ESI newsletter 3/2015, 19-03-2015 - Bosnia as Wunderkind - Corruption from Kosovo to Germany (Doing business and a Bosnian fairy tale; Letter to Presidency; A powerful tool to measure corruption ...)

Bosnia as Wunderkind – Corruption from Kosovo to Germany

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  Bosnia as Wunderkind – Corruption from Kosovo to Germany Ugly ducklings, fairy tales and Bosnia in 2015 Doing business and a Bosnian fairy tale Letter to the Presidency A powerful tool to measure corruption Corruption in Europe: perception and reality Perception – where Kosovo beats Germany A plea: do not let this anti-corruption effort die Dear friends, A few months ago we wrote about the annual World Bank Doing Business report: Pumpkins, outliers and the Doing Business illusion. We analysed two striking stories: how Georgia overtook Germany in 2007 and remained ahead of Germany year after year in the World Bank's Doing Business rankings. And how Macedonia managed to beat Switzerland in the same rankings. We concluded that: "Unexpected success stories reinforce the World Bank's message that if any country follows concrete prescriptions it will achieve amazing results. It is the promise of fairy tales: the ugly duckling turns into a beautiful white swan, giving hope to all ugly ducklings in this world." This week we need to go one step further: it is time for Bosnia to become a white swan. A little magic needed Doing business and a Bosnian fairy tale For all its flaws, Doing Business is not going away. In fact, this ranking has just become even more important for Bosnia and Herzegovina. In its conclusions this week the European Council of the EU wrote: "Meaningful progress on the implementation of the agenda for reforms, including the 'Compact for Growth and Jobs', will be necessary for a membership application to be considered by the European Union." The Compact for Growth and Jobs has six conditions, and one of these six is about Doing Business:  "Bosnia and Herzegovina needs to boost competitiveness by approving a results-based plan aimed at improving the conditions measured by Doing Business indicators to match the regional average." Thus, progress on Doing Business has become a new condition for an EU membership application to even be considered. One might ask whether this makes any sense. Or one might turn to transforming Bosnia into a new Macedonia-like-doing-business-success-story instead. Letter to the Presidency Talking about a Compact … In a letter to the Bosnian presidency this week we write: "Today, according to the World Bank, Bosnia is the worst place in Europe for business. This is not a good reputation to have. The most recent World Bank Ease of Doing Business report ranked 189 countries. Singapore came first, Eritrea came last and Bosnia came in 107 position. This implies that it is more difficult to do business in Bosnia than in Kosovo (75), Azerbaijan (80) or in Ukraine (96), which is at war. In this letter we would like to suggest how to change this situation within a very short period of time and without a huge effort. We carefully studied the astonishing rise in the Doing Business rankings by Georgia and Macedonia. Here we outline how within one year Bosnia can reach a better rank than the Balkan average; and it will help you understand how within another year Bosnia could overtake the EU." Attached to our letter is a detailed outline of fourteen concrete steps: Bosnia as Wunderkind of Doing Business Outline 14 of steps to take These steps are easy to take. They might, unfortunately, not lead to many new jobs: "We can advise you on how to improve Bosnia's ranking within one year. We do not promise that this will actually lead to more jobs or investment. And yet, it is time for some surprising good news from Bosnia." Thus, without spending any more money on consultants Bosnia can become the next white swan … following in the footsteps of Georgia and Macedonia. It is about time. A powerful tool to measure corruption Presenting a new instrument in 2014 Every year in its annual progress reports the European Commission discusses corruption in all seven accession countries. It notes that even the best laws, the shiniest anti-corruption agencies and the longest anti-corruption action plans are only means to an end. The end of anti-corruption policies should be impact and measurable results. But can the incidence of corruption in different walks of social life be fairly established? Can the impact of anti-corruption reforms be measured? In a new discussion paper we argue that the European Commission has a very powerful tool at its disposal which has not yet been used with the accession countries: Measuring corruption The case for deep analysis and a simple proposal Between 2011 and 2014 the European Commission invested serious resources to develop a sound methodology to measure corruption inside the EU. In 2011, the European Commission noted that "existing international monitoring and evaluation mechanisms" were limited. It added: "EU Member States have in place most of the necessary legal instruments and institutions to prevent and fight corruption. However … anti-corruption rules are not always vigorously enforced, systemic problems are not tackled effectively enough and the relevant institutions do not always have sufficient capacity to enforce the rules. Declared intentions are still too distant from concrete results." In February 2014, it published Special Eurobarometer 397 – Corruption covering all 28 EU member states. At the same time it released a survey on corruption geared towards the EU's business world, Flash Eurobarometer 374 – Business' attitudes towards corruption in the EU. These surveys became the key input into the 2014 EU Anti-Corruption Report, based on polling 1,000 individuals and 300 companies in each EU country. Going forward, the European Commission proposed a regular anti-corruption report to provide objective assessments every two years. This was meant to be a regular publication. In fact, it may cease to exist under the new Commission. Corruption in Europe: perception and reality How widespread is corruption? How are anti-corruption campaigns perceived? Here are some of the findings from the EU report for six countries: How widespread is corruption? (percent) Country Widespread Rare Denmark 20 75 Germany 59 33 Poland 82 13 Romania 93 3 Italy 97 2 Greece 99 1 Note: In ten EU member states more than 90 percent of respondents considered corruption to be widespread! How about the actual experiences of individuals and businesses? Has anyone asked or expected a