48th Congress of the European Regional Science Association

Liverpool, UK, August 27 – 31, 2008

Croatian institutional and structural adjustments towards EU regional policy

Zlatan Fröhlich

Zagreb Chamber of Economy, Zagreb, Croatia

E-mail: zfrohlich@hgk.hr

Abstract

As Croatia actively prepares for accession to the EU, it is crucial that it is well prepared for the introduction of EU Structural Funds and pre-accession funds. This will require a significant effort on the part of the government to strengthen the institutional base for the management of the Funds – from the centre of government to regions across the country. The National strategy for regional development will be a major part of that effort.

The implications for approach to the analysis of regional policy in Croatia today is concentrate essentially upon three main fields of enquiry from two perspectives – top-down and bottom-up. These are:

• Assessment of the overall policy framework for regional development, including the current legal framework in particular policies, legal acts and regulations which affect the development of those parts of the country which can be loosely termed “assisted areas”; • Assessment of the institutional and administrative capacity in place, and • Appraisal of the types of regional development instruments currently deployed and their effectiveness in dealing with development needs at national, regional and local level.

The central logic of the EU Structural Funds (2007-2013) is that by concentrating much of their resources on the least developed member states and regions, EU regional and cohesion policy can contribute to reducing disparities while raising the competitiveness of the EU as a whole. The outcome of this debate over the next years will have significant repercussions on the direction and management of national (regional) policy in Croatia, too.

Croatian regional strategy in the framework of the EU accession process

The purpose of this analysis is to create the basis for the elaboration of a national strategy for regional development which is in line with EU principles and practice. The goal of national regional development policy is:

to contribute to overall national growth and development by enabling those regions and counties which are lagging behind the more prosperous to compete,

to reduce the social and economic disparities between the regions/counties and

to provide a national framework for coordinated local initiative for economic and social development across the country.

As Croatia actively prepares for accession to the EU, it is crucial that it is well prepared for the introduction of EU Structural Funds and pre-accession funds. This will require a significant effort on the part of the government to strengthen the institutional base for the management of the Funds – from the centre of government to local areas across the country. The national strategy for regional development will be a major part of that effort. It will address the internal disparities which are damaging the overall development prospects of the country. In a separate but related exercise, the National Development Plan, and the work associated with it, will provide a framework for dealing with the deep structural obstacles which block Croatia’s path towards convergence with the richer member states of the EU. The National Development Plan will eventually incorporate, as a core priority, within a single framework, the National Strategy for Regional Development and Action Plan for Regional Development.

Factors for Sustainable Competitive Regions

The Commission’s Third Cohesion Report (2004), identifies a number of factors associated with those regions which have been successful in reversing the development deficit. These concern the effectiveness of the policies and actions undertake to address the bottlenecks and obstacles to growth and development of the region. Consistently, those regions and member states, which have made the most progress in achieving sustainable competitiveness, have been able to formulate and implement effective policies, strategies and actions to:

address the structural faults in the regional economy

improve the quality and flexibility of the labour force

tackle the infrastructural obstacles to accessibility (tackling peripherality) and sustainable development

promote innovation (new products, processes) and better links between science and technology and enterprise

support and stimulate the small and medium sized enterprise sector

build a modern, competent and responsive administration – and systems of institutions working together for development.

National preparation process

SCF preparation process

The Strategic Coherence Framework (SCF) represents one of the programming documents that serve as a reference point for the use of the EU assistance in Croatia.

Croatia, as a candidate country for EU membership, has access to the Instrument for Pre-Accession Assistance (IPA) launched in 2007. The IPA provides assistance to build institutional capacity for the efficient implementation of the acquis communautaire and to prepare for the management of Structural Funds on accession. The Strategic Coherence Framework is concerned with Component III (Regional Development) and Component IV of IPA (Human Resource Development). These Components are designed to assist the candidate countries in policy development and prepare them for the implementation and management of the Community’s Cohesion policy: in particular the European Regional Development Fund and the Cohesion Fund (Component III) and the European Social Fund (Component IV).

