Opening borders economically and fostering better cooperation in the region is important to create the environment to attract large companies. We must not forget the need for connectivity, improved trade facilitation, and upgraded transport infrastructure for deeper regional and global integration, especially within the Western Balkans and the European Union.
“IFC supports the European Union accession path of the Western Balkans countries and helps them address their main development constraints. Our support is aimed at improving the business environment, private sector development and competitiveness, and regional cooperation and connectivity. IFC can support the governments of the region in privatizing state-owned enterprises, either in an advisory capacity or by financing acquisition by investors. It is our goal to see privatization happen through competitive and transparent tenders”, said Thomas Lubeck, IFC Regional Manager for CEE about business climate, cooperation and regional development in an outgoing interview, exclusively for Diplomacy&Commerce magazine.
In your opinion, what needs to be done to make the Western Balkans region more attractive to investors?
The WB countries must continue improving their investment climates. The region is severely hit by the COVID-19 pandemic, some countries more than others are. In the medium term, the outlook is improving for the region’s growth, but it remains far below its potential. From our perspective, tackling of structural issues needs to be accelerated. The challenges are remarkably similar across the countries—limited fiscal space, state-owned enterprises competing with or replacing the private sector, and burdensome administrations and bureaucracies. These lead to suboptimal levels and quality of private investment, high informal employment, and low labor market participation. The current COVID crisis has also highlighted the importance of internet speeds as well as digital delivery of goods and services.
Over the last few years, IFC has worked closely with various companies to introduce good corporate governance practices that can help attract investments to local businesses from the international market. I am glad that more and more companies see the benefits of good corporate governance practices. By attracting foreign investors and partners, these companies gain a competitive advantage, increase financial returns, and provide shareholders with greater security on their investments.
Where do you see main potential for the region’s growth?
The Western Balkans growth model was vulnerable even before the COVID-19 pandemic. In recent years, private consumption in the region accounted for more than 60 percent of GDP. Consumption growth in some countries was fueled by higher public spending, one-off wage policies, near double-digit growth in household lending, and remittance inflows. This raised questions on the sustainability of this consumption-driven growth.
However, growth of investment in the region in 2019 has been limited. What Serbia and other countries need are more export-oriented foreign direct investments, especially in higher domestic value-added production. FDI of this nature is difficult to attract and is heavily dependent on a favorable and predictable business environment.
Opening borders economically and fostering better cooperation in the region is of utmost importance to create the environment to attract large companies. We must not forget the need for connectivity, improved trade facilitation, and upgraded transport infrastructure for deeper regional and global integration, especially within the Western Balkans and the European Union.
“Serbia has advanced four places on the World Bank’s Doing Business rankings for 2020 and currently occupies the 44th place among 190 countries listed”
You have lived in Serbia for the past six years and have witnessed many changes in the business environment here and in the region. Have you seen improvements and to what extent?
Serbia has advanced four places on the World Bank’s Doing Business rankings for 2020 and currently occupies the 44th place among 190 countries listed. Of the countries in the region, North Macedonia placed the highest, taking the 17th spot, Slovenia is 37th, while Montenegro and Croatia are below Serbia with 50th and 51st spots, respectively; Bulgaria is 61st, and Albania is 82nd. I believe that Serbia, as well as the other countries of the region, has further potential to climb the ranks, primarily by improving the business environment through regulatory reform, regulation of parafiscal charges, public procurement procedures, and investments in infrastructure. I feel most countries of the region continue to make systemic efforts to create a more attractive business climate.
Speaking of Serbia, IFC has implemented several projects to improve its Doing Business ranking. The Debt Resolution and Business Exit (DRBE) project, in partnership with State Secretariat for Economic Affairs of Switzerland (SECO), has focused both on improving legislation and resolving non-performing loans (NPLs). In addition, the Government has taken significant steps to attract for private sector investment to improve the delivery of infrastructure services including Belgrade’s Nikola Tesla Airport, generation of electricity from wind power and through environmental remediation at the Vinča landfill – all of which have been supported by IFC advisory and financing.
With IFC’s support, Serbia amended its bankruptcy laws twice, in 2014 and in 2017, enabling over 300 debtors to submit prepackaged reorganization plans, of which approximately more than 120 were confirmed by the court. This, in the short run alone, is estimated to have saved more than 15,000 jobs and restructured more than €2 billion of debts. As of the last quarter of the year 2019, Serbia’s NPLs stood at 4.1 percent, its lowest level for over a decade.
To make economic recovery sustainable over the medium term, some countries in the region need to build more resilience to economic shocks and all countries must continue to pursue structural reforms to boost productivity and economic growth.
“In Serbia, digitization is without doubt the biggest opportunity for the country to become more competitive and efficient”
How has IFC contributed to doing business in the Western Balkans region?
In Serbia, digitization is without doubt the biggest opportunity for the country to become more competitive and efficient and to have a faster and more sustainable economic growth. Digitization and eGovernment are also powerful tools to counter corruption.
I must mention the three-year Investment Climate Project (2018-2021) implemented by IFC, in cooperation with the Government of the Republic of Serbia and supported by the U.K. Good Governance Fund and the British Embassy in Belgrade. It aims to decrease administrative burden for businesses by simplifying 1,250 administrative procedures for issuance of various licenses and permits, digitization of 100 procedures (eDozvole), and removing practices that negatively impact development of competition.
The digitization of issuance of permits and licenses is already in the implementation phase. The first digitized permits were ready in March, but the COVID-19 pandemic prevented the team from testing and going live. We now expect this to be done in June-July and all 100 procedures under this project to be fully digitized by the end of this year.
