Graft and Grey Economy Hindering Balkan Business, EBRD

A new survey from the European Bank for Reconstruction and Development, EBRD, shows that corruption, competition with the informal sector, complex taxes and lack of access to bank loans are the chief complaints of business leaders in the Balkans.
Road construction in Tirana, Albania. Corruption in construction is considered a major obstacle in doing business here. | Photo by Maton Dibra/LSA

The EBRD’s business environment in the transition region survey, BEEPS, interviewed some 15,000 business leaders in 24 countries during 2013 shows that in Albania, electricity shortages, unfair competition from the informal sector and corruption are seen as the main obstacles to business.

About 40 per cent of the firms surveyed reported having to compete against firms in the informal sector.

Corruption, especially over construction permits is another major concern in Albania, the survey said.

“Although relatively few firms applied for construction-related permits, almost one-third of the firms that did said that an informal gift or payment was expected or requested during the application process,” EBRD noted in the report.

In Croatia, business leaders ranked difficulties in accessing bank loans as their first concern, followed by competition with the informal sector and complex taxes.

“Of the firms surveyed, 29 per cent applied for a loan or a line of credit and almost 30 per cent of them reported that their application was rejected,” the report stated.

Among the companies that did not apply for any loans, high interest rates were cited as the main reason for not applying.

In Kosovo, competition from the informal sector, power cuts and corruption were the main problems encountered by business leaders.

“The share of firms that reported competing against firms in the informal sector amounted to 66 per cent and was the highest among all the 30 countries covered in the survey,” the report said.

About 80 per cent of the companies surveyed said that power cuts were almost a daily issue in Kosovo. Corruption, ranked in third place, registered an increase since the last survey in 2007.

“The percentage of contract value typically paid to secure a government contract increased from 1 per cent [in 2007] to 4.3 per cent [in 2013]. The share of firms asked to make an informal payment to obtain a construction-related permit increased from 0.7 to 9.6 per cent [in 2013],” the report noted.

The main issue in Montenegro is competition from the informal sector, which has shown a marked increase since the 2007 survey. About 52 per cent of the firms cited the informal sector as their main problem in the 2013 survey, up from 27 per cent in 2007.

The workings of the banks accounted for the second biggest concern and the majority of the companies reported that they rely on advance payment from customers or their own resources to finance their needs as result of a lack of access to bank loans.

In Serbia, political instability and the tax administration were cited as the main concerns for business. The survey here was influenced by the fact that in 2011 and 2012 major opposition rallies took place in Serbia, leading to a change of power in 2012 from the Democratic Party to the Serbian Progressive Party.

“Tax administration moved up from sixth to the second place in terms of severity for Serbian firms. In 2012, the Serbian government passed a fiscal consolidation package, increasing many tax rates and introducing structural reforms in the tax administration… Serbian firms face a total of 67 payments per year to comply with tax regulations, the most in all of Europe,” the EBRD report noted.

In Macedonia, an improvement was registered in dealing with the informal sector, which is still the main concern for business there, however, followed by lack of access to finance and electricity power cuts.

In Bosnia and Herzegovina, political instability, poor access to finance and informal sector are ranked as the main concerns by business leaders.

“Bosnia and Herzegovina’s complex administrative, political and legal framework, established after the devastating war in 1992-95, makes it one of the most corruption-prone states in Europe according to several sources. The country itself is not politically unstable, but political rigidity as a result of the war may explain why political instability was rated as the top obstacle,” the report observed.

Corruption is also on the rise. The percentage of firms that were asked for informal payments by tax officials increased from 1.4 per cent in 2007 to 6.5 per cent in 2013, the second highest in the Southeast Europe region, according to the report.