The preparation of the SCF in Croatia is coordinated by the Central Office for Development Strategy and Coordination of EU Funds (CODEF). The work on the SCF commenced in November 2005 in cooperation with the state administration bodies responsible for policy areas relevant for this strategic document. This includes the Ministry of Finance, the Ministry of Economy, Labour and Entrepreneurship, the Ministry of Sea, Tourism, Transport and Development, the Ministry of Environment Protection, Physical Planning and Construction, the Ministry of Agriculture, Forestry and Water Management, the Ministry of Science, Education and Sports, the Ministry of Health and Social Welfare and the Central State Office for e-Croatia.

Major policy priorities and objectives defined in the SCF are in accordance with the priorities and objectives set out in:

national strategic documents (i.e. Strategic Development Framework for 2006-2013);

strategic documents referring to the EU integration process of Croatia (Stabilization and Association Agreement, Accession Partnership, 2006 Progress Report, Multi-annual Indicative Planning Document for Croatia, Multi-annual Indicative Financial Framework for Croatia for 2007-2010);

relevant sectorial documents defining broad policy-guidelines in particular areas with a view to adopting EU standards and best practices (e.g. priorities within the section on human resource development are aligned with Joint Inclusion Memorandum and Joint Assessment Paper);

documents establishing broad EU priorities linked to the Lisbon agenda and forming a reference point for member states’ strategies and programmes (i.e. Community Strategic Guidelines).

2.2. Strategic Development Framework 2006-2013 (SDF)

Strategic Development Framework 2006-2013 was approved by the Croatian Government in August 2006. The formal adoption of SDF followed after two rounds of public consultations with trade unions, non-governmental organizations, different associations of entrepreneurial sector and general public who had the opportunity to give their comments and suggestions.

SDF defines national economic goals and instruments for their implementation in the period between 2006 and 2013, with the overall aim to achieve economic growth through competitiveness and employment embedded in the modern state of social cohesion. Goals and instruments defined in the document are drafted in accordance with the determination of Croatia to become a full member of the EU and its obligations arising from this process.

The starting point of the Strategic Development Framework is that government driven growth is not sustainable in the long run; what is required is the strengthening of private sector, its competitiveness and its overall ability to become the main driver of the future economic growth. Since the economic growth should ultimately result in improved living standard for all the citizens, the elements of social inclusion and social justice are equally important for this process. These two pillars are integrated into the main strategic goal of Croatia – achievement of prosperity through the development of a competitive economy in a modern European welfare state.

In order to achieve this goal simultaneous and coordinated actions are required in 10 strategic areas. These strategic areas can be divided into three main groups which reflect their ability to influence growth and competitiveness. The first one refers to the completion of the transition process through comprehensive reform of judiciary and public service, i.e. building new role of government, strengthened entrepreneurial climate and decisive implementation of privatisation and restructuring. The first group of strategic areas focuses those problems that directly obstruct development, as their resolution is a precondition for an efficient use of available resources. These are called “the problems of uncompleted transition” because the analysis shows that Croatia has a developmental ‘reserve’ which is currently spent on unproductive subsidies to individual companies and inefficient administrative processes.

The second group of priority areas refers to the strengthening of development infrastructure i.e. education and efficient labour market, productive application of science and ICT in economy, further development of transport and energy infrastructure and last but not least social cohesion and justice. These are fundamentals of future growth and their effects on growth could be observed only after a certain period of time. However, the decisive actions toward the implementation of the measures identified in these areas are needed now, exactly because of the time lag needed to fuel the growth.

The third group of priority areas includes developmental links i.e. macroeconomic environment, efficient and integrated financial services and sustainable development visible through the constant care about environment, natural resources and regional development. These strategic areas by themselves can not be the sources of long-lasting growth, but sustainable growth is not possible without continued improvements in those strategic areas.

