NATIONAL TREATMENT OF INTERNATIONAL INVESTMENT IN SOUTH EAST EUROPEAN COUNTRIES: MEASURES PROVIDING EXCEPTIONS

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1 STABILITY PACT SOUTH EAST EUROPE COMPACT FOR REFORM, INVESTMENT, INTEGRITY AND GROWTH NATIONAL TREATMENT OF INTERNATIONAL INVESTMENT IN SOUTH EAST EUROPEAN COUNTRIES: MEASURES PROVIDING EXCEPTIONS ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT OCTOBER 2003

2 STABILITY PACT SOUTH EAST EUROPE COMPACT FOR REFORM, INVESTMENT, INTEGRITY AND GROWTH NATIONAL TREATMENT OF INTERNATIONAL INVESTMENT IN SOUTH EAST EUROPEAN COUNTRIES: MEASURES PROVIDING EXCEPTIONS ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT

3 The Stability Pact for South Eastern Europe is a political declaration and framework agreement adopted in June 1999 to encourage and strengthen co-operation among the countries of South East Europe (SEE) and to facilitate, co-ordinate and streamline efforts to ensure stability and economic growth in the region. (see The South East Europe Compact for Reform, Investment, Integrity and Growth ( The Investment Compact ) is a key component of the Stability Pact under Working Table II on Economic Reconstruction, Development and Co-operation. Private investment is essential to facilitate the transition to market economy structures and to underpin social and economic development. The Investment Compact promotes and supports policy reforms that aim to improve the investment climate in South East Europe and thereby encourage investment and the development of a strong private sector. The main objectives of the Investment Compact are to: Improve the climate for business and investment. Attract and encourage private investment. Ensure private sector involvement in the reform process. Instigate and monitor the implementation of reform. The participating SEE countries in the Investment Compact are: Albania, Bosnia and Herzegovina, Bulgaria, Croatia, former Yugoslav Republic of Macedonia (henceforth Republic of Macedonia or FY Republic of Macedonia), Moldova, Romania and Serbia and Montenegro. Building on the core principle of the Investment Compact that ownership of reform rests within the region itself, the Investment Compact seeks to share the long experience of OECD countries. It provides region-wide peer review and capacity building through dialogue on successful policy development and ensures identification of practical steps to implement reform and transition. The work of the Investment Compact is actively supported and financed by seventeen OECD member countries: Austria, Belgium, Czech Republic, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Norway, Sweden, Switzerland, Turkey, United Kingdom and United States. (see 2 NATIONAL TREATMENT OF INTERNATIONAL INVESTMENT IN SOUTH EAST EUROPEAN COUNTRIES OECD 2003

4 FOREWORD National treatment is a key element of a favourable investment climate. It provides to non resident foreign investors and foreign controlled enterprises established in the country, treatment no less favourable than that accorded to domestic enterprises in like circumstances. This principle is embodied in numerous bilateral investment treaties and the OECD Investment Instruments. The application of the national treatment principle in all countries of the Region represents a tangible medium-term goal for South East European (SEE) countries as part of their reform agenda to create a high-quality investment environment. Success here will constitute a strong message to the investor community of the political will of the countries of the Region to match recognised international standards of investor treatment and to provide for equality of competitive conditions. At their first meeting at ministerial level held in Vienna in July 2002, the Ministers of Economy and designated Ministers dealing with business and investment in SEE countries called for the elimination of obstacles to national treatment and invited the Investment Compact to survey any remaining deviations from this standard. In response, the Investment Compact has conducted national treatment reviews for all SEE countries the results of which are contained in this report. The report shows that the laws of most countries contain relatively few discriminatory elements. However, a number of significant exceptions remain and the uneven implementation of formal non discriminatory rules still raise concern. Most of these barriers are the heritage of the past and have very little economic justification. The national treatment review was prepared by the OECD and a network of regional experts in cooperation with the SEE Country Economic Teams. These reports were finalised through a process of questionnaires, individual meetings, dialogue and peer review in which all SEE countries and the private sector commented on various drafts and included a drafting meeting hosted by Romania in Bucharest in June The information contained in the report is current as at July Earlier drafts of Chapters 1 (Regional Overview) and 2 (Summary of Most Significant National Measures) have been considered by the second meeting of the South East Europe Investment Compact at Ministerial level held in Vienna in July The statement adopted by ministers on this occasion (see Appendix 1 to Chapter 1) drew substantially on the recommendations identified in this report. The summary of the most important deviations from national treatment contained in Chapter 2 are discussed in greater detail in the individual country chapters (Chapters 3 to 10) which also provide a full assessment of laws and regulations faced by international investors. Progress in applying national treatment throughout South East Europe will be regularly reviewed in the Monitoring Instruments of the Investment Compact and at the annual SEE Ministerial meeting to be held in Vienna in July This report, including the Regional Overview as well as individual chapters for each SEE country, is published under the responsibility of the Investment Compact Project Team. Manfred Schekulin Director, Export and Investment Policy Department Federal Ministry for Economic Affairs and Labour of Austria Co-Chair, Investment Compact Project Team Rainer Geiger Deputy Director Directorate for Financial Fiscal and Enterprise Affairs, OECD Co-Chair, Investment Compact Project Team Cristian Diaconescu State Secretary Ministry of Foreign Affairs of Romania Co-Chair, Investment Compact Project Team NATIONAL TREATMENT OF INTERNATIONAL INVESTMENT IN SOUTH EAST EUROPEAN COUNTRIES OECD

