EMERGING ECONOMY IN EUROPE Macedonian Model for Improving the Business Environment

Zoran Stavreski, MA Vice Prime Minister and Minister of Finance

Viktor Mizo CEO, Free Zones Authority

February, 2014 Republic of : Euro-Atlantic integration

Political Stability - European Union candidate country

. Candidate country since 2005

. European Commission Progress Reports consecutively (from 2009, 2010, 2011, 2012 and 2013) give recommendation to start EU accession negotiations

. Expecting date for starting negotiations for EU membership Key Macroeconomic Indicators

REAL GDP GROWTH RATE (%) INFLATION

6.1 5.0 5.0 3.8 Low and stable over last 10 years 2.9 2.8 3.3 3.2 Average inflation: 2% annually -0.9 -0.4

2006 2007 2008 2009 2010 2011 2012 2013* 2014* 2015*

EXPORT GROWTH RATE (%)

CURRENCY 29.2 30.9 26.9 16.5 8.9 2.7 10.4 11.4 Fixed exchange rate pegged to the Euro -3.2 -28.2

2006 2007 2008 2009 2010 2011 2012 2013* 2014* 2015* CREDIT RATINGS FDI (% of GDP) - Standard & Poor’s: BB-, Stable Outlook 8.5 6.6 - Fitch: BB+, Stable Outlook 6.0 4.7 4.5 3.4 4.1 2.2 2.3 1.0 2006 2007 2008 2009 2010 2011 2012 2013* 2014* 2015* Source: SSO and MoF; *Projection Financial System

. Sound and stable financial system . No spillover of the world financial crisis on Macedonia . 16 banks with capital adequacy ratio of 17.3% . Macedonian banks are highly liquid with credit to deposit ratio bellow 1 (0.90) . 75.2% share of foreign in total bank capital . Some of the banks operating in Macedonia are: . French Societe Generale Bank . German ProCredit Bank . Austrian Sparkasse Bank . Dutch-Turkish Halk Bank

Sustainable Public Finances

Moderate size of Government and fiscal policy that supports economic growth

As % of Total Budget Total Revenues GDP Expenditures balance . Total revenues 2007 32.8 32.2 0.6 30.0% of GDP 2008 33.1 34.1 -0.9 2009 31.3 33.9 -2.7 . Total expenditures 2010 30.4 32.9 -2.4 33.4% of GDP 2011 29.8 32.3 -2.5 2012 30.1 34.0 -3.9 2013 28.4 32.3 -3.9 2014* 29.9 33.4 -3.5 Prudent fiscal policies

Central Government Debt (% of GDP) . Budget balance -3.5% of GDP 34.1 34.3 28.0 . General Government Debt 24.0 23.8 24.2 20.6 34.3% of GDP

2007 2008 2009 2010 2011 2012 2013 Invest Macedonia - Agency for ForeignSource: Investments MoF; *Projection

Lowest taxes in Europe

Reduction of social contributions Lowest Flat Tax on Profit 10% Total rate of 26.5% in 2013 Lowest Flat Tax on Income 10% Pension and disability insurance 18% Tax on Undistributed Profit 0% Health insurance 7.3% Unemployment insurance 1.2%

Corporate Tax is only paid when Social contributions have been dividends and profits are distributed, reduced from 32% to 26.5% effectively making the CT rate 0%

Additional incentives in the 42+ Double taxation avoidance Free Economic Zones treaties signed

6 Continuous implementation of Regulatory and Administrative Reforms

Regulatory reforms . One-Stop-Shop: 4 hours company registration without minimum start-up capital . Regulatory Guillotine (“silence is consent”, reduced admin.fees & time limits) . Electronic One-Stop-Shop for customs permits and licenses . Improving interoperability (exchange of information) between government institutions, which reduces red tape and regulatory burden on companies Cadastre reforms . New Cadastre Law . Digital Cadastre covering 99% of the real estate in Macedonia . Notaries and land surveyors have access to land register through on-line system to obtain extracts of real estate and check for burdens and mortgages Innovation . New Law on Innovation and establishment of Fund for Innovations and Technology Development, that will provide grants&credit to match private investments in new technologies, finance new start-ups and spin-offs . Strategy for Innovation 2013 - 2020 covering a range of financial incentives, as well as educational, regulatory, infrastructural and other measures to build integrated national innovation system 7