bribe from you in past 12 months? (Individuals) Country "Victim" of corruption Romania 25 Poland 15 Greece 7 Italy 1 Germany 1 Denmark 1 A more nuanced picture emerges. Perception and experience are consistent with each other in Denmark – people there have not experienced corruption and do not believe it is widespread. They also match in Romania, Poland and Greece, where many people believe corruption is widespread and many have experienced it in the past twelve months. But in the case of both Italy and Germany there is a gap. In both countries clear majorities believe that corruption is widespread. And yet few people in either country have experienced corruption themselves. However, more detail is needed if one wants to also understand where people have been victims of corruption in the past twelve months. Look at these findings: Victim of corruption (percent) in the past 12 months in…  (percent) Country Healthcare Police/customs Romania 22 2 Poland 8 2 Greece 6 0 Italy 1 0 Germany 0 0 Denmark 0 0 Such findings have obvious policy and reform implications. So do the findings of the business survey: Is corruption a problem for your business? (percent) Country No Yes Denmark 94 4 Germany 76 22 Poland 67 32 Italy 51 49 Romania 34 65 Greece 34 66 Corruption is a very serious problem for businesses in Romania and Greece. But there is also a wide gap between Denmark and Germany, where 22 percent of businesses say corruption is a problem. In what areas do businesses encounter corruption? Businesses have different problems in different countries. In Greece more than 3 percent of businesses have problems with building permits and vehicle permits and environmental permits; the same is true in Poland and the Czech Republic. Such surveys help by providing a focus for national debates on corruption. They make comparisons fair. They are an essential complement to existing analysis. Perception – where Kosovo beats Germany The most widely cited corruption ranking – the annual Transparency International Corruption Perceptions Index (CPI) – has done what its title promises since 1994, which is to measure perceptions. To see why perception is a useful, but never sufficient, indicator, consider the results of the most recent Transparency International Global Corruption Barometer and the national results presented on the Transparency International country pages, and see how people in three countries – Turkey, Kosovo, Germany – feel about corruption in key institutions. "Percentage who felt these institutions were corrupt/extremely corrupt 2013 (percent) Institution Turkey Kosovo Germany Political Parties 66 75 65 Parliament/legislature 55 66 48 Military 30 8 25 NGOs 34 20 31 Media 56 34 54 Religious bodies 41 17 34 Business 50 52 61 Education systems 42 47 19 Judiciary 43 80 20 Medical and health services 43 70 48 Police 38 39 20 Public officials and civil servants 42 44 49 There are many surprises here. Political parties are perceived as similarly corrupt in both Turkey and Germany. The German military is perceived as significantly more corrupt than the Kosovo Security Forces. The same is true for German NGOs and religious bodies compared to those in Kosovo. Finally, when it comes to the perception of corruption among public officials, both Turkey and Kosovo rank better than Germany. Perceptions can highlight a problem. But they are dangerous and misleading when they are not qualified by other sources of information. Certainly, perceptions are not a good basis for plans of action. What is needed is deeper analysis of what exactly is wrong and a credible tool to track performance. The 2014 EU Anti-Corruption Report has provided this for the EU member states. This is also needed in the accession countries today. A plea: do not let this anti-corruption effort die The EU Anti-Corruption Report, meant to be a regular biennial publication, may cease to exist under the new Commission. We hope this decision will be reconsidered and there will be another report soon, then including all seven accession countries. The Commission's investment in developing a sound methodology has been made: these are sunk costs. It would be a terrible waste, and a lost opportunity, not to put this to use going forward. What is needed in discussions of corruption in the Balkans and Turkey is depth, not shallowness, and statements based on serious analysis, not preconceptions. The European Commission has the tool to ensure this. It only has to use it. If corruption is serious business, its assessment should be as well. Yours sincerely, Gerald Knaus Further reading ESI letter to the Bosnian presidency - 14 stops to Bosnian business miracle – NEW ESI discussion paper - Measuring corruption - the case for deep analysis – NEW EU Anti-Corruption Report (2014) Special Eurobarometer 397 – Corruption (2014) Flash Eurobarometer 374 – Business' attitudes towards corruption in the EU (2014) Transparency International 2013 Global Corruption Barometer country sections: Germany, Greece, Italy, Kosovo, Turkey Ivan Krastev, Shifting Obsessions, CEU Press, 2004 ESI essay: The good news from Greece – Can Thessaloniki point the way? (February 2015) ESI essay: Transition and happiness – a Bulgarian paradox? (December 2014) ESI report: Protests and Illusions – How Bosnia and Herzegovina lost a decade (23 December 2014) Rumeli Observer: Enlargement 2.0 – The ESI Roadmap Proposal (Belgrade presentation) (27 November 2014) Follow ESI on social media Feedback As always, we are looking forward to your feedback. Please send your comments to feedback@esiweb.org. Contact European Stability Initiative (ESI) Grossbeerenstrasse 83 10963 Berlin GERMANY Tel: +49 30 53214455 Fax: +49 30 53214457 E-mail: info@esiweb.org Website: www.esiweb.org © European Stability Initiative (ESI) To: H.E. Dr Mladen Ivanic, Chair of the Presidency of Bosnia and Hercegovina H.E. Mr Bakir Izetbegovic, Member of the Presidency of Bosnia and Herzegovina H.E. Dr Dragan Covic, Member of the Presidency of Bosnia and Herzegovina 19 March 2015 Dear members of the Presidency, Today, according to the World Bank, Bosnia is the worst place in Europe for business. This is not a good reputation to have. The most recent World Bank Ease of Doing Business report ranked 189 countries. Singapore came first, Eritrea came last and Bosnia came 107th. This implies that it is more difficult to do business in Bosnia than in Kosovo (75th), Azerbaijan (80th) or in Ukraine at war (96th). In this letter we would like to suggest how to change this situation within a very short period of time and without a huge effort. We carefully studied the