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6 ACKNOWLEDGEMENTS This study has been undertaken by the Investment Compact Project Team co-chaired by Austria, OECD and Romania. The work has been led by Rainer Geiger (Deputy Director for Financial, Fiscal and Enterprise Affairs, OECD), Manfred Schekulin (Director for Export and Investment Policy, Austrian Ministry for Economic Affairs and Labour) and Cristian Diaconescu (State Secretary for Bilateral Affairs, Romanian Ministry of Foreign Affairs). The research has benefited from the contributions of a team of expert consultants, mainly from the region. Slavica Penev (Economics Institute, Belgrade) and Matija Rojec (Faculty of Social Sciences, University of Ljubljana) organised and coordinated the work of the consultants and presentation of the draft report. Input for individual country reports has been provided by Will Bartlett (School for Public Studies, University of Bristol), Fikret Cauševiƒ (Economics Institute, Sarajevo), Nevenka Cuckoviƒ (Institute for International Relations, Zagreb), Ahmet Mancellari (Department of Economics, University of Tirana), Slavica Penev (Economics Institute, Belgrade), Matija Rojec (Faculty of Social Sciences, University of Ljubljana), Stoyan Totev (Institute of Economics, Bulgarian Academy of Sciences, Sofia) and Liviu Voinea (Academy of Economic Studies, Bucharest). Marie-France Houde, DAF/CMIS, OECD advised on the preparation of the questionnaire. The Country Economic Team Leaders of Albania, Bosnia and Herzegovina and Bulgaria provided information in response to the Questionnaire on the Identification of Deviations from National Treatment for Incoming Investment and for Activities by Established Foreign-Controlled Enterprises'. The report has been reviewed and enhanced by the participants of the Drafting Session of the 2nd Ministerial Conference on Attracting Investment to South East Europe: Removing Obstacles, held in Bucharest, 5-6 June 2003 (see Appendix 2 to Chapter 1). The final report has been edited and prepared for publication by Declan Murphy (Programme Director), Deniz Eröcal (Administrator) and Georgiana Pop (Regional and Policy Reform Assistant), from the OECD Investment Compact team. NATIONAL TREATMENT OF INTERNATIONAL INVESTMENT IN SOUTH EAST EUROPEAN COUNTRIES OECD

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8 TABLE OF CONTENTS PART ONE: SYNTHESIS... 9 Chapter 1. REGIONAL OVERVIEW INTRODUCTION CONCEPTS, METHODOLOGY AND STRUCTURE OF THE REPORT OVERVIEW OF MEASURES GENERAL RECOMMENDATIONS Chapter 2. SUMMARY OF MOST SIGNIFICANT NATIONAL MEASURES ALBANIA BOSNIA AND HERZEGOVINA BULGARIA CROATIA FY REPUBLIC OF MACEDONIA MOLDOVA ROMANIA SERBIA AND MONTENEGRO A. SERBIA B. MONTENEGRO APPENDIX 1. MINISTERIAL STATEMENT APPENDIX 2. LIST OF PARTICIPANTS TO THE DRAFTING SESSION PART TWO: COUNTRY REVIEWS Chapter 3. ALBANIA INTRODUCTION DETERMINANTS OF EXISTING AND FUTURE FDI INFLOWS IN ALBANIA TRANSITION PROCESS IN ALBANIA, AND THE FDI REGULATORY FRAMEWORK AND POLICIES THE LEGAL AND REGULATORY MEASURES FOR FDI IN ALBANIA: GENERAL MEASURES THE LEGAL AND REGULATORY FRAMEWORK FOR FDI: SECTORIAL MEASURES OTHER RELEVANT ELEMENTS OF FDI FRAMEWORK Chapter 4. BOSNIA AND HERZEGOVINA INTRODUCTION INVESTMENT OPPORTUNITIES AND BARRIERS IN BOSNIA AND HERZEGOVINA THE CONSTITUTIONAL/LEGAL CONTEXT OF BOSNIA AND HERZEGOVINIA, CURRENT STATUS OF THE TRANSITION PROCESS AND MAJOR FUTURE TASKS THE LEGAL AND REGULATORY MEASURES FOR FDI: GENERAL MEASURES THE LEGAL AND REGULATORY FRAMEWORK FOR FDI: SECTORAL MEASURES OTHER RELEVANT ELEMENTS OF FDI FRAMEWORK Chapter 5. BULGARIA INTRODUCTION INVESTMENT OPPORTUNITIES AND BARRIERS IN BULGARIA TRANSITION PROCSS IN BULGARIA, AND FDI STRATEGY AND POLICIES THE LEGAL AND REGULATORY MEASURES FOR FDI: GENERAL MEASURES THE LEGAL AND REGULATORYFRAMEWORK FOR FDI: SECTORAL MEASURES OTHER RELEVANT ELEMENTS OF FDI FRAMEWORK NATIONAL TREATMENT OF INTERNATIONAL INVESTMENT IN SOUTH EAST EUROPEAN COUNTRIES OECD

