Reconstruction and Development Program in Bosnia and Herzegovina

By The World Bank

Description
Economics

Excerpt
Even six years since the Dayton Agreement, state-owned enterprises still dominate BiH's economy. While privatization laws and regulations have been in place in the course of the past four years, long delays in preparing Opening Balance Sheets (OBS), clarifying ownership questions, installing the necessary technical infrastructure for carrying out mass privatization, and insufficient government commitment have repeatedly postponed the privatization of large enterprises. Complex and cumbersome (and decentralized in the case of the Federation of BiH) privatization schemes, which combine the objective of transferring public assets into private hands with that of absorbing the citizens' financial claims on the Entity Governments, are another important factor in explaining the slow privatization process.. Consequently, inefficient enterprises continue to benefit from Government subsidies and risky bank credits, thereby preventing new businesses from entering the market or existing ones from expanding. Moreover, efficient enterprises often fail to develop and to serve as engines of growth because political parties or public agencies intervene directly in their business activities. Alarmed by the low contribution of the private sector to GDP (estimated at some 35 percent), decelerating economic growth rates and the possibility of reduced support from the international community, the Entity Governments have become aware of the urgency of the situation and have taken steps to accelerate privatization. In a first phase, small businesses have been privatized through cash and certificates or coupons in the Federation and Republika Srpska, respectively. This process was largely completed by mid-2001. In a second phase, large enterprises, holding companies and utilities are to be privatized through tenders and public offering of shares (POS) and vouchers/coupons in the Federation and Republika Srpska, respectively. By mid-2002, over 50% of state capital in both Entities has been privatized, of which as much as 80% by Privatization Investment Funds who have, however, so far failed to undertake restructuring and/or recapitalization of enterprises that would result in improved corporate performance and appreciation of the greatly discounted certificates (informally trading at about 2% of nominal value). This underscores the priority of the Governments and the hopes of the IFIs that the remaining state owned capital, which is concentrated in the utility companies and strategic enterprises whose majority shares (with full management control), will be sold to investors with the strategic intent, capital, management skills and market-oriented corporate governance policies in order to effectively restructure and recapitalize the enterprises, resulting in their profitability and realization of their economic development potential.