Seven of the above-mentioned strategic areas and related measures and instruments envisaged for their resolution are directly relevant for the SCF and more specifically components III and IV of the IPA programme. These areas are the following: new role of the government; entrepreneurial climate; efficient labour and education; science and ICT; transport and energy infrastructure; spatial planning, protection of nature and environment, regional development, and social cohesion and justice.

Pre-Accession Economic Programme

Pre-accession Economic Programme (PEP) is a national strategic document, defining main economic policy guidelines on a three-year rolling basis. It sets the schedule for the implementation of measures necessary for the achievement of the goals set by the Strategic Development Framework 2006-2013 (SDF), in order to make Croatia developed and competitive economy in the context of its EU accession process. The document also follows Economic and Fiscal Policy Guidelines 2007-2009 defining fiscal space for the measures planned by the Government and the budget users. It is also aligned with the various documents defining Croatian economic relations with international community, with special focus on the obligations arising from the process of negotiations with the EU.

The latest PEP covering period between 2007 and 2009 was submitted to the European Commission in December 2006 resulting from work of various line ministries, government offices, Croatian National Bank, employers’ association and trade unions. The document outlines macroeconomic and fiscal measures necessary to achieve reduction of external imbalances and further fiscal consolidation, and it also states the main structural reforms to be implemented in the following three years in order to result in the increased competitiveness and development.

Several of the above mentioned structural reform areas and associated measures are directly relevant for the SCF as well as components III and IV of the IPA programme. The following paragraphs give a short account of these areas.

The PEP identifies the ambition of the Government to continue its orientation towards development and improved competitiveness of national economy through privatization of public companies (primarily by means of capital markets) and further elimination of administrative barriers for business development. Apart from continuing with HITRO.HR and Administrative Guillotine incentives, which shall further simplify burdensome regulations. The Government is determined to continue with the education of entrepreneurs, boost cluster development, integrate SMEs and R&D institutions, and improve access to sources of SME financing through special credit-lines and venture capital.

Labour market reform shall stimulate employment by reducing mismatch between supply and demand on the labour market. The foreseen measures include continuous evaluation and refinement of active employment measures, strengthening institutional capacities of the employment policy delivery structures, as well as the creation of local partnerships between employers, education institutions, trade unions and other relevant stakeholders.

Reform of the education system is undertaken with the aim to create labour force that more adequately responds to labour market need. Measures include improvement of the outdated curricula, reduction of educational areas following with labour market analysis (VET in particular) and introduction of mandatory secondary education. Attention will be put to the implementation of Bologna process and the transfer of knowledge from education institutions and institutes to practical application in the production sector. Special focus will be put on the application of the life-long learning principles in education.

In the field of social cohesion, social benefits reform should reduce the share of overall social spending in the GDP, while the spending of social assistance benefits should increase and the whole system should become more beneficiary-oriented with improved quality and better social-benefits targeting.

When it comes to environmental policy measures, enforcement of various kinds of environment impact assessments should lead to the integration of environment protection principles into planning and implementation of sectoral policies. The upcoming three year period will witness the establishment of a comprehensive waste management system and strengthening of the integrated water management system, as well as continuous prevention of industrial contamination and use of dangerous substances.

Development of effective and fiscally sustainable public administration should be achieved through its rationalisation and simplification of administrative procedures. It is also planned to further expand e-Croatia –programme in order to improve public services for all citizens. These efforts, together with the continuous reform of judiciary and implementation of anti-corruption programmes, should lead to improved market entry and exit and enforcement of property and creditor rights.