astonishing rise in Doing Business rankings by Georgia and Macedonia. Here we outline how within one yearBosnia can reach a better rank than the Balkan average; and it will help you understand how within another year Bosnia could overtake the EU. The objective is to make Bosnia another global Wunderkind of Doing Business. In December 2014 you drafted the Joint Statement on the commitment to undertake reforms in the framework of the EU accession process. Since then all Bosnian leaders and parliament have agreed to implement "social and economic reforms in the framework of the Compact for Growth and Jobs." And as the European Commission wrote in the Compact for Growth and Jobs: "Bosnia and Herzegovina needs to boost competitiveness by approving a results-based plan aimed at improving the conditions measured by Doing Business indicators to match the regional average." To be frank, let us note what we can and cannot do. We can advise you on how to improve Bosnia's ranking within one year. We do not promise that this will actually lead to any more jobs or investment. And yet, it is time for some surprising good news from Bosnia. What the European Commission has asked you to do you can do, and more. And then turn to policies which might actually make a real difference in the long run. We remain at your disposal for further discussions, Yours sincerely,               Adnan Cerimagic                      Gerald Knaus Basic facts about Doing Business As you plan Bosnia's rise in the Doing Business (DB) rankings, it is useful to focus on a few basic facts about this ranking.[1] To begin, study the starting position in the race you are about to begin. Here is Bosnia's ranking compared to other countries in the Western Balkans today:[2] Race I: 2015 Ease of Doing Business ranking Country Position Macedonia 30 Montenegro 36 Average 60 Albania 68 Kosovo 75 Serbia 91 Bosnia 107 And here is Bosnia compared to the EU's average ranking: Race II: 2015 Ease of Doing Business ranking Country Position EU average 36 Bosnia 107 DB is based on the following ten indicators which together determine the global rank: Race II: Balkans vs. EU Indicator Western Balkan average EU average Overall ranking 60 36 Dealing with construction permits 141 82 Getting electricity 100 78 Paying taxes 93 56 Starting a business 42 53 Trading across borders 89 34 Enforcing contracts 112 48 Registering property 77 62 Protecting minority investors 33 48 Getting credit 30 55 Resolving insolvency 65 33 You may be surprised to find that "getting credit", "protecting investors" or "starting a business" is easier in the Western Balkans than in the EU. But do not worry, the international media skip over such implausibilities. They will report Bosnia's rise in the ranking without asking questions, as they have celebrated the rise of Georgia. (If you want to know more about the flaws, please read our newsletter: Pumpkins, outliers and the Doing Business illusion from 4 November 2014). Now let us take a look at how Bosnia compares to its neighbours at the level of indicators: Race I: Bosnia vs. Balkans[3] Indicator Bosnia Western Balkan average Overall ranking 107 60 Dealing with construction permits 182 141 Getting electricity 163 100 Paying taxes 151 93 Starting a business 147 42 Trading across borders 104 89 Enforcing contracts 95 112 Registering property 88 77 Protecting minority investors 83 33 Getting credit 36 30 Resolving insolvency 34 65 Bosnia is already better than the Balkan average at "enforcing contracts" and "resolving insolvency". With regard to enforcing contracts, Bosnia is on place 95 among 189 countries. This is better than the Western Balkan average of 112. When we look at resolving insolvency, Bosnia on place 34 is not only much better than the Western Balkan average (65). It is also better than twelve EU countries. The EU average is place 33.   Resolving insolvency: BiH vs. 12 EU states Country Position Malta 86 Lithuania 67 Western Balkan average 65 Hungary 64 Luxembourg 62 Croatia 56 Greece 52 Cyprus 51 Romania 46 Slovenia 42 Latvia 40 Bulgaria 38 Estonia 37 Bosnia 34 EU average 33 Acting strategically, it makes sense to focus on the other eight indicators where Bosnia lags behind the Western Balkan average. Before we do this, please be aware where DB measures the business climate: it always measures it in the "economy's largest business city". In Bosnia, this is Sarajevo. So, the situation elsewhere in Bosnia is irrelevant. You just need to focus on Sarajevo. Year one: catching up with the Balkans Construction permits With regard to construction permits, Bosnia is ranked 182nd among 189 economies in the world. The Western Balkan average to beat is rank 141. The World Bank looks at three sub-indicators. First, the total number of procedures required to build a warehouse in Sarajevo with two floors and 1,300 square meters of space. Second, the total number of days needed to finish all necessary administrative procedures. And third, the costs of these procedures.[4] In Sarajevo, there are 15 procedures. The Western Balkan average is 14. Construction: total number of procedures Country Procedures Montenegro 8 Macedonia 11 Average 14 Bosnia 15 Kosovo 15 Serbia 16 Albania 19 DB lists the following 15 procedures in Sarajevo: Obtain excerpt from the cadastre plan showing status of the land plot Obtain excerpt from the land registry book showing proper registration* Obtain urban planning consent Obtain preliminary verification of water supply and sewage system projects Obtain preliminary verification of study on fire and explosion prevention* Obtain validation of technical audit of the main project Pay the rent fee and shelter construction fee at a commercial bank* Apply for building permit Request marking of the land plot Notify the Municipality about the commencement of works Request water and sewage connection Receive technical inspection from the Municipality* Request occupancy permit Register the building with the Municipality's Cadastre Department Register the building with the and Registry Department at the District Court of Sarajevo *Takes place simultaneously with other procedure[5] In order to reach the Balkan average, Bosnia should get rid of at least one procedure. The World Bank estimates that it takes 179 days to complete the 15 procedures to build a warehouse in Sarajevo. The average of the Western Balkan countries is 178. Construction procedures: total number of days Country Days Macedonia 89 Kosovo 152 Montenegro 158 Average 178 Bosnia 179 Albania 228 Serbia 264 This yields our first recommendation: Bosnia needs to get rid of at least 1 of the 15 procedures necessary to build a commercial building. It should select one whose elimination will also shorten the time to complete the procedures. In order to assess the level of the costs of the procedures, the World Bank puts them in relation to the value of the warehouse. This value is assumed to be 50 times the monthly income per capita.