap- peared during and after the war, and only a few companies have been able to maintain a minimum of research activity in metallurgy (steel and aluminium), electricity

8 In a detailed analysis of innovation-active SMEs, carried out in Tuzla canton, only one company recognised public research institution as relevant partner in their innovation efforts. (Centar za razvoj poduzetništva Tuzla, 2011)

376 Local Economic and Infrastructure Development of SEE in the Context of EU Accession M. Bučar: The Role of R&D and Innovation in Local Economic Development production, pharmaceuticals and food production. It has retained a mining industry (iron ore and coal), and agricultural resources and forests represent an important asset (BIH exports wood). Only a few like Bosnalijek, pharmaceutical industry, are now strong enough to develop in-house research (Kaminski and Francis 2010), but even for them no reliable data can be obtained.

In increasing the innovation capacity, one of the important strategic actions should be rebuilding of industrial R&D by stimulating business sector to resume/start investing in R&D and innovation. Entrepreneurs are particularly important actors in innovation, as they help to turn ideas into commercial applications. In many developed countries, the data reveals that firms less than five years old accounted for nearly two-thirds of net new jobs. This is why the entrepreneurial environment and strength of business firms is an important segment of innovation capacity of any economy. And the support for entrepreneurship can be provided at the local, regional or state level.

EC Progress Report of 2012 stated that the “country lacks a comprehensive industrial policy and an updated framework for SME policy. Coordination between the Entities remains the key issue for promoting enterprise development. Overall, preparations in the fields of industrial policy and SMEs remain at an early stage” (EC 2012). While the strategies for promotion of SMEs are being developed by each entity, the studies assessing their R&D potential warn that most of the enterprises are too small and understaffed to be able to participate in implementation of R&D projects (MAPEER 2011; CPU 2010). As noted by the MAPEER project: “More concentrated on the short term goals, SMEs choose programs and activities which could bring them fast benefits, rather than R&D opportunities important for their long term competitiveness. Adopting standards of Quality Management System and other production and administrative certificates were, and still is, one of the most popular activities demanded by the SMEs to be supported by the programs of Entity ministries. Additionally, missing of the dialogue with Universities and Institutes, determines their objectives and intentions towards the activities other than R&D.”

Sponsored by various international founders, a number of cluster initiatives have taken place over the recent years, yet only limited numbers of the clusters still exist. Most of them have not been able to develop towards the clusters in “Porter sense”: the vertically and horizontally integrated firms, which are reinforcing each other’s competitive position through R&D and innovation.

As limiting factors to innovation activity of SMEs the lack of qualified personnel has been reported by some studies, including poor entrepreneurial education. Especially lack of knowledge on innovation processes, marketing analysis and opportunities as well as contemporary management techniques were identified, along with lack of external technical support. Firms cite difficulties in finding partners in innovation

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 377 Financing Local Economic and Infrastructural Development process as one of the obstacles to undertaking innovation projects (Preduzetnički centar Tuzla 2011). Education and training policies should help foster an entrepreneurial culture by instilling the skills and attitudes needed for creative enterprise. This opens another area of possible cooperation between universities and business firms and can importantly contribute to increasing the potential for further development of project-based cooperation.

Among the reasons cited for low degree of cooperation between business sector and public research organisations has often been the lack of information on the research activities as well as possible service which could be provided by the PROs. The business sector sees universities primarily or exclusively as educational institutions and do not see them as entities where potential assistance for their relatively specific and often short-term problems can be obtained.

Similar problem can be identified at the site of higher education institutions which don’t have developed technology transfer offices or other intermediary mechanisms to offer services to business sector. Firms complain that the services offered by the PROs are expensive and too slow in implementation. Often the reasons for poor cooperation lie in already identified poor capacity of the firms for innovation activity due to limited human resources.

In most transition countries, similar or same observations were found. The standard policy response is the formation of intermediary institutions, like innovation centres, technology centres or parks, incubators, etc. This has been taking place also in BIH. The question which remains is the coordination of various institutions put in place by different stakeholders, their networking and especially their capacity to implement fully a demanding task of providing a bridge between public R&D and business as well as promoter of innovation activity. Increased involvement of the local government in the formation of intermediary institutions is important, since this way a better incorporation of the local economic strengths and weaknesses is possible.

The increasing importance of innovation governance stems from the new role of governments as facilitators and equal partners, rather than controllers of research and innovation systems changing (EC 2009). Existing governance system in the RTDI area in BIH is complex, since it follows the political and administrative set-up of the country. Responsibilities over different segments of the policy are scattered and divided among the state, entity and canton level. Such heterogeneity necessary entails a much more complicated and time consuming coordination and can often result in less than optimal transparency and insufficient complementarity of the support measures at various organisational levels.

While the impact of various international practices/consultancies, including “Europeanization” of innovation policies may have many positive impacts, it also

378 Local Economic and Infrastructure Development of SEE in the Context of EU Accession M. Bučar: The Role of R&D and Innovation in Local Economic Development poses a danger of uncritical imitation of institutions, measures and instruments, without needed reflection on own capabilities and resources. Yet the capability to adjust the measures and instruments-best practices, seen in other environments, to one’s own environment and circumstances is one of the essential elements of good governance. This calls for careful assessment and critical “import” of good practices, suitable for the local environment.

Conclusions

The complexity of innovation processes and systems provides few shortcuts if one tries to put R&D and innovation in service of local development. Yet, systematic and continuous approach with a clear goal of improving innovation capacity at all levels should bring about positive results.

There is considerable scope to improve the efficiency of government spending and innovate in the delivery of public services. Reforms of education and training systems and public research institutions, for example, can help increase returns from public investment in innovation. Moreover, many policy actions that can help strengthen innovation do not require additional or significant public investment. Structural policy reforms of the framework conditions that support innovation, such as the removal of regulatory barriers to innovation and entrepreneurship, including administrative regulations, as well pro-growth tax reforms, can do much to strengthen innovation and growth.

The innovation policy must take the existing industrial structure as a starting point, developing existing competences in a more productive and innovative direction. The institutions for research and education should be encouraged to develop competences that can strengthen these processes (Knell 2012), since human capital is the essence of innovation. Empowering people to innovate relies on broad and relevant education as well as on the development of wide-ranging skills that complement formal education (OECD 2010). Universities, colleges and vocational training centres are essential nodes in the innovation system, both producing and attracting the human capital needed for innovation. These institutions act as essential bridges between players – businesses and governments.

It is essential that the concrete set-up of the policy mix is tailored to the specific needs of a given country, region or local entity. There is not a one-fit-all solution and, therefore, the recommendations/conclusions for success proposed in this literature survey will mostly remain rather broad and inconclusive. The generic lesson for all, however, is that while many considerations will dictate the choice of specific options in the short-term, all of these choices should be made within the context of longer-term strategies that foresee the balanced development of all parts of R&D

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 379 Financing Local Economic and Infrastructural Development and innovation systems. The experience of transition countries shows that they have broadened the scope of instruments, mechanism, actors and institutions that are relevant for the efficient innovation policy, however, due to underdeveloped framework for innovations in the past they have based their innovation policy to a much more pronounced extent on the EU policy recommendations. Further, lack of experience and tradition in innovation governance seems to limit their ability to successfully integrate transferred policy to national environment. Country-specific factors (institutional set-up, structural characteristics, relations between stakeholders) are very important in innovative capacity building and accordingly also in shaping innovation policy and governing it at the national or EU level (Bučar and Stare 2010).

The analysis of the countries that in the history were successful in catching-up with more developed countries by leap-frogging certain development stages shows that this was never achieved without a conscious action of the government9. The transformation of R&D and educational systems towards innovation does not occur by spontaneous activity of the free market or even by increased investment in R&D. Contrary to this, the very nature of innovation as an endogenous process calls for the type of economic growth which is imbedded in the overall social, cultural and institutional framework of a country (Švarc 2006 : 337). A pro-active role of the government as well as wider society is therefore needed, or in the words of (Abramovitz 1986) sufficient “social capability”, which in turn determines the ability for technological and structural transformation of a country and thus opens a possibility for catching up and a transition to knowledge-based economy/society (Bučar 2011).

References

Abramovitz, M. (1989) Thinking about Growth, and other essays on economic growth and welfare, Cambridge University Press, Cambridge. Bučar, M. and Stare, M. (2010) From Policy Imitation to Policy Learning: governance of innovation policy in the new EU member states GARNET’s JERP 5.3.6: “Technology, Innovation and Governance”. Policy brief, No. 3. Bučar, M. (2011) Is knowledge society a vision or illusion?: the case of Slovenia. Druš. istraž., Zagreb, 20(4): 967-990, tabele, graf. prikazi, doi: 10.5559/di.20.4.03. Centar za razvoj poduzetništva Tuzla (2011) Analiza inovativnih kapaciteta malih i srednjih preduzeća i okruženja za poslovanje na području regije Posavina, BiH. Cohen, W. M. and Levinthal, D. A. (1989) Innovation and Learning: The Two Faces of R&D, Economic Journal, 99(3): 569-96. CPU (2010) Izvještaj o politikama podsticanja malih i srednjih preduzeća u Bosni i Herce- govini, Septembar 2010.

9 Freeman (1989) points out the complexity of such undertakings: The success of any country to catch- up within next decades depends crucially on their ability for institutional innovation, infrastructure, investment in education, S&T and last, but not least, on the international economic system.

380 Local Economic and Infrastructure Development of SEE in the Context of EU Accession M. Bučar: The Role of R&D and Innovation in Local Economic Development

Cunningham, P. et al. (2008) Mapping of Innovation Support Measures, INNO Learning Platform; PRO INNO. Dasgupta, P. and Stiglitz, J. (1980) Industrial Structure and the Nature of Innovative Activity. The Economic Journal, 90: 266-293. (http://www.jstor.org/discover/10.2307/2231788?u id=3739008&uid=2&uid=4&sid=21102549685137) EC, European Commission (2012) Bosnia and Herzegovina 2012 Progress Report, Com- mission staff working paper. (http://ec.europa.eu/enlargement/pdf/key_documents/2012/ package/ba_rapport_2012_en.pdf) EC, European Commission (2003) Raising EU R&D Intensity. Improving the Effectiveness of Public Support Mechanisms for Private Sector Research and Development: Direct Measures, DG RTD, Report to the European Commission by an Independent Expert Group. EC, European Commission (2009) Making public support for innovation in the EU more effective – Lessons learned from a public consultation for action at Community level, Commission Staff Working Document SEC(2009)1197 of 09.09.2009. Edquist, C. (1997) Systems of innovation approaches – their emergence and characteristics. In: Edquist, C. (ed.) (1997) Systems of Innovation: Technologies, Institutions and Or- ganizations, London: Pinter/Cassell. Freeman, C. (1989) New Technology and Catching Up, The European Journal of Develop- ment Research, 1: 85-99. Furman, J. L., Porter, M. and Stern, S. (2002) The Determinants of National Innovative Ca- pacity, Research Policy, 31: 899-933. INOVO (2013a) Review of RTDI organisations and policies. (EuropeAid/129575/C/SER/ BA.mimeo) INOVO (2013b) Review of innovation support measures: Lithuania, Estonia and Slovenia. (EuropeAid/129575/C/SER/BA.mimeo) Jaklič, A. et al. (2012) Targeted Research Programme: The effectiveness of introduced measures for supporting innovations. Final Report. (Available at: http://www.mgrt.gov.si/fileadmin/mgrt.gov.si/pageuploads/DPK/CRPi_2010/Koncno_porocilo_CRP_konkurenc- nost.pdf) Kaminski, B. and Francis, N. (2010) Bosnia and Herzegovina’s Surprising Export Perfor- mance. Back to the Past in a New Veil but Will It Last?, World Bank Policy Research Working Paper 5187, Washington. Knell, M. (2012) Governing Innovation policy in the Western Balkans, WBINNO POLICY BRIEF. Lundvall, B.-Å. (ed.) (1992) National Systems of Innovation: Towards a Theory of Innova- tion and Interactive Learning, Pinter Publishers, London. MAPEER (2011) Public report on the analysis of SMEs and stakeholders’ needs, requirements and feedback to overcome barriers for research & innovation activities in Bosnia and Herzegovina, MAPEER SME – Making Progress and Economic enhancement a Reality for SMEs, 2011. Nelson, R. R. (1993) National Innovation Systems: A Comparative Analysis, Oxford Univer- sity Press, Oxford. OECD (2002) Frascati Manual 2002. Proposed Standard Practices for Surveys on Research and Experimental Development. OECD (2010) The OECD Innovation Strategy: Getting a Head Start on Tomorrow.

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Oslo Manual (2005) Guidelines For Collecting And Interpreting Innovation Data, European Commission and OECD. Porter, M. (1990) The Competitive Advantage of Nations, Free Press, New York. Radošević, S. (2010) Restructuring of the research system of BIH in the light of experiences of countries of Central and Eastern Europe, Science, Technology and Innovation Policy Workshop, Sarajevo, 29 January. Reid, A. and Peter, V. (2008) TECHNOPOLIS Group (Brussels), Sectoral Innovation Sys- tems: The Policy Landscape in the EU25, Final Report, SYSTEMATIC study, February 2008. Spence, M. (1984) Cost Reduction, Competition, and Industry Performance, Econometrica, 52(1): 101-122. Švarc, J. (2006) Institucionalne pretpostavke tranzicije u gospodarstvo znanja: karika koja nedostaje, Društvena istraživanja, Zagreb, 15(3): 319-344.

382 Local Economic and Infrastructure Development of SEE in the Context of EU Accession DOI 10.5644/PI2013-153-23

FISCAL FEDERALISM AND BORROWING OPPORTUNITIES OF LOCAL COMMUNITIES

Izudin Kešetović* Željko Rička**

Abstract

The principles of the European Charter of Local Self-Government were accepted and incorporated in the legislation of Bosnia and Herzegovina. Fiscal federalism is classified in the area of public finance theory that studies the system of collection and distribution of resources in the public sector with two or more levels of government. In practice, in the public sector we have an increasing presence of a trend of decentralization of powers and jurisdictions of the state through: the transfer of political power and the transfer of influence from higher to lower levels of government. Decentralization achieves some of the following goals: reducing the share of public sector in the overall economy, mobilization of public revenues while reducing the cost of public services, harmonization of responsibilities for local public expenditures and the available financial resources, boosting of own revenues of local authorities, promotion of cooperation between different levels of fiscal government in provision of public services.

Characteristic of the mechanisms of financing of local government units in Bosnia and Her- zegovina are different levels of development, which is why there is a need to find financing models that would meet the needs of local population and achieve the highest possible level of harmonization of standards, as well as a higher degree of fiscal decentralization. The theory and practice developed the forms of financial equalization: vertical financial equalization and horizontal financial equalization. According to the principles of the European Charter on Local Self-Government, local authorities have the right to adequate sources of financing which they shall freely use within the framework of their powers. Funding sources should be appropriate to their powers. Objectification of allocation of public revenues by levels of state organization is achieved through harmonized policy for allocation of public revenue and fiscal equalization policy at all levels of government.

A significant part of the local units’ budget is quite meagre and strict. This is particularly true in local units in which most of the revenues are non-tax revenues. These non-tax revenues

* PhD, Full-time Professor at the Faculty of Economics, University of Tuzla, Univerzitetska 8, 75000 Tuzla, Bosnia and Herzegovina, phone: +387 61 179 917, fax: +387 35 320 820, e-mail address: izudin. [email protected] ** PhD, Associated Professor at the Faculty of Economics, University of Zenica, Travnička 1, 72000 Zenica, Bosnia and Herzegovina, phone: +387 32 444 700, fax: +387 32 444 701, e-mail address: [email protected]

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 383 Financing Local Economic and Infrastructural Development have established intended use (mostly for the cost of maintenance functions of the local community and large constructions). Such tying of revenue with precisely set use prevents local governments to be more flexible in allocation of budgetary resources. Based on the analysis of debt and borrowing of local government units, as well as research, we came to an assessment that there are real conditions and opportunities for local government borrowing in Bos- nia and Herzegovina. Local units mainly borrow from a bank (or banks) in which they have deposited funds and whose accounts are used for cash management. There are few incentives and initiatives for borrowing by issuing of municipal bonds. One limitation is the lack of interest or knowledge to present all the costs and benefits of planned capital investments and to assess the financial potential and ability to repay debt. Promising modalities of financing of local communities in Bosnia and Herzegovina are those of public-private partnerships and emissions of municipal bonds that would require reliable demonstration of justification of borrowing purposes at the time of approval.

Keywords: Fiscal federalism, Local communities, Fiscal equalization, Public debt, Budget, Public-private partnerships, Emission of municipal bonds.

Introductory considerations – European Charter of Local Self-Government

Three basic theoretical principles of local democracy in the world are: Freedom (autonomy) – local democracy implies the existence of the bodies of self-government that will limit the concentration of political power of the central government, which allows a different political choice in different local units; Participation (democracy) – the existence of local self-government bodies that allow a greater inclusion of citizens in matters of self-government; • Efficiency – capacity of local authorities to provide different, efficient, services at the local level.

The European Charter of Local Self-Government (Council of Europe, Strasbourg, 15 October 1985) is the first multilateral legal instrument that defines and protects the principles of local autonomy incorporated in the concept of modern pluralist democracy, developed and promoted by the Council of Europe in order to safeguard the common values as a platform of uniting the European countries. It is a result of a number of initiatives that have preceded it, (for example, the Declaration of Local Autonomy, proposed for adoption in 1968 by the then Conference of Local and Regional Authorities (1), or the Resolution no. 126 of 1981, which provided the first draft of an internationally binding document, eventually adopted by the Committee of Ministers of the Council of Europe in June 1985).

The Charter has no pretensions to impose a model of local self-government which would apply to all member states, regardless their mutual major political and economic differences, and therefore it does not regulate in detail its structure and powers.

384 Local Economic and Infrastructure Development of SEE in the Context of EU Accession I. Kešetović, Ž. Rička: Fiscal Federalism and Borrowing Opportunities of Local...

Its aim is to build standards in establishing, functioning, assessing and protecting the level of government closest to the citizens and thus to ensure effective participation of members of a specific local community in decision-making about what relates to their everyday lives.

“Local self-government denotes the right and the ability of local authorities, within the limits of the law, to regulate and manage a substantial share of public affairs under their own responsibility and in the interests of the local population.

This right shall be exercised by councils or assemblies, composed of members freely elected by secret ballot on the basis of direct, equal, universal suffrage, and which may possess executive organs responsible to them. This provision shall in no way affect recourse to assemblies of citizens, referendums or any other form of direct citizen participation where it is permitted by statute.

Local authorities shall be entitled, within national economic policy, to adequate financial resources of their own, of which they may dispose freely within the framework of their powers.

Local authorities’ financial resources shall be commensurate with the responsibilities provided for by the constitution and the law.

Part at least of the financial resources of local authorities shall derive from local taxes and charges of which, within the limits of the statute, they have the power to determine the rate.