3. COMMUNITY STRATEGIC FRAMEWORK

3.1. COUNCIL REGULATION (EC) 1085/2006 ESTABLISHING AN INSTRUMENT FOR PRE-ACCESSION

3.1.1. Setting an overall framework for pre-accession assistance

On 17 July 2006, the European Council adopted a Regulation Establishing the Instrument for Pre-Accession Assistance that sets the overall framework for assistance to candidate and potential candidate countries covered by the Regulation, and identifies general principles of assistance under each of its components. In general terms, the assistance supports the strengthening of democratic institutions and rule of law, protection of human rights, minority rights and gender equality, public administration reform, economic reform, development of civil society, social inclusion, confidence-building measures and reconstruction and regional/cross-border co-operation. Since Croatia belongs to the group of candidate countries, and taken into account that accession negotiations with Croatia have commenced, support under the Instrument for Pre-Accession Assistance shall in addition finance progressive alignment with the acquis communautiaire and social, economic and territorial development, including the investment in the areas of regional and human resource development. The latter shall enable the beneficiary country to gain experience with Structural Funds-type and Cohesion Fund-type interventions, and prepare for the management of the EU Cohesion Policy on accession.

The general policy framework for assistance under the Council Regulation 1085/2006 is defined by the Accession Partnership, the Commission reports on the progress made in the process of preparing for the EU accession, and the Strategy Paper contained in the Enlargement Package. Within the general framework, assistance is provided through multi-annual or annual programmes that are aligned with the Commission Multi-Annual Indicative Planning Document and Multi-Annual Financial Framework. The Strategic Coherence Framework, and the related operational programmes for specific sector areas, take due account of the priorities and principles established in the Commission documents.

3.1.2. Regional development component

According to the Council Regulation 1085/2006, the Regional Development component will provide support in the policy development and implementation of the Community’s Cohesion Policy, more specifically the European Regional Development Fund and the Cohesion Fund. In this context, the priorities eligible for financing under IPA programme are regulated by Article 147 of the Commission Regulation implementing Council Regulation (EC) No 1085/2006 establishing IPA instrument. Implementation of actions defined under the above mentioned Regulation should support Croatia in gaining experience in Structural Funds type interventions which will be taken over and followed up by the actions supported by the European Regional Development Fund and the Cohesion Fund (as defined under Regulation No 1080/2006 of 5 July on the European Regional Development Fund; Regulation No 1084/2006 of 11 July 2006 establishing a Cohesion Fund) upon accession to the EU.

3.1.3. Human resources development component

The Human Resource Development component shall also support the beneficiary country in policy development as well as in preparation for the implementation and management of the Cohesion Policy, more specifically the European Social Fund. In this context, the priorities eligible for financing under IPA programme are regulated by Article 151 of the Commission Regulation implementing Council Regulation (EC) No 1085/2006 establishing IPA instrument. Implementation of actions defined under the above mentioned Regulation should support Croatia in gaining experience in Structural Funds type interventions which will be taken over and followed up by the actions supported by the European Social Fund (as defined under the Council Regulation No 1081/2006 of 5 July 2006), upon accession to the EU.

4. ANALYSIS OF THE SOCIO-ECONOMIC SITUATION

4.1. PRINCIPLES FOR CONCENTRATION OF ASSISTANCE

The limited volume of financial support available from the IPA programme requires careful consideration of priorities and their concentration on a specific set of areas. All the priorities identified in this SCF represent an intersection between the objectives identified in the national and Community strategic documents and they were selected on the basis of their compliance with national and Community policies. Within that framework, the following concentration principles were observed:

The fact that IPA will primarily serve an important goal of building operational capacity for the management of Cohesion policy post-accession, and that maximum resources need to be allocated to reinforcing institutional capacity of the management structures and the preparation of project pipeline for the future;

The fact that IPA serves as an instrument through which candidate countries are assisted in the implementation of the acquis communautaire and that the interventions need to be closely aligned with the priorities from the Accession Partnership;

The urgency of the measures to be implemented, based on the socio-economic analysis in a given sector areas, and their ability to provide a platform for subsequent Structural Funds-type interventions.