[6] In Sarajevo, the costs of the procedures represent 19.7 percent of the assumed value of the warehouse. The Western Balkan average is 11.2 percent. Construction procedures: costs in percent (of cost of warehouse) Country Percentage Albania 3.3 Kosovo 6.7 Macedonia 8.2 Average 11.2 Montenegro 12.2 Bosnia 19.7 Serbia 25.7 In absolute terms, the procedures in Sarajevo cost 35,000 Euro, while the Western Balkan average is 22,000 Euro. Construction procedures: costs in Euro Country Euro Albania 5,000 Kosovo 9,000 Macedonia 13,000 Average 22,000 Montenegro 33,000 Bosnia 35,000 Serbia 51,000 How can Bosnia lower the costs? Let us look at the individual cost items as quoted by Doing Business: Construction in Bosnia: breakdown of costs in Euro[7] Procedure Euro Pay the rent fee and shelter construction fee at a commercial bank 16,331 Obtain validation of the technical audit of the main project 14,451 Request occupancy permit 4,002 Request water and sewage connection 256 Register the building with the Municipality's Cadastre Department 92 Obtain preliminary verification of the study on fire and explosion prevention 77 Obtain preliminary verification of water supply and sewage system projects 60 Rest of procedures combined 67 Total 35,336 The single most expensive item – 16,331 Euro – is for a rent fee and shelter construction fee. The rent fee is a payment for the use of roads, street lights and other infrastructure provided by the state. It is established under a Federation law and the amount is set by the municipality.[8] The Federation also requires businesses to provide for shelters for their personnel in case of war or natural disasters.[9] The shelter construction fee covers the enlargement, where necessary, and maintenance of existing shelters. It is set at 1 percent of the costs of the construction of a new building.[10] The entrepreneur also has the option to build a new shelter, but this is rarely done since it is more expensive.[11] According to the World Bank, there is no requirement to pay for shelters and for "renting" infrastructure in other Balkan countries. Our second recommendation is therefore: The Federation should consider abolishing or significantly lower the rent fee and the shelter construction fee. Getting electricity Bosnia is in 162nd position when it comes to getting electricity for a warehouse. The Western Balkan average rank is 100. The World Bank again uses three sub-indicators: first, the number of procedures; second, the number of days needed to finish the procedures; third, the cost of obtaining a permanent electricity connection for the warehouse in Sarajevo.[12] In Bosnia there are 8 procedures. The Western Balkan average is 5. Bosnia should reach this average. Electricity: total number of procedures Country Procedures Serbia 4 Average 5 Montenegro 5 Macedonia 5 Albania 6 Kosovo 7 Bosnia 8 Six of the eight procedures in Bosnia are linked to the Federation's public electricity company Elektroprivreda BiH: Obtain initial electric power permit from Elektroprivreda BiH. Request issuance of electro-energetic consent from Elektroprivreda BiH. Elektroprivreda BiH carries out external visit of the site.* Receive electro-energetic consent and go to utility's main building (Elektroprivreda BiH) to submit application for connection, pay estimate and sign contract. Await and receive external connection works by Elektroprivreda BiH. Hire specialized electrician to issue a certificate of compliance for the internal wiring. Receive site visit by a technical commission of the municipality.* Elektroprivreda BiH comes to the warehouse to energize the connection. * Takes place simultaneously with another procedure.[13] The Federation government is the majority owner of Elektroprivreda BiH.[14] This gives it leverage. It should push Elektroprivreda BiH to cut the procedures from 6 to 3. There is also a need to shorten the time it takes to get an electricity connection. According to DB, it takes 125 days to get electricity in Sarajevo. The average in the Western Balkan is 106 days. The waiting time in Sarajevo needs to be reduced by at least 19 days so that Bosnia performs better than the Balkan average. Electricity: total number of days Country Days Kosovo 46 Montenegro 71 Average 106 Macedonia 107 Bosnia 125 Serbia 131 Albania 177 Of the 125 days it currently takes to get electricity in Sarajevo, 116 days are related to procedures involving Elektroprivreda BiH. This should be 19 days less: 97 days. Our third recommendation is: The Federation government should convince Elektroprivreda BiH to reduce the procedures for an electricity connection from 6 to 3 and make sure that the remaining procedures take less than 97 days. The average cost of getting electricity in the Western Balkans is 15,000 Euro. In Sarajevo it is 17,000 Euro. Electricity: costs in Euro Country Euro Albania 1,000 Macedonia 9,000 Average 15,000 Bosnia 17,000 Serbia 18,000 Kosovo 24,000 Montenegro 25,000 In order to assess the level of the costs, the World Bank presents them as a percentage of the economy's income per capita.[15] In Bosnia, the costs amount to 484.4 percent. The Balkan average is 494.6 percent. Bosnia is already below the average, so in the short-term there is no need to take action. Electricity: costs as percentage (of the economy's income per capita) Country Percentage Macedonia 255.3 Serbia 454.9 Montenegro 467.9 Albania 472.6 Bosnia 484.4 Average 494.6 Kosovo 822.5 Paying taxes As regards the tax burden, Bosnia is placed 151st, behind Afghanistan (79th), South Sudan (98th) and Egypt (149th). The Western Balkan average rank is 93. To measure the tax burden, the World Bank looks at a Sarajevo-based commercial company with 60 employees, and the following six sub-indicators: first, the number of tax payments per year. Second, the number of hours needed to calculate and pay taxes. Third, the profit tax. Fourth, the labour tax and contributions. Fifth, the percentage of other taxes. And sixth, the total tax rate expressed as a percentage of profit.