9 Table of Contents Chapter 6. CROATIA INTRODUCTION THE DETERMINANTS OF FDI INFLOWS: INVESTMENT OPPORTUNITIES AND BARRIERS IN CROATIA ECONOMIC TRANSITION IN CROATIA: THE DEVELOPMENT OF THE REGULATORY FRAMEWORK AND FDI STRATEGY AND POLICIES THE LEGAL AND REGULATORY MEASURES FOR FDI: GENERAL MEASURES THE LEGAL AND REGULATORY FRAMEWORK FOR FDI: SECTORAL MEASURES OTHER RELEVANT ELEMENTS OF FDI FRAMEWORK Chapter 7. FY REPUBLIC OF MACEDONIA INTRODUCTION DETERMINANTS OF EXISTING AND FUTURE FDI INFLOWS THE LEGAL AND REGULATORY MEASURES FOR FDI: GENERAL MEASURES THE LEGAL AND REGULATORY FRAMEWORK FOR FDI: SECTORAL MEASURES OTHER RELEVANT ELEMENTS OF FDI FRAMEWORK Chapter 8. MOLDOVA INTRODUCTION INVESTMENT OPPORTUNITIES AND BARRIERS IN MOLDOVA TRANSITION PROCESS AND FDI STRATEGY/POLICY IN MOLDOVA THE LEGAL AND REGULATORY MEASURES FOR FDI: GENERAL MEASURES THE LEGAL AND REGULATORY FRAMEWORK FOR FDI: SECTORAL MEASURES OTHER RELEVANT ELEMENTS OF FDI FRAMEWORK Chapter 9. ROMANIA INTRODUCTION DETERMINANTS OF EXISTING AND FUTURE FDI INFLOWS IN ROMANIA TRANSITION PROCESS IN ROMANIA AND FDI STRATEGY AND POLICIES THE LEGAL AND REGULATORY MEASURES FOR FDI: GENERAL MEASURES THE LEGAL AND REGULATORY FRAMEWORK FOR FDI: SECTORAL MEASURES OTHER RELEVANT ELEMENTS OF FDI FRAMEWORK ANNEX A. SCHEDULE OF CAPITAL ACCOUNT LIBERALISATION OF ROMANIA ANNEX B. INCENTIVES GRANTED BY THE LOCAL AUTHORITIES IN ROMANIA TO INVESTORS Chapter 10. SERBIA AND MONTENEGRO NOTE ON RECENT CONSTITUTIONAL CHANGES SERBIA INTRODUCTION DETERMINANTS OF FDI INFLOWS TRANSITION PROCESS IN SERBIA, AND FDI STRATEGY AND POLICIES THE LEGAL AND REGULATORY MEASURES FOR FDI: GENERAL MEASURES THE LEGAL AND REGULATORY MEASURES FOR FDI: SECTORAL MEASURES OTHER RELEVANT ELEMENTS OF FDI FRAMEWORK MONTENEGRO INTRODUCTION DETERMINANTS OF EXISTING AND FUTURE FDI INFLOWS THE DEVELOPMENT OF MONTENEGRO S REGULATORY FRAMEWORK, STRATEGY AND POLICIES TOWARDS FDI THE LEGAL AND REGULATORY MEASURES FOR FDI: GENERAL MEASURES THE LEGAL AND REGULATORY FRAMEWORK FOR FDI: SECTORAL MEASURES OTHER RELEVANT ELEMENTS APPENDIX 3. PRINCIPAL CONTACTS ON INVESTMENT IN SOUTH EAST EUROPE NATIONAL TREATMENT OF INTERNATIONAL INVESTMENT IN SOUTH EAST EUROPEAN COUNTRIES OECD 2003

10 PART ONE SYNTHESIS

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12 Chapter 1. REGIONAL OVERVIEW 1. INTRODUCTION The Ministers of Economy and designated ministers in charge of investment in South East European (SEE) countries held their first ministerial meeting in Vienna on 18 July 2002 where they adopted the Ministerial Declaration on Attracting Investment to South East Europe: Common Principles and Best Practices. One of the key principles of this Declaration relates to the importance of national treatment for foreign investors at both the pre and post establishment stage. SEE Ministers declared that exceptions should be clearly and precisely formulated and periodically reviewed with a view to phasing them out, in order to ensure the fair and equitable treatment of domestic and foreign investments. To implement this principle the Declaration called for improved notification and the publication of lists of national measures providing exceptions to national treatment and the rationale for maintaining these measures. This report responds to that request and was presented to the Second Ministerial meeting held in Vienna on July It provided background for the Ministerial Statement (see Appendix 1) and the renewed commitment by SEE countries to extend national treatment. The explicit objective of the analysis is to identify national measures providing deviations from national treatment for both incoming investment as well as activities by already established foreign-controlled enterprises. The information contained in the report is current as at July National treatment is the commitment of a country to accord to foreign investors and to foreigncontrolled enterprises in its territory treatment no less favourable than that accorded in like situations to domestic enterprises. National treatment is the basic principle of the OECD liberalisation instruments, most notably of the OECD Declaration and Decisions on International Investment and Multinational Enterprises and the Code of Liberalisation of Capital Movements. Therefore, national measures providing exceptions to national treatment represent a deviation from OECD principles and rules in the area of foreign direct investment. This holds for de jure as well as for de facto deviations from national treatment. While de jure measures mean explicitly formulated deviations from national treatment, de facto measures mean deviations in the implementation of legal rules, which formally do not discriminate. In this sense the latter measures can be an even more serious obstacle to foreign investors, since they are hidden and unpredictable. 2. CONCEPTS, METHODOLOGY AND STRUCTURE OF THE REPORT Foreign investors in this report are defined as legal entities of one country (investing or home country) investing in another country (host country), while foreign-controlled enterprises are enterprises, which operate in the territory of a particular country and are owned or controlled directly or indirectly by nationals of other countries. The major concepts used in the report are as follows: National treatment in pre-establishment is the commitment of a (host) country to accord to the investment by non-resident enterprises in its territory, including the right of establishment, treatment no less favourable than that accorded in like situations to resident enterprises. Deviations from national treatment in pre-establishment includes any limitations on non-resident (as opposed to resident) investors affecting their operations and other requirements set at the time of entry or establishment; for NATIONAL TREATMENT OF INTERNATIONAL INVESTMENT IN SOUTH EAST EUROPEAN COUNTRIES OECD