The financial systems on which resources available to local authorities are based shall be of a sufficiently diversified and buoyant nature to enable them to keep pace as far as practically possible with the real evolution of the cost of carrying out their tasks.” (Council of Europe 1985)

The need to protect financially weak local authorities requires the establishment of appropriate procedures or measures of financial equalization, in order to rectify the consequences of unequal distribution of financing sources, or financial burden of local authorities. Such procedures or measures cannot narrow the rights of local authorities that they have within their jurisdiction.

The principles of the European Charter of Local Self-Government have been accepted and incorporated into: • The Law on Principles of Local Self-Government in FBIH (Official Gazette of FBIH, 49/06; 51/06) • The Law on Local Self-Government of the Republic of Srpska (Official Gazette of the Republic of Srpska, 101/04, 42/05 and 118/05)

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Fiscal federalism and the position of local communities in the financing system

In a broader sense, fiscal federalism includes the relations between the central government and regional and local collectives. Uncoordinated definition and collection of public revenues has a number of negative economic, social, political and financial repercussions since all observed public and legal entities of different levels of government claim the same fiscal potential. Disharmony in the collection and disposal of public revenues by different levels of state organization on purely financial plan has a negative reflection on the rational use of public revenues and harmonious satisfying of public needs. Therefore, a fiscal agreement is necessary as a system of norms that delimitate and coordinate the relations in the financing of public expenditures by levels. The most significant components of the fiscal agreement are contained in the domains of delimitation of powers in defining the duties, the regime of allocation of public revenues and disposal of funds. “Fiscal federalism is part of the theory of public finance which deals with the problems of decision-making, possibilities of tax apportionment and the use of funds collected in the public sector with two levels or more levels of government” (Bajo and Alibegović 2008 : 42).

In the world, and so in the region, an increasingly present trend is the trend toward decentralization of powers and jurisdiction of the state through: Transfer of political power, and Transfer of effects from higher to lower levels of government.

Such decentralization achieves many goals: Reduction of the share of public sector in the overall enterprise, Mobilization of public revenues while reducing the costs of public services, Ensuring that the responsibilities for local public expenditure are in line with available funds, Strengthening of own revenues of local authorities, and • Promotion of joint cooperation between different levels of fiscal authorities in the provision of public services.

The sources of revenues of local communities consist of: Tax revenues allocated from higher levels; • Own financial resources; • Grants and subsidies (fiscal equalization).

Tax revenues that are allocated from higher levels: Revenues from VAT and other indirect taxes (since 2006) which, despite the relatively low participation of municipalities in these revenues (approximately 8%) constitute a very important source of funds (on average between 20-30%); Revenues from income tax and other direct taxes;

386 Local Economic and Infrastructure Development of SEE in the Context of EU Accession I. Kešetović, Ž. Rička: Fiscal Federalism and Borrowing Opportunities of Local...

Funds collected from taxes and contributions that fully or partially belong to local communities as own source revenues.

Own financial sources:

The structure of public revenues allocated to LSUs consists of: Taxes, Charges, Fees.

Taxes are a form of compulsory levies imposed by the state, but without specific use and have no direct consideration by the state or the level of authority that imposes them.

Charges are cash income of the state or LSUs, depending on who imposes them. The obligations payment thereof is not limited to citizens of the country that imposes this obligation, but the territorial principle applies to the payment of charges. Revenues from charges are used to finance public needs and are declarative state revenues. In some of their characteristics, the charges significantly differ from taxes because they are a consideration for the service that the state provides to a taxpayer. As tax, charges also have elements of compulsion, which can be seen in the following: (a) the obligation of charge and the amount of the obligation is unilaterally established by the state authority, (b) some of the rights or actions can be realized only after the payer has initiated the due procedure, or done a specific action, and (c) unsettled obligations will be charged by force. For a paid charge, the payer gets a particular consideration. Therefore, the closest definition is that the charges are “partial payment by a user of the costs of a public service that he has voluntarily requested either on his own behalf or which he was imposed in the name of the use”.

Fees are public revenue, and in its purpose are basically very similar to charges and are introduced as compensation for consideration of a particular organ or institution that provides the service. The difference in relation to the charges is based on the entity that is authorized to prescribe it. The right to introduce fees belongs to institutions that perform the tasks of wider interest, not only those of the state.

Fines, according to the meaning of the word, are prescribed sanctions in criminal and misdemeanour law that obliges the offender to pay to the state/entity/municipality a specific amount of money.

It follows from the above that LSUs independently or within the set limits determine the amount of administrative, utility fees and fines that are in the jurisdiction of municipalities, while special water charges and fees, income from games of chance and municipal fees for the use of natural and other resources of general interest are in the jurisdiction of other organs. Local Economic and Infrastructure Development of SEE in the Context of EU Accession 387 Financing Local Economic and Infrastructural Development

According to the structure of revenues that (according to the Law on the Budget System of the Republika Srpska) belong to towns and municipalities, we can conclude that they are based on the principle of the territory where they are exercised, or where the property or a form of organization of games of chance is located and on which the services are provided by a public authority or institution.

Thus determined public revenues are intended to compensate for the costs of providing certain services by a public authority or institution (charges) and to compensate for the costs of maintaining a certain function (fees, real estate tax). The public revenues allocated to LSUs only partially have a social component, redistribution of income (tax on winnings from games of chance, real estate tax, fines).

Bearing this in mind, the rates (taxes), amount of charges, fees and fines are calculated on a cost basis; the costs of collection and maintenance costs. To the extent to which the policy of charges and fees could provide compensation for material costs and personal income of employees, then the part of distributed public revenues provided from the distribution from the single account on the basis of indirect taxes and income taxes would contain the development component.

Grants and subsidies (mainly with a specific purpose): Grants and subsidies from higher levels of government, Grants and subsidies from other sources.

In all political systems, there is an increasing sense of justification of fiscal decentralization and increased participation of local communities in public funds, which has its base in the following facts: • Transfer of political power and influence from higher to lower levels of government, • More efficient public sector, Mobilization of public revenues while reducing the costs of public services, Satisfying different local interests and needs for public resources and services, Better access to public services required by the local population, Ensuring that the responsibilities for local public spending are in line with available funds.

In the current system of financing the public expenditure, units of territorial autonomy and local self-government have an ultimately narrowed degree of fiscal authority. The system of related separation has been abandoned; it was a system in which the local self-government units were able to introduce taxes from the legally stipulated circle, to determine the amount of tax rates of these taxes within the limits of the agreed policy, to use the incentives through giving tax reliefs and exemptions and to collect not only from taxes that belong to them but also from the taxes that belong to the Entities through decentralized (municipal) services of public revenues. This is a regime of shared revenues from ordinary taxes by which local self-government units

388 Local Economic and Infrastructure Development of SEE in the Context of EU Accession I. Kešetović, Ž. Rička: Fiscal Federalism and Borrowing Opportunities of Local... have the right to generate revenue from certain taxes without any impact whatsoever on its amount and collection. This also means the exclusion of the option to create local “tax oases” on the basis of tax incentive measures of local fiscal authorities, primarily in taxation of revenues from independent activity, which, in addition to certain weaknesses, have a positive function primarily in the economic sphere. In fact, a sort of competitive relationship between the local self-government units has a positive impact on felling of fiscal pressure on a broader scale and on the development of economic activities that are related to local conditions.

In states organised as federation, as well as in unitary states, with respect to the presence of territorial autonomy and local self-government, there is not only a problem of jurisdiction and powers in respect of the establishment, implementation and determining the amount of public revenues and their collection, but also a problem of distribution or allocation of given types and forms of public revenues by the levels of political and territorial organization.

Various models and their variants are possible in the application.

In theory, certain criteria have been clearly specified, which should be taken into account in the constitution of the relationship in the distribution of public revenues vertically so to comply to the maximum extent with the requirements of functionality and rationality, and in the operationalization to adjust to the specifics of socio- political organization, the capacities of fiscal resources and their structure. Abundance of sources from which the duties are paid. Less abundant resources would belong to only one level of financing, public expenditure. However, the most generous sources of income, such as the taxation of trade, should be used by the immediate and wider political and territorial units, i.e. a system of separation and shared revenues should apply. The nature and importance of the sources and objects of duties. Those sources that are of importance to the overall flows of social reproduction should be covered with fiscalities belonging to the state and Entities, and those duties that include objects and sources of regional and local importance should belong to the units of territorial autonomy and local self-government; Position of individual administrative-territorial units observed by levels in the socio-political system. A pronounced degree of fiscal sovereignty of the Entities and local government in municipalities and towns require the application of a combination of related separation and shared sources, so that the local collectives would have available both separate revenues and participation in shared sources.

Of course, it is not possible to satisfy each of these and other possible criteria. They are often contradictory, so that they have a cumulative instead of an alternative character. In order to achieve the global optimum, their combination is necessary.

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 389 Financing Local Economic and Infrastructural Development

Sometimes one of them should be given the priority, and some should not even be taken into consideration, depending on the present situation. Objectification of the distribution of public revenues by levels of state organization is achieved by agreements at all levels of government.

Needs (expenses) and means (income) should be determined by each other, and should be a reflection of the principle of harmonization, application of which achieves the main goals of an allocative, redistributive and stabilization policy.

The realization of the principle of harmonization should be a reflection of the application of the basic principles of fiscal federalism: • principle of efficiency, principle of fairness, principle of low administrative costs and • principle of meeting the fiscal needs.

System of fiscal equalization and the position of Local Self- Government Units (LSUs) in Bosnia and Herzegovina

The basic characteristics of mechanisms of financing of LSUs in Bosnia and Herzegovina are: The degree of development of LSUs is different in general, • The need to find financing models that would meet the local needs of the population and harmonize standards as much as possible, • It is necessary to achieve the greatest possible degree of fiscal decentralization (measured by the LSUs’ share of revenues in GDP).

Under active financial equalization or financial equalization in the narrower sense, we imply the regulation of the distribution of public revenues. Therefore, the object of observation is now the tax system, i.e. a single consistent whole of tax forms.

In theory and practice, there are forms of financial equalization, namely: • vertical active financial equalization, • horizontal financial equalization.

Certain forms of active financial equalization have a very important practical significance for public revenues. In vertical active financial equalization, there is so-called mixed system that com- bines the system of its own (source) revenues and the system of shared revenues.

390 Local Economic and Infrastructure Development of SEE in the Context of EU Accession I. Kešetović, Ž. Rička: Fiscal Federalism and Borrowing Opportunities of Local...

Mixed system of public revenues allocation is actually a variant of both forms, which practically means that certain administrative-territorial units, in order to finance expenditures under their jurisdiction, partly dispose the revenues, and earn one part by participation in other territorial units. This practically means that sovereignty is divided into a number of territorial units. In the practical terms of the model development, this would mean that the customs own source revenues, which are allocated upwards (state level), should also be distributed downwards (cantons); that revenues from special taxes, so-called excise taxes, that are the revenues of Entity budgets, should be directed toward the cantons. Also general taxes on turno- ver of goods and services would have to be distributed upwards (Entity), as are allocated downwards (municipality). These rules could be valid partially with other tax forms, such as profit tax and income tax, as expressed representatives of direct taxes. Tying these taxes to the economic power of companies and citizens should have a significant redistributive and regressive role. The existing model of allocation of profit tax ignores both of these criteria, which is particularly negatively reflected on the economically developed regions that are losing financial strength through the classic form of “spillover” of income and creation of greater consumer power in the administrative-territorial units with the seats of companies in the field of energy, postal services (ptt), as well as with the head offices of commercial banks, insurance companies and funds. Since we have a constant tendency to the development of administrative-territorial structure, two approaches are objectively confronted: First, in the stressed centralization, Second, in the stressed decentralization.

Surveys conducted in the area of public finance point to certain aspects of the problems that need to be borne in mind in Bosnia and Herzegovina’s practice, namely: territorial organisation or building the state structure of Bosnia and Herzegovina, functions and distribution of responsibilities of certain levels of the state structure (separation of functions of the state and of the local communities: cantons and municipalities), • system of financial equalization and fiscal capacity, tax sharing, non-tax forms at the local level, budgetary balance and borrowing opportunities, preparation of consolidated balance according to the government levels and forms of demand (current and capital), • planning and financing capital projects (water supply, road communication, etc.), planning, execution, control, internal monitoring and auditing (internal and external), organization and development of the tax administration, professional training for all participants in the process of budgetary and extra-budgetary financing.

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 391 Financing Local Economic and Infrastructural Development

According to the principles of the European Charter of Local Self-Government, local authorities have the right to adequate funding sources, which they dispose freely within their powers. Sources of funding should be appropriate to their prescribed responsibilities.

Local authorities should be consulted regarding the methods on the basis of which they will be allocated the redistributed funding sources. As much as possible, the funds that are transferred to local authorities should be consistent with the volume of assumed responsibilities and subject to the system of public control. Allocating these funds may not jeopardize the discretion right of local authorities to conduct policy in the framework of their powers.

To allow the borrowing for capital investment, it is necessary to allow the local authorities to access the national capital market.

Diversity and resilience of the municipal revenues are provided through the structure of municipal revenues: From indirect taxes, From direct taxes, Fees and charges, Fines and other penalties, Income from property, Donations.

Financial equalization has been built-in through the model of the distribution of revenues from the Treasury Single Account – TSA – BIH.

The distribution is made on the basis of the following formula (Anon. 2006): 68% based on the population of the local government unit; 5% based on the surface of the local government; 20% based on the number of pupils in primary education; • 7% based on the level of development of municipalities, defined through the development index.

For the first time, the system based on the derivation has been replaced with a system based on a clear and simple formula, which has ensured that municipalities and cantons can make a safer planning of public revenue and expenditure.

Although it is very difficult to predict how the political situation in the country will develop in the future, there is a possibility that in the same way as a unique system of equalization for the FBIH has been established we develop such a system for the whole country in the future. Only in this way it is possible to reduce the existing differences between the Entities, and thus to strengthen the integrative forces in the state.

392 Local Economic and Infrastructure Development of SEE in the Context of EU Accession I. Kešetović, Ž. Rička: Fiscal Federalism and Borrowing Opportunities of Local...

During 2012, the generated public revenues of municipalities and towns in the FBIH amounted to:

Table 1: Overview of the total realized and distributed public revenues for the period January – December 2012

Type of revenue Total public revenues Total public revenues of % of total public 31/12/2012 municipalities 31/12/2012 revenues in FBIH Tax revenues 2,778,252,232 321,176,881 11.6 Non-tax revenues 944,664,801 271,019,983 28.7 Extra-budgetary funds 2,650,467,398 - - Total 6,373,384,431 592,196,864 9.3 Source: Federal Ministry of Finance, archives

In the Republika Srpska, the sources of funding for local communities are: Tax revenues, • Non-tax revenues, Grants, Transfers, Proceeds from assets, Proceeds from borrowings.

Revenues from indirect taxes The main source of revenues for all levels / part is used for servicing foreign debt Revenues from indirect taxes, paid in the budget of Republika Srpska from the Single Account of the Indirect Tax Authority, which, after the allocation of a part of funds for servicing of foreign debt of Republika Srpska, are distributed as follows: The remainder is divided as follows: RS 72% Municipalities and towns 24% JP Putevi RS (PE Roads of the RS) 4%

Revenues from income tax RS 75%, municipalities and towns 25%

Revenues from the change of use of agricultural land RS 30%, municipalities and towns 70%

Revenues from the concession fees for use of mineral resources RS 30%, municipalities and towns 70%

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 393 Financing Local Economic and Infrastructural Development

Revenues from special water fee RS 55%, municipalities and towns 30%, Fund for Environmental Protection of the RS 15%

Revenues from confiscated proceeds and funds from the sale of seized items under the jurisdiction of the Republic Administration for Inspection Activities RS 70%, municipalities and towns 30%

Distribution of revenues collected on the previously mentioned bases The share of municipalities and towns in these revenues is determined according to the following criteria: 75% based on the population 15% based on the surface 10% based on the number of students in secondary schools The system of distribution is determined by a formula that considers the period of ten years • Coefficients of distribution in accordance with this formula are established by the Government of Republika Srpska (Anon. 2003).

Borrowing opportunities and constraints of local units in Bosnia and Herzegovina

Based on the analysis of debt and borrowing of local units, as well as on surveys, we can say that there are objective conditions and opportunities for borrowing of local units in Bosnia and Herzegovina.

A significant part of the budget of local units is quite stiff. This is particularly true for the local units where most of the revenues are non-tax revenues. These non-tax revenues have a specified purpose and established intended use (mostly for costs of maintenance and capital construction). Such tying of revenues to concretely set use prevents local units in a more flexible distribution of budgetary resources. In addition, the financial position of local units can be improved because on the revenue side there is a problem of fiscal discipline or collection of non-tax revenues (revenues under special regulations).

Competition of local units for borrowing in financial market also affects the strengthening of criteria for borrowing. There is often the question of quality of the financial management of local units. Poor quality of financial management of local units results from the lack of vision in using financial resources. Local units mostly borrow from banks (or a bank) in which they deposit the funds and whose accounts they use for cash management. There are few incentives and initiatives for borrowing by issuing municipal bonds. One of the constraints is the lack of interest or knowledge

394 Local Economic and Infrastructure Development of SEE in the Context of EU Accession I. Kešetović, Ž. Rička: Fiscal Federalism and Borrowing Opportunities of Local... to present all the costs and benefits of planned capital investments and to assess the financial potential and ability to repay the debt.

Undeveloped market and public debt management is one of the constraints that does not encourage local units to use municipal bonds more actively. The state has not yet defined the criteria or conditions for borrowing by issuing bonds. The fact is that the government has not initiated an organized management, and the market of domestic public debt is transferred directly to local units that show no deeper interest in the use of local government bonds.

For banks and financial institutions that lend to local units there is still a problem of assessing the credit risk of local units. Specifically, comprehensive information on local units that would encompass financial business is still missing. The impetus for the publication of information may be indirectly given by commercial banks.

The question of borrowing by institutions and enterprises owned by local communities is related to their prior approval in the capacity of a majority shareholder or founder. Granting warranties/guaranties to shareholder companies, limited liability companies (d.d. and d.o.o.) or to institutions by the local communities creates additional risk, which has the character of a potential credit risk which, in principle, in total creates additional financial risks and potentially increases non-tax burden of citizens. Institutions and utilities owned by local communities may borrow in short and long term. Short-term borrowing is related, mostly, to business with the bank. The framework of short-term borrowing should be monitored at the level of the local community when it comes to financing of current expenditure. To finance capital projects, local companies and institutions borrow long-term loans from banks or by issuing bonds. Corporate bonds are debt securities that may be listed on a stock exchange. The procedure of borrowing and issuing guarantees of local communities (municipality, town, Canton) is provided by the Entity Law on Debt, Borrowing and Guarantees and on the basis of the Law on Borrowing, Debt and Guarantees of Bosnia and Herzegovina (Anon. 2005; Anon. 2007; Anon. 2012). The decision on borrowing of utilities should be based on the calculation of the obligations and ways of their settlement (annuities or instalments), as well as their impact on non-tax burden and increasing of utility charges and contributions. Therefore it is essential to make an assessment of financial capability to repay the debt per given guarantees which may cause an increase in the total debt of local communities and an additional fiscal burden on citizens. Thus, the debt of local community could be presented as the sum of all accumulated obligations based on loans, issued guarantees on debts of utility companies and institutions as well as due to unpaid obligations.