Reforms to Develop of Real Estate Market

Liberalization of real estate market . Foreign nationals can purchase residential and commercial real estate and construction land . Simple procedures for obtaining construction permits using Electronic One- Stop-Shop for obtaining licenses and permits (gradezna-dozvola.mk) . Purchase of State owned land for construction of commercial /industrial and residential buildings at concessionary rates:  For industry, logistics, hotels and residential buildings – bidding starts as low as 1 EUR/m2  For commercial and business premises – starting bidding price 5 – 100 EUR/m2 depending on the location of the parcels  E-Auctions are available from any location/country on the web site gradezno-zemjiste.mk (with information on all current parcels on sale) Benefits for foreign nationals . Foreign nationals that invest 400,000 EUR have the opportunity to obtain Macedonian citizenship . Foreign nationals that purchase real estate in amount of over 40,000 EUR can obtain residence permit in Macedonia

7 years continuously among the Best Reformers

3rd BEST REFORMER 25rd IN THE WORLD ON THE IN THE WORLD OVERALL INDICATOR World Bank’s “EASE OF DOING BUINESS” Doing Business 2010 & 2012 Reports Doing Business 2014 Report

- 3rd IN THE WORLD IN GETTING CREDIT INDICATOR - 7th IN THE WORLD IN THE EASE OF STARTING A BUSINESS - 16th IN THE WORLD IN PROTECTING INVESTORS 4 TIMES AMONG THE TOP 10 Doing Business 2014 Report REFORMERS IN THE LAST 7 DB REPORTS Doing Business 2008/10/12/14 Reports

1st IN THE WORLD WITH LOWEST TOTAL TAX RATE (8.2%) PWC and World Bank Group 2014 Study

36th BEST COUNTRY FOR BUSINESS IN THE WORLD Forbes Magazine Significant improvement on the world leading indicators measuring business climate and competitiveness

Rank of Macedonia on the Ease of Doing Business Indicator, Macedonia improved: World Bank "Doing Business" Reports 2006-2014 69 places – “Ease of Doing Business 22 23 25 Indicator”, DB Report 32 34 Macedonia is the 5th country among the 50 economies that have most reformed since 69 2005, DB Report 2014 75 Four times Macedonia is among the top 10 94 92 reformers in the world

2006 2007 2008 2009 2010 2011 2012 2013 2014 Macedonia is among the 4 case studies in DB 2012 Report (with S.Korea, UK and Mexico)

Rank of Macedonia among the Best Rank of Macedonia on the Global Heritage Foundation: Index of economic Countries for Business, Forbes Magazine Competitiveness Index, World Economic freedom (rank) Forum Report 43 36 73

82 94 78

2007 2013 2007 2013 2006 2014

46 places –“Best Countries for 21 places–“Global 35 places–“Index of economic Business”, Competitiveness Index”, freedom”, Forbes Magazine WEF Report Heritage Foundation

Free Trade Agreements

Free Trade Agreements provide access to markets in 41 country with 650 million consumers

. EU – European Union (28 countries) . EFTA – European Free Trade Association (4 countries)

. CEFTA – Central European Free Trade Agreement (7 countries) . Bilateral Free trade agreements with: Turkey and Ukraine

Why Macedonia?