13 1. Regional Overview instance, prohibition of foreign investment in certain sectors, ceilings of foreign equity share, prohibition of foreign acquisitions, prohibition of foreign investment in certain geographical areas, authorisation procedures, specific corporate organisation requests, etc. National treatment in post-establishment is the commitment of a (host) country to accord to foreigncontrolled enterprises operating in its territory treatment, under its laws, regulations and administrative practices, no less favourable than that accorded in like situations to domestic enterprises. Deviations from national treatment in post-establishment includes any limitations set on activities of already established foreign-controlled (as opposed to domestic) enterprises; for instance, general authorisation or licensing requirements, limitations on acquisition or expansion of activities, ceilings on foreign ownership, grants or financial assistance for specific activities, higher or special taxes, public work projects reserved to local firms, etc. Exceptions concern measures that do not conform to the national treatment principle because they treat foreign controlled-enterprises different, i.e. less favourably than their domestic counterparts in like situations. Measures, which qualify as exceptions include restrictions banning foreign investment in certain sectors, or requiring authorisation or licensing as prerequisites for investment, setting ceilings on foreign ownership, etc. For example, if authorisation for acquisition of a majority equity share in a company is requested in general it is not an exception to national treatment, however, if this authorisation is requested only in the case when the acquirer is a foreign-controlled enterprise, this constitutes an exception to national treatment. In the report exceptions are classified into those related to: a. Investment by foreign investors and by established foreign-controlled enterprises, with two subgroups of measures related to: (i) approval and licensing/screening procedures and (ii) equity and other discriminatory measures on establishment and/or expansion. b. Corporate organisation. c. Employment of foreigners and movement of key personnel. d. Privatisation. e. Government procurement. Transparency items concern measures that discriminate against foreign-controlled enterprises but are motivated by reasons of public order and essential security interests, and other means that do not discriminate against foreign-controlled enterprises, but nevertheless represent an impediment to foreign investment. Transparency measures include restrictions on activities in areas covered by public monopolies and concessions, public aids and subsidies granted to government-owned enterprises by the state as a shareholder in the enterprises concerned, and corporate organisation requirements concerning the nationality of management or director positions in host countries. In the report transparency measures are classified into those related to: a. Security considerations, which relate to approvals, general/equity restrictions, location restrictions, etc. b. Public order considerations, which also relate to approvals, general/equity restrictions, location restrictions, etc. c. Nationality of management. Measures and transparency items are either trans-sectoral, being applied for all the sectors, or sectoral, being applied only in individual sectors. The countries reviewed in the report are all the signatories of the Ministerial Declaration on Attracting Investment to South East Europe: Common Principles and Best Practices (July 2002), i.e. Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Republic of Macedonia (hereafter Macedonia), Moldova, Romania, Serbia and Montenegro. The report is based on the following sources: (i) field work of project team members, (ii) Questionnaire for the Identification of Deviations from National Treatment for Incoming Investment and for Activities by Established Foreign-Controlled Enterprises prepared for the project and responded to by the Country Economic Team Leaders (Albania, Bosnia and Herzegovina, Bulgaria), 12 NATIONAL TREATMENT OF INTERNATIONAL INVESTMENT IN SOUTH EAST EUROPEAN COUNTRIES OECD 2003

14 1. Regional Overview (iii) available analysis, reports, guides, web pages, articles, etc., (iv) comments and suggestions of the participants of the Drafting Session of the 2nd Ministerial Conference Attracting Investment to South East Europe: Removing Obstacles, held in Bucharest, 5-6 June 2003 (see Appendix 1). The report contains two parts. This document is the first part and presents a Regional Overview of national measures providing exceptions to national treatment in South East European countries. The second part contains detailed presentations of national measures by individual countries. Recommendations for the strengthening of national treatment principles and for the gradual phasing out of exceptions are given on the general level for all the countries, as well as specifically for individual countries, in this second part. 3. OVERVIEW OF MEASURES A Matrix of National Measures Providing Exceptions to National Treatment and of Transparency Measures (see Table 1) provides an overall summary of exceptions and transparency measures in individual SEE countries and in the region as a whole. The major intention of the matrix is to show the frequency of individual country exceptions and transparency measures and in the region as a whole. The analysis has revealed that eight SEE countries altogether have exceptions in 68 fields. The respective number for transparency measures is By far the most frequent type of exception measures relate to: Equity and other discriminatory measures on establishment and/or expansion (41 out of 68 exceptions), Measures in the field of approval and licensing/screening procedures (17 out of 68 exceptions) Corporate organisation measures (5). Exceptions in the field of employment of foreigners and movement of key personnel, privatisation and government procurement are very few. Among the transparency measures, the most frequent are those related to: Security considerations (12 out of 20 transparency measures), Nationality of management requests (4) Public order considerations (4) Exceptions Exceptions in the field of authorisation and licensing/screening procedures relate to various approval, authorisation, licensing/screening and registration procedures for foreign investors and foreign-controlled enterprises. Four countries (Bosnia and Herzegovina, Republic of Macedonia, Moldova and Montenegro) have trans-sectoral measures of this kind. They relate to the permission of each foreign investment, approval for the establishment of a branch, approval of larger foreign investments and specific registration procedures for foreign-controlled enterprises. The overwhelming trend in the world is the elimination of trans-sectoral authorisations and licensing/screening procedures. It is broadly recognised that they represent an unnecessary administrative barrier, which complicates life for foreign investors and makes the investment climate of a host country less attractive and unpredictable. Almost all the SEE countries also have authorisation and licensing/screening procedures in individual sectors. The sectors, which are subject to such procedures, are the banking sector, insurance, securities market, air transport, maritime transport, fishing, and mining and quarrying. Most of these procedures in banking, insurance and securities market are in the context of prudential regulation. The following are the main features of exceptions in the field of equity and other discriminatory measures on establishment and/or expansion: a. Six countries (Bosnia and Herzegovina, Bulgaria, Croatia, Moldova, Serbia, and Montenegro) have certain types of trans-sectoral measures which restrict the establishment and/or expansion of NATIONAL TREATMENT OF INTERNATIONAL INVESTMENT IN SOUTH EAST EUROPEAN COUNTRIES OECD