Therefore the debt management requires the following information: conditions of borrowing of institutions and utilities at the local level;

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establishing the credit rating for local units and utility companies owned by local communities; determining the value of assets and liabilities of enterprises and institutions owned by local communities; procedures for approval of guarantees based on assessments of the effects of borrowing on the budget of local communities; conducting the performance audit procedures on the basis of borrowing of enterprises and institutions owned by local communities (Bajo 2006).

Final assessment and recommendations: Possible modalities of financing of local communities in Bosnia and Herzegovina

Public-Private Partnership (PPP) – the basis for generation of revenues of LSUs (local self-government units)

Public-private partnership (PPP) is a long-term contractual relationship between public authorities and private partners/entrepreneurs, in which for the purpose of building the public infrastructure and/or providing a public service, the private partner assumes the obligation of financing, design, construction and/or upgrading, and possibly the provision of public services, while the public sector sets standards of services and reserves the right to perform monitoring for the entire duration of the contract.

PPP is between the traditional public procurement and the privatization. It is important to identify the circumstances under which the PPP model may be the best way to deliver certain services or construction of infrastructure in comparison with the traditional methods of public procurement.

In the scheme of PPP, the private partner bears partial or full costs of the project implementation, as well as a key part of the risk associated with the construction and operation. The public partner determines the output specifications for the design and the technical and operational characteristics of the project, and determines the payment mechanism either through regular payments (e.g., in annual instalments) that are associated with the availability of facilities and compliance with the output specifications, or through direct payments by end users in the form of charges (e.g. tolls).

The objective of the PPP is to include private partners in the implementation of projects or in the provision of services in order to ensure not only additional financial resources, but also the use of their knowledge, human resources, innovative approach and ability to effectively manage complex projects in the public interest.

The main advantages of PPP are the following:

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Financing of multiple projects

Due to the growing demand for public services, which the state administration is more and more unable to satisfy alone, there is a need for support from the private sector. During periods of slow growth, state revenues are often insufficient to cover the necessary expenses, which results in sharp costs cutting or tax raise. Partnerships allow unimpeded continuation or even higher level of services even at lower costs. By developing partnerships with the private sector, the state can maintain quality of services despite limitations in budget and offer its citizens a wider range of works and faster and more efficient services.

Risk distribution

A key principle of PPP is the distribution of risks to the party that will best manage those risks at the lowest cost. To ensure the achievement of the best value, the goal is to optimize rather than maximize risk transfer, resulting in a significant reduction in costs and in exceeding of deadlines. Moreover, the fact that the private partner is also responsible for the project implementation results in better services with greater functionality throughout the duration of the project.

Improvement of the investment environment

PPP model mobilizes greater investments than those that the public sector alone could provide, and thus offers a possibility to various representatives of the private sector and investors to participate in infrastructure projects, develop innovations and develop new activities. The long-term nature of PPP projects results in the establishment of financially stable trade companies with predictable cash flows that contribute to market and promote the growth of the economy.

Greater benefit and satisfied citizens – value for money

This is a result of the application of knowledge of private companies in the respective areas of work and their motivation that stems from the possibility of long-term revenues meeting all requirements of contracts relating to the quality of provided services, which the public sector assesses and controls for the entire duration of the contract.

In PPP projects, the private partner is selected through an appropriate public procurement procedure. PPP is implemented through contracts which clearly agree and define all aspects of a project, not only during the construction phase, but also in the operational period of the building, or in the period of service provision – also including the obligations of both contractual partners. After the end of pre-agreed period of duration of a project implemented according to the PPP model, the building is transferred from the private to the public partner.

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Project financing and cost reimbursement

After the completion of the public procurement procedure, the selected private partner as a rule establishes a joint business entity for completing the project Construction of the project, and Operation and exploitation of the project or maintenance under the provisions of the contract.

In general, a smaller part of the funds come from the private partner or from its capital and the bigger part of these are bank loans. Joint business entity is responsible for the construction of the project infrastructure (construction, rehabilitation of the existing infrastructure, installation of equipment, etc.) and for the provision of pre- agreed services during the contract period, using either its own resources or subcon- tractors’ services to satisfy the criteria set by the public partner. During the project duration, the private partner is paid either by the public partner who pays to the joint business entity the regular payment by instalments (payments for availability) or by payment by the end user. In return, the joint business entity repays loans and, if it generates profit, it pays dividends to its investors on the basis of return on equity.

From the explanations of the legal provisions regarding the public-private partnership, it is clear that LSUs can play an active role in initiating the procedures of contracting of the public-private partnership, which represents a quality basis for generating new revenues for LSUs (Anon. 2010).

Issuance of municipal bonds

Municipal bonds (bonds of LSUs) are debt securities by which the local government as the issuer commits to repay the borrowed funds with a certain interest until a certain date. They have an identical purpose as government bonds, with proviso that the funds collected are invested in projects of local and regional importance, while government bonds finance the projects of general national and state interests.

Many public facilities that are located in the area of LSUs are funded by municipal bonds of LSUs, which are repaid from the collected tax revenues.

Interest on municipal bonds may be paid exactly in the same way as the government bonds: at once together with the principal at the time of maturity of the bond, periodically, i.e. in instalments.

Municipal bonds may be: long-term,

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medium-term, short-term, and with or without the index clause.

Municipal bonds are primarily a lending instrument, but they can also serve as a means of payment to the local government (e.g. for the payment of taxes).

Municipal bonds are one of the safest securities, because the state (LSUs) guarantees for their payment and they are therefore regularly traded on the secondary market of securities.

Municipal bonds are transferable securities. An investor in municipal bonds has two basic options: to hold the municipal bonds to maturity with the regular payment of interest and principal, and thus to achieve a return that he has bought; or to sell the municipal bonds at any time prior to maturity to any other interested investor with an opportunity to generate a capital gain or loss thereby.

Issued bonds are used for different purposes, such as renovation of roads, construction of residential and office building with garages and parking lots, and investment in sports facilities and playgrounds and so on.

Municipal bonds are issued in non-material form, in the form of electronic records in the series; they are personal, freely transferable and uninsured. Municipal bonds are uninsured, direct and unconditional obligations of the issuer, which are mutually equal and have the same rank with all other present and future uninsured obligations of the issuer, other than obligations that may take precedence under the law.

It is evident that LSUs in the region underuse the opportunity to obtain additional funds by borrowing through the issuance of municipal bonds. Issuance of municipal bonds offers possibility of obtaining large amounts of capital at a time, with a lower interest rate compared to other borrowing instruments. The conditions under which municipal bonds are issued prove the mutual profitability for both the issuers and the investors.

The use of municipal bonds may be very wide. Basically the collected money is used for the construction of local infrastructure such as sports facilities, roads, schools, hospitals, utilities, etc. They are significant also because they enable local population to invest their money in their own town or municipality, obtaining favourable interest rates. In addition, the return that the municipal bonds bear is attractive not only for small, but also for institutional investors (funds, insurance companies, banks). They can also be issued to cover the budget deficit of LSUs or for financing of specific

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 399 Financing Local Economic and Infrastructural Development projects, the cash flow of which will cover the bonds. Revenue municipal bonds generally carry a higher risk, so they are often insured by large insurance companies.

The advantage of borrowing through the issuance of municipal bonds is a lower interest rate compared to borrowings, the tax reliefs and an increased accountability of government representatives due to the expressed transparency of the whole process. By building better infrastructure, LSUs increase the standard of living at the local level and create the conditions for more rapid development of the real sector through greater inflow of foreign investment. In addition to real effects, bonds of LSUs can have positive marketing effects on the LSUs.

Municipal bonds usually have a high nominal value, which is why they are not affordable for small investors. Most often, institutional investors such as banks, insurance companies and investment funds invest in them. Through investment funds, municipal bonds may be available to small investors as well. Investment units of funds of municipal bonds will be bought by investors aiming at income from investment for which the fund does not pay tax, so that the resulting return is higher.

References

Anon. (2003) Law on the Budget System of RS, Official Gazette of the Republic of Srpska, No. 96/03; 14/04; 67/05; 34/06; 128/06, 117/07, No. 54/08 – Consolidated text, 126/08, 92/09. Anon. (2005) Law on Debt, Borrowing and Guarantees in BiH, Official Gazette of BIH, No. 52/05. Anon. (2006) Law on allocation of public revenues in FBiH, Official Gazette of FBIH, No. 22/06; 43/08; 22/09. Anon. (2007) Law on Debt, Borrowing and Guarantees in FBIH, Official Gazette of FBIH, No. 86/07, 24/09 and 45/10. Anon. (2010) JPP ukratko (PPP Briefly), Agency for Public-Private Partnership, Zagreb. Anon. (2012) Law on Debt, Borrowing and Guarantees of the Republika Srpska, Official Gazette of BIH, No. 71/12. Bajo, A. (2006) Proračunski sustav – ornament ili sredstvo upravljanja državnim finansijama (Budgetary System – Ornament or Means to Manage Government Statistics), Institute of Public Finance, Zagreb; Newsletter No. 28, May 2007. Bajo, A. and Jurlina Alibegović, D. (2008) Javne finansije lokalnih jedinica vlasti (Local Public Finance), Školska knjiga, Zagreb. Council of Europe (1985) European Charter of Local Self-Government, Strasbourg, 15.X.1985. (http://conventions.coe.int/Treaty/en/Treaties/Html/122.htm)

400 Local Economic and Infrastructure Development of SEE in the Context of EU Accession DOI 10.5644/PI2013-153-24

INNOVATION AND ENTREPRENEURSHIP – INVESTMENT IN PEOPLE AND SKILLS

Fuada Stanković*

Abstract

The paper focuses on the role of innovation, entrepreneurship and education in skills to create change and foster local/regional development in SEE. Short review of key theories and research are introduced as the basis for understanding the dynamics and practice of innovation and entrepreneurship. These include discussion on some global concepts such as smart specialization, the role of universities, national systems and institutions as well as some cases of good practice. International context is of great importance and international projects and cross-border cooperation play an important role – good example is EU Strategy for the Danube Region.

Keywords: Innovation, Entrepreneurship, Skills, Smart specialisation, Role of universities.

Introduction

There is more or less agreement among economists that innovation and entrepreneurship are crucial for economic growth and development. There are arguments in the literature and real life that incentives and general state of knowledge are important in explaining innovation. This is the reason why these two elements are relevant when discussing innovation, entrepreneurship and skills. When discussing skills we are dealing with human capital. One short definition of the concept of human capital could include the knowledge and skills that enable persons to act in a new way. Individuals invest in themselves through education and training. Individual investment in personal development is crucial, but also in every society, especially those in transition, the role of governments in developing education in general is extremely important. The major pillars of innovation infrastructure today are higher education, SMEs support and clusters.

* PhD, University of Novi Sad, Bulevar cara Lazara 45, 21000 Novi Sad, Republic of Serbia, phone/fax: +381 21 469 456, e-mail address: [email protected]

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Innovation and entrepreneurship

Innovation is a multidisciplinary attitude; it is about transgressing boundaries of disciplines in search of developing novelties in all fields of human activities. In explaining phenomena of innovation and entrepreneurship it is common not to go too far into the past but start with the work of Joseph Schumpeter. He made many important distinctions and gave definitions of some major factors influencing innovation and entrepreneurship which stayed relevant until today and influenced many contemporary economists. He made distinction between invention and innovation, the first being an idea to be implemented in production, the second being the process of turning invention into an actual product. Schumpeter argued that it is not the same to make decision to buy some resources and the function of implementing a new production process. It is common today not to see this important difference between management and entrepreneurship in business and management literature. Schumpeter was the first to give such importance to innovation and entrepreneurship being crucial for a firm to survive in the more and more competitive market. Innovations can be numerous and located in different parts of economic processes including production, market, industrial organisation and management. Leadership is more important for an entrepreneur than ownership (Schumpeter 1934).

For the past few decades, entrepreneurship has been considered one of the basic features of production/services, besides capital, labour, and natural resources. In today’s world, it is believed that the encouragement of entrepreneurial activities is the key to economic development. Entrepreneurship is present in all fields of human activity, from economy to culture, education, sports, etc. It is important for large companies (internal, corporative entrepreneurship), but is also linked with small private companies. Following important Schumpeter’s conclusion that creativity and entrepreneurship can be characteristic of every field of human activity it became a part of the mainstream theory of entrepreneurship. Today, there is a network of entrepreneurial universities; leaders of cultural institutions and local mayors can also be entrepreneurs, not to mention governments which can behave entrepreneurially. Entrepreneurial and innovative environment is characteristic of prosperous societies.

Numerous contemporary books and articles deal with macro and microeconomic models of free market, innovation and growth, raising questions such as: how to treat consequences of innovation in aggregative models of growth; which macroeconomic conditions favour innovation and growth; which are major exogenous and endogenous elements important in explaining innovation, etc.

American economy has been for many decades the best example of entrepreneurial economy. Innovative, entrepreneurial companies (Intel, Microsoft, eBay, Google, Genentech, Chiron, Netscape…) have driven the technology revolution and have become significant players throughout US economy – not only in the information

402 Local Economic and Infrastructure Development of SEE in the Context of EU Accession F. Stanković: Innovation and Entrepreneurship – Investment in People and Skills technology industry, but also in retailing, biotechnology, financial services and many traditional manufacturing industries (Baumol 2007 : 1-28). SMEs in general play very important role in U.S. economy. According to U.S. Census Bureau, SMEs accounted for 99.9 per cent of the 27 million employer and nonemployer private non- farm businesses in 2006. The vast majority of SMEs are firms with fewer than 20 employees. (www.census.gov/econ/smallbus.html)

Both technology based entrepreneurship and non-technology based entrepreneurship contribute to economic development at all levels. They are different in many aspects. First group work in more uncertain, complex and dynamic environment. This is why gestation period is longer than in non-technology group and during this period they are concentrated on planning, resource acquisition, and establishment of boundary and legitimacy while the second group is more focused on marketing. This is also one of the reasons why technology companies need larger start capital (venture) (Liao and Welsch 2003 : 665). Although technology based companies are motors of economic development, it is important that governments create policies to support SMEs in general because they are significant sources of new innovations and create new employment.

Small and Medium-sized Enterprises (SMEs)

After domination of large companies in the fifties of the 20th century, in the last decades SMEs dominate in the structures of all economies making over 90 per cent of all companies. They also provide the greatest number of new work places in both developed and less developed countries. They are the holders of innovation, and due to their flexibility, can adapt to the constant challenges of the changing world faster and more efficiently. In contrast to the traditional belief that only large companies can succeed in the international market, numerous small companies have proven this not to be the case. Among SMEs, the most advantageous for the community are high-tech companies, due to their ability to innovate and contribute to community development in the long run.

SMEs by the EU definition employ between 1 and 249 persons and they represent backbone of the economy and economic growth. In 2012 in EU there were 20.7 million SMEs which represented 98% of all enterprises. 92.2% of SMEs had less than 10 employees. SMEs employ 67% of all employees in EU and produce 58% of gross value added (Anon. 2012a : 9).

In Serbia in 2010 micro firms (72.000) made 86.2 per cent of all firms which is lower than in EU27 92.1%; small firms (8.939) 10.7%, EU27 (6.6%); medium firms (2,121) 2.5%, EU27 1.1%; large companies (509) 0.6%, EU27 0.2% (Anon. 2013 : 1).

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These figures about number of SMEs do not say much about the relationship between the total number of population and total number of companies, which is probably inadequate compared with EU27. We also do not have data about number of closed SMEs in Serbia in the last several years which is obvious.

In general, SMEs in Serbia did not have substantial support from government after 2000. Our opinion is that one of the major reasons for this is that members of government were and mostly still are mentally living in the old system, believing that large companies will employ more people. This showed not to be true in any economy. It is paradoxical that in the last decade Serbian government spent more money on subsidies trying to save old large (state) companies than to support start-ups and SMEs in general. Recently, the language of government changed in favour of private companies and SMEs under the pressure of EU, but we will see how it would work in real life. It is very important to develop longer strategy on SMEs support including local and national development efforts in order to create a good business climate.

It is well known that SMEs need external support in their start-up phase and growth. The process of nurturing business start-up and growth has, for many years, been appropriately called “incubation”. The purpose of incubation is to provide all the resources that the entrepreneurs need to build successful businesses. After first incubators in U.S. in 60s of 20th century, in Europe first incubators were established in 70s and 80s. Network of incubators in Vojvodina were established after 2000 although the knowledge and awareness about their importance was present in the former Yugoslavia already in 80s.

Technology parks are still in embryonic phase in Serbia. Some of the best news is coming from the Engineering Faculty at the University of Novi Sad (UNS). In the last decade 72 spin-offs from its Faculty of Engineering were created, mostly in high-tech sector, and founders were students and professors. Total number of employees in these companies in 2011 was 1,267 and it grew 9.5% compared to the previous year. Majority of firms are located close to the University campus and they create nucleus of the technology park. Incubators and technology parks are places where universities and their external stakeholders meet and they are also the places for knowledge and technology transfer and partnerships between industry and universities.

The role of universities

Universities can be seen as one of the best places for innovation and also a natural place for knowledge and practice to meet. Entrepreneurship is much more than the transfer of knowledge and the ability to start your own company. It is also a cultural phenomenon and universities have a role to play in culture, enabling

404 Local Economic and Infrastructure Development of SEE in the Context of EU Accession F. Stanković: Innovation and Entrepreneurship – Investment in People and Skills entrepreneurialism to be a feature of any university. What does being an entrepreneurial university therefore mean? Being the birthplace of high technology spin-offs is not enough to achieve this attribute. Behaving entrepreneurially, being innovative in its programmes, research, management, engaging in institutional development, and being able to make money aside from government resources, would be some further characteristics of an entrepreneurial university. Universities should also promote and teach entrepreneurship and offer training in skills. As concrete cases show, one of the basic resources of an entrepreneurial university is its central leadership (Stanković 2006).

Universities and their stakeholders

Universities are repositories of knowledge about future technological, economic, and social trends, a gateway to global information and sources of expertise in regional analysis. They provide their region with intelligence for its forward planning, support regional infrastructure and the underlying quality of the whole environment. Universities have numerous stakeholders, internal and external. The major stakeholders are academics, researchers, professionals, students, institutional leaders and managers, national, regional and local governments, national agencies and advisory bodies, different training institutions, civil society and NGOs, supranational bodies (World Bank, OECD, etc.), and businesses and industry (including both multina- tional and SMEs).