[16] In Bosnia there are 45 payments to be made per year. The average of the Western Balkans is 34. Paying taxes: total number of payments per year Country Payments Macedonia 7 Montenegro 29 Kosovo 33 Average 34 Albania 34 Bosnia 45 Serbia 67 It is easy to change this with a single reform. In the Federation, there is a tourism fee that the majority of companies and self-employed businesspeople have to pay on a monthly basis. It is paid to the Cantonal Tourism Association in order to help develop tourism. If this fee had to be paid only once a year, there would only be 34 procedures, which is the Balkan average. In addition, the Federation government could also limit the types of companies that have to pay this fee to those that directly work in tourism. This way, the sample company that the World Bank uses – a company that "performs general industrial or commercial activities" – would be excluded.[17] Our fourth recommendation is: Allow for annual payment of the tourism fee and oblige only tourism companies to pay it. As regards the second sub-indicator, it takes 407 hours per year in Bosnia to prepare, file and pay the three major types of taxes that the World Bank looked at: corporate income tax, value added tax and labour taxes including payroll taxes and social contributions. The Western Balkan average is 246 hours. Paying taxes: number of hours Country Hours Macedonia 119 Kosovo 155 Average 246 Serbia 279 Montenegro 320 Albania 357 Bosnia 407 In Bosnia, more than 60 percent of this time (258 hours) is spent on dealing with the value- added tax (VAT), which needs to be paid monthly. The Western Balkan average for VAT is 112 hours. In Macedonia it is only 44 hours. This means it takes almost six times longer to calculate, prepare, file and pay VAT in Bosnia than in Macedonia. Paying taxes: number of hours VAT Country Hours Macedonia 44 Kosovo 87 Serbia 105 Average 112 Albania 144 Montenegro 179 Bosnia 258 Our fifth recommendation is: Bosnia should streamline the procedures related to preparation, calculation and payment of VAT so that this activity does not take more than 94 hours/year. In this way, the number of hours needed for all three types of taxes would be 245, which is 1 day below the Balkan average. Concerning the third sub-indicator "profit tax" (expressed by DB as a share of commercial profit), Bosnia is doing better than the Western Balkan average. There is no need to do anything in this area. Paying taxes: profit tax, in percentage of profit[18] Country Profit tax Macedonia 5.5 Montenegro 7.1 Bosnia 7.2 Kosovo 9.1 Average 9.5 Albania 9.5 Serbia 16.2 As regards to labour tax and contributions paid by employer, the Western Balkan average is 11.5 percent. In Bosnia it is 13.5 percent. In Macedonia it is 0 percent. Paying taxes: employer-paid labour tax and contributions, in percentage of profit[19] Country Percentage Serbia 20.2 Albania 18.8 Bosnia 13.5 Montenegro 12.8 Average 11.5 Kosovo 5.6 Macedonia 0 Our sixth recommendation is: The Federation should lower the labour tax and contributions paid by the employer to the Western Balkan average of 11.5 percent.  As regards to the "total tax rate", no action is needed. The World Bank measures the total tax rate as "the amount of taxes and mandatory contributions borne by the business in the second year of operation, expressed as a share of commercial profit." The Western Balkan average is 22.8 percent. In Bosnia it is 23.3 percent. So Bosnia is only 0.5 percent above the average.[20] Paying taxes: total tax rate as share of profit[21] Country Percentage Macedonia 7.4 Kosovo 15.3 Montenegro 22.3 Average 22.8 Bosnia 23.3 Albania 30.7 Serbia 38.6 According to DB, an entrepreneur in Bosnia has to pay the following taxes and contributions: Paying taxes: taxes and contributions in Bosnia, as share of profit[22] Tax or contribution Percentage of profit Social security contributions (10.5% of gross salaries) 11.84 Corporate income tax (10% of taxable profit) 7.16 Forestry tax (0.07% of turnover) 1.24 Contribution for disabled employees (25% of average net salary in the Federation per disabled employee) 0.91 Tourist community fee (0.05% of revenue) 0.88 Local property tax (2 Euro per sqm) 0.46 Fee for protection against natural and other disasters (0.5% of net salaries) 0.39 Water protection fee (0.5% of net salaries) 0.39 Signage fee (100 Euro) 0.02 Fuel tax 0.00  (Very small amount) VAT (17%) Not included here Social security contributions paid by employee (31% of gross salary) Paid by employee TOTAL 23.3 This list includes the tourism fee. We already recommended that it should be limited to companies that directly work in tourism. If this is done, the tax rate in Bosnia will decrease by 0.88 percentage points to 22.4 percent of profit. With that, it will be below the Western Balkan average of 22.8. Starting a business Bosnia performs very badly when it comes to starting a business. It ranks 147th among 189 economies, behind Afghanistan (24), Iran (62) and Libya (144). But the fact that Afghanistan does so well here shows you that it should be easy to improve Bosnia's ranking. The Western Balkan average ranking is 42, below the average in the EU, which is 53. Starting a business Country Position Macedonia 3 Albania 41 Kosovo 42 Average 42 Montenegro 56 Serbia 66 Bosnia 147 DB looks at four indicators: first, the number of procedures required to register a business with at least 10 employees. Second, the number of days that this takes. Third, the costs of the necessary procedures as a percentage of Bosnia's income per capita. And finally the amount that must be paid in advance as a minimum deposit, as a percentage of income per capita. There are eleven procedures to be completed in Sarajevo, compared to five as the Western Balkan average. Starting a business: total number of procedures Country Procedures Macedonia 2 Albania 5 Kosovo 5 Average 5 Serbia 6 Montenegro 6 Bosnia 11 DB lists these procedures in Bosnia: Stipulate a founding act and have it notarized by a notary Obtain a statement from commercial bank that full amount of the capital has been paid in; pay the registration fee to the budget account of the Cantonal court Obtain the statement of tax authorities that the founders have no tax debts Court registration with Municipal Courts Buy a company stamp Obtain the Certificate of the business premises Notify the commencement of the business activities to the Cantonal Inspection Authority Apply for company identification number with the competent tax office Open a company account with commercial bank Enrol the employees in health insurance with Health Insurance Institute and in the pension insurance Adopt and publish a rule book on matters of salary, work organization, discipline, and other employee regulations.