15 1. Regional Overview Measures Table 1. A Matrix of National Measures Providing Exceptions to National Treatment and of Transparency Measures 4 EXCEPTIONS 68 1.Investment by foreign investors and by established foreign-controlled enterprises Approval and licensing/ screening procedures 17 Trans-sectoral X X X X 4 Banking X X 2 Insurance X X 2 Securities market and other financial services X X 2 Air transport X X 2 Maritime transport X X 2 Mining and quarrying X 1 Fishing X X Equity and other discriminatory measures on establishment and/or 41 Trans-sectoral X X X X X X 6 Banking X X 2 Insurance X X X X X 5 Telecommunications X 1 Air transport X 1 Maritime transport X X X X X 5 Mining and quarrying X 1 Fishing X X X X 4 Trade X 1 Other sectors X X X X X X 6 Real estate X X X X X X X X X 9 2. Corporate organisation 3 Trans-sectoral X X X 1 Maritime transport X 1 Other sectors X 1 3. Employment of foreigners and movement of key personnel Albania X Bosnia and Herzegovina Bulgaria 4. Privatisation X X 2 5. Government procurement X 1 Croatia Republic of Macedonia Moldova Romania Serbia and Montenegro Serbia X Montenegro Total 2 TRANSPARENCY MEASURES Security considerations 12 Approval X 1 General/equity restriction X X X X X 5 Location restriction X X X X X 5 Other X 1 2. Public order considerations X X X X 4 3. Nationality of management 4 Banking X X 2 Energy X 1 Other sectors X 1 Source: Country reports. 14 NATIONAL TREATMENT OF INTERNATIONAL INVESTMENT IN SOUTH EAST EUROPEAN COUNTRIES OECD 2003

16 1. Regional Overview foreign-controlled enterprises in general. These trans-sectoral measures typically put forward the reciprocity condition. Denial of national treatment due to a reciprocity consideration conflicts with the multilateral approach to international economic relations as embodied in the national treatment instrument of the OECD. A very important reason for allowing foreign-controlled enterprises to engage in business on the same basis as domestic firms is the benefit of that investment flow to the host country regardless of whether the home country of that firm provides equal treatment to host country firms. Also, it is very difficult to implement the reciprocity principle in practice, which is why it may become a real obstacle for foreign investors. b. The most numerous are exceptions related to foreign real estate ownership, which is restricted in one or the other way in all of the analysed countries. The real estate restrictions typically apply to agricultural land and/or residential ownership and/or request reciprocity, while foreign-controlled companies established under the national law are as a rule given the same rights as indigenous natural and legal persons. Sometimes foreigners are permitted limited real estate rights (to build and to use), ownership rights on buildings, or the ownership rights are linked to business purposes. It is a necessity to enable foreign investors and foreign-controlled enterprises normal access to real estate for the purpose of operating the investment. Long term leases, which may be subject to periodical adjustment of lease payments are not an equivalent solution unless their duration is at least 50 years. c. Sectoral restrictions are the most frequent in insurance (Bosnia and Herzegovina, Croatia, Republic of Macedonia, Serbia, Montenegro), maritime (cabotage) transport (Albania, Bulgaria, Croatia, Romania, Serbia) and fishing (Albania, Bulgaria, Croatia, Romania). Other sectors include banking, telecommunications, air transport, audit and legal services, gaming, trade and handicrafts. Typical measures are restrictions on foreign equity or requests for local equity/partner participation and reciprocity requests. While air transport, maritime transport and fishing might be considered as being a specific case in many countries, restrictions in sectors like banking, telecommunications, trade and other business services oppose the basic development needs of SEE countries. Business services, being among the major promoters of modern economies, are relatively under represented in the whole region. Exceptions in the field of business activities of foreign-controlled enterprises are relatively few and relate to: (i) employment of foreign personnel, (ii) government procurement and (iii) privatisation. Privatisation related exceptions are in the context of mass privatisation schemes and are actually of a temporary nature. There is still reluctance in a number of countries to allow the employment of foreign skilled personnel and these restrictions can affect the viability and progress of the investment. Explicit or implicit discrimination in government procurement should be considered not only a violation of national treatment but also as a reduction of the level of competition on the local market and a sub-optimal use of government resources Transparency measures Seven of the analysed countries (all except Albania and Romania) have some kind of transparency measures related to the security considerations and in four countries (Albania, Republic of Macedonia, Moldova, Romania) these measures relate to public order considerations. Typical measures related to security considerations are foreign equity limitation and/or request for approval in the armaments production and/or trade, and restrictions and/or approvals for foreign-controlled enterprises to locate and/or to acquire real estate in military zones and/or in border zones. Similarly, measures related to public order considerations usually relate to foreign equity limitation and/or request for approval in the field of medical treatment, production of narcotic, toxic material, acquisition of real estate of historical and/or cultural relevance and/or in natural parks, the respecting of established social order and moral norms, etc. In a number of the afore-mentioned activities, the national regulation requests licensing as such and establishes specific supervision; in such context it is not clear why foreign investors or foreigncontrolled companies should be treated specifically on the grounds of public order considerations. Four NATIONAL TREATMENT OF INTERNATIONAL INVESTMENT IN SOUTH EAST EUROPEAN COUNTRIES OECD