How can leadership of any university deal with such a complex environment? Different departments and individual researchers naturally have links with the wider community. The challenge is to develop institutional links at university level, in order to develop a strategy that would encourage the flow of ideas, information, and research results between the university and its stakeholders in a systematic way and in the long run. Universities should give initiatives for continuous dialogue among stakeholders directed to identification of the areas of education and training that should be developed. Training needs should be transferred into priorities, strategies of cooperation among companies and other stakeholders and universities. Groups of stakeholders create partnerships working together around common interests. Not every cooperation is a partnership. This is a new experience for the universities and companies in the region (HELP 2012). There are many opportunities for joint projects financed by the EU Commission.

There are numerous possibilities of cooperation between higher education institutions and companies such as joint research laboratories, joint training programmes with specific topics – to educate people who can be potential employees with the skills most adequate for the company activities.

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Sometimes this is a long term project such as collaborative doctoral programmes – industry experts take part in the supervisory board officially or informally, combining different goals and cultures. Initiatives can be driven individually, company driven from large companies or SMEs, university driven, or driven by national, regional, local governments. Benefits are mutual knowledge, development of trust and respect, sharing resources and facilities, joint development of new technologies or devices of joint interest, access to university laboratories, commercialization of research results, better employability of PhD students (Borrel-Damian 2009).

Teaching entrepreneurship and innovation

Entrepreneurship is a relatively new discipline at European universities. The first books and papers on entrepreneurship in the former Yugoslavia were published in the late 1980s. At universities, the first courses also started in the late 1980s, with Engineering and Economics faculties being the first to introduce such courses, yet they are still not a university wide programme. The first course in entrepreneurship at UNS was offered as an elective course to the students of the Faculty of Law in 1991. The Engineering Faculty and the Faculty of Economics also introduced obligatory courses in Entrepreneurship together with courses in Management in the 1990s. The first teachers were academicians (economists) who brought the idea from U.S. universities. One of the firsts TEMPUS projects in 1990 in the former Yugoslavia was Postgraduate Studies in Entrepreneurship which gathered academicians from several European universities, the University of Ljubljana and the University of Novi Sad. The model that inspired this initiative was the one at the Scottish Enterprise Foundation, University of Stirling in Scotland, UK. Another important part of the project was a study of university incubators and one of the examples was Barcelona Activa at Barcelona Polytechnic in Spain. Unfortunately, crisis in the region post- poned implementation of the experience from the Project for many years.

There is no legal constraint on universities in Serbia to introduce entrepreneurship as a regular/elective course in different departments and faculties. But there is no tradition in teaching this subject, and there is still a lack of flexibility from both academicians and students about the need for all students to be offered courses in entrepreneurship. Narrow mono-disciplinary studies still prevail, especially at undergraduate level. As a new academic discipline, entrepreneurship does not yet have a reputation as a field of education and research at universities in general including atUNS. At the start of 2005/2006 academic year, a new course Small and Medium Sized Enterprises and Entrepreneurship: a Challenge for New Europe is being offered as an elective course within the Postgraduate European Studies programme European Studies Across Borders, which is taught in English (Anon. 2010; Anon. 2012a).

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In 2007, UNESCO Chair for Entrepreneurial Studies was established at the University of Novi Sad. It was offered to the University by UNESCO and this Chair became a member of UNESCO Chairs global network (UNITWIN). Long term goal of the Chair is to contribute to development of the region through promoting and developing entrepreneurial culture at the local, regional and national levels, strengthening entrepreneurial capacity of individuals and institutions in Serbia. Short term goals of the Chair are to develop graduate studies in entrepreneurship and a general course in entrepreneurship to be offered to all students as an elective course, as well as programmes in entrepreneurship skills as a part of Lifelong Learning (LLL). Fourth generation of one year master studies in entrepreneurship in English organized by the UNESCO Chair is starting next school year (www.unescochair.uns.ac.rs ).

Since in the future there will be fewer government jobs, more and more students wish to start their own business after graduation. This is a new challenge for young people in transition economies. Unlike their parents, they will look more to private entrepreneurship. In that social context, as entrepreneurial culture is not yet becoming a part of everyday life, training in entrepreneurial skills has become a very important subject in the education system. This is why there is a need to organize specific courses in entrepreneurship not only for students in engineering and economics but also for all students. Entrepreneurship is an interdisciplinary discipline based on the notion that one becomes an entrepreneur not by birth but by education as well as by experience. Students should develop job related social skills and competencies. They should learn about the instruments and management requirements to create their own firm and/or transfer and exploit knowledge produced in the university context. This is how universities should contribute through education and research to the economic development of their wider communities in general and in transition economies especially. Within the Bologna reforms, the promotion of entrepreneurial studies will be encouraged, together with building up partnerships between the units of the university and public and private sectors. It will become more common that students from all departments choose a course in entrepreneurship as an elective course.

Smart specialisations

Comprehensive definition of smart specialisation is given in the Guide to Research and Innovation. The focus of policy support and investment is on key national/regional priorities, challenges and needs for knowledge-based development, including IT-related measures: policies are built on each country’s/region’s strengths, competitive advantages and potential for excellence; technological and practice based innovation is in the centre with the aim to stimulate private sector investment; stakeholders should be fully involved and should encourage innovation and experimentation; they are evidence-based and include sound monitoring and evaluation (Anon. 2012a : 9).

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Smart growth is the one of the key elements in Europe 2020. It has the vision for Europe’s social market economy with the aims to confront its structural weaknesses through progress in three interrelated priorities: (1) smart knowledge and innovation based growth; (2) sustainable growth promoting a more resource efficient, greener and competitive economy and (3) inclusive growth fostering a high employment economy with economic, social and territorial cohesion (Anon. 2010).

Investment in research, innovation and entrepreneurship is at the heart of Europe 2020 and it is also Europe’s response to economic crisis. Concept of smart specialisation is a way to achieve smart, sustainable and inclusive growth.

Briefly, smart specialisation or RIS3 (Research and Innovation Strategies for smart specialisation) is a strategic approach to economic development through targeted support for research and innovation. It involves a process of developing a vision, identifying the place-based areas of greatest strategic potential, developing multi- stakeholder governance mechanisms, setting strategic priorities and using smart policies to maximize the knowledge-based development potential of a region, regardless of whether it is strong or weak, high-tech or low-tech. In this context, new terms are used such as smart cities and smart regions. Smart specialisation strategy is the new way for management of structural change, including services in all sectors. Creative industries are employing more and more population. There are many innovative ways of developing these industries at the local level based on specific cultural and historical traditions (Anon. 2012a).

Skills

Training is a learning process that involves the acquisition of knowledge, focusing on skills, concepts, rules of changing of attitudes and behaviours to enhance the performance of people in work and life. It is said that the amount of training required is at least as much as the amount of change that has occurred (Anon. 2012c).

Employment and Training Administration within U.S. Department of Labor developed Entrepreneurship Competency Model consisting of nine tiers. First three tiers are related to personal effectiveness competencies, second to academic competences and third to workplace competences. Personal effectiveness competencies are essential for all life roles, and they are often referred to as “soft skills”. They include interpersonal skills – skills to work with others from diverse backgrounds, demonstration of a willingness to work, desire and dedication to achieve goals, capability to adapt to new, different or changing requirements, capability to deal with ambiguity, willingness to take risks, to assume risks, willingness to learn. Academic competencies are the following: understanding written sentences and paragraphs in work-related documents, using standard language to compile information and convey ideas, using

408 Local Economic and Infrastructure Development of SEE in the Context of EU Accession F. Stanković: Innovation and Entrepreneurship – Investment in People and Skills mathematics to express ideas and solve problems, applying scientific principles and using technology to solve problems or develop solutions, giving full attention to what others are saying and speaking language well enough to be understood by others, critical and analytical thinking. Workplace competencies include creative thinking, networking, planning and organizing, problem solving and decision making, checking, examining and recording, applying knowledge of basic business principles, trends and economics to work activities (business ethics market knowledge, business and economic principles..), knowledge of computer applications. The rest of tiers relate to the specific competencies such as entrepreneurship technical competencies, entrepreneurial focus areas and occupation specific requirements. Each of competencies in the above mentioned document is elaborated in detail and could be very useful tool for developing of any training programme (www.doleta.gov).

In the processes of innovation it is important to have opportunity orientation, to identify changes and dynamics in taste, preferences, and trends, in needs, wants, and problems, smaller markets within larger markets, to be able to use opportunities to develop and offer new products/services, to be able to improve, streamline, reinvent work processes, to balance business concept and opportunity, to evaluate opportunities, to create and undertake new business venture.

In R&D it is necessary to analyse the failure of other projects as research for possible new venture, to conduct research and development, experiment and application, to practice invention and innovation, to identify design trends, to incorporate human, environmental, and technological factors in the design process, to design a system, product or service.

In technology transfer first step should be identification of scientific research which has potential commerce value, analysis of the consequences of societal or technological change, development of practical applications for the results of scientific research, application of newly created technology to new, innovative, productive uses.

Some specific skills/technical competences are needed for an entrepreneur, such as understanding of entrepreneurial process (generating ideas, recognition of opportunities, concept development, resourcing, actualization, harvesting), leadership and team building (showing passion for goal attainment, taking responsibility for managing growth).

Unlike training in entrepreneurship, management training overwhelms the region. There is a large interest among young people to study management expecting to be managers before having any experience in any professional work. Manager for what? Many private institutions are teaching management in the region at undergraduate level although there is no tradition, practical expertise and enough teaching and training staff.

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Clusters

Clusters are one of the ways of connecting universities with stakeholders. They are also one of the important parts of infrastructure for innovation. Clustering in the economy which fosters business connecting and networking is recognized as one of the strategic factors for economic development.

Flexible organization of clusters enables assembling of small businesses and giving them strength and competitiveness to enter the international market, develop new technologies and improve skills of their employees.

Provincial government of Vojvodina created Cluster development strategy 2014– 2020 in order to support clustering in the region in general but focusing on areas were Vojvodina has traditional comparative advantages: the efficient use of arable land, food processing facilities, infrastructure and logistics, metals and textile industries as well as development of modern advanced technologies and ICT which can be used in the above mentioned traditional areas. In 2013, Vojvodina government opened competition for support to clusters in the region (Anon. 2013b). Incentives will be directed to support capacity building for cluster management, education and learning of new skills by the cluster members, incentives for adoption of new technologies, joint appearances and winning new international markets, financial support to clusters and business associations that have been funding on EU Calls for Proposals, financial support for creation of new clusters, financial support for work of existing clusters, etc. (www.Vojvodina.gov.rs). There are 16 recently established clusters in Vojvodina (see Anex) (Anon. 2013b).

Danube Strategy

The Danube Region covers parts of nine EU countries (Germany, Austria, Hungary, Czech Republic, Slovak Republic, Slovenia, Bulgaria, Romania and Croatia) and five non-EU countries (Bosnia and Herzegovina, Serbia, Montenegro, Ukraine and Moldova). The European Council endorsed the EU Strategy for the Danube Region in June 2011; the European Commission’s in-house science service, the Joint Research Centre (JRC), responded to this call of the Council by launching the “Scientific Support to the Danube Strategy Initiative”.

Out of the eleven priority areas identified in the Strategy, the JRC will contribute with its initiative to seven of them: waterways, energy, water quality, environmental risks, biodiversity, landscapes, quality of air and soils, knowledge society and ICT, and competitiveness.

The objective of the JRC’s Scientific Support initiative contributes to the implementation of the EU Strategy for the Danube Region (EUSDR). It addresses the scientific

410 Local Economic and Infrastructure Development of SEE in the Context of EU Accession F. Stanković: Innovation and Entrepreneurship – Investment in People and Skills needs related to the implementation of the EUSDR and helps decision-makers and other stakeholders to identify the policy needs and large-scale projects needed for the implementation of the Strategy. It also contributes to the reinforcement of ties and cooperation amongst the scientific communities of the Danube Region.

The JRC and the scientific partners identified a set of limited priorities: environment protection; irrigation and agricultural development; navigability; energy production. Supporting better European governance is an additional (transversal) priority. It brings together universities, research organisations, public partners and national and regional governments. Key partners are for instance the Academies of Science, the Danube Rectors’ Conference and the International Commission for the Protection of the Danube River (ICPDR).

Clusters have important role in the JRC initiative. Besides the above mentioned six priorities it also addresses one transversal priority, focused on the 6 scientific clusters. The water cluster will address the environmental and socio-economic consequences of changing agriculture-energy pressures on water. This requires a basin- wide perspective and cooperation with countries in the region, taking into account needs of all stakeholders. Allocation of available water across different sectors needs to be integrated into the overall economic strategy of the Danube Region, based on optimisation concepts in order to maximise growth and minimise the environmental impact. The land and soil cluster will deal with the following issues: land and soil availability, quality and related risks, preservation and restoration of above- and below-ground ecosystems and biodiversity, harmonised data collection and monitoring and awareness raising and capacity building. The air cluster will deal with air- related issues in the Region and especially the assessment of air quality sources and the assessment of the impacts of air pollution on health. The bio-energy cluster will address the challenges of energy production in the Danube Region while focusing on the development of bio-energy and its possible impacts on the agriculture sector and on the environment. The reference data and service infrastructure cluster will offer a global view of various data covering a wide-range of areas (such as water and soil quality, population, landscapes…etc.) and will encompass the whole Danube Region. It will provide access to and exchange of quality-documented data and services for large scale projects which will form the key elements of the EU Danube Strategy implementation plan. The smart specialisation cluster will use the Danube Region as a pilot area to study and foster the integration and coordination of regional or national research and innovation strategies for smart specialisation at macro-regional level. This approach can stimulate the constructive use of regional diversity by avoiding uniformity and duplication in regional investment goals as well as help develop critical mass to tackle major common challenges. (http://ec.europa.eu/dgs/ jrc/index.cfm?id=2470&obj_id=4480&dt_code=EVN&lang=en).

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 411 Financing Local Economic and Infrastructural Development

Conclusion

The focus of this paper was on human resource development as the most important source in the region. Training in skills for the new era in the global world is one of the weak points. Rates of participation in training in the region continue to lag behind average levels in the European Union. Training must not be seen as an option but rather a fundamental component of good business practice and regional and overall development. In general, higher education institutions have the most important role in local and regional development. In the region, vocational schools should get more important role. Mutually beneficial partnerships between the education and business sectors should be based around training. Businesses can increase their specialist knowledge and facilities from education institutions in marketing, technology, product development and soft skills. Education institutions can raise capacity for market-oriented work and increase the relevance of the courses offered to better meet the needs of businesses and their employees. The role of training in successful businesses and as a component of lifelong learning (LLL) needs greater emphasis and support at the policy-making level. Local communities and regions need entrepreneurial leaders to be able to respond to the new challenges. In Serbia good examples are some local communities such as Indjija and Pećinci. Supportive environment for innovation and SMEs should come from governments at all levels, including macroeconomic and microeconomic policies.

References

Amudhavalli, A. (2007) Knowledge a Commodity in the New Millenium, Conference on Recent Advances in Information Science and Technology (READIT-2007) Proceedings, pp. I-7–I-14. (available at www.igear.gov.in/ig2004/sird/redit2007/pdf) Baumol, W. J. et al. (2007) Sustaining Entrepreneurial Capitalism, Capitalism and Society, 2(2), Art 1. Borrel-Damian, L. (2009) Collaborative Doctoral Education, University-Industry Partner- ships for Enhancing Knowledge Exchange, European University Association, Sixth Framework Programme, European Research Area. Anon. (2010) Europe 2020, a Strategy for Smart, Sustainable and Inclusive growth, Brus- sells, COM final. (http://ec.europa.eu/europe2020/index_en.htm) Anon. (2012a) SMEs in 2012 – at the Crossroads Annual Report on Small and Medium sized Enterprises in the EU, 2011/2012 Ecorys, European Commission, EU, Roterdam. Anon. (2012a) Guide to Research and Innovation, Strategies for Smart Specialisation (RIS 3), Smart Specialisation Platform, European Union, Regional Policy. (RIS43_Guide_ March_2012final_0204_1_pdf) Anon. (2012c) Summary Results of the HELP Training Needs Analysis 2009, Tempus project: Higher Education Learning Partnerships (HELP). Anon. (2013a) Enterprise and Industry SBA Fact Sheet Serbia 2012, European University Association.

412 Local Economic and Infrastructure Development of SEE in the Context of EU Accession F. Stanković: Innovation and Entrepreneurship – Investment in People and Skills

Anon. (2013b) Cluster development strategy 2014–2020, Provincial government of Vojvo- dina, Novi Sad. (www.Vojvodina.gov.rs) Liao, J. and Welsch, H. (2003) Exploring the Venture Creation Process: Evidences from Tech and Non-Tech Nascent Entrepreneurs, Frontiers of Entrepreneurship Research, Babson College. Schumpeter, J. (1939) Business Cycles: A Theoretical, Historical and Statistical Analysis of the Capitalist Process. (http://docenti.lett.unisi.it/files/115/17/2/1/BusinessCycles_Fels. pdf) Stanković, F. (2006) Entrepreneurialism at the University of Novi Sad, Higher Education in Europe, 31(2): 117-128. www.census.gov/econ/smallbus.html (Last revised August 22, 2012) www.doleta.gov http://ec.europa.eu/dgs/jrc/index.cfm?id=2470&obj_id=4480&dt_code=EVN&lang=en. www.unescochair.uns.ac.rs www.Vojvodina.gov.rs

Annex – The list of newly established clusters in Vojvodina / Serbia

Vojvodina Metal Cluster –VMC Vojvodina ICT Cluster – VOICT Association for Promoting Cooperation and Development of Tourism in the Danube Region – ISTAR 21 Cluster for Health Tourism in Vojvodina Fund of Microregional Tourism Cluster, Subotica – Palić Fund Tourism Cluster Srem Transport and Logistics Cluster of Vojvodina Fruška Gora Cluster of Winemakers and Wine Growers – ALMA MONS Bio-Science Cluster Association Cluster Agroindustry Subotica The Creative Industry Cluster of Vojvodina Cluster of Artistic Crafts from Sombor Serbian Association of Food Manufacturers – POLUX Association Cluster – VOJPLAST The Cluster for Ecological Energy and Ecological Culture – ECOPANONIA Cluster Green Table (Plums)

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 413

DOI 10.5644/PI2013-153-25

THE ROLE AND IMPORTANCE OF THE PUBLIC-PRIVATE PARTNERSHIP IN THE REPUBLIC OF SERBIA IN FINANCING LOCAL ECONOMIC DEVELOPMENT

Andrijana Jovanović*

Abstract

Due to the current needs of the construction of new public infrastructure, investment in goods of general interest and the public interest by providing services in the Republic of Serbia, it is necessary to create a framework to attract private investment, notably through the establishment of public-private partnerships, which would specifically be aimed to increase the number of private investments, contribute to the development of infrastructure and reduce public debt.