Investor - Competitive Excellent Competitive Investment friendly Location Infrastructure Workforce Incentives Government

Higher Profits & Increased Competitiveness Excellent Infrastructure and Competitive Transportation Costs

• Two Pan-European corridors: – East-West Corridor 8 – North-South Corridor 10 • Road network: 9,205 km • Railway network: 900 km Large pool of logistic companies • Two international airports: provide competitive transportation – costs and delivery times 2BELARUS Brand New Int’l Airports – All of Europe in RUSSIA - Int’l Airport Alexander the Great - • International ports*: 2-3 days Via Skopje (Capacity 4 million UNITED KINGDOM GERMANY Highway passengers,UKRAINE 23 check-in desks, 6 – Thessaloniki (): 250 kmLUXEMBOURG ConnectionsCZECH REPUBLIC passengers boarding gates, Cargo – Durres (Albania): 300 km hangar with 40,000 tons) SLOVAKIA

* Distance from capital Skopje AUSTRIA MOLDOVA HUNGARY FRANCE SWITZERLAND ROMANIA

BOSNIA AND HERZ.

ITALY MONTENEGRO BULGARIA KOSOVO 2.5 hours to Port MACEDONIA of Thessaloniki TURKEY ALBANIA SPAIN 35 days or less inbound GREECE container ships from China Investment Opportunities Motorways

Sections for concessions Sections under construction A. Skopje - Blace (24 km) A. Demir Kapija - Smokvica (28.2 km) B. Gostivar - Kicevo (42 km) B. Skopje - Stip (53.5 km) C. Kicevo – Ohrid (65 km)

A

B B

C A

Other Motorways Reconstruction and modernization of existing and building of new regional motorways and local roads with support of EBRD and the World Bank Investment Opportunities Railway Transportation

Corridor 8 – Eastern Section: Railway connection between Macedonia and Bulgaria

• Reconstruction of the railroad section Kumanovo-Beljakovce with length of 30 km • Construction of the railroad section Beljkakovce-Kriva Palanka toward Bulgarian border with length of 60 km • Total construction cost estimated at €420M • EBRD participates in the project realization

Modernization • Modernization of the railway on Corridor X financed by EBRD (54 km) • Renewal of the passenger transport fleet and procurement of 150 train cars of various types for freight transport • Rehabilitation and upgrade of the railway station in Skopje Investment Opportunities Energy Sector

• Construction of national gas transport system (value ≈ €350M) • Opening of lignite mines for electricity production (value ≈ €200M) • PPP with the National Power Producer ELEM for the construction of a combined cycle heat and power plant (value ≈ €250M) • An ongoing tender – under the auspices of the IFC advisory services for two large HPP “Cebren and Galiste” (value ≈ €600M) • Rehabilitation of the existing hydropower plants (value ≈ €100M) • HPP “Boskov Most” and “Lukovo Pole” (value ≈ €170M) • Privatization of the minority share (up to 49%) of the state owned electricity generation company ELEM (book value ≈ €1.2B) • Construction of three new 400 kV overhead lines (value ≈ €60M) • New SCADA, (re)construction of more than 200 km of numerous 110 kV overhead lines (value ≈ €45M) • Potential for numerous small HPP’s (up to 10 MW) • Bogdanci wind park, 16 wind turbines with total capacity of 36.8 MW and annual energy production of 100 GW (value ≈ €55M) Education

Investments in Education • Education Budget ~5-6% of GDP • Mandatory secondary education • Entrepreneurship and 2 foreign languages as subjects in primary schools • New universities with campuses in many cities in Macedonia • €60M invested in over 50 new R&D laboratories

Primary Secondary • Textbooks from top 100 world Foreign School School Languages universities Students Students • Scholarships English 91% 94% • 99% enrolment rate from secondary to French 22% 32% tertiary education German 13% 21% • 71,114 total number of students in Italian / 2% Public and Private Universities Russian 1% 2% Turkish / 1%

• 6,617 number of IT students Total No. of primary and secondary schools students 310,000 Source: State Statistical Office, Macedonia (Education 2008/2009) Major recent investors in Greenfield sites

