Bosnia as Wunderkind of Doing Business - Outline of 14 steps to take – A Proposal to the presidency of Bosnia and Herzegovina

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 107^th. This implies that it is more difficult to do business in Bosnia than in Kosovo (75^th), Azerbaijan (80^th) or in Ukraine at war (96^th).

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 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. 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

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]

And here is Bosnia compared to the EU's average ranking:

DB is based on the following ten indicators which together determine the global rank:

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:

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.  

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.

With regard to construction permits, Bosnia is ranked 182^nd 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.

DB lists the following 15 procedures in Sarajevo:

1. Obtain excerpt from the cadastre plan showing status of the land plot
2. Obtain excerpt from the land registry book showing proper registration*
3. Obtain urban planning consent
4. Obtain preliminary verification of water supply and sewage system projects
5. Obtain preliminary verification of study on fire and explosion prevention*
6. Obtain validation of technical audit of the main project
7. Pay the rent fee and shelter construction fee at a commercial bank*
8. Apply for building permit
9. Request marking of the land plot
10. Notify the Municipality about the commencement of works
11. Request water and sewage connection
12. Receive technical inspection from the Municipality*
13. Request occupancy permit
14. Register the building with the Municipality's Cadastre Department
15. 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.

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.

In absolute terms, the procedures in Sarajevo cost 35,000 Euro, while the Western Balkan average is 22,000 Euro.

How can Bosnia lower the costs? Let us look at the individual cost items as quoted by Doing Business:

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.

Bosnia is in 162^nd 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.

Six of the eight procedures in Bosnia are linked to the Federation's public electricity company Elektroprivreda BiH:

1. Obtain initial electric power permit from Elektroprivreda BiH.
2. Request issuance of electro-energetic consent from Elektroprivreda BiH.
3. Elektroprivreda BiH carries out external visit of the site.*
4. Receive electro-energetic consent and go to utility's main building (Elektroprivreda BiH) to submit application for connection, pay estimate and sign contract.
5. Await and receive external connection works by Elektroprivreda BiH.
6. Hire specialized electrician to issue a certificate of compliance for the internal wiring.
7. Receive site visit by a technical commission of the municipality.*
8. 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.

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.

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.

As regards the tax burden, Bosnia is placed 151^st, behind Afghanistan (79^th), South Sudan (98^th) and Egypt (149^th). 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.

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.

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.

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.

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.

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]

According to DB, an entrepreneur in Bosnia has to pay the following taxes and contributions:

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.

Bosnia performs very badly when it comes to starting a business. It ranks 147^th 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.

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.

DB lists these procedures in Bosnia:

1. Stipulate a founding act and have it notarized by a notary
2. 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
3. Obtain the statement of tax authorities that the founders have no tax debts
4. Court registration with Municipal Courts
5. Buy a company stamp
6. Obtain the Certificate of the business premises
7. Notify the commencement of the business activities to the Cantonal Inspection Authority
8. Apply for company identification number with the competent tax office
9. Open a company account with commercial bank
10. Enrol the employees in health insurance with Health Insurance Institute and in the pension insurance
11. 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.

The cost of starting a business in Bosnia is 14.6 percent of income per capita. The Western Balkan average is 4 percent.

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.

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.

Here Bosnia is ranked 104^th. The Western Balkan average is 89.

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.

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. 

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.

Bosnia ranks 88^th with regard to the effort, time and costs it takes to register a property. The Western Balkan average is 77.

A note of encouragement: Bosnia is better than eight EU member states including Germany, France, Luxembourg and Belgium.

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.

Recommendation number eleven is: Cut one of the procedures necessary to register a property.

These are, according to Doing Business:

1. Obtain the land registry extract as proof of ownership
2. Parties obtain the court extract certifying that company representatives are authorized to act on behalf of each company*
3. Notarization of sale-purchase agreement
4. Submit the request for an evaluation of the property for tax purposes
5. On-site inspection of a property
6. Payment of transfer tax at the commercial bank
7. 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.

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.

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.

Bosnia is ranked 83^rd out of 189 countries on this indicator. The Western Balkan average is 33.

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 16^th in the world in 2013.

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.

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:

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 36^th, while the Balkan average is 30.

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:

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.

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:

1. 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.
2. The Federation should consider abolishing or significantly lower the rent fee and the shelter construction fee.
3. 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.
4. Allow for annual payment of the tourism fee and oblige only tourism companies to pay it.
5. 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.
6. The Federation should lower the labour tax and contributions paid by the employer to the Western Balkan average of 11.5 percent.
7. 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.
8. Introduce a business registration agency in Sarajevo that will register companies for free and regulate the notarisation price as in Serbia.
9. Cut one of the documents needed to export or import a container of goods by sea transport, or combine two similar documents into one.
10. Cut by 2 the number of days needed to obtain the necessary documents for the export of a cargo by sea.
11. Cut one of the procedures necessary to register a property.
12. Lower the cost of notarisation of a sale-purchase agreement for a business property.
13. Look to Macedonia as a model how to address the issues raised in the questionnaire for investor protection.
14. 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.

• 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)

 

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