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6.1. Programme overview

In line with the consolidated outline, the 2004 PEP covers structural reforms related to the enterprise and financial sector, labour market, agricultural sector and public administration. Moreover, it reports on a broad range of other horizontal or sector reforms, including judicial reform, environmental protection, education, transport and public procurement. The presentation is for a great part descriptive and backward looking, providing information on past reforms with an emphasis on legislation. The main policy objectives are the swift completion of privatisation of socially-owned enterprises, the promotion of SME development, a continuation of pension and social security reforms and the reform of public administration. Key measures are legislative alignment with EU law, institutional strengthening, and state financial support. The latter contains financial aid schemes for SMEs and for the restructuring of loss making enterprises, in particular in agriculture, tourism and shipbuilding. The presentation sometimes lacks precise definitions of policy objectives and respective instruments. Not all of the measures listed in the structural reform matrix are described in the text. Key reforms are not always related to specific structural deficiencies and cost estimates are generally not provided. Most of the measures are expected to be implemented during the 2004 PEP period; some others are being extended beyond the current PEP time frame.

In spite of progress with structural reforms that has been made over the past few years in some important policy areas, the Croatian economy is still suffering from significant inefficiencies and weaknesses that constrain productivity and growth. Also, some earlier announced reforms have been delayed during 2004, in particular in the field of privatisation and enterprise restructuring. Moreover, some policy changes seem to have at least partly reversed previous reforms, such as in the area of pensions. Public administration reform and the reform of the judiciary have progressed more slowly than previously expected. Against this background, the 2004 PEP structural reform agenda looks ambitious and will require continued reform commitment and enhanced policy implementation over the programme period.

Key policy measures in the area of privatisation and real sector restructuring are front-loaded in 2005 and may appear very ambitious. Also, some specific measures e.g. in the area of state aid and pension adjustment are scheduled for 2005. Other policies, such as SME development, social security reforms and legislative alignment are planned to occur more gradually. Sector specific policies also tend to be of a continuous nature. As the programme does not provide any detailed information on the sequencing of specific reforms, it is difficult to assess implementation risks.

6.2. Product and capital markets

The PEP outlines the following main reform areas related to the functioning of product markets: the finalisation of privatisation of socially-owned enterprises, the strengthening of competition policy and state aid control, the restructuring of public utilities and SME development. Since the start of privatisation in the early 1990’s, some 2,000 companies have already been sold, mainly on the basis of stock exchange auctions or public tenders. As of September 2004, the Privatisation Fund still held minority or majority shares in 1,073 companies. Enterprises in the tourism, agriculture and shipbuilding sector account for a significant share of the Fund’s assets in gross nominal value terms. Privatisation of state

ownership in these sectors has generally been delayed, as many companies are loss making and highly indebted (shipbuilding, agriculture) or suffer from a lack of maintenance and unresolved real estate issues (tourism). The cancellation of share sales and strong resistance from trade unions have also delayed privatisation. The declared policy objective is to accelerate privatisation and finalise it by end-2005 (for shipbuilding later). This is expected to be achieved through the re-organisation of the Privatisation Fund, a more effective communication policy, new privatisation methods (e.g. public private partnership), and financial restructuring of companies to make them more attractive for potential investors. The PEP remains quite vague on the precise policy measures. It does not quantify the potential budgetary costs of state financial support. Overall, given recent implementation delays, major financial problems of a large number of enterprises and fiscal constraints, the completion of privatisation by end-2005 seems rather ambitious and would certainly require a stronger commitment on the part of the government, including the willingness to eventually liquidate enterprises. On competition policy, some progress has been made, namely with respect to the establishment of the legal framework for anti-trust and state aid policy, although it has not yet been sufficiently aligned with the EU acquis. Further legislative harmonisation is therefore a key priority. The problem of a still weak administrative capacity and enforcement record are planned to be addressed through an increase in staff and financial resources of the competition agency. The PEP rightly puts emphasis on strengthening state aid policy through the establishment of a fully-fledged state aid registry, enhanced cooperation with sector regulators and measures raising public awareness about state aid rules. With respect to reforms in the area of public utilities, the 2004 PEP very much focuses on recent and outstanding legislation. In the energy sector, a number of new laws are in preparation aimed at bringing regulatory frameworks and policies gradually in line with the EU acquis. The schedule for next phases of the privatisation of the oil company INA remains open. In the transport sector, an important objective is the restructuring of Croatian railways and opening of railway services to competition. In the telecommunication area, the license for a third GSM operator has been awarded with a view to enhancing competition. Also the market entry of new operators on the fixed line market is being prepared. The PEP envisages liberalising the telecommunication market by 2007 through the adoption of EU compatible legislation. SME policies are guided by the “Programme of Incentives for SME’s (2004-2008)” which was adopted by the government in May 2004. The programme foresees a large number of support schemes, such as subsidies, state guarantees and co- financing arrangements. The PEP does not provide estimates on their respective effects on growth or on budgetary costs.