Plant 1, TIDZ Skopje 1: €80M; 350+ employees; Exhaust catalyst manufacturer supplying all OEM plants in Europe; €20M; 500 employees; Phase 1: $12M;160 empl’s; €10M; 150 employees; The biggest exporter from Macedonia Production of buses & coaches for Pharmaceutical plant; Production of armored high- Plant 2, TIDZ Skopje 1: €65M; 300 employees; the USA and EU markets; The largest pharmaceutical pressure rubber hoses for the Set to double production Major bus manufacturer in Europe company in Russia automotive industry

Plant 1, TIDZ Skopje 1: $40M; up €25M; 500 employees; to 500 employees; Production of Production of capacitors equipped PCBs for Mercedes, VW, (consolidation of European BMW, Renault, Ford, Skoda, PSA footprint)

€35M; 500+ employees; 15,000 m² €6M; 1,500 employees; plant; Production of PCBs, metal & Production of interconnect plastic housings and final assembly systems for safety devices and (Mercedes, BMW and Audi) expanding onboard electronics

€10M; 150 employees; Wire harness automotive supplier; Plant 2, TIDZ Stip: Production of standard and special $20M; 1,400 employees; Cut & automotive cables and wires trim plant for car seats

€20M; 3,500 employees; €25M; 4,500 employees; Wire harness automotive supplier; Plant for production of wiring Production of cable installations in harness and electrical Macedonia management systems Competitiveness for Investments in Macedonia

Price Level Index for Investments

100 67 70 53 59 61 62

Macedonia Bosnia and Serbia Albania Croatia Montenegro EU28 average Herzegovina Price Level Index for Construction

100

52 55 37 40 42 46

Macedonia Bosnia and Serbia Albania Croatia Montenegro EU28 average Herzegovina

Source: Eurostat, January 2014 TECHNOLOGICAL INDUSTRIAL DEVELOPMENT ZONES (TIDZ’s) – FREE ZONES Global Free Zones of the Future 2012/2013 Winners fDi Magazine fDi Magazine’s Global Ranking of Economic Zones reported Technological Industrial Development Zones Skopje 1 & 2 in the top 50 Free Zones of the Future 2012/2013 Investment Opportunities Technological Industrial Development Zones - TIDZs

Fiscal Benefits

TAX RATES CUSTOMS DUTY TAX PRODUCT TIDZs Outside TIDZs TIDZs Outside TIDZs 0% Corporate tax 10% Raw materials 0% Up to 15% for the first 10 years 0% Personal income tax 10% Equipment 0% 5% - 20% for the first 10 years

Value added tax 0% 18% No customs duties & No VAT on Property tax 0% 0.1% - 0.2% imported raw materials, equipment Excise taxes 0% 5% - 62% & construction materials

• Connection to utilities, complete infrastructure is available • Subsidy of up to €500,000 towards construction costs • Green Customs Channel available at border for rapid export from Zone to EU countries • Land in the TIDZ is available under long-term lease for a period of up to 99 years • Training and job creation grants • All incentives are in line with EU regulations The Free Zone Authority at Your Service…

University linkages Identification of project Reference company linkages specific location factors Business Recruitment agencies Cost analysis Creating opportunities linkages linkages Identification of supplier analysis Organization of meetings base with legal advisors and Detailed due diligence financial partners

Locations, operational costs Labor availability, HR and competitiveness Our companies and consulting

One-stop-shop and project management approach Services Ensure success! Design and infrastructure approvals Support with relevant tax and customs issues Issuing building and operational permits Assistance in acquiring One-stop-shop Aftercare visas/work permits Customs outpost in the Zone Coordination and support in contacts with other Zone infrastructure state and local authorities maintenance and upgrade Johnson Matthey - Case Study

Overview of Johnson Matthey Plc

• A speciality chemicals company, world leader in advanced materials technology • Origins date back to 1817, floated 1942, FTSE 100 company since June 2002 • Operations in over 30 countries with around 11,000 employees • Leading global market positions in all its major businesses