IFC works to create markets that give new opportunities to people in developing countries. Belgrade’s Waste-to-Energy project shows how our innovative approach has helped the Serbian capital solve a major ecological problem resulting from an unmanaged landfill. In Albania, IFC was mandated to advice on structuring and implementing a medical laboratory network through a public-private partnership. IFC assisted the Ministry of Health in designing and tendering a PPP to partner with a qualified private healthcare company to invest in and manage laboratory services in 18 public health facilities, which will provide access to improved services for the country’s entire population, but especially the poor who only have access to the local health system.
Could you compare the business environment in Serbia with the business environments in other countries of the region? To what extent has the COVID-19 pandemic affected the region?
Serbia has been recording a positive trend and I am optimistic that, with progress in accession to the EU, the situation in various fields is getting better. However, the COVID-19 pandemic has led to deterioration of conditions for doing business in all countries of the region. According to the World Bank Group report on the Economic and Social Impact of COVID-19, Western Balkan countries have different economic strengths and weaknesses. So, they will react differently to the pandemic.
Labor markets that are informal, temporary, and where self-employment is disproportionate, will be hit by job losses, which will cause considerable hardship, especially if the social safety nets are not adequate. By end 2019, the employment rate in the Western Balkans had reached 44.3 percent, up from 42.7 percent for 2018 and 36.9 percent for 2012. However, many of the jobs created were in low-paying labor-intensive manufacturing and services. Another aggravating factor is outward migration or “brain drain”–the emigration of able, highly-educated individuals in search of higher-paying jobs or better working conditions, usually to the EU. However, what I call “brawn drain”, which is the migration of unskilled and semi-skilled labor, is also an important issue.
The importance of tourism to their economies makes Albania, Montenegro, and Kosovo more vulnerable to the economic impact of the crisis than the rest of the countries in the region.
Fiscal policy support is crucial to help the private sector through the pandemic, but countries in the region have limited fiscal space for new measures. In 2019 all Western Balkans countries had fiscal deficits, though all were relatively small. However, despite relatively strong revenue performance in recent years, the fact that revenues in the region trail those in the Euro Zone also limits fiscal space for crisis response, when compared to advanced economies. This is especially true of Kosovo and Albania. Public debt levels in the region are still elevated—a legacy of the global financial crisis and the Euro Zone crisis—except for Kosovo and Bosnia and Herzegovina.
Which of IFC’s recent investments in the region you would highlight as the most important and progress drivers?
I would definitely highlight the environmental remediation and Waste-to-Energy project in Vinča, Belgrade, as the first large-scale public-private partnership environmental infrastructure project in the region. This PPP will help clean up one of Europe’s largest outdated landfills and construct a new, sustainable waste-management complex to reduce pollution and mitigate climate change. The Belgrade Waste-to-Energy project involves the closure and remediation of the overcapacity landfill in Vinča, a suburb of Belgrade, the construction of a new EU-compliant landfill, a waste-to-energy generation plant, and a facility to process construction and demolition waste. Construction has started and is expected to take up to three-and-half years.
The other major investment would be the Belgrade airport concession to boost development of Serbia’s infrastructure. We were delighted to support the entry of a global leader in airport operation to Serbia, helping Nikola Tesla Airport reach its full potential for all stakeholders. This was the first airport concession in the country, and we hope it will serve as a model for how the private sector can deliver efficient infrastructure solutions for the region.
IFC has supported businesses worldwide to mitigate negative impacts of the COVID19 pandemic. How many companies IFC is planning to support?
IFC is providing $8 billion in fast-track financial support to help existing clients to sustain economies and preserve jobs during this crisis that will hit the poorest and most vulnerable countries the hardest. Significant interest has been expressed for IFC’s $8 billion facility by nearly 300 IFC clients across all regions and diverse sectors (for example, finance, health and pharmaceuticals, agribusiness, services, and infrastructure). Given the wide and deep impact of COVID-19, IFC expects that the facility will be fully utilized by clients and will potentially get oversubscribed. Strong emphasis will be placed on supporting clients operating in low-income and fragile and conflict-affected countries.
“The construction work for the Belgrade Waste-to-Energy Project in Vinča, which will provide over 1.7 million inhabitants of the Serbian capital with a modern waste-management system, is in full swing”
IFC initiated the landmark PPP aimed at solving the Vinča landfill problem in the Serbian capital. How was your cooperation with the City of Belgrade?
The construction work for the Belgrade Waste-to-Energy Project in Vinča, which will provide over 1.7 million inhabitants of the Serbian capital with a modern waste-management system, is in full swing. With the financial close reached, lenders have started disbursements to support timely implementation of the project.
The project is being managed in close collaboration with the City of Belgrade, which is one of IFC’s strongest partners. IFC has been working closely with the City to realize its vision to improve services and quality of life for Belgrade’s citizens. IFC has several advisory mandates and is considering direct financing of several projects to achieve this.
For instance, IFC is advising the City on structuring and implementing PPPs for large infrastructure projects in water and sanitation. The private partners will be selected through a competitive tender based on their expertise, experience, and cost-efficiency. PPPs enable the City to tap into world-class know-how at competitive prices, resulting in improved services for citizens and mobilization of private sector financing, thus reducing the direct impact on the City’s budget.
You have managed innovative projects in capital market development, renewable energy infrastructure, and anti-crisis investing in the financial sector. What are your professional preferences for the future?
Sadly, my time in Belgrade has come to an end. Working and living in this region has been a great pleasure, personally and professionally. As of June 15, I will assume responsibility for IFC’s PPP and Concessions Transaction Advisory Business for South and East Asia Pacific, based in Singapore. The challenges faced in many Asian countries are quite different, but I am still hoping to leverage the experiences and skills I developed here. After six dynamic and successful years in the Balkans, I am looking forward to new challenges.