The Croatian financial sector is dominated by banks, accounting for 83% of assets. The privatisation of the Croatian banking sector was largely completed by end-2000, followed by further sector consolidation which reduced the number of banks from 53 at end-1999 to 40 in 2004. Almost 97% of banking assets are privatised and 91% are foreign owned. Banks are generally very liquid, well capitalised, and highly profitable. Banking supervision lies within the responsibility of the Croatian National Bank and is in line with relevant EU legislation. The credit risk associated with the high level of euro-isation as well as a generally weak legal framework for the enforcement of creditor rights are potential vulnerabilities to the banking system. The PEP does not report on new reform measures related to the banking sector. With respect to the non-banking financial sector, major policy initiatives concern further alignment of legislation, the promotion of investment funds, and the introduction of an efficient and unified supervision. The 2004 PEP does not give any indication as to the privatisation of the largest insurance company that was repeatedly announced in the past but has not yet materialised.

6.3. Labour market

The 2004 PEP gives a fairly comprehensive overview of the situation on the Croatian labour market. Participation rates are relatively low, unemployment of youth is particularly high, and long-term employment accounts for more than one half of total employment. Recent labour market reforms have introduced incentives for active job seeking and substantially reduced the level of employment protection that has been assessed as one of the most stringent in Europe. These measures are expected to continue to improve the functioning of labour markets, as evidenced by recent increases in employment despite a slight deceleration of growth. Employment subsidies are mentioned as the main financial instrument to enhance employment creation, but the document does not provide details, e.g. on the design and fiscal costs. Unfortunately, the programme lacks a precise description of future measures listed in the structural reform matrix which includes, among others, the setting up of redundancy programmes for companies under restructuring, the implementation of an active employment policy and the institutional strengthening of the Croatian Employment Bureau. During 2003 and 2004, the Croatian authorities have prepared a National Action Plan for Employment, which has not yet been adopted. On social security reforms, the PEP outlines a number of policy objectives, such as enhancing the efficiency and transparency of the social system, but remains rather vague on the nature of policy measures planned to be undertaken. It also remains unclear what is precisely meant by the envisaged de-centralisation and partial privatisation of social welfare activities.

6.4. Other reform areas

Public administration reform is a key priority under the 2004 PEP. A comprehensive strategy of public administration reform has not yet been developed and adopted by the government. The 2004 PEP contains an ambitious agenda of policy measures aimed at improving transparency and efficiency of state administration, including the implementation of a new Civil Service Act. The programme could have elaborated more on specific reform measures envisaged to strengthen institutional capacity relevant for the acquis in the economic and financial domain. In the area of agricultural reform, the 2004 PEP envisages the development of agricultural land markets, the improvement of the cadastre system, the privatisation of agricultural companies and the establishment of institutions required for future participation in the Common Agricultural Policy. Detailed information could have been provided on the development of state support for this sector over the programme period and on the proposed agricultural policy instruments. The programme also foresees continuing work on a Regional Development Strategy that does not yet exist in Croatia. Urgent judiciary reforms that have been delayed for long are another key priority and should help enforcing creditor’s rights and improving the overall business environment. The planned restructuring of the Croatian railways entails the opening of railway infrastructure to domestic and foreign providers of transport services, the division into core and non-core business and the privatisation of the latter. These measures should contribute to enhancing competition and improving the quality and efficiency of passenger and cargo transport services. The 2004 PEP also covers areas such as environmental protection, education and research, tourism, and public procurement.