With the Law on public-private partnerships and concessions, which was adopted in Novem- ber 2011, the concept of public-private partnership was introduced to the legal system of the Republic of Serbia for the first time, and thus it was allowed to state and local authorities to fulfil the needs for infrastructure and public services and to achieve this model, with clearly established rules of conduct. The law regulates the models for public-private partnerships and concessions, and the Commission of a public-private partnership is established. The Commission has a consulting, informative, expertise and educational role in relation to the formulation and implementation of public-private partnerships, and it is authorized to produce methodological documents, determining the need for new forms of financing apart from traditional budgetary funding.

Linking public and private sectors enables support to ongoing development and implementation of local strategies for sustainable development, in order to improve the quality of life. The essence of private sector involvement in traditional public affairs is to reduce the fiscal pressure on local budgets, accelerating infrastructure investments, improving services, and encouraging the growth of output and job creation.

Keywords: Public private partnership, Concessions, Commission for public private partnership, Pubic sector, Private sector, Cooperation, Local economic development, Public interest, Budget funding.

* Ministry of Regional Development and Local Self-Government, Vlajkovićeva 10, 11000 Belgrade, Republic of Serbia, phone: +381 64 214 5480, e-mail: [email protected], anikafpn@ gmail.com. The author is currently also engaged as Junior teaching assistant (i.e. Demonstrator) at the Faculty of Political Sciences, Belgrade University, Jove Ilića 165, 11000 Belgrade, Republic of Serbia.

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 415 Financing Local Economic and Infrastructural Development

General review of Public-Private Partnership

A public-private partnership is a dynamic and developing process of funding projects of economic development, and it represents a form of cooperation between the government and private sector with a purpose to modernize the construction of public infrastructure as well as strategic public services. In some cases, a public-private partnership includes financing, planning, constructing, reconstructing, managing or maintenance. In other cases, it includes providing the services which are traditionally provided by public institutions. Although the focus of public-private partnership should be on the improvement of efficiency in public services through sharing risks and implementation of private sector expertise, it should be stressed that public- private partnership indirectly reduces the pressure on public finances by providing additional source of funding. For that reason, public-private partnership is based on the fact that both public and private sector can benefit from adjoining their financial resources, knowledge and expertise for providing better services to all citizens.

Public-private partnership is the direct consequence of the economic needs of the country to develop a partnership with private capital, instead of obtaining credit capital intended for construction, and development of infrastructure, and the development of sustainable system that provides services of public interest. It is very important that public and private interest, although in partnership, remain in constant competition which is realized in legal frameworks of public-private partnership (Cvetković and Sredojević 2013 : 13-14). Public-private partnership has justified its existence when both sectors (public and private) achieve their objectives that were causes of partnership. These causes aren’t the same. The cause of public-legal subjects is achieving social prosperity and improving the quality of living by making the quality of public services better and building infrastructure and objects of public importance. The aim of private-legal participants is economic benefit. The main characteristic of public-private partnership is cooperation, not competition. Mutual interest and risk sharing are crucial for realization of projects. Public-legal entities should adopt entrepreneur way of thinking and acting, and private public sector should respect the criteria of public responsibility and it should have the obligation to protect the public interest. In a situation like that the common interest is to create a flexible management structure and to evaluate the effectiveness of public-private partnerships with a measurable result – economic, political and social.

Types of Public-Private Partnership

In theory, there are two types of public-private partnerships: a partnership that relies merely on responsibilities of partners from both public and private sector determined by a contract, and an institutionalized partnership, which does not include the cooperation of public and private sector in the frames of any legal subject.

416 Local Economic and Infrastructure Development of SEE in the Context of EU Accession A. Jovanović: The Role and Importance of the Public-Private Partnership in the Republic...

The first type of public-private partnerships is a cooperation between a public partner and private investor that is determined by a contract in which it is stated that the private investor is obliged to finance the building of a public object (a road, school, pool, sport’s hall) and after that continues to provide maintenance of the object and accept a compensation through doing a public service from final users or the budget. This type of partnership considers a variety of forms in which one or more, small or big, projects are given to the private investor, which can include creating, making a project, financing, completing the work, restoration, using the resources and/ or providing services. One of these types of partnerships by contracts is a concession, which stands for commercial use of natural sources or causes that are of public interest. The law defines concession as a public-private partnership determined by a contract, determined by time, under certain conditions, that includes paying of concessive compensation from the private and/or public partner. Additionally, the private partner is responsible for any risk regarding commercial use of the subject of a concession. (Pavlović-Križanić 2012 : 19)

The other type of public-private partnerships is an institutionalized public-private partnership which stands for founding a conjoined company or building and/or managing a public infrastructure. Investments, responsibilities, obligations, risk sharing and managing such an institution is the result of the contract between a partner form private and a partner from the public sector. Moreover, institutionalized public-private partnership can be created by founding a new institution or taking over a part of a previously existing public company by a private investor. This type of public- private partnerships is recommended in companies that provide public services that are of great importance for a public sector and, thus, it is needed for public sector to keep the control over such services. (For instance, in Italy, Hungary, Czech Republic and other countries, public-private companies are in charge of providing water based on the contract on utilities).

Legal and regulatory frame of public-private partnerships in Republic of Serbia

A public-private partnership is an object of direct and indirect regulating by different laws. Indirectly, the institution of public-private partnerships is an object of regulating by the Law of public-private partnerships and Concessions (Anon. 2011a) and Law of public procurement (Anon. 2012a). Directly, public-private partnerships are an object of regulation of systemic laws that regulate the economic system of Republic of Serbia. In that sense, the most important laws are Law of utility services (Anon. 2011b), Law on public property (Anon. 2011c), Law on foreign investments (Anon. 2003a), Law on energy (Anon. 2011d). Norms that refer to public-private partnerships represent the rules that are generally implemented to all types of partnerships, regardless of legal model or an object of partnership (energy, infrastructure,

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 417 Financing Local Economic and Infrastructural Development schools, hospitals). For the first time in the Republic of Serbia Law on public-private partnerships provides an explicit frame for regulating this important institute. The law was enacted because of the realization of following goals: • The empowerment of financial capacities in regard to building infrastructures; Realizing the public services of a higher quality; Realization of publicity and ‘transparency’ of procedure of availability and usage of public resources; Compatibility of legal frame of public-private partnerships and the conventions of EU and ‘good practices’ (Cvetković 2012 : 11).

The Law on public-private partnerships and concessions regulates the conditions and the fashion of creation, suggestion and approving of projects of public-private partnerships; rights and obligations of public and private partners; authority of Commission for public-private partnerships; conditions and the way of granting concessions; the subject of a concession; legal protection during the acts of assignment of public contract (Anon. 2011a) as well as the basic principles: The protection of the interests of the public; • Efficiency; Transparency; Equal and just treatment; Free market; Proportionality; The protection of environment; The autonomy of will; The equality of both partners (Anon. 2011a).

With regard to this law, public-private partnership is a long lasting cooperation between a public and a private partner with a goal of providing financing, building, reconstruction, managing or keeping of infrastructure and other buildings of public importance and providing services of public importance, that can be a partnership based on a contract or it can be institutionalized (Anon. 2011a). In regard to this law, concession is a public-private partnership determined by a contract, containing the elements of a concession, in which a commercial exploitation of a natural resource is determined by a public contract. Natural resources can also refer to the assets in public use, that belong to the state or providing services of public interest, that are given to the domestic or foreign entity, for a limited period of time, under strict conditions. A private and/or public partner gives compensation, whereby the private partner takes the risk involved in commercial use of the object of the concession (Anon. 2011a). Concession can be awarded for commercial uses of natural resources or resources of public use that are public property or conducting a business of public interest, and in particular for exploration and exploitation of minerals and other geological resources, for specific activities within the protected areas, as well as for exploitation of other natural resources; in the areas of energy; for harbours, public

418 Local Economic and Infrastructure Development of SEE in the Context of EU Accession A. Jovanović: The Role and Importance of the Public-Private Partnership in the Republic... roads, public transport, airports; in the areas of sport and education, on cultural assets; for utility services; railway; for commercial uses of cable cars; in healthcare; tourism. The grantor of a concession can be: The Government, on behalf of the Republic of Serbia in cases when public bodies and subject of concession are under the authority of the Republic of Serbia The Government of autonomous province, on behalf of autonomous province, in cases when public bodies and subject of concession are under the authority of the autonomous province The Parliament of a municipality, in cases when public bodies and subject of concession are under the authority of a municipality A public company, or a legal entity authorized by rules for awarding concession (Anon. 2011a).

A public call is to be published in “Službeni glasnik RS” as a means of public informing that is distributed on the territory of Serbia, on the web page of the public body and on the Portal of public procurements. Besides that, if needed, a public call is to be published in one international paper and the internet edition of appendix to “Službeni list” on European Union, which is obligatory for every project with the value greater than five million euro. A public contract is signed over a period of no less than 5 and no more than 50 years. If any regulation changes after signing a contract in the direction of diminishing any of the parties involved, there is a stabilization clause that allows adjusting the contract without any limitations in regard to reclaiming the position a partner had at the beginning of concluding the agreement. Legal protection in the process of signing a contract is provided according to the Law of public purchases. Public contracts are registered in the Public Contract Register kept by the Ministry of Finance and Economy as a unique electronic database on the Portal of Public Purchases.

The object regulated by the law is extensively defined. The law regulates the conditions and the manner of producing, suggesting and approving of projects of public-private partnerships, subjects, rights and obligations of actors in public-private partnerships, legal grounds (public contract), process of awarding concessions, protection of the rights of actors in the process of assigning public contracts, and any other issues that can occur during the arranging and realizing the partnership. The Law on Public-Private Partnerships and Concessions is the fundamental legal source of managing public-private partnerships. Note that subjects of public-private partnerships cannot be used exclusively for commercial purposes of general application. The awareness of the public interest is therefore essential for the existence of the partnership; without that element a project is not a public-private partnership in reference to the Law on Public-Private Partnerships and Concessions. On the other hand, a public body can use other legal mechanisms (a lease contract or other forms of contracts) with a goal of creating such a project (commercial, without realization of public interest). However, those mechanisms are not included in frameworks of

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 419 Financing Local Economic and Infrastructural Development the implementation of the Law on Public-Private Partnerships. In addition: when a municipality (or any other public body) sells or leases a lot for construction or a plant for industrial production, there are no grounds for the implementation of public-private partnerships. Namely, this is the case of putting into operation of economic resource (a lot) in order to utilize it in an economic activity. Public interest is being exhausted, which means that it begins and finishes with the obligation of an investor (a buyer or a leaseholder) to utilize the lot for the purposes of performing an economic activity with regard to systemic laws (tax, labour and employment law, environmental law and others). Nonetheless, if a lot is leased for a limited period of time (not longer than fifty years, according to the Law on Public-Private Partnerships and Concessions) with an aim of fulfilling a certain public interest, then it is the matter of a project that is regulated by this Law, since its realization and process partly involves public interest. Thereby, the existence of the private interest realized in the interest of a private actor for the returns of their investments and earning a suitable profit is not excluded (without such an interest that agreement would not be a public- private partnership, but it would be a project of public works that are funded from the budget).

Institutional framework – Commission for Public-Private Partnership in the Republic of Serbia

An important actor of the concept of public-private partnership in Republic of Serbia is Commission for Public-Private Partnership designed as professional body of the Government of Republic of Serbia, which provides help in the realization of public- private partnership projects and concessions in Republic of Serbia. Commission is made of nine members, deputies of relevant ministries and bodies. Representative of the Ministry in charge of Economy and Regional Development is also the President of the Commission, a representative of the ministry responsible for finance is his deputy. President of the Commission represents the Commission before the state bodies and organizations, as well as other national and international bodies, organizations and institutions; manages the work of the Commission; organizes, directs and coordinates the work of the Commission; President convenes meetings of the Commission, proposes the agenda of meetings and presides at meetings; signs documents of the Commission; takes care of implementation of the Rules and other regulations of the Commission; performs other duties specified by law, these Rules and other regulations of the Commission. The deputy chairman of the Commission can preside at a Session of the Commission on the basis of the written authority of the President of the Commission.1 Preparation of meetings is organized by the President of the Commission with the help of professional services of the Ministry. Preparing of the meeting of the Commission includes in particular: compiling proposals on the

1 Poslovnik o radu Komisije za javno-privatno partnerstvo, Beograd, 2012, član 4.

420 Local Economic and Infrastructure Development of SEE in the Context of EU Accession A. Jovanović: The Role and Importance of the Public-Private Partnership in the Republic... agenda; preparing appropriate written materials for the meeting; summons for the meeting and providing technical and administrative conditions for the undisturbed work of the Commission. Report on the work of the Commission meeting is also prepared. Record contains basic information about the meeting of the Commission, and in particular: indication of the number of session with the note marking oral, in written or conference session; place, time and date of the session; information about the present and absent members of the Commission at the meeting , and other persons present at the meeting; agenda of the session; issues that were the subject of the vote and the result of each vote; summary of discussions on issues on the agenda, unless the record is made for the work of the session held in writing form; results of the voting on all issues which the Committee discussed at the meeting; opinions or other documents adopted at the meeting; other information relevant for the session and decision making; time of the conclusion of the session (Anon. 2012b art. 25).

An integral part of the record sheets are declarations of members of the Commission at meetings and written papers for declaration which members submitted in writing. Written records of the meeting of the Commission shall be made no later than 10 days from the date of the meeting. Publicity of the Commission is exercised by: publication of the documents which the Commission adopted in carrying out prescribed tasks; publication of the annual report on state aid granted in the Republic of Serbia; publication of other data and information deemed to be of importance for the implementation of regulations in the field of public-private partnerships and concessions; issuing statements to the media (press releases) (Anon. 2012b art. 27).

Necessary professional, technical and administrative support, and other resources necessary for the successful operation of the Commission are provided by the Ministry (Anon. 2012b art. 28). The Commission is profiled as a professional (not a political body). Following the adoption of the Law on Public-Private Partnership and Concessions a by-law was adopted (Decree on the establishment of the Public- Private Partnership), which provides that “for the implementation of any project of public-private partnership it is necessary to obtain a favourable opinion of the Commission” (Decree paragraph 5.). This is clearly committed to the “binding” nature of the above Commission’s opinion: the absence of a positive or negative opinion means that giving the project to a public-private partnership is not approved. The Commission has the authority to: assist in the preparation of proposals for public- private partnerships; facilitate the development of public-private partnerships and public contracts; inform and consult on issues of public-private partnerships with

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 421 Financing Local Economic and Infrastructural Development the elements of a concession or without them; give advice in the process of approval of the project proposal for public-private partnerships without elements of concession and the concession act nomination procedure for the approval by the competent authorities; identify and facilitate the implementation of best foreign experience for the Republic in terms of public-private partnerships with the elements of a concession or without them; develop methodological materials in the field of public-private partnerships and other. Until today, positive opinion of the Commission is adopted for four project proposals of public-private partnerships, and another project that meets the requirements prescribed by law is in the procedure. Ministry of Finance and Economy has prepared a Decree on the Supervision of the implementation of public contracts awarded for the implementation of public-private partnership with the elements of the concession without them, as well as the Rules of Procedure, the methods and content of the register of public contracts, which were adopted by the Government. The methodology developed and value for money, which is entrusted to the international consultants, waiting for its approval by the Commission.

Examples of projects of public-private partnership and their impact on local economic development

Local government in Serbia is responsible for providing adequate infrastructure to support existing and encourage new businesses in their territory. Local development planning on the basis of public revenue base is too narrow for the rapid development of the local community. Today, therefore, it is necessary to complete the budget funding by attracting private capital to build local infrastructure and improving the quality of public services. Involvement of the private sector in the construction of public facilities and providing public services to local authorities realizes a number of benefits for its citizens: faster implementation of projects that can be achieved by entrusting more phases of the project (financing, design, construction, use) to a private partner (including a consortium), savings in construction costs through faster implementation, faster procurement and reducing of risk of exceeding the deadlines and costs, savings in operating costs by using modern technology, skilled labour, centralization of administrative staff and multipurpose use of facilities, innovation in the provision of infrastructure and services through competition that encourages private partners to find efficient ways to carry out projects of its com- petitors and municipalities, • more possibilities of financing of infrastructure projects without the involvement of the limited budget and borrowing on financial markets, better measurement of the performance of service delivery by introducing market standards for assessing the quality and

422 Local Economic and Infrastructure Development of SEE in the Context of EU Accession A. Jovanović: The Role and Importance of the Public-Private Partnership in the Republic...

increase in local revenues: property taxes and wages, rents, concession fees or income from the project/services (Brdarević 2012 : 33).

Public-private partnerships offer no benefits for local projects. For this reason, there is a question of identifying appropriate projects. The experience of the European Union showed that potential projects should meet the following requirements: (1) that the project has a higher value, (2) that the private sector can provide the necessary facility construction and the provision of services, (3) that the project requires technology that is available, (4) the local authorities to define their needs for the duration of the project, (5) that the project is financially viable and economically justified, and (6) that there is an agreement for the project among relevant bodies at local and higher levels of government.

In Serbia, almost two years after the Law was implemented, only one project in public-private partnership is realized, submitted by JKP Informatika Novi Sad, proposing the implementation of the project to build and expand an existing optical telecommunication network on the principle of an open FTTH (fibre to the home – fibre to the end user) in the city of Novi Sad. In addition, this year, three projects were evaluated positively by the Public-Private Partnership Comission: a Concession Deed proposal for the activity of urban-suburban public transportation in the city of Loznica; a Concession Deed proposal for the design, financing, construction, maintenance and management of a public parking garage in Šabac; as well as the proposal of a public-private partnership project submitted by the Public Utility District Heating Zrenjanin, which proposes the production of heat and electricity from biogas and the use of organic raw materials and agricultural industry residues and by-products from the food industry to produce it. The proposal of a public-private partnership that has been submitted by the Public Company for Land, Building and Roads “Directorate for Construction Apatin” in the name of Apatin, contains elements that are regulated by the Law on Public-Private Partnership, but the Commission points out that it needs to comply with the provisions of the Law on navigable and inland waters and precise duration of public-private partnerships.

Conclusion

It is more than expected for public-private partnerships to gradually become an option of choice in the following years, especially for local authorities and in relation to funding big local and regional projects. The question of conducting valid and transparent mechanisms for the analysis of a price/value of every project (value for money methodology, that is to be prepared by the Commission for Public-Private Partnerships and Concessions), minute elaboration on the legal criteria of the assessment and the approval of a project (including determining the type of the risk of each partner), as well as determining a valid mechanism within a municipality in

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 423 Financing Local Economic and Infrastructural Development order to follow up on the implementation of a project are the most important issues to be resolved. Unless these issues are resolved shortly upon taking up a project, the occurrence of improperly and inefficiently prepared realized projects could become a serious burden on a budget in a long term. Moreover, covering the deficit can cause the increase in debt, followed by ecological, social and economic risks (Pavlović- Križanić 2012 : 23). The expectations from this institute are immense in regard to the increase of the in- flux of private investments in those local projects with the potential of improving the quality of public services, by investing the funds into new infrastructures, equipment and the way services are provided. The Public-Private Partnerships Commission has the crucial role in fulfilling such expectations. Furthermore, the Commission’s work is expected to be efficient and depoliticized and encouraging in terms of the investing of private funds into a faster growth of local communities, as well as improving the quality of public services. Arrangements of public-private partnerships should be made after a thorough and impartial assessment. Promoting of a model of public-private partnerships and its wider application can be very beneficial not only for private sector, but for the society in general as well. In the future, these arrangements might be the leader of the local economic development, due to the reasons of efficiency, investment’s reliability and cost analysis, compared to standard budgetary funding of projects.