17 1. Regional Overview of the analysed countries (Albania, Republic of Macedonia, Moldova, and Romania) also pose requests related to local nationality of management. In two countries this request is of a trans-sectoral character, while most requirements are present in the banking, energy and gaming. 4. GENERAL RECOMMENDATIONS The matrix gives information on the most common (typical) measures providing exceptions to national treatment in SEE countries in general and in individual countries. As such it offers guidelines for individual countries on where to concentrate efforts in strengthening the national treatment principle. Two considerations are important in this regard. The first is that SEE countries face a number of major problems, such as economic and political instability, transition process and underdevelopment. Furthermore, to varying degrees, they lack market institutions and related regulatory framework, and have considerable difficulties in implementing existing laws and regulations. These factors have served to reduce their attractiveness as investment location. In this broader overall business climate context, elimination of measures providing exceptions to national treatment should be considered among the basic prerequisites for creating a friendly investment environment. Foreign investors do consider the exceptions to national treatment as important obstacles and also as a reflection of host country governments attitude to foreign investors. Providing national treatment to foreign investors is usually perceived internationally as an important indicator of the country s willingness to welcome foreign investment. The second consideration is that one should not expect SEE countries to move towards a general elimination of exceptions and transparency measures. Some of these measures are also present in a number of OECD countries as well and are of a quasi permanent nature, while others are of a rather temporary nature (for instance those related to the privatisation processes) and will disappear in the transition process. However, a thorough revision of existing exceptions and transparency measures should be undertaken by each SEE country in order to define: (i) those which present a serious obstacle to foreign investors and foreign-controlled enterprises and whose elimination would obviously bring benefits to host countries and (ii) those, which seem to be unnecessary from the host countries point of view, and for which the motivation of their existence has not been clearly revealed or has vanished with the process of political and economic transition. In endeavouring to strengthen the national treatment principle, the SEE countries agree to take the following key measures over the next year, taking into account the legal situation in each country: reduce licensing and approval procedures and special registration procedures, including reciprocity requirement, for foreign investment, to the level necessary for normal company law registration take decisive steps with the view to allowing the acquisition of real estate by foreign investors for the purpose of investment reduce reporting requirements of foreign investment for statistical purposes to a minimum necessary establish transparent laws, regulations, procedures and practices regarding government procurement with a view to ensuring full national treatment streamline measures relating to work and residence permits so as to allow the movement of key personnel for investment promote the development of an effective services sector, in particular by removing obstacles to foreign direct investment in the areas of financial and professional services The country reports also reveal the existence of comprehensive transparency measures in the form of monopolies and state aids and subsidies practice in the analysed countries. These measures do not formally discriminate against foreign-controlled enterprises, but also affect domestic enterprises. In this way, they can represent an impediment to investment, distort competition and prevent new entries in the 16 NATIONAL TREATMENT OF INTERNATIONAL INVESTMENT IN SOUTH EAST EUROPEAN COUNTRIES OECD 2003

18 1. Regional Overview sectors. The issues of monopolies of state aids and subsidies are at the heart of the transition process of SEE countries, because efficient market structures and institutions are the best guarantee for the restructuring of the SEE economies. Introduction of competition via liberalisation of public utilities and financial services, establishment of independent regulatory mechanisms/institutions and privatisation of state-owned enterprises are necessary to overcome the huge investment gap of SEE countries in the infrastructural sector. Surveys of state aids and subsidies are necessary to provide reliable information on the nature and cost/benefit of these measures. The present situation is such that countries do not always know how much state aid individuals or enterprises obtain from various sources. A survey would provide countries with better chances: (i) to ensure that public finance is used efficiently, (ii) to monitor the results of state aids and subsidies policy and (iii) to reduce them as far as possible. The national treatment review of SEE countries also reveals quite frequent national management requirements in companies. These measures are usually based on perceived national security and public order considerations and are therefore classified under the transparency measures. SEE governments may nevertheless consider the elimination of these requirements, since it is in their interest to attract management skills to their country. The spread of modern management knowledge and techniques from foreign to domestic managers and from foreign-controlled to domestic companies represents one of the most appreciated and beneficial spill-over effects of FDI. Any restrictions on foreign management participation reduce the scope for this kind of spill-over effects and the full maximisation of the benefits of FDI in the host country. NATIONAL TREATMENT OF INTERNATIONAL INVESTMENT IN SOUTH EAST EUROPEAN COUNTRIES OECD