[23] Canton Sarajevo and the Federation could look to either Kosovo or Republika Srpska for inspiration how to reduce the number of these procedures. Kosovo has five procedures. A business registration agency provides a fiscal number, a value added tax registration, a business certificate and other services to entrepreneurs. According to the 2015 National Economic Reform Programme, Republika Srpska recently cut the number of days needed to register a firm from 23 to 3 and the number of procedures from 11 to 5. It also made the registration of business much cheaper.[24] All the Federation needs to do is to copy the reforms adopted in Republika Srpska. Our seventh recommendation: The Federation/Canton Sarajevo should cut the number of procedures needed to register a business from 11 to 5, following the example of Republika Srpska. This would also automatically cut the number of days needed to register a business. According to DB it takes 37 days in Sarajevo, compared to 8 in the Western Balkans. Starting a business: total number of days needed Country Days Macedonia 2.0 Albania 4.5 Average 8.0 Montenegro 10.0 Kosovo 11.0 Serbia 12.0 Bosnia 37.0 The cost of starting a business in Bosnia is 14.6 percent of income per capita. The Western Balkan average is 4 percent. Starting a business: costs as percentage (of income per capita) Country Percentage Macedonia 0.6 Kosovo 1.2 Montenegro 1.6 Average 4.0 Serbia 6.8 Albania 10.0 Bosnia 14.6 The absolute cost in the Western Balkans is between 115 and 125 Euro.[25] In Bosnia, however, it costs 523 Euro to start a business. Starting business: costs in Euro Country Euro Kosovo 20-50 Serbia 62-70 Macedonia 65 Montenegro 85 Average 115-125 Albania 344-358 Bosnia 523 These costs can be reduced by at least 400 Euro in two steps. First, the introduction of a business registration agency, which would register companies for free, would cut the cost of registration by 284 Euro – the current cost of court registration. Second, the cost of notarising the founding act should be changed. In Bosnia, the price of notarisation is 205 Euro for all business registrations. In Serbia this price depends "on the amount of basic capital and the value of the lease contract".[26] Since DB cannot calculate it, it simply does not calculate any costs for this procedure in Serbia. Thus our eighth recommendation is: Introduce a business registration agency in Sarajevo that will register companies for free and regulate the notarisation price as in Serbia. Trading across borders Here Bosnia is ranked 104th. The Western Balkan average is 89. Trading across borders Country Position Montenegro 52 Macedonia 85 Average 89 Albania 95 Serbia 96 Bosnia 104 Kosovo 118 The World Bank establishes this by looking at the time and costs (excluding tariffs) associated with exporting and importing a standardised cargo of goods by sea transport (also excluding the sea transport costs).[27] There are four indicators: first the number of documents needed to export/import. Second, the number of days needed to export/import. Third, the cost of export/import per container. And fourth, the deflated cost[28] of a container to be imported/exported. A company in Bosnia needs to prepare 8 documents for the export and the import of a container each. These documents include for example a customs export/import declaration, an inspection report or a packing list. The Western Balkan average number of documents is 7. Trading across borders: The total number of documents Country No. of documents for export No. of documents for import Bosnia 8 8 Kosovo 8 7 Albania 7 8 Average 7 7 Montenegro 6 5 Serbia 6 7 Macedonia 6 8 Our ninth recommendation is: Cut one of the documents needed to export or import a container of goods by sea transport, or combine two similar documents into one. At this point in time, Bosnia does not need to do anything concerning the time it takes to import a cargo container. The Western Balkan average is 15 days, while in Bosnia it is 13 days. However, Bosnia should cut down the number of days it takes for a company to export a container. The Western Balkan average is 14, while in Bosnia it is 16 days.  Trading across borders: total number of days Country To import To export Macedonia 11 12 Bosnia 13 16 Montenegro 14 14 Serbia 15 12 Kosovo 15 15 Average 15 14 Albania 18 19 Although the documents required per shipment to export or import goods are essentially the same, a company needs seven days to obtain the export documents and only five days to obtain the import documents. The tenth recommendation is: Cut by 2 the number of days needed to obtain the necessary documents for the export of a cargo by sea. There is no need for Bosnia to do anything about the costs, including deflated costs, associated with the procedures required to import or export a container by sea transport. In both cases, it is already below the Western Balkan average. Trading across borders: total costs in US dollars Country Cost to export Cost to import Albania 745 730 Montenegro 985 985 Bosnia 1,260 1,200 Average 1,342 1,292 Macedonia 1,376 1,380 Kosovo 1,695 1,730 Serbia 1,910 1,635 Registering Property Bosnia ranks 88th with regard to the effort, time and costs it takes to register a property. The Western Balkan average is 77. Registering property Country Position Kosovo 34 Serbia 72 Macedonia 74 Western Balkan average 77 Montenegro 87 Bosnia 88 Albania 118 A note of encouragement: Bosnia is better than eight EU member states including Germany, France, Luxembourg and Belgium. Registering property: Bosnia and 8 EU states Country Position Western Balkan average 77 Bosnia 88 Germany 89 Slovenia 90 Croatia 92 Cyprus 112 Greece 116 France 126 Luxembourg 137 Belgium 171 The World Bank looks at three indicators. First, the number of procedures required to register a property. Second, the number of days needed to register a property. Third, the costs of registering a property as a percentage of property value.[29] The number of the necessary procedures is 7. In the Western Balkans it is 6 in each of the other countries. Registering property: number of procedures[30] Country Procedures Montenegro 6 Average 6 Kosovo 6 Serbia 6 Albania 6 Macedonia 7 Bosnia 7 Recommendation number eleven is: Cut one of the procedures necessary to register a property. These are, according to Doing Business: Obtain the land registry extract as proof of ownership Parties obtain the court extract certifying that company representatives are authorized to act on behalf of each company* Notarization of sale-purchase agreement Submit the request for an evaluation of the property for tax purposes On-site inspection of a property Payment of transfer tax at the commercial bank Apply for registration at the Land Registry * Takes place simultaneously with another procedure.