References

Anon. (2003a) Zakon o stranim ulaganjima, Official Gazette of SRJ, No. 3/2002 and 5/2003. Anon. (2011a) Zakon o javno-privatnom partnerstvu i koncesijama, Official Gazette of RS, No. 88/2011. Anon. (2011b) Zakon o komunalnim delatnostima, Official Gazette of RS, No. 88/2011. Anon. (2011c) Zakon o javnoj svojini Republike Srbije, Official Gazette of RS, No. 72/2011. Anon. (2011d) Zakon o energetici Republike Srbije, Official Gazette of RS, No. 57/2011. Anon. (2012a) Zakon o javnim nabavkama, Official Gazette of RS, No. 124/2012. Anon. (2012b) Poslovnik o radu Komisije za javno-privatno partnerstvo, Beograd, član 25. Brdarević, Lj. (2012) Motivi lokalne vlasti za uspostavljanje javno-privatnih partnerstava, Časopis za javnu politiku POLIS, Stalna konferencija gradova i opština – Savez gradova i opština Srbije i Centar za javnu i lokalnu upravu – PALGO centar: 33. Cvetković, P. (2012) Regulatorni okvir javno-privatnog partnerstva: pregled novih rešenja, Časopis za javnu politiku POLIS, Stalna konferencija gradova i opština – Savez gradova i opština Srbije i Centar za javnu i lokalnu upravu – PALGO centar, Beograd. Cvetković, P. and Sredojević, S. (2013) Javno-privatno partnerstvo, Priručnik za sprovođenje na nivou lokalne samouprave, Stalna konferencija gradova i opština – Savez gradova i opština Srbije, Beograd, pp. 13-14. Pavlović-Križanić, T. (2012) Lokalna javno-privatna partnerstva u Srbiji – između propisa i realnosti, Časopis za javnu politiku POLIS, Stalna konferencija gradova i opština – Savez gradova i opština Srbije i Centar za javnu i lokalnu upravu – PALGO centar, Beograd.

424 Local Economic and Infrastructure Development of SEE in the Context of EU Accession A. Jovanović: The Role and Importance of the Public-Private Partnership in the Republic...

Legal sources

Zakon o javno-privatnom partnerstvu i koncesijama, Official Gazette of RS, No. 88/2011. Zakon o javnim nabavkama, Official Gazette of RS, No. 124/2012. Zakon o javnoj svojini Republike Srbije, Official Gazette of RS, No. 72/2011. Zakon o komunalnim delatnostima, Official Gazette of RS, No. 88/2011. Zakon o stranim ulaganjima, Official Gazette of SRJ, No. 3/2002 i 5/2003. Zakon o energetici Republike Srbije, Official Gazette of RS, No. 57/2011. Poslovnik o radu Komisije za javno-privatno partnerstvo, Beograd, 2012.

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 425

DOI 10.5644/PI2013-153-26

THE BASE METHODOLOGY TO SAFE IMPLEMENTATION OF PUBLIC PRIVATE PARTNERSHIP ON THE EMERGING MARKET OF THE SOUTH EAST EUROPE

Izet Bajrambašić*

Abstract

The market of the South East Europe (SEE) is recognized as emerging market of the transition countries which needs priority investment in different infrastructure projects for sustainable development. Infrastructure of a country is understood as the fundamental service foundation of economy, society and overall development. It is very well known that adequate services are necessary for the development of the economy, including transport, electric power, telecommunications, water supply etc. The transition countries are financially con- strained and they have big problems in financing infrastructure projects, especially during the global financial crisis. These projects are generally characterised by high development and maintenance costs, and historically it was seen as the role of the government to fund and manage these assets. A way to fund and manage these assets in this challenging environment is via Public Private Partnership (PPP). Financing and development of infrastructure on the base of PPP means introducing the private sector in financing and management of public services and physical infrastructure.

The key question is how to implement PPP on the emerging market of the SEE?

The methodology to implement PPP has to be understandable, functional and practicable. It has to cover core tasks and performers which can produce planed results. The base Method- ology for safe implementation of PPP needs cohesion of the following important elements: training, projects development, finance structure arrangement and implementation. The units and individual experts of the organisation structure need strong cohesion and it is necessary that everybody understands individual and complete process. Training Unit has task to train experts of the beneficiaries for PPP. It has to have corresponding infrastructure and equipment, good trainer, experience in education and training and possibility to organise training. The Project Developer (project development and finance structure arrangement) has task to develop PPP projects. The Developer will develop projects based on strategic document of the beneficiaries (municipalities, cantons, entities and state). Certified experts from Training Unit will be included. Implementation of the PPP project is guided by the Beneficiary (including certified experts trained according to their needs), with assistance of the Developer.

* PhD, assistant Minister, Ministry of Communication and Transport of the Bosnia and Herzegovina, Trg BIH 2, 71000 Sarajevo, Bosnia and Herzegovina, phone: +387 33 707 664, fax: +387 33 707 693, e-mail address: [email protected]

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 427 Financing Local Economic and Infrastructural Development

This Methodology for safe implementation of PPP has strong cohesion units and activities “top to down” to follow up feasible and sustainable investment process.

Keywords: Project financing, Developer, Circular cooperation.

Introduction

SEE countries are generally developed countries and countries with transitional (Anon. 2012 : 31) economies, and they all need greater investments in all social and economic segments. Overall economic development of the countries greatly depends of investment possibilities, results and quality. This is especially related to the infrastructure as an exceptionally significant social and economic segment, without which overall development is inconceivable. Every infrastructure sector is relevant and especially the following: roads, railways, water supply lines, gas lines, solid waste disposal, telecommunications, electrical power/electricity, schools, hospitals etc. All these infrastructure forms are traditionally under the competence of public institutions and organizations with regard to ownership, management and financing.

Demand for faster development in SEE countries is increasing and requires, inter alia, faster infrastructure development. On the other hand, this requires countries’ governments to make larger budget appropriations and increased debts. Actual investment needs and financial possibilities of the country should be reconciled, which is not always possible, due to limited financial sources of the public sector. Difficulties arise from other social demands that are evidently high by comparison with infrastructure segment, especially when it is known that due to the increase in infrastructure, in addition to great benefits, operating costs and maintenance costs also increase, and efficiency of the public sector in this respect, generally, is not adequate. When analysing efficiency of the invested resources it is very important to analyse operating and maintenance costs in this segment, because these costs are very high and difficult to control with the public sector, regardless of the experience and large number of introduced standards (Anon. 2013b; Anon. 2013c; Anon. 2013d; Anon. 2013e; Anon. 2013f).

By introducing the private sector in infrastructure management and financing, possibilities of financing and investments are expanding, public sector operative costs are decreased, and overall development is enhanced. In this way, investments in infrastructure gain their full significance and justification in view of social-economic aspect (Anon. 2013b; Anon. 2013c; Anon. 2013d; Anon. 2013e; Anon. 2013f).

This approach of broadening the financial possibilities through introduction of private sector for needs of infrastructure development requires few prerequisites and conditions that countries’ governments have to prepare and fulfil. One of the most

428 Local Economic and Infrastructure Development of SEE in the Context of EU Accession I. Bajrambašić: The Base Methodology to Safe Implementation of Public Private... important prerequisites for success is knowledge and good practice. Attaining needed knowledge and practical application for the PPP is not simple, which is proven by the fact that SEE countries tried to implement PPP projects and failed many times or only partially succeeded in implementation. Fact that these countries, except for Turkey and Greece in part, have not applied and used PPP in all possible options shows how great is the gap in knowledge and practical application of the model. Connection between knowledge and practice in development of the processes and projects is not satisfying at the moment and does not provide appropriate results. This is why this paper addresses such specific and applicable topic, which will significantly help and enhance application of the PPP in SEE countries (Anon. 2013a; Anon. 2013b; Anon. 2013c; Anon. 2013d; Anon. 2013e; Anon. 2013f).

This paper will firstly present significance of the PPP for infrastructure development and project orientation toward “project financing” principle, and then it will present methodology of the safe PPP implementation in SEE countries. The methodology is based on cohesion between three factors: education, project development and project implementation. Basically, this implies transfer of the knowledge and experience, and continuity of the cyclic cooperation between same persons through overall process up to the final PPP project results.

PPP significance and characteristics

Private financing of the infrastructure occurs as a result of inability for traditional financing models to meet increased demand for infrastructure development, and need for more rational and cost-effective operation. This should be understood as a new possibility for investments and management, i.e. as an upgrade to the traditional system of financing and managing projects and assets.

The essential difference between these two approaches, especially in a view of investing and project appraisal, is visible from the beginning to the end of the project.

While preparing infrastructure project, the public sector does not analyse strictly refunding from the investment directly, nor provides sources for return of invested funds directly. Although public sector sometimes works like this, it is certain that while analysing the project it does not only consider financial assessment but it compulsory takes into consideration socio-economic assessment of benefit. Public sector plans refunding from total of budget funds, meaning that funds are returned even from the sources that have no direct linkage to the investment. However, in public infrastructure investment, in direct charging (telephony, motorways, gas...) refund is accurate and uses direct sources, which is usually always the rule of private sector in all forms of infrastructure. The private sector for their commitment to the project does not take into account the socio-economic assessment, but solely bases its

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 429 Financing Local Economic and Infrastructural Development interest on financial estimates and project cash flow. Money is the heart of the PPP projects, which is why projects are based on the principles of “project financing”. The main reason for this approach is the fact that private funds (equity and debt) are under the market assessment and values, and are strictly controlled in terms of the expected higher value, i.e. capitalization (Kendrick 2004; Stiglitz and Walsh 2005).

Through the PPP model, in terms of state, capital investments in infrastructure are realized without additional budget burdens, risks and maintenance costs, particularly with administrative bureaucracy. The largest part of the burden transfers to the private sector. “Projects can be developed without exposure to increasing debt or exceeding the state budget. Public sources are then available for the achievement of other policy objectives, such as education and health. As a result, the image of the country – or even financial rating – gains an improvement, making the capital market of the country cheaper and more attractive for foreign investment...” (Perrot and Chatelas 2000 : 19).

PPP in a country is applicable as a system to all public services and physical infrastructure such as telecommunications, energy, transport, drinking water, wastewater, solid waste, heating, schools, hospitals, prisons, military equipment and military in- stallations and other. Introduction of the financing systems to the transition countries and the countries with weak economy can be a good precondition for direct investment (domestic and foreign), the opening of public works and other benefits for the economy, because public services and infrastructure are improved in accordance with requirements of the economy and living standards of citizens. While using the planned private financing models, investment in infrastructure increases significantly in a short period of time. “Public-Private Partnership is not indicating only a reliable increase in the private sector in financing of capital investment projects on the basis of flow-generated revenue of the future facility, but also incorporates benefits of private sector in skills and expertise in construction and operation work, more efficiency throughout the project cycle” (Perrot 2000 : 19).

All models of private investment in infrastructure are mainly based on the concession rights, being the legal framework for financial processes, which is why these projects are often simply called “concession projects”. The concession is briefly defined as the granted right, and consequently concession infrastructure projects would be the projects in which the owner (the grantor) gives exclusive right to the concession user (concessionaire) with the aim of building the infrastructure facility or provision of services in the field of infrastructure, etc. The concession is granted for a period of time for a fee. After the expiry of the concession period, the concessionaire is obliged to transfer the facility on grantor. Concession relationship is always regulated by a written contract, and the procedure of assigning concession rights in the field of infrastructure, as a rule, is prescribed by law. In this regard, there are a number of national and international rules, making a significant contribution to the implementation of

430 Local Economic and Infrastructure Development of SEE in the Context of EU Accession I. Bajrambašić: The Base Methodology to Safe Implementation of Public Private...

PPP in terms of market security and openness. As an example: “Recommendation 1 Constitutional, legislative and institutional framework for privately financed infrastructure projects, to ensure a transparent, fair and long-term sustainable project. Undesirable restrictions toward the participation of private sector in infrastructure development and operational work should be eliminated” (Anon. 2001).

Using the word “concession” and “concession project” is usual to all projects where there is such legal basis on which it is clear that an authorized institution assigns this kind of right. Given that the legal basis is assumption that provides possibility of investment, utilization, operating performance and transfer of facility, in the broadest sense, experts from the fields of business and finance have developed investment models and procedures in this area. The models used for these investments also include actual private investment on the basis of concessions. A large number of these models of private investment, which are found in a PPP group, are in some way (in practice accepted) synonyms to “concession projects”, although concessions may be assigned to public capital companies, which also can be found in practice (Anon. 2013a; Anon. 2013b; Anon. 2013c; Anon. 2013d; Anon. 2013e; Anon. 2013f).

Project financing in PPP projects

PPP projects include many participants of the process, but key participants are the following: government, concessionaire and financiers.

Financiers of these projects are significant participants in the processes and have in most cases a decisive role. Everything depends on their relationship to and evaluation of PPP projects. For this reason it is important to note that they define these projects exclusively as financial processes, because each project as a whole is observed from aspect of financial investments and financial returns. In addition, the worldwide term “project financing” is accepted as the principle that PPP projects are based on. The basis of this business philosophy is that the return on investment is expected and required exclusively from the income of the project. Because of that, financiers are seeking bankable and safe projects. “Project financing” is a project self-financing model, where lenders and investors (debt and equity) are seeking for a safe return of funds in the project cash flow and where the project resources (objects) as a result of investments are certain. True, there is no full guarantee for the invested funds, and that is why the projects are carefully prepared and evaluated in detail. This kind of self-financing requires structuring of debt and equity so the project cash flow is adequate for recovery of funds and for profit. This means that the project is based on cash flow, which is generated (created) by the realization of the project, with assigned concession rights. The financial aspect of the project, including risk management, along with banking and government guarantees must be comprehensive and professionally processed. Finally, projects must be feasible and sustainable. In order

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 431 Financing Local Economic and Infrastructural Development to secure investment and realization, it is necessary to prepare multiple analyses for PPP projects, related to the net current value, internal rate of return, etc. It is also necessary to prepare due diligence which is one of the most effective and the most comprehensive estimates (Anon. 2013a; Anon. 2013b; Anon. 2013c; Anon. 2013d; Anon. 2013e; Anon. 2013f).

Due diligence includes assessment from the commercial, financial and legal aspects. In the application of this approach, it is important to understand the business of the company (the concessionaire), where many questions should be answered, taking into account the risks, business trend, return of invested funds and other. So, in this process (due diligence) an in-depth analysis is conducted, which is important for the concessionaire, who wants to know all the information. The concessionaire is trying to get an answer to all questions, and does not allow the public sector, either inten- tionally or unintentionally, to suppress some significant information (Anon. 2011; Anon. 2012; Anon. 2013a; Anon. 2013b; Anon. 2013c; Anon. 2013d; Anon. 2013e; Anon. 2013f; Mankiw 2006).

In network industries, which are based on the associated distribution networks, this analysis is also necessary due to the nature of the industry. According to the “industrial organization” network industries are part of the national economy, so their importance is higher. This is where the following analysis is conducted: the macroeconomic aspect, taxation, regulation, management, human resources, represented technology, industry, environment, equipment, property, marketing, production, etc. (Mankiw 2006 : 267). This analysis is mainly conducted by a team of experts of various profiles: lawyers, financiers, experts for human resources, technologists, IT professionals, etc. Overall team work is included in the final assessment document called “Due diligence report”, which will serve the public sector and the concessionaire during negotiations and when reaching the final decision (Anon. 2013b; Anon. 2013c; Anon. 2013d; Anon. 2013e; Anon. 2013f).

This analysis is necessary because positive evaluation of concession projects requires not only sound elements of the project, but also a sound environment, where the project is implemented. Therefore, concession projects of great complexity and attachment to public and private sector require extremely regulated legal and business environment. These “two environments” in reality are one environment, because the concessionaire and other entities are not separating them. Their interde- pendence is essential for the realization of concession projects as for the grantor, so for concessionaire and the other service users. In essence, the economic and social development policy should be based on sound legal and business framework, which provides security and business attractiveness to investors, and which is particularly important for investment in infrastructure through PPP model (Stiglitz and Walsh 2005; Kendrick 2004; Perrot and Chatelus 2000; Anon. 2013b; Anon. 2013c; Anon. 2013d; Anon. 2013e; Anon. 2013f).

432 Local Economic and Infrastructure Development of SEE in the Context of EU Accession I. Bajrambašić: The Base Methodology to Safe Implementation of Public Private...

Methodology to safe implementation of PPP projects

Practice shows that the implementation of PPP projects requires essential knowledge of all participants in the process, especially with the three key participants. The biggest problem of knowledge occurs in the public sector, where education is needed, according to the understanding of many. However, current practice shows that it is not enough. In many places, although high quality education is already performed, projects are not implemented or are implemented with a lot of mistakes. Problem after training occurs in practical work and with skills from project preparation to completion of project. Therefore, it is not just a matter of education, but also of the following question: how to implement an overall training and connect knowledge acquired with the practise, and to ensure continuity in the implementation of projects by the end user? (Anon. 2011; Anon. 2012; Anon. 2013a; Anon. 2013b; Anon. 2013c; Anon. 2013d; Anon. 2013e; Anon. 2013f)

Methodology to safe implementation of PPP projects provides an answer to this question, because it is based on cohesion of three factors: education, project development and implementation of projects. Special attention is paid to the continuity of the cyclic cooperation between same persons through the whole process to the final results of the PPP projects. (Anon. 2011; Anon. 2012; Mankiw 2006; Anon. 2013b; Anon. 2013c; Anon. 2013d; Anon. 2013e; Anon. 2013f)

Continuity of cyclic cooperation between same persons (experts) from education to the realization of the project goes through the developer, which is a key link of education and practical realization of projects. The developer has to be experienced, and has to cover all aspects necessary for the project, such as engineering, legal, finance, etc. Also, project management skills of the developer have to be particularly high, because this mode of work in the final implies transfer of a good knowledge and experience (Anon. 2012; Anon. 2013). Education is the starting point of circular cooperation, so it is very important who is a teacher and what it teaches. Education program (Anon. 2013) must be well designed, with no redundant theories outside investment. It is important that the education program covers basic topics that are part of essential knowledge for practical application. Among other things, the una- voidable topics of education must be of crucial importance for the development and implementation of projects. This particularly applies to: • Development, Significance and Models of the PPP; PPP Project Management; PPP Project Risk Management; Institutional and Legal Framework for PPP and • Procurement, Negotiation, Contracting, Conflicts and Post contract claims (Anon. 2013a; Anon. 2013b; Anon. 2013c; Anon. 2013d; Anon. 2013e; Anon. 2013f).

