Helping Bosnia's wood and furniture sector recover

Entering a highly competitive market

Wood is one of Bosnia's most important natural resources. Before the war the forestry sector and wood-based industry employed over 36,000 people, generated over $200 million in exports and accounted for 10 percent of Bosnia's gross domestic product. But four years of war seriously disrupted the sector at every level, from the workforce to the market, from organisation to financial resources. As part of its wider industrial development programme for Bosnia-Herzegovina the European Commission is now working with Europe's wood and furniture sector to help Bosnia's industry recover. A task force has been set up seeking to forge a strong link with Bosnia's wood sector through industrial cooperation.

You might think the task is simply a matter of repairing war damage. But far from that ­ since the pre-war period a new challenge has arisen. Market conditions have completely changed and wood firms have to adapt from the centrally-planned economic system to the new highly-competitive free market environment which has taken its place. They have to make their mark in a Europe which has become the world leader in the furniture sector.

"To make your mark in the sector nowadays it is not enough simply to launch a quality product," explains Bart De Turck, the Secretary General of the European Furniture Manufacturers' Federation, which has joined with the Italian association of wood and furniture industry in the task force. "The most successful businesses are those who manage the whole production chain the most efficiently and profitably, from the purchase of the wood to the distribution of the finished product," he said. "For Bosnian companies this requires a global rethinking of the way they do business."

Enzo Tagliabue, project manager of the task force, says step by step industrial cooperation is the best way to integrate Bosnian entrepreneurs in the European wood market. "But this can only be effective if it involves committed EU and Bosnian potential partners, and offers concrete and measurable advantages to both. Building confidence between them is our key task," he said.

So what are the competitive advantages on the side of the Bosnian wood sector? According to Enzo Tagliabue, who carried out an assessment visit to more than 35 Bosnian wood processing and furniture companies, they are threefold: the quality of the raw materials, the good technical environment and Bosnia's geographical location, close as it is to EU countries. Bosnian wood companies are stronger in up-stream activities, notably wood processing which accounted for 80 percent of pre-war activity, than downstream, where the furniture sector lacks creativity and new product development, he says.

The main disadvantage to be overcome, according to Mr Tagliabue, is Bosnia's legal environment. As long as companies are not privatised, major joint ventures between foreign and Bosnian companies will simply not happen. His previous experience developing joint ventures between EU and Russian wood and furniture companies proved that this process can work, but that it takes time: it took three years to sign the first joint venture contract.

Enzo Tagliabue and his team selected 21 Bosnian companies ­ nine in the Republika Srpska and 12 in the Federation ­ which have the potential to lure European businesses. Visits have been organised, and the results are tangible. The contracts now being discussed between EU and Bosnian companies focus mainly on long-term purchases of raw materials and sub-contracting to EU companies. EU companies can in this way test the reliability of their Bosnian partners, creating a basis for a future strengthening of relations. In this way, by the time privatisation has taken place and the legal framework for investment improved in Bosnia, useful contacts will have been made and from then on things should be able to move on quickly.

Mutual benefit

"An important part of our assignment is giving technical assistance to Bosnian companies, according to their needs. For instance, we organised a seminar on product development recently in Sarajevo, at which we also had participants from the RS," explained Mr Tagliabue. "After this seminar, nine Bosnian companies asked for assistance of EU experts in this field. We will send them experts that we will select within EU companies who already showed an interest in the Bosnian wood sector. So the benefit will be mutual: Bosnian companies will benefit from the expertise and European companies will learn to know more about the way the Bosnian companies work from the inside, and better understand the opportunities of working together." 

EC to fund economic regeneration of BiH forestry

The 1992-95 war severely disrupted the exploitation of Bosnia-Herzegovina's forests, resulting in a lack of raw materials. With the help of external financial assistance for the reconstruction programme, harvesting has picked up from negligible levels in 1995 to about 50% of the annual allowable cut in 1997. However, this has also had a negative impact by degrading stocks and putting the medium-term sustainability of the forests at risk. This is partly due to the absence or ignorance of management plans, but also to illegal cuts, clear cuts, absence of forest regeneration and insect proliferation. Efforts to ensure the longer-term sustainability of the forests are crucial for the environment as well as for the related industry. That is why the EC Phare programme will support a forest management programme in BiH, to start in early 1999.