19 1. Regional Overview NOTES 1. For detail on the subject see especially OECD National Treatment for Foreign-Controlled Enterprises. Paris: Organisation for Economic Co-Operation and Development. 2. The actual number of exceptions and transparency measures is higher because individual countries have more than one measure in a particular category. 3. See especially OECD National Treatment for Foreign-Controlled Enterprises. Paris: Organisation for Economic Co-Operation and Development, p Sign X in the matrix means that a particular category of exceptions/transparency measures exists in a country. A country might apply one or more measures in a particular category. 18 NATIONAL TREATMENT OF INTERNATIONAL INVESTMENT IN SOUTH EAST EUROPEAN COUNTRIES OECD 2003

20 Chapter 2. SUMMARY OF MOST SIGNIFICANT NATIONAL MEASURES 5 1. ALBANIA FDI inflows in Albania have been relatively low. End-2002 FDI stock was US$ 945 million. Annual FDI inflows in were US$ 47.5 million, US$ 45 million and US$ 41.2 million, respectively. This is a considerable decrease compared to 1996, when the inflow was roughly twice as high. The decline of FDI inflows since 1997 was due to the series of crises, which affected the country; starting with the 1997 civil disturbances that followed the collapse of the pyramid financial schemes; the coup attempt in September 1998, and the Kosovo crisis in In the following years 2000, 2001, and 2002 FDI inflows increased and were US$ 143 million, US$ 207 million USD, and around US$ 143 million, respectively (Bank of Albania). The increase is largely explained by the improvement in the overall investment climate in the country and by the role of the privatisation process. In 2002, the FDI inflow was much lower than in 2001 due to the non-realisation of the privatisation programmes of some strategic state companies. Out of 61,859 active enterprises in Albania at the end of 2001, 1,793 (2.9 percent) were partly foreignowned companies (joint ventures) and 1,122 (1.8 percent) were wholly foreign-owned companies. In terms of numbers, 58.5 percent of all foreign-controlled companies is in trade and retailing, 21.2 percent in industry, 9.7 percent in services, 5.9 percent in construction, 3.8 percent in transport, and only 0.9 percent in agriculture (INSTAT, end-2001 data). In terms of value, 27 percent of total FDI stock is in trade, 21.2 percent in textile and leather manufacturing, 6.4 percent in food, beverages and tobacco, 6.2 percent in construction and 24.3 percent in other sectors. (Bank of Albania, end-2001 data). The only two relevant investing countries in Albania are Italy (48 percent of end-2001 FDI stock) and Greece (43 percent), followed by Republic of Macedonia and Turkey (2.2 percent each); the rest 6.8 percent is distributed among other countries of Europe and USA. Foreign investments are mainly concentrated in the main districts of the country such as the capital of Tirana and Durres, which is the largest port handling most of the import-export activities. 67 percent of all foreign-controlled companies operate in these two locations General legislative framework for investment Since the beginning of transition and the opening up process of the country, attracting FDI in Albania has been considered of critical importance for achieving the main growth, development and transition goals. The main piece of legislation related to FDI in Albania is the Law On Foreign Investment (No. 7764, date ), which aims to ensure a favourable investment climate for foreign investors in the country. Subject to a limited number of exceptions, the investment conditions for foreigners are as favourable as for local investors, i.e. national treatment principle is applied. Apart from extending the national treatment, foreign investors are also given a number of guarantees, such as: (i) no prior authorization is needed for foreign investments; (ii) there is no limitation on the percentage share of foreign participation in companies, 100 percent foreign ownership is possible; (iii) foreign investment may not be expropriated or nationalised directly or indirectly, except for special cases, in the interest of the public use, defined by law. In the case of expropriation, an immediate, appropriate and effective compensation is provided; (iv) foreign investors have the right to expatriate all funds and contributions in kind related to investments; (v) most favourable treatment according to international agreements is NATIONAL TREATMENT OF INTERNATIONAL INVESTMENT IN SOUTH EAST EUROPEAN COUNTRIES OECD