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 433 Financing Local Economic and Infrastructural Development

Experts come to the education intended for the end user (Beneficiary) of future investment PPP projects (e.g. municipality, canton, public companies...). This is because the ultimate beneficiaries of the projects are most important. Without them and their needs there is no possibility for realization of projects, and they are also the most interested parties. After education and certification, experts are working with the developer to develop projects that are necessary to the end user where the experts come from. They are familiar with the needs of the environment from which they come from, and developer applies his practical knowledge in the preparation and realization of projects. The developer and experts are working on twinning principle, with the aim of developing projects and practical training of experts for managing the PPP projects. Education and Training Centre (Training Unit) must be closely linked to the Project Developer, because their activities have to be synchronized, so that experts and final users could have a clear picture of the dynamic plans of projects, their preparation and implementation. (Graphic presentation of relationships of the Methodology to implement safe PPP is in Appendix). The role of the developer is extremely important because it represents a link to the application of knowledge in practice, with the active participation of certified experts of the project end-user (Anon. 2013a; Anon. 2013b; Anon. 2013c; Anon. 2013d; Anon. 2013e; Anon. 2013f).

The developer performs several complex tasks, among which the most important are the following: Research on the needs of end-users for PPP projects Preparation and appraisal of projects, Advising the end user in the tender procedures, negotiating and contracting (also including assistance in financial arrangements), and Assistance in the monitoring and implementation of projects (Anon. 2013a; Anon. 2013b; Anon 2013c; Anon. 2013d; Anon. 2013e; Anon. 2013f).

The Developer will develop projects based on strategic document and project priority list of municipalities, cantons, entities and state. Developed projects would have very clear indicators of feasibility and sustainability. Developer will pay special attention on Environmental Impact Assessment (EIA). Developer, in cooperation with beneficiary, prepares project financial model and they together cooperate with financial institutions and donors. In this phase of the project development the cooperation triangle is very important and it consists of the Beneficiary, the Developer and the Financier (Donor). All projects will be developed using modern software acceptable for International Financial Institutions and other financial institutions and donors (Anon. 2011; Anon. 2012; Anon. 2013a; Anon. 2013b; Anon. 2013c; Anon. 2013d; Anon. 2013e; Anon. 2013f).

All phases of the work carried out by the developer also include certified experts and responsible persons of project’s end-user. Significance of this kind of work is related

434 Local Economic and Infrastructure Development of SEE in the Context of EU Accession I. Bajrambašić: The Base Methodology to Safe Implementation of Public Private... to the priority need to implement the project, then to simultaneously transfer practical skills and to provide training for certified experts for independent management of PPP projects. Close cooperation between the developer and experts on the principles of twinning is a guarantee for success in cooperation with the ultimate aim of enabling end-user to independently manage all phases of PPP projects. This will allow the end user to independently plan their development, prepare projects, and carry out the necessary tender procedures, contracting and implementing of projects. These investments are important because they enable higher working activities, employment, GDP growth, increase of living standards, etc. Altogether, it means contribution to economic and social development of user and overall community in which the projects are implemented (Anon. 2011; Anon. 2012; Anon. 2013a; Anon. 2013b; Anon. 2013c; Anon. 2013d; Anon. 2013e; Anon. 2013f; Mankiw 2006; Stiglitz and Walsh 2005; Kendrick 2004; Perrot and Chatelus 2000).

Conclusion

The base Methodology to safe implementation of PPP on the emerging market of South East Europe is a good way to introduce new models of financing and management of projects. Hereby interested end-users have the ability to simultaneously develop and train their staff through the development of projects. It provides users with great benefits, and among other, it enables them to work independently on complex PPP projects.

It is here that special attention, more specifically, is given to the knowledge and practical skills that enable continuity of the work for the end-user in future, good planning and implementation of all relevant activities and investments. With actively pursuing this mode of work, the desired distribution and decentralization of knowledge and good practice in all interested social organizational units from the municipal to the state level is achieved. Therefore, mass and independence in the work of multiple users will certainly contribute to competition and quality of work, and show good results of the implemented projects.

When it comes to Bosnia and Herzegovina (BIH), it should be noted that there are all prerequisites for the realization of the Base Methodology to safe implementation of PPP on the emerging market of the South East Europe, and that the author is the leader of creation and application of this Methodology in BIH. Initial activities to prepare the implementation of this work mode are at an advanced stage. The key actors in the process are defined: School of Business and Economics-Sarajevo (Training Unit), Joint venture of the IPSA Institute Sarajevo and Institute of Economics – Sarajevo (Developer) and public organizations from municipal to the state level in Bosnia and Herzegovina (Beneficiary).

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 435 Financing Local Economic and Infrastructural Development

References

Anon. (2011) United Nations Commission on International Trade Law (UNICITRAL), Leg- islative Guide on Infrastructure, New York. Anon. (2012) United Nations, DESA, World Economic Situation and Prospects (WEPS) 2012, Statistical annex New York. (http://www.un.org/en/development/desa/policy/ wesp/wesp_ archive/ 2012 wespupdate.pdf, 10th June 2013) Anon. (2013a) PPP – Education and training, School of Business and Economics – Sara- jevo, Sarajevo. (http://www.pppsarajevo.ba/index.php/en/centre-for-ppp/education-and- training, 25th June 2013) Anon. (2013b) Public private partnership. (http://www.investopedia.com/terms/p/public- private-partnerships.asp) Anon. (2013c) Public private partnership, European Commission. (http://ec.europa.eu/inter- nal_market/publicprocurement/partnerships/public-private/index_en.htm) Anon. (2013d) Excellence in Public Private Partnerships, Brussels. (http://bamppp.com/) Anon. (2013e) PPP in Europe, Brussels. (http://www.cmslegal.cn/Hubbard.FileSystem/files/ Publication /ed219c67-c7b1-40c6-a54d-3494ef81e6c8/Presentation/PublicationAttach- ment/33ec4891-c549-49f4-b161-370b851fbd78/CMS_PPPinEurope_Guide082010. pdf) Anon. (2013f) EU Public Private Partnership, EPC, European Policy Centre, Brussels. (http://www.epc.eu/prog_forum.php?forum_id=24&prog_id=2) Kendrick, T. (2004) The project management – Tool kit, New York. Mankiw, N. G. (2006) Principles of Economics, III edition, Mate, Zagreb. Perrot, J. and Chatelus G. (2000) Financing of major infrastructure and public service projects (Public-Private Partnership), French Ministry of public works, transport and housing, Paris. Stiglitz, E. J. and Walsh, E. C. (2005) Principles of Macro-Economics, IV edition, New York.

436 Local Economic and Infrastructure Development of SEE in the Context of EU Accession LIST OF PARTICIPANTS OF SCIENTIFIC CONFERENCE

Sofija Adžić, Faculty of Economics Subotica, University of Novi Sad, Segedinski put 9-11, 24000 Subotica, Republic of Serbia, +387 66 241 987, sofija.adzic@ gmail.com Hazim Bašić, Faculty of mechanical engineering, University of Sarajevo, Vilsonovo šetalište 9, 71000 Sarajevo, Bosnia and Herzegovina, +387 61 818 448, basic@ mef.unsa.ba Maja Bučar, Faculty of Social Sciences, University of Ljubljana, Kardeljeva 5, 10000 Ljubljana, Slovenija, +386 15 805 115, [email protected] Boban Ceković, City of Podgorica, Njegoševa 13, 81000 Podgorica, Montenegro, [email protected] Mirsad Cvrk, Municipality of Centar Sarajevo, Mis Irbina 1, 71000 Sarajevo, Bosnia and Herzegovina, +387 61 398 474 Elena Davitkovska, Institute of Economics, Prolet 1, 1000 Skopje, FYR Macedonia, + 389 70 222 899, [email protected] Edin Demirović, Association of municipalities and cities of the FBiH, Musala 5/1, 71000 Sarajevo, Bosnia and Herzegovina, [email protected] Aida Dobrača, UniCredit Bank, Zelenih beretki 24, 71000 Sarajevo, Bosnia and Herzegovina, [email protected] Anto Domazet, School of Economics and Business, University of Sarajevo, Trg oslobođenja – Alije Izetbegovića 1, 71000 Sarajevo, Bosnia and Herzegovina, +387 33 275 936, [email protected] Nejra Duraković, Regional Representation of Canton Sarajevo to the European Union, Rue du commerce 491000 Bruxelles, Belgium, +387 61 515 505, durako- [email protected] Šemsudin Džeko, Turistička zajednica Federacije BiH, Branilaca Sarajeva 24/1, 71000 Sarajevo, Bosnia and Herzegovina, +387 33 275 700 Gordana Đurović, Faculty of Economics, University of Montenegro, Jovana Tomaševića 37, 81000 Podgorica, Montenegro, +392 69 070 452, +382 20 244 588, [email protected]

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 437 List of Participants of Scientific Conference

Maida Fetahagić, Zavod za planiranje razvoja Kantona Sarajevo, Branilaca Sarajeva 26, 71000 Sarajevo, BiH, +387 61 157 535, [email protected] Šaćir Filandra, Faculty of Political Sciences, University of Sarajevo, Skenderija 72, 71000 Sarajevo, Bosnia and Herzegovina, +387 33 203 562, [email protected] Marijana Galić, Federalni zavod za programiranje razvoja, Ćemaluša 9/3, 71000 Sarajevo, Bosnia and Herzegovina, +387 63 439 719, [email protected] Vesna Goceva, Bureau for regional development, Ministry of local-self Government, M. H. V. Jasmin, 20, 1000 Skopje, Macedonia, +389 23 121 350, +389 23 126 411, [email protected] Haris Gudić, Municipality of Ilidža, Butmirska cesta 12, 71000 Sarajevo, Bosnia and Herzegovina, [email protected] Armin Halitović, Municipality of Bosanska Krupa, Terzića bb, 77240 Bosanska Krupa, Bosnia and Herzegovina, +387 37 471 083, +387 37 471 090, armin@ arminhalitovic.ba Ole Hammer, European Union Special Representative of Bosnia and Herzegovina, Skenderija 3a, 71000 Sarajevo, Bosnia and Herzegovina, +387 33 560 800, ole. [email protected] Arijana Huseinović, Faculty of Law, University of Sarajevo, Nahorevska 179b, 71000 Sarajevo, Bosnia and Herzegovina, +387 61 277 503, arijanahuseinovic@ gmail.com Biserka Ivanović-Šarkanović, VNG International (Capacity Development of Municipal Associations), Josipa Vancaša 10, 71000 Sarajevo, Bosnia and Herzegovina, +387 60 326 26 77, [email protected] Vojislav Ivanović, USAID / GOLD project, Ljubljanska 9, 71000 Sarajevo, Bosnia and Herzegovina, +387 61 223 545, [email protected] Željko Josić, Municipality of Domaljevac, Posavskih branitelja 148, 76233 Domaljevac, Bosnia and Herzegovina, +387 31 385 499, [email protected] Andrijana Jovanović, Ministry of Regional Development and Local Self-Government, Vlajkovićeva 10, 10000 Belgrade, Republic of Serbia, +381 64 214 54 80, +381 11 333 41 86, [email protected], [email protected] Jasmin Jusić, School of Economics and Business, University of Sarajevo, Trg oslo- bođenja – Alije Izetbegovića 1, 71000 Sarajevo, Bosnia and Herzegovina, +387 61 817 725, [email protected] Izudin Kešetović, Faculty of Economics, University of Tuzla, Univerzitetska 8, 75000 Tuzla, Bosnia and Herzegovina, +387 61 179 917, izudin.kesetovic@bih. net.ba

438 Local Economic and Infrastructure Development of SEE in the Context of EU Accession List of Participants of Scientific Conference

Aleksandar Knežević, CETEOR Sarajevo, 71000 Sarajevo, Bosnia and Herzegovina, [email protected] Ivo Komšić, City of Sarajevo, Hamdije Kreševljakovića 3, 71000 Sarajevo, Bosnia and Herzegovina, +387 33 208 340, [email protected] Sead Kreso, School of Economics and Business, University of Sarajevo, Trg oslo- bođenja – Alije Izetbegovića 1, 71000 Sarajevo, Bosnia and Herzegovina, sead. [email protected] Tarik Kupusović, HEIS Sarajevo, S. Tomića 1, 71000 Sarajevo, Bosnia and Herzegovina, +387 61 158 007, tarik. [email protected] Emir Kurtović, School of Economics and Business, University of Sarajevo, Trg oslo- bođenja – Alije Izetbegovića 1, 71000 Sarajevo, Bosnia and Herzegovina, +387 61 399 703, [email protected] Lejla Lazović-Pita, School of Economics and Business, University of Sarajevo, Trg oslobođenja – Alije Izetbegovića 1, 71000 Sarajevo, Bosnia and Herzegovina Refik Lendo, Municipality of Novi Travnik, Kralja Tvrtka bb, 72290 Novi Travnik, Bosnia and Herzegovina, +387 61 131 825, [email protected] Saša Leskovac, Faculty of Political Sciences, University of Sarajevo, Skenderija 72, 71000 Sarajevo, Bosnia and Herzegovina, +387 61 486 003, leskovacsasa@ yahoo.com Aida Lušničkić, Municipality of Ilidža, Butmirska cesta 12, 71000 Sarajevo, Bosnia and Herzegovina, +387 61 210 087, [email protected] Hasan Mahmutović, Faculty of Economics, University of Zenica, Fakultetska 1, 72000 Zenica, Bosnia and Herzegovina, +387 61 912 531 Nermin Mandra, Municipality of Kakanj, Alije Izetbegovića 123, 72240 Kakanj, Bosnia and Herzegovina, +387 32 771 801, [email protected] Danijela Martinović, School of Economics and Business, University of Sarajevo, Trg oslobođenja – Alije Izetbegovića 1, 71000 Sarajevo, Bosnia and Herzegovina, +387 33 275 934, [email protected] Gordana Memišević, Zavod za planiranje razvoja Kantona Sarajevo, Branilaca Sarajeva 26, 71000 Sarajevo, Bosnia and Herzegovina, +387 33 555 175, gorda- [email protected] Ljiljana Misirica, Zavod za planiranje razvoja Kantona Sarajevo, Branilaca Sarajeva 26, 71000 Sarajevo, Bosnia and Herzegovina, +387 33 555 166, ljiljana.misiri- [email protected]

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 439 List of Participants of Scientific Conference

Jelena Misita, Revicon, Envera Šehovića 14, 71000 Sarajevo, Bosnia and Herzegovina, +387 33 720 599, [email protected] Tatjana Muhić, Faculty of Political Sciences, University of Sarajevo, Skenderija 72, 71000 Sarajevo, Bosnia and Herzegovina, +387 61 331 361, tatjana_muhic@yahoo.com Alisa Mujkić, School of Economics and Business, University of Sarajevo, Trg Oslobođenja – Alije Izetbegovića 1, Sarajevo, Bosnia and Herzegovina, +387 62 378 033, [email protected] Sabina Mujkić, Urban Planning Institute of the Republic of Slovenia, Trnovski pristan 2, 1000 Ljubljana, Republic of Slovenia, [email protected] Edina Muslić, Municipality of Centar Sarajevo, Mis Irbina 1, 71000 Sarajevo, Bosnia and Herzegovina, +387 33 562 310, e-mail: [email protected] Amina Nikolajev, Faculty of Law, University of Sarajevo, Obala Kulina Bana 7, 71000 Sarajevo, Bosnia and Herzegovina, +387 61 170 639, a.nikolajev@pfsa. unsa.ba Rahman Nurković, Faculty of Natural Sciences and Mathematics, University of Sarajevo, Zmaja od Bosne 34, 71000 Sarajevo, Bosnia and Herzegovina, +387 63 718 139, [email protected] Zlata Odobašić, Northeast Regional Development Association NERDA, M. i Ž. Crnogorčevića 5, 75000 Tuzla, Bosnia and Herzegovina, +387 35 369 900, +387 35 369 903, [email protected] Mirko Pejanović, Faculty of Political Sciences, University of Sarajevo, Skenderija 72, 71000 Sarajevo, Bosnia and Herzegovina, +387 33 203 562, pejanovicm@ fpn.unsa.ba Antonija Petričušić, Faculty of Law, University of Zagreb, Trg m. Tita 3, 10000 Zagreb, Republic of Croatia, +385 91 887 26 58, [email protected] Muhamed Ramović, Municipality of Goražde, Maršala Tita 2, 73000 Goražde, Bosnia and Herzegovina, +387 38 221 333, [email protected] Elmir Sadiković, Faculty of Political Sciences, University of Sarajevo, Skenderija 72, Sarajevo, Bosnia and Herzegovina, +387 61 141 474, [email protected] Jasmina Selimović, School of Economics and Business, University of Sarajevo, Trg oslobođenja – Alije Izetbegovića 1, 71000 Sarajevo, Bosnia and Herzegovina, +387 33 275 906, [email protected] Senad Softić, School of Economics and Business, University of Sarajevo, Trg oslo- bođenja – Alije Izetbegovića 1, 71000 Sarajevo, Bosnia and Herzegovina, +387 33 275 757, [email protected]

440 Local Economic and Infrastructure Development of SEE in the Context of EU Accession List of Participants of Scientific Conference

Željko Šain, School of Economics and Business, University of Sarajevo, Trg oslo- bođenja – Alije Izetbegovića 1, 71000 Sarajevo, Bosnia and Herzegovina, +387 33 275 906 Damir Šaljić, Faculty of Electrical Engineering, University of Sarajevo, Zmaja od Bosne bb, 71000 Sarajevo, Bosnia and Herzegovina, +387 62 944 041, saljicd@ gmail.com Ensar Šehić, School of Economics and Business, University of Sarajevo, Trg oslobo- đenja – Alije Izetbegovića 1, 71000 Sarajevo, Bosnia and Herzegovina, +387 33 275 907, [email protected] Aida Šošić, M. Hadžijahića, Koševsko brdo, 71000 Sarajevo, Bosnia and Herzegovina, +387 61 329 722, [email protected] Elena Tagliani, Emilia-Romagna Region, Viale A. Moro 52, Bologna, Italia, +390 51 527 36 09; [email protected] Vesna Travljanin, Association of Municipalities and Cities of the Federation of Bosnia and Herzegovina, Musala 5, 71000 Sarajevo, Bosnia and Herzegovina, +387 33 216 502, [email protected] Miloš Trifković, Academy of Sciences and Arts of Bosnia and Herzegovina (ANUBIH), Bistrik 7, 71000 Sarajevo, Bosnia and Herzegovina, +387 33 560 700, [email protected] Veljko Trivun, School of Economics and Business, University of Sarajevo, Trg oslo- bođenja – Alije Izetbegovića 1, 71000 Sarajevo, Bosnia and Herzegovina, +387 33 275 900, +387 33 275 936, [email protected] Kasim Trnka, Faculty of Law, University of Zenica, Fakultetska 1, 72000 Zenica, Bosnia and Herzegovina, +387 61 137 187, [email protected] Ana Vukčević, City of Podgorica, Njegoševa 13, 81000 Podgorica, Montenegro, +382 67 313 496, +382 20 665 077, [email protected] Azra Zečević, Zavod za planiranje razvoja Kantona Sarajevo, Branilaca Sarajeva 26, 71000 Sarajevo, Bosnia and Herzegovina, +387 33 555 175, [email protected] Rajica Živković, Federalni zavod za programiranje razvoja, Ćemaluša 9/3, 71000 Sarajevo, Bosnia and Herzegovina, [email protected]