4.1.1. Regional development (component III)

Assistance to the transport sector will concentrate on the modernisation of network along the Pan-European transport corridors. This will include the rehabilitation of the railway network on Corridor X and the inland waterway network on Corridor VII. The selection of priority areas of intervention is based on the needs analysis in the transport sector, which shows that the investments into the transport infrastructure have to be structured in such a manner that will allow for a more balanced development and inter-connectedness of individual types of transport, whereby special attention is to be attributed exactly to the railways and waterways. This objective that has been fully acknowledged by the Strategic Development Framework 2006-2013. It is also in line with the principles of the EU transport policy, which promotes the development of transport modes alternative to the road transport to provide for a more economical and environmentally friendly transportation of goods and passengers.

Activities in the environment sector will be directly related to the implementation of heavy-investment environmental acquis that shall prepare Croatia for accession to the EU. The priority sectors will include preservation of drinking water quality, wastewater treatment and solid waste management already identified as key sectors in the Strategic Development Framework 2006-2013 and the Accession Partnership with Croatia. In the second phase of the IPA operation, issues of energy efficiency and air quality may be considered, provided that the socio-economic analysis identifies them as priority sectors from the environmental point of view.

The regional competitiveness operational programme will, in line with the objectives identified in the Strategic Development Framework, support entrepreneurship as one of the key development factors of the country’s economic development and promote business and investment climate to increase its impact on efficiency of economy. The programme will provide cohesion-type support to the underdeveloped areas of Croatia and competitiveness-type support on a more general scale in order to prepare for effective management and use of both types of Cohesion policy interventions (cohesion and competitiveness) upon accession. The cohesion part of this programme will concentrate on Croatia’s two less developed NUTS II regions – East (Panonian) Croatia and Adriatic Croatia regions. Investment into infrastructure associated with SME development and promotion of the business and investment climate will be geographically concentrated on counties that have more than 50% of their surface area categorised as an Area of Special State Concern. In order to ensure continuity of EU assistance, the project pipeline which has been prepared under previous EU programmes will be taken into account in the project selection process. In its competitiveness segment, the programme will support the wider competitiveness agenda in line with the Lisbon objectives, focusing on advisory services for enterprises, use of new technologies, links between the research & technological development and economy, and creation of platforms for networking of businesses.

4.1.2. Regional Development and Competitiveness

In administrative terms, Croatia is organised into 21 counties, (the City of Zagreb has the dual status of a county and a city), another 126 cities and 429 municipalities. The current administrative division of the Republic of Croatia fulfils Eurostat’s criteria regarding the collection of statistics at the NUTS I level (the Republic of Croatia), the NUTS II level (East or Panonian Croatia, Adriatic Croatia, North-Western Croatia), the NUTS III level (counties) and the LAU 2 level (municipalities and towns).

Although Croatia is a relatively small economy, there are significant socio-economic differences between counties (NUTS III level) in terms of demographic trends, economic activity and growth rates. Croatia is characterized by a significant concentration of population in a few macro-regional and regional centers. The highest population density is in the City of Zagreb, 7.5 times higher than the county which comes second (Međimurje), and 15.5 times higher than the Croatian average (78.4 inhabitants/km2). With the exception of the City of Zagreb, the ratio of population density between the least populated county (Lika-Senj) and the most populated county (Međimurje) is 1:16.2.

Data on the location of registered business entities for 2004 show that economic activity is to a great extent based in major urban centers (Zagreb, Split and Rijeka) and their surrounding areas. Again, the lead is taken by the City of Zagreb whose share in the year 2004 amounted to 34.01%. At the other extreme is Lika-Senj County where this share was slightly higher than 6%. Fairly low presence of registered business activity has been also recorded in Virovitica-Podravina County and Požega-Slavonija County. As explained, Croatia is characterized by significant differences in regional administrative unemployment rates, from County of Istria 8.8% to County of Vukovar-Srijem 33.6%.

In 2003 the two most developed counties had a 2.6 times higher GDP per capita than the two least developed counties. The three most developed locations in terms of GDP per capita are the City of Zagreb, the County of Istria and the County of Primorje-Gorski kotar. Beyond these, only the County