[31] Concerning the time it takes to register a property, Bosnia is already doing well, so there is no need for action. In Bosnia, it takes 24 days. The Western Balkan average is 41 days. Registering property: number of days Country Days Albania 22 Bosnia 24 Kosovo 27 Macedonia 31 Average 41 Serbia 54 Montenegro 69 Finally, the costs of registering a property in Bosnia are 5.2 percent of the property value. The Western Balkan average is 3.9 percent. The property value is simply assumed to be equivalent to 50 times the annual gross income per capita. Registering property: costs, in percentage (of property value) Country Percentage Kosovo 0.3 Serbia 2.7 Montenegro 3.1 Macedonia 3.3 Average 3.9 Bosnia 5.2 Albania 9.9 By far the most expensive procedure is the notarisation of the sale-purchase agreement, which costs 256 Euro. Our twelfth recommendation is therefore: Lower the cost of notarisation of a sale-purchase agreement for a business property. Protecting minority investors Bosnia is ranked 83rd out of 189 countries on this indicator. The Western Balkan average is 33. Protecting minority investors Country Position Albania 7 Macedonia 21 Serbia 32 Average 33 Montenegro 43 Kosovo 62 Bosnia 83 Minority investors are those who possess shares of a company without having voting control It is important to ensure their protection so that they are not outmaneuvered by a director or majority investor who pursue their personal interest at the expense of the company's interest. The World Bank assumes a scenario whereby a director could decide to buy products from a company which he owns, while this decision may not be beneficial for the company he manages, and where a minority investor then sues the director. This indicator is supposed to assess transparency – e.g. of companies' governance structures, transactions, possible conflicts of interest – and the regulation of conflicts of interest. DB has divided this indicator into nine sub-indicators, which again represent indexes. These indexes are further divided into 38 components. There is no need to list them all here.[32] Bosnia rates badly on all of the nine sub-indicators. Macedonia has traditionally done extremely well here and ranked 16th in the world in 2013. Protecting minority investors: Bosnia[33] Indicator Points Of maximum Extent of shareholder rights index 7.5 10.5 Extent of shareholder governance index 6.2 10.0 Extent of director liability index 6.0 10.0 Extent of corporate transparency index 5.5 9.0 Strength of governance structure index 5.5 10.5 Strength of minority protection index 5.4 10.0 Ease of shareholder suits index 5.0 10.0 Extent of conflict of interest regulation index 4.7 10.0 Extent of disclosure index 3.0 10.0 Total 48.8 90.0 The input on all these issues is provided by local corporate and securities lawyers who complete a questionnaire and award points.[34] Our recommendation number 13 is: Look to Macedonia as a model how to address the issues raised in the questionnaire for protecting investors. Getting credit According to the World Bank, Bosnia is doing well at getting credit – something that most entrepreneurs in Bosnia might find surprising. Here Bosnia is ahead of half of the EU: 2015 Getting credit: Bosnia and EU member states Country Position Slovakia 36 Finland 36 Bosnia 36 Austria 52 Spain 52 Sweden 61 Cyprus 61 Croatia 61 Netherlands 71 France 71 Greece 71 Portugal 89 Belgium 89 Italy 89 Slovenia 116 Luxembourg 165 Malta 171 The reason for Bosnia's astonishing performance is that DB does not measure how easy it is to get credit and at which interests rates money is lent. It measures the legal rights of borrowers and lenders with respect to secured transactions, and the sharing of credit information. In comparison with other Western Balkan countries, Bosnia is still below the average. It ranks 36th, while the Balkan average is 30. Getting credit Country Position Montenegro 4 Kosovo 23 Average 30 Bosnia 36 Albania 36 Macedonia 36 Serbia 52 The World Bank looks at two types of framework which can improve access to credits: the level of protection of the rights of borrowers and lenders in collateral and bankruptcy laws; and a "credit information system", which consist of a credit information bureau and a registry enabling lenders to view a potential borrower's credit history. These two items are measured by four sub-indicators: the "strength of legal rights index"; the "depth of credit information index"; the "credit bureau coverage"; and the "credit registry coverage". For the first two sub-indicators, DB uses a questionnaire given to financial lawyers and verified through analysis of laws and regulations and public sources of information on collateral and bankruptcy laws as well as through occasional on-site visits. This is how Bosnia did on the four indicators: Getting credit: legal rights and credit information[35] Indicator No. of points obtained Max. no. of points possible Strength of legal rights index 7.0 12 Depth of credit information index 6.0 8 Credit registry coverage (percentage of adults) 39.7 Credit bureau coverage (percentage of adults) 8.1 Recommendation number 14 is: Go through the questionnaire on credit and find the easiest areas where legal changes can generate a few more positive answers. This will be enough to improve Bosnia's ranking on this indicator. Summary We hope that you and other leaders will task a small team of people to work on improving Bosnia's DB rank. As most changes concern the Federation and Sarajevo it would be advisable to ask the Federation's prime minister to take the lead. You can then report on the success in all your international meetings. After a few months, this team will discover that it is quite easy. They will easily achieve further-reaching change, beyond what we recommended. This will turn Bosnia into a Doing Business Wunderkind. Here is a summary of all measures we propose for the first year: Bosnia needs to do get rid of at least 1 of the 15 procedures necessary to build a commercial building. It should select one whose elimination will also shorten the time to complete the procedures. The Federation should consider abolishing or significantly lower the rent fee and the shelter construction fee. The Federation government should convince Elektroprivreda BiH to reduce the procedures for an electricity connection from 6 to 3 and make sure that the remaining procedures take less than 97 days. Allow for annual payment of the tourism fee and oblige only tourism