Johnson Matthey ECT Macedonia

Construction Phase from Greenfield Site to Operational Factory -15 Months Johnson Matthey - Case Study

PHASE 1 CONSIDERED COUNTRIES • Fully integrated • Reviewed: Bulgaria, Croatia, manufacturing site Estonia, Latvia, Lithuania, for automotive Slovenia, Romania, Ukraine, catalyst production Czech, Poland, Hungary, Slovakia • €80M investment • Initial choice: Czech Republic • 350+ employees Macedonia a “Late entrant”

WHY MACEDONIA • Macedonia scores best for labour, slightly lower on logistics • Labour availability looking very good for Skopje • Our experience has been positive, Invest Macedonia, Ministry and others superb • This will be JM’s ‘mega-European plant’ and the largest ever single investment project

Colin Jaffray, Director, Strategic Planning, Johnson Matthey Plc Johnson Matthey - Case Study

“Present in Macedonia since 2010, PHASE 2 producing six million world-class catalysts, being the country's number one • Set to double the exporter. The expansion comes as a production response to the rapidly increasing demand • €65M investment for more sophisticated and complex catalysts and the effort undertaken by • 300 additional the Macedonian Government to welcome employees and fully support our initial investment”

Larry Pentz, Executive Director on Environmental Technologies, Johnson Matthey Plc

LOCAL FACTS AND EXPERIENCE • Government and the departments very helpful during the investment phase and after care • Regulatory framework and business policies being actively developed • Infrastructure on TIDZ now in good state, focus on future improvements • Recruitment of local workforce successful, quick to learn and hard working - positive feed back from customers Connections, Culture and Lifestyle

Brand New Int’l Airports in capital Skopje and Ohrid - €120M+ investment from TAV

Macedonia is a country of nature, the cradle of culture, place of great hospitality that offers a mix of traditional and modern life

5 International Schools with Summer and winter sports large mix of ex-pats - 4 national parks - Lakes, several ski-centers International cultural events: - Ohrid Summer Festival Largest wine producer in the region - Struga Poetry Evenings - 78 wineries in Macedonia - Skopje Jazz Festival - “Wine Road” travel programs - May Opera Evenings Opportunities in Tourism

Government measures, policies and specific projects

• Reducing VAT on tourism from 18% to 5% • Promotion of sites for construction of hotels & tourist facilities and Tourism Development Zones • International branding - Macedonia Timeless Campaign • Tour Operator and airline subsidies (10-25 € per tourist) • Increase in overnight stays of tourists from EU of 38% in 2011 and 25% in 2012

What they say?

Best in Travel 2014: Top 10 countries not to be missed Macedonia was ranked among the 10 countries destined for an epic year, whether they’re hosting festivals, cutting the ribbon on new attractions or simply raising their game for travelers

World Economic Forum - Travel & Tourism Competitiveness Report 2013 "Attitude of population toward foreign visitors" MACEDONIA – 4th most friendly country in the world Tourism Development Zones

Tourism development zones near the three tectonic lakes

Tourism development zones in the mountain regions of Shar Planina, Kozuf and Galicica • State-owned land • Opportunities for hotels and leisure developments, sport and recreational centers, amusement and aqua parks etc.

Ohrid Popova Dojran Galicica Kozuf Lake Shapka Lake Tourism development zones: (Ski Center) (Ski Center) (1 Zone) (1 Zone) (2 Zones) SUMMARY: WHY TO INVEST IN MACEDONIA?

 EU & NATO Candidate Status  Macroeconomic and financial stability  Prudent fiscal policies that support economic growth  Attractive tax package and Incentives in FEZs  Young, available and competitive work force (41% of population under 30, excellent language skills)  Consistent and predictable policies  Track record for successful implementation of economic, regulatory and administrative reforms  Among top reformers according to WB Doing Business  Free trade to 650 million market  Solid Infrastructure (Trans European Corridors 8 & 10)  Business friendly government 30 Thank you for your attention

31