The challenges facing the country of 4.4 million people are great.The barren Srdj plateau overlooking the mediaeval city of Dubrovnik is a real estate developer’s dream, offering breath-taking views of Croatia’s top tourist destination.
That’s precisely why an Israeli-Croatian consortium began planning a billion-euro golf resort there in 2006. Seven years on, construction has yet to start.
This project typifies the problems facing foreign investors in Croatia, which joins the EU on July 1, more than 20 years after it broke away in war from socialist Yugoslavia.
Worth about €1.1 billion, Golf Park Dubrovnik has become tied up in red tape, ever-changing municipal building plans and most recently the ire of Dubrovnik’s residents.
A referendum in April, forced by civic groups who said the project would spoil the eco-system, failed due to low turnout. But the developers say the damage has been done, reinforcing Croatia’s image as hostile territory for foreign investors.
Croatia’s image is that of a hostile territory for foreign investors
“This is the biggest greenfield investment in tourism in Croatia’s modern history,” project director Ivan Kusalic told Reuters, standing on the shrub-covered plateau that is still littered with landmines from Croatia’s 1991-95 war of independence. “A lot of investors interested in Croatia have contacted us and are watching closely.”
Analysts say an oversized state lies behind many of the problems experienced by such projects. Successive governments have hesitated in cutting the public administration and its employees’ socialist-era benefits for fear of losing votes.
In some cases the investment flow is reversing just as Croatia joins the single European market. Some local firms are moving production to neighbouring Balkan countries that will remain outside the EU to remain competitive in their backyard.
Foreign direct investment in Croatia peaked at around €4.2 billion in 2008, before the global financial crisis fully struck, and had dwindled to a mere 326 million two years later.
It climbed back to €973 million in 2012, but these figures pale in comparison with an investment boom over the past decade in the likes of Slovakia, Hungary and the Czech Republic in ex-communist Eastern Europe.
Romania, the poorest member of the EU, attracted €23 billion between 2006 and 2008.
Slovenia, Croatia’s western neighbour and a fellow ex-Yugoslav republic, blazed a trail for the Balkans when it joined the EU in 2004 and the eurozone in 2007. However, Ljubljana is now paying the price of refusing to give up state control over around half of the economy as it tries to avoid an international bailout.
Croatia, by contrast, sold its banks and telecoms and oil firm after independence, but greenfield investments have been few and far between.
Tourists, who flock every summer to Croatia’s Adriatic coast and over 1,000 islands, account for almost 20 per cent of national output. Yet only a handful of communist-era hotels have been sold to foreigners.
Successive governments have dragged their feet on reforms. Scandinavian-style furniture retailer IKEA, for example, had to wait five years to obtain all the necessary permits to open a store in Croatia, and hopes to begin business in 2014.
“Croatia has too many people living off the budget,” said Zrinka Zivkovic Matijevic, an analyst at Raiffeisenbank.
“Any serious reform should deeply cut (welfare and public sector) rights and the privileged groups, at the risk of losing the next elections. So far no one has been willing to do that, even though everyone knows what needs to be done,” she said.
Weak foreign direct investment has contributed to a recession that has lasted four years. The current Social Democrat-led government has made improving the business climate its top priority to spur growth.
“At the moment we’re pursuing 60 different activities aimed at removing investment barriers, primarily to speed up procedures and reduce costs,” said Deputy Prime Minister Branko Grcic. “We believe we’ll be able to unblock investment projects this year worth around €1.2 billion,” he said, citing the tourism, industry and energy sectors.
The Government also plans to invest 14.3 billion kuna (€2 billion) this year in projects including two power plants and an overhaul of the railways.
But the challenges facing the country of 4.4 million people are great. Croatia ranked 84th on the World Bank’s 2012 ease of doing business list, dropping four places from 2011 behind poorer Balkan neighbours Macedonia and Montenegro and former Soviet republics such as Armenia, Georgia and Kyrgyzstan.
It ranked even worse in terms of investor protection, property registration and construction permits. It’s small wonder that investors see Croatia as a “stagnant and uncompetitive economy”, said Naz Masraff, an analyst at Eurasia political risk consultancy.
“It’s business environment is less attractive than its regional peers, with an inflexible labour market, high barriers to entry as well as a bloated and inefficient public sector,” Masraff said.
Through seven years of accession talks, Croatia worked hard to bring its legal system into line with the EU, arguing to voters that membership was a ticket to prosperity.
But analysts say it has failed to figure out how best to exploit its accession, beyond tapping the more than €1 billion in structural funds that will become available each year.