companies to pay it. Bosnia should streamline the procedures related to preparation, calculation and payment of VAT so that this activity does not take more than 94 days/year. The Federation should lower the labour tax and contributions paid by the employer to the Western Balkan average of 11.5 percent. The Federation/Canton Sarajevo should cut the number of procedures needed to register a business from 11 to 5, following the example of Republika Srpska. Introduce a business registration agency in Sarajevo that will register companies for free and regulate the notarisation price as in Serbia. Cut one of the documents needed to export or import a container of goods by sea transport, or combine two similar documents into one. Cut by 2 the number of days needed to obtain the necessary documents for the export of a cargo by sea. Cut one of the procedures necessary to register a property. Lower the cost of notarisation of a sale-purchase agreement for a business property. Look to Macedonia as a model how to address the issues raised in the questionnaire for investor protection. Go through the questions and find the easiest areas where legal changes can generate a few more positive answers for getting credit. We hope that this makes clear how the Doing Business ranking works. Once Bosnia has caught up with the Western Balkan average, it can also easily catch up with the EU average. It just needs to improve a little more on each of the eight indicators we have discussed, and the two other DB indicators where it is already doing well: enforcing contracts and resolving insolvency. Some recent ESI publications ESI newsletter: Pumpkins, outliers and the Doing Business illusion (4 November 2014) ESI essay: The good news from Greece – Can Thessaloniki point the way?(February 2015) ESI essay: Transition and happiness – a Bulgarian paradox? (December 2014) ESI report: Protests and Illusions – How Bosnia and Herzegovina lost a decade (23 December 2014) ESI report: Vladimir and Estragon in Skopje – A fictional conversation on trust and standards and a plea on how to break a vicious circle (17 July 2014) Rumeli Observer: Enlargement 2.0 – The ESI Roadmap Proposal (Belgrade presentation) (27 November 2014) Rumeli Observer: Enlargement reloaded – ESI proposal for a new generation of progress reports (31 January 2014) [1]              All tables in this paper are, if not otherwise stated, based on data of the World Bank's Doing Business 2015 Ranking. [2]              Note that throughout this document Bosnia's ranking is not included in calculation of the Western Balkan average. [3]              Doing Business, 2015 Ranking. Doing Business, 2015 Ease of Doing Business in Bosnia and Herzegovina. [4]              Doing Business, Dealing with Construction Permit Methodology. [5]              Doing Business, 2015 Ease of Doing Business in Bosnia and Herzegovina. [6]              The World Bank does not elaborate further, but it must be using Gross National Income per capita, which it cites at 4,740 USD (3,470 Euro in June 2014, according to oanda.com). This corresponds to a monthly GNI/capita of 290 Euro. Multiplied by 50 = 14,500 Euro. Doing Business, Dealing with Construction Permits Methodology. [7]              Doing Business, 2015 Ease of Doing Business in Bosnia and Herzegovina. [8]              For rent fees in Sarajevo, see website of the Novi Grad Municipality, "Rente: Stari Grad najskuplji, a Novi Grad najjeftiniji" (Rent fees: Stari Grad most expensive, Novi Grad cheapest), 25 February 2015. [9]              Federation Government, Law on the financing of assistance to remove the consequences of natural disasters and to rebuild the areas hit by natural disasters; Federation Government, Federation law on protection and rescue. [10]             Canton Sarajevo, Uputstvo o nacinu uplate i trosenja naknade za izgradnju i odrzavanje javnih sklonista u Kantonu Sarajevo (Instructions for payment and spending of shelter fee in Canton Sarajevo), 24 April 2007; Municipality of Novo Sarajevo, Guide to construction permit. [11]             Federation Government, Law on financing of help for removing consequences of natural disasters and rebuilding of areas hit by natural disasters; Federation Government, The Federation Law on protection and rescue. [12]             Doing Business, Getting Electricity Methodology. [13]             Doing Business, 2015 Ease of Doing Business in Bosnia and Herzegovina. [14]             Elektroprivreda BiH, Executive Board, accessed on 18 March 2015. [15]             Doing Business, Getting Electricity Methodology. According to the World Bank, the Gross National Income per capita was 4,740 USD (3,470 Euro in June 2014, according to oanda.com). [16]             Doing Business, Paying Taxes Methodology. [17]             The Federation government is already considering to reduce the types of persons and companies that have to pay the tourism fee. [18]             Doing Business, Paying Taxes Methodology. [19]             Doing Business, Paying Taxes Methodology. [20]             Doing Business, 2015 Ranking. [21]             Doing Business, Paying Taxes Methodology. [22]             Doing Business, Paying Taxes Methodology. [23]             Doing Business, 2015 Ease of Doing Business in Bosnia and Herzegovina, accessed on 18 March 2015. [24]             BiH Agency for Economic Planning, 2015 National Economic Reform Program, January 2015. [25]             Note that we convert the currencies for you using the exchange rates quoted by the various national banks on 15 February 2015. [26]             Doing Business, 2015 Ranking for Serbia, Starting a Business. [27]             Doing Business, Trading Across Borders Methodology, accessed on 18 March 2015. [28]             The cost for each year is divided by a GDP deflator to take the general price level into account when benchmarking this absolute cost indicator across economies with different inflation trends. In Doing Business 2015, the deflated costs are identical to the non-deflated (base year for the deflator). [29]             Doing Business, Registering Property Methodology. [30]             Doing Business, 2015 Enforcing Contracts. [31]             Doing Business, 2015 Ease of Doing Business in Bosnia and Herzegovina. [32]             Doing Business, Protecting Minority Investors Methodology. [33]             Doing Business, 2015 Ease of Doing Business in Bosnia and Herzegovina. [34]             Doing Business, Protecting Minority Investors Methodology. [35]             Doing Business, 2015 Ease of Doing Business in Bosnia and Herzegovina. 19 March 2015