Credit for business

Loans for Bosnian entrepreneurs

Kerim Zupcevic runs a small business in Sarajevo. Working alongside two employees, he repairs all kinds of electrical applicances for private households and businesses. He asked the Micro Entreprise Bank in Sarajevo for a 5,000 DM-loan for working capital to buy tools and spare parts. His loan was accepted and he has just got the go-ahead of a second installment of 7000 DM to expand on his profitable activities.

All this would have been impossible without the creation of MEB-Banka in November 1997. The European Commission, through the European Bank for Reconstruction and Development (EBRD), injected a fund of ECU four million for 10 years, along with a further ECU one million to help manage the bank. Thanks to the Commission fund small Bosnian private companies will be able to get loans and the Bank's local management will receive training for the first two years.

After nearly a year of operation, the Bank has outstripped all expectations receiving around 230 loan applications per month. Bank clients who have benefited from EU-funded loans include restaurants, taxi drivers, leather manufacturers, farmers, pharmacies, car repair services and dentists.

"In response to the overwhelming demand, we have hired more personnel in the credit division, and we have opened new branches. We now have three offices: in Sarajevo, Ilidza and Bihac. The ultimate aim is to cover the whole territory of BiH " says Ralph Niepel, General Manager of MEB Banka.

"As soon as appropriate laws are passed, we will open an office in the Republika Srpska," he said. "We will also try to build up a better service to our clients by allowing international money transfers and by introducing the possibility of using traveller cheques for business trips".

At the end of August, MEB Banka had received 1552 applications, out of which 679 were rejected, 670 disbursed and 218 pending.

Encouraging foreign investment

Political risk insurance

As long as Bosnia and Herzegovina is perceived as a high-risk country by foreign investors, they will be reluctant to make substantial long-term commitments and explore the country's commercial opportunities. Companies fear that hostilities may resume, resulting in physical damage to their projects or serious business interruptions; they are worried about the possibility that their investment may be expropriated or that they will not be able to repatriate their profits, and they may be concerned that the BH authorities may not fulfill their contractual obligations related to foreign-owned investment projects.

While its experts are working hard to assist the Bosnian authorities to put in place the appropriate legal and regulatory frameworks, the European Commission designed a solution to minimize the impact of these types of political risks. In cooperation with the Multilateral Investment Guarantee Agency (MIGA), and in agreement with the BH authorities, the EC established a Trust Fund that will provide political risk guarantees to foreign companies willing to undertake an investment in BH. The "EU Investment Guarantee Trust Fund for BH" provides coverage for new projects by eligible investors against losses due to: War and Civil Disturbance, Expropriation, Transfer Restriction, and Breach of Contract. The Trust Fund covers both equity investments and foreign loans, for periods up to 15 years. What makes the Trust Fund attractive, is that it will cover up to 90% of the investment.

Projects must be majority privately owned, and are screened for financial soundness and their developmental impact. This means that the projects covered should bring a major benefit to the economy through creating jobs, by transferring modern technology and managerial know-how, and by creating up- and down-stream linkages in the economy. Since the Trust Fund's inception, in September 1997, a dozen companies have registered approximately US$250 million worth of projects for potential future guarantees. The Trust Fund is expected to help restore confidence of foreign investors in BH, and encourage foreign private capital to play its role in supporting BH's ongoing economic recovery.

Drafting the law on foreign trade

Lawyers from the European Union are currently helping Bosnia-Herzegovina by drafting legislation texts on foreign trade and foreign investment. The task may be laborious and complicated, but it is a crucial one if Bosnia-Herzegovina is to attract badly-needed foreign investment. The existing legal vacuum is one of the major obstacles standing in the way of Bosnia attracting foreign investment, but resolving it is not an easy task given that responsibility is shared by the central state and the two entities. No less than three foreign promotion agencies will have to be set up :a national agency and two agencies at the level of the entitites. The EU lawyers, financed by the European Commission, are working in collaboration with Bosnian counterparts with the aim of setting up a legal system which is largely compatible with that of the European Union. Apart from the law on foreign investment the EU lawyers are also helping draw up commercial legislation including accounting and auditing.

Europe for BiH
Quarterly newsletters published by the European Commission on its actions in Bosnia and Herzegovina
No 5, November 1998

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