21 2. Summary of Most Significant National Measures also provided. The Republic of Albania has signed agreements with a number of countries for mutual protection of investments and for avoiding the double taxation Exceptions Investment by foreign investors and by established foreign-controlled enterprises Banking Authorisation. Foreign bank that proposes to own more than 10 percent of the authorised capital of a bank in Albania, should receive permission by the respective authority to engage in the business of accepting and collecting money deposits or of other repayable funds in the country where its head office is located. The foreign authority, which supervises the financial activity of the head office of the foreign bank, gives its written consent for granting such a licence. With the correct interpretation of Regulation 45", the banking industry is well regulated and open to FDI. Insurance Authorisation. The conditions a foreign company must fulfil to get the authorisation from the Albanian Insurance Supervisory Commission to perform insurance activities in Albania are: (i) to be authorised for carrying out insurance activities according to the legislation of the home country and to have at least 5 years experience in insurance activities; (ii) to establish a branch, which will carry out insurance operations in Albania; (iii) to assume that this branch will keep and maintain special accounting and all documents related to its activity; (iv) to have in Albania assets at a value of at least ½ of minimum guarantee fund defined by one of the articles of the law and to deposit ¼ of this minimum fund as a guarantee, which will be reimbursed in case the authorisation is not issued; (v) to meet the solvency margin; (vi) to submit a business programme. Maritime Transport Cabotage. Based on International Regulations but also on national legislation, only Albanian ships flying Albanian flag are allowed to exercise activity in the inner maritime transport (cabotage). An Albanian register of ships does not yet exist. Fishing. According to Article 19 of the Law On Fishery and Aquaculture (No. 7908, date on ), the Ministry of Agriculture and Food exclusively may issue licences for fishing, or other activities related to fishing, to foreign vessels or persons, (i) on the basis of international agreements in force with the country to which the foreign vessel or persons belong; or (ii) in cases when the issuing of licence is considered: a) necessary for the economy of the country and especially when the applicant undertakes beneficial investments for the fishery sector in Republic of Albania in line with policies and strategies formulated for the development of this sector; b) necessary for a sustainable use of resources, considering the national capacity for fishing and its development; c) in compliance with the policy of the Republic of Albania regarding the foreign investments and especially with the future goals and objectives of fishery and aquaculture administration plan. Article 20 of the Law says that the issuing of licences is prohibited for foreign vessels applying for demersal fishing with trawls and fishing and/or collection of bivalve molluscs. Real estate Land ownership. Albanian legislation contains limitation with regard to the right of foreigners to acquire land in Albania. Law On the Land (No. 7501, date , amended in 1993, 1994, 1995), in Articles 3, 4, and 5, does not permit foreigners to buy land. According to this Law foreigners can only lease the land they need. As for leasing, foreigners receive the same treatment as nationals. The rationale behind this measure is to prevent speculation with land by foreigners, considering the weak financial power of the Albanian citizens for the last decade. Real estate Land ownership. According to the Law On Acquisition of Plots (No. 7980, date 27 July 1995, amended in 1997), Article 5, foreign investors are entitled to buy state-owned non-agricultural land provided that the value of investment is at least three times higher than the value of the land. From the moment of getting the construction permit until s/he gets the ownership of the plot, the foreign natural or legal person pays the rent for using the plot. The rent is agreed in the contract. The price of eventual land acquisition is also predetermined in the contract as well as for how long this price is valuable. The Council 20 NATIONAL TREATMENT OF INTERNATIONAL INVESTMENT IN SOUTH EAST EUROPEAN COUNTRIES OECD 2003

22 2. Summary of Most Significant National Measures of Ministers determines the value of such land. (Article 8). The rationale behind this measure is the promotion of investments and site developments. Public health. According to the Order of Minister of Health On Licence Granting for Health Professional Practice in Free Private Activity", point 3/1 (No. 108, date ), the licensing of foreigners in the field of health care is possible only if they cooperate with an Albanian professional in the field of activity to be practised. The purpose of introducing this measure is to ensure: (i) a better communication with the patients; (ii) a better relationship with the Albanian government (for fiscal and administrative purposes). Corporate organisation Trans-sectoral Registration fees. Costs related to the registration of the company are 1,500 Lekë when the shareholders are Albanian nationals or national companies, and 5,000 Lekë in case one of the shareholders is a foreign national/company. Employment of foreigners and movement of key personnel Trans-sectoral Employment of foreigners. To be able to work in Albania a foreign national should obtain a work permit issued by the Ministry of Labour and Social Affairs. Among the documents, which should accompany the application form for a work permit, is also the written and proven confirmation from the employer testifying that for each foreign employee, s/he has employed two Albanian citizens". The rationale of this condition is the promotion of employment of local workers and also the promotion of employment of qualified foreign personnel (Law On Issuing of Work Permit to Foreigners", No. 8492, date and accompanying by-laws) Transparency measures Nationality of management Banking. The branch of a foreign bank must employ at least two resident administrators for administration of the branch of the foreign bank. RECOMMENDATIONS Apart from measures to be taken to strengthen the national treatment principle as proposed in General Recommendations, the authorities of Albania should specifically consider the elimination of restrictions related to: (i) issuing of work permits for foreigners, (ii) the licensing of foreigners in the field of healthcare only if they co-operate with an Albanian professional, (iii) the request that the branch of a foreign bank must employ at least two resident administrators. 2. BOSNIA AND HERZEGOVINA FDI inflows in Bosnia and Herzegovina (BiH) in totalled US$ 848 million; 70 percent of that in the last three years and as much as 35 percent in the last year (in 2000 US$ 147 million, in 2001 US$ 130 million and in 2002 US$ 321 million). Most of FDI came in cash (60.1 percent), the rest being in the form of tangible and intangible assets (36.3 percent) and in the form of rights (3.6 percent). The major recipient of FDI ( ) has been manufacturing (55.5 percent), followed by banking (16.5 percent) and trade and services (13 percent). The most important investing countries in BiH in were Croatia (US$ 124 million), Kuwait (US$ 117 million), Slovenia (US$ 99 million), Austria (US$ 92 million), Germany (US$ 92 million), Serbia and Montenegro (US$ 69 million) and the Netherlands (US$ 62 million). Of the total FDI stock 42 percent is allocated in 15 companies, the largest being Kuwait Consulting Investment Company with million of Convertible Marks (KM) (Ministry of Foreign Trade and Economic Relations, April 2003) NATIONAL TREATMENT OF INTERNATIONAL INVESTMENT IN SOUTH EAST EUROPEAN COUNTRIES OECD