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 441 LIST OF PARTICIPANTS OF FORUM OF MAYORS

Sofija Adžić, Full-time professor, Faculty of Economics Subotica, University of Novi Sad, Segedinski put 9-11, 24000 Subotica, Republic of Serbia, +387 66 241 987, [email protected] Amra Avdagić, Secretary, Academy of Sciences and Arts of Bosnia and Herzegovina, Bistrik 7, 71000 Sarajevo, Bosnia and Herzegovina, +387 33 560 712, +387 33 560 703, [email protected] Naida Avdagić-Hamzić, Expert assistant, Academy of Sciences and Arts of Bosnia and Herzegovina, Bistrik 7, 71000 Sarajevo, Bosnia and Herzegovina, +387 33 560 715, +387 33 560 735, [email protected] Boban Ceković, Advisor, City of Podgorica, Njegoševa 13, 81000 Podgorica, Montenegro, +382 67 377 001, +382 20 408 708, [email protected] Vladimir Čavrak, Full-time professor, Faculty of Economics, University of Zagreb, Trg J. F. Kennedya 6, 10000 Zagreb, Republic of Croatia, +385 98 271 038, vca- [email protected] Aida Dobrača, Relationship manager, UniCredit Bank, Zelenih beretki 24, 71000 Sarajevo, Bosnia and Herzegovina, +387 61 156 207, [email protected] Nejra Duraković, Assistant, Regional Representation of Canton Sarajevo to the European Union, Rue du commerce 491000 Bruxelles, Belgium, +387 61 515 505, [email protected] Nebojša Džebo, Head, Department of Planning, Transport and residential-utilities, Stefana Nemanje 14, 71123 Istočno Sarajevo, Bosnia and Herzegovina, +387 57 322 500, +387 57 342 731, [email protected] Semir Efendić, Mayor, Municipality of Novi Grad Sarajevo, Bulevar Meše Selimovića 97, 71000 Sarajevo, Bosnia and Herzegovina, +387 62 663 280, [email protected] Marijana Galić, Expert advisor, Federalni zavod za programiranje razvoja, Ćemaluša 9/3, 71000 Sarajevo, Bosnia and Herzegovina, +387 63 439 719, marijana.galic@ gmail.com Igor Golijanin, Head of Mayor’s Office, City of East Sarajevo, Stefana Nemanje 14, 71123 Istočno Sarajevo, Bosnia and Herzegovina, +387 57 322 500, +387 57 342 731, [email protected]

442 Local Economic and Infrastructure Development of SEE in the Context of EU Accession List of Participants of Forum of Mayors

Haris Gudić, Advisor, Municipality of Ilidža, Butmirska cesta 12, 71210 Ilidža, Sarajevo, Bosnia and Herzegovina, +387 33 775 729, +387 33 775 777, haris. [email protected] Admir Hadžiemrić, Mayor, Municipality of Travnik, Konatur bb, 72270 Travnik, Bosnia and Herzegovina, +387 62 711 166, [email protected] Zlatko Hujić, Mayor, Municipality of Bosanski Petrovac, Bosanska 110, 77250 Bosanski Petrovac, Bosnia and Herzegovina, +387 37 883 578, 037 881 012, op- [email protected] Biserka Ivanović-Šarkanović, Project manager, VNG International (Capacity Development of Municipal Associations), Josipa Vancaša 10, 71000 Sarajevo, Bosnia and Herzegovina, +387 60 356 26 77, [email protected] Tihana Jurić, Expert assistant, City of Zagreb, Trg Stjepana Radića 1, 10000 Zagreb, Republic of Croatia, +385 1 610 00 59, +385 1 610 15 96, [email protected] Belinda Kikić, Expert assistant, Academy of Sciences and Arts of Bosnia and Herzegovina, Bistrik 7, 71000 Sarajevo, Bosnia and Herzegovina, +387 33 560 722, [email protected] Ivo Komšić, Mayor, City of Sarajevo, Hamdije Kreševljakovića 3, 71000 Sarajevo, Bosnia and Herzegovina, +387 33 208 340, [email protected] Tarik Kupusović, Former mayor of City of Sarajevo, Independent expert, Komisija za prostorno uređenje, stambeno-komunalnu politiku, infrastrukturu i zaštitu oko- liša, Stjepana Tomića 1, 71000 Sarajevo, Bosnia and Herzegovina, +387 61 158 007, +387 33 207 949, [email protected] Mark McCord, Growth-Oriented Local Development (GOLD), Ljubljanska 9, 71000 Sarajevo, Bosnia and Herzegovina, +387 66 143 278, [email protected] Sabina Mujkić, Researcher, Urban Planning Institute of the Republic of Slovenia, Trnovski pristan 2, 1000 Ljubljana, Republic of Slovenia, +386 1 430 13 14, +386 1 420 13 31, [email protected] Harun Omerbašić, Advisor, City of Zagreb, Trg Stjepana Radića 1, 10000 Zagreb, Republic of Croatia, +385 1 610 10 23, [email protected] Rasim Omerović, Mayor, Municipality of Kalesija, Patriotske lige 15, 75260 Kalesija, Bosnia and Herzegovina, +387 61 898 740, +387 35 631 286, opcina@ kalesija.ba Jasmina Osmanković, Full-time professor, School of Economics and Business, University of Sarajevo, Trg oslobođenja – Alije Izetbegovića 1, 71000 Sarajevo, Bosnia and Herzegovina, +387 62 452 522, [email protected]

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 443 List of Participants of Forum of Mayors

Mirko Pejanović, Corresponding member, Academy of Sciences and Arts of Bosnia and Herzegovina, Bistrik 7, 71000 Sarajevo, Bosnia and Herzegovina, +387 62 211 222, [email protected] Antonija Petričušić, Assistant, Faculty of Law, University of Zagreb, Trg maršala Tita 3, 10000 Zagreb, Republic of Hrvatska, +385 91 887 26 38, apetricusic@ pravo.hr Aleksandar Popov, Director, Center for Regionalism, Železnička 35, 21000 Novi Sad, Republic of Serbia, +381 21 528 241, aleksandar.popov@centarzaregiona- lizam.org.rs Muhamed Ramović, Mayor, Municipality of Goražde, Maršala Tita 2, 73000 Goražde, Bosnia and Herzegovina, +387 38 221 333, +387 38 221 332, muhamed. [email protected] Mustafa Resić, Advisor, Municipality of Centar Sarajevo, Mis Irbina 1, 71000 Sarajevo, Bosnia and Herzegovina, +387 33 562 310 Almedina Šuvalija, Delloite Consulting LLP Growth-Oriented Local Development (GOLD), Ljubljanska 9, 71000 Sarajevo, Bosnia and Herzegovina, +387 61 109 165, [email protected] Nerma Tanović, Expert assistant, Academy of Sciences and Arts of Bosnia and Herzegovina, Bistrik 7, 71000 Sarajevo, Bosnia and Herzegovina, +387 33 560 718, +387 33 560 703, [email protected], internationalcooperation@ anubih.ba Boris Tihi, Accademician, Academy of Sciences and Arts of Bosnia and Herzegovina, Bistrik 7, 71000 Sarajevo, Bosnia and Herzegovina, +387 61 133 942, boris.tihi@ efsa.unsa.ba Vesna Travljanin, Director, Association of municipalities and cities of Federation of Bosnia and Herzegovina, Musala 5, 71000 Sarajevo, Bosnia and Herzegovina, +387 33 216 502, [email protected] Zlata Turkić, Senior assistant, Association of municipalities and cities of Federation of Bosnia and Herzegovina, Musala 5, 71000 Sarajevo, Bosnia and Herzegovina, +387 33 216 502, [email protected] Goran Vujović, Expert assistant, City of Sarajevo, Hamdije Kreševljakovića 3, 71000 Sarajevo, Bosnia and Herzegovina, +387 33 443 090, [email protected] Ana Vukčević, City manager, City of Podgorica, Njegoševa 13, 81000 Podgorica, Montenegro, +382 67 313 496, +382 20 665 770, [email protected]

444 Local Economic and Infrastructure Development of SEE in the Context of EU Accession PROGRAMME

OPENING SPEECHES

Chairpersons: Academician Boris Tihi; Corresponding member of ANUBiH Mirko Pejanović, PhD; Stefano Bianchini, PhD

1. Academician Boris Tihi, Secretary of Department of Social Sciences of ANUBIH: OPENING SPEECH 2. Academician Božidar Matić, President of ANUBIH: WELCOMING SPEECH ANUBIH 3. Damir Mašić, Premier of the Federation of Bosnia and Herzegovina: LOCAL ECONOMIC DEVELOPMENT IN FEDERATION OF BOSNIA AND HERZEGOVINA 4. Ivo Komšić, PhD, Mayor of City of Sarajevo: CITY OF SARAJEVO IN INTERNATIONAL COOPERATION WITH FOCUS ON LOCAL ECONOMIC DEVELOPMENT AND FORUM OF MAYOR 5. Stefano Bianchini, PhD: UNIVERSITY OF BOLOGNA 6. Ole Hammer: DELEGATION OF EU IN BIH AND LOCAL ECONOMIC DEVELOPMENT 7. Željko Šain, PhD, Dean of School of Economics and Business Sarajevo: SCHOOL OF ECONOMICS AND BUSINESS SARAJEVO, UNIVERSITY OF SARAJEVO 8. Šaćir Filandra, PhD, Dean of Faculty of Political Sciences Sarajevo: FACULTY OF POLITICAL SCIENCES, UNIVERSITY OF SARAJEVO 9. Vesna Travljanin, Director of Association of municipalities and cities of the Federation of Bosnia and Herzegovina: ASSOCIATION OF MUNICIPALITIES AND CITIES OF THE FEDERATION OF BOSNIA AND HERZEGOVINA KEYNOTE SPEAKERS

Chairpersons: Vladimir Čavrak, PhD; Corresponding member of ANUBIH, Mirko Pejanović, PhD; prof. Jasmina Osmanković, PhD

1. Mirko Pejanović, PhD, corresponding member of ANUBIH: CONSTITUTIONAL AND LEGAL ROLE OF LOCAL AUTHORITIES IN ECONOMIC AND INFRASTRUCTURAL DEVELOPMENT OF MUNICIPALITIES AND CITIES IN BOSNIA AND HERZEGOVINA

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 445 Programme

2. Vladimir Čavrak, PhD, Faculty of Economics and Business, University of Zagreb: LOCAL ECONOMIC DEVELOPMENT AS PART OF HETERODOXY DEVELOPMENT POLICY 3. Elena Tagliani: FINANCING DEVELOPMENT AND EXPERIENCES EMILIA ROMAGNA 4. Kasim Trnka, PhD: TERRITORIAL AND CONSTITUTIONAL REDEFINITION OF FEDERATION OF BOSNIA AND HERZEGOVINA 5. Anto Domazet, PhD: STRATEGY PLANNING OF LOCAL ECONOMIC DEVELOPMENT IN BOSNIA AND HERZEGOVINA

LEGAL AND POLITICAL ASPECTS OF LOCAL ECONOMIC AND INFRASTRUCTURAL DEVELOPMENT

Chairpersons: Academician Miloš Trifković; prof. Veljko Trivun, PhD; prof. Jasmina Osmanković, PhD

1. Josip Kregar, PhD, Antonija Petričušić, PhD: CIVIL SOCIETY: AN INEVITABLE PARTNER IN THE DEVELOPMENT OF LOCAL COMMUNITIES IN YOUNG DEMOCRACIES 2. Veljko Trivun, PhD: CONSTITUTIONAL AND LEGAL POSITION OF MUNICIPAL AND CITY GOVERNMENTS IN STRATEGIC PLANNING AND PROMOTING LOCAL ECONOMIC AND INFRASTRUCTURE DEVELOPMENT 3. Borche Davtkovski, PhD, Elena Davitkovska, PhD, Vesna Goceva, MA: INSTITUTIONAL FORMS AND SHAPES IN THE IMPLEMENTATION OF REGIONAL DEVELOPMENT IN THE REPUBLIC OF MACEDONIA 4. Elmir Sadiković, PhD, Željko Josić, MSc: ROLE OF MUNICIPAL PREFECTS AND MAJORS IN THE LOCAL ECONOMIC AND INFRASTRUCTURAL DEVELOPMENT 5. Saša Leskovac, PhD: LOCAL ECONOMIC DEVELOPMENT AND MODERNIZATION OF LOCAL GOVERNANCE IN BOSNIA AND HERZEGOVINA

446 Local Economic and Infrastructure Development of SEE in the Context of EU Accession Programme

ECONOMIC AND INFRASTRUCTURAL ASPECT OF LOCAL DEVELOPMENT

Chairpersons: prof. Vladimir Čavrak, PhD; prof. Jasmina Osmanković, PhD; ass. prof. Ensar Šehić, PhD

1. Sofija Adžić, PhD: FRAMEWORK FOR SUSTAINABLE LOCAL DEVELOPMENT STRATEGY: A CASE STUDY OF SERBIA 2. Ensar Šehić, PhD, Marijana Galić, Jasmina Osmanković, PhD: ECONOMIC AND FUNCTIONAL EFFICIENCY OF TERRITORIAL ORGANIZATION OF BOSNIA AND HERZEGOVINA 3. Muamer Halilbašić, PhD, Emir Agić, PhD: CONVERGENCE OF LOCAL GOVERNMENT UNITS IN BOSNIA AND HERZEGOVINA 4. Marijana Galić, Ensar Šehić, PhD: COMPETITIVENESS UNITS OF LOCAL GOVERNMENT 5. Jasmina Osmanković, PhD, Ensar Šehić, PhD, Marijana Galić: LOCAL COMMUNITIES AND REFORM OF TERRITORIAL ORGANIZATION: CASE OF BOSNIA AND HERZEGOVINA 6. Rahman Nurković, PhD: INFLUENCE OF TERTIARY ACTIVITIES ON LOCAL AND RURAL DEVELOPMENT IN BOSNIA AND HERZEGOVINA 7. Šemsudin Džeko, PhD: LINKING OF THE URBAN AND RURAL TOURISTIC DIMENSION FOR THE PURPOSE OF INCREASE IN ECONOMIC EFFECT OF TOURISM 8. Emir Kurtović, PhD, Senad Softić, PhD, Maida Fetahagić, MSc, Gordana Memišević: STRATEGIC PLANNING AT CANTONAL LEVEL – STEP CLOSER TO EU: CANTON SARAJEVO EXAMPLE 9. Tarik Kupusović, PhD, Arijana Huseinović, Candidate for MA: OPPORTUNITIES AND RESPONSIBILITIES OF LOCAL SELF- GOVERNMENT IN ENVIRONMENTAL ASPECTS OF THE EU INTEGRATION PROCESS FOR BIH 10. Alisa Mujkić, PhD candidate, Jasmin Jusić, PhD candidate, Damir Šaljić, PhD candidate: EUROPEAN UNION REGIONAL POLICY: LESSONS FOR BOSNIA AND HERZEGOVINA

Local Economic and Infrastructure Development of SEE in the Context of EU Accession 447 Programme

FINANCING LOCAL ECONOMIC AND INFRASTRUCTURAL DEVELOPMENT

Chairpersons: Elena Tagliani; Maja Bučar, PhD

1. Elena Tagliani: PPP TOOLS AS AN INNOVATION ELEMENT FOR THE QUALIFICATION OF THE PUBLIC PROCUREMENT SECTOR IN THE EU POLICY FRAMEWORK FROM A REGIONAL POINT OF VIEW. EMILIA-ROMAGNA POLICY AND A CASE STUDY, WITH AN ASSESSMENT ON PPPS IMPACTS AND ADDED VALUE AT A REGIONAL SCALE 2. Gordana Đurović, PhD: POTENTIALS OF THE EU PRE-ACCESSION ASSISTANCE IN FINANCING OF LOCAL ECONOMIC AND INFRASTRUCTURE DEVELOPMENT: EXPERIENCES OF MONTENEGRO IN MFF 2007–2013 3. Maja Bučar, PhD: THE ROLE OF R&D AND INNOVATION IN LOCAL ECONOMIC DEVELOPMENT 4. Izudin Kešetović, PhD, Željko Rička, PhD: FISCAL FEDERALISM AND BORROWING OPPORTUNITIES OF LOCAL COMMUNITIES 5. Andrijana Jovanović: THE ROLE AND IMPORTANCE OF THE PUBLIC-PRIVATE PARTNERSHIP IN THE REPUBLIC OF SERBIA IN FINANCING LOCAL ECONOMIC DEVELOPMENT

CONCLUSSION Prof. Maja Bučar, PhD; Mirko Pejanović, PhD, corresponding member of ANUBIH; prof. Jasmina Osmanković, PhD

448 Local Economic and Infrastructure Development of SEE in the Context of EU Accession Proceedings. International Scientific ConferenceLocal Economic and Infrastructure Development of See in the Context of EU Accession. Sarajevo, September 20-21, 2013

Publisher Academy of Sciences and Arts of Bosnia and Herzegovina

Editors Jasmina Osmanković Mirko Pejanović

Language Editor Adnan Arnautlija

DTP TDP d.o.o.

Printed by Dobra knjiga, d.o.o.

Circulation 300

Sarajevo, 2013

C.E.E.O.L. (Central and Eastern European Online Library) EBSCO Publishing CIP – Katalogizacija u publikaciji Nacionalna i univerzitetska biblioteka Bosne i Hercegovine, Sarajevo

338.1(497.6)(063)(082)

INTERNATIONAL scientific conference Local economic and infrastructure development of SEE in the context of EU accession (2013 ; Sarajevo) Local economic and infrastructure development of SEE in the context of EU accession : proceedings / International scientific conference Local economic and infrastructure development of SEE in the context of EU accession, Sarajevo, September 20-21, 2013 ; editors Jasmina Osmanković, Mirko Pejanović ; editorial board Boris Tihi ... [et al.]. – Sarajevo : Akademija nauka i umjetnosti Bosne i Hercegovine = Academy of Sciences and Arts of Bosnia and Herzegovina, 2013. – 449 str. : graf. prikazi ; 24 cm. - (Special Editions / Academy of Sciences and Arts of Bosnia and Herzegovina ; Vol. 153. Department of Social Sciences ; Vol. 3)

Na spor. nasl. str.: Internacionalna naučna konferencija Lokalni ekonomski i infrastrukturni razvoj SEE u procesu pridruživanja EU. - Bibliografija i bilješke uz tekst

ISBN 978-9958-501-92-0

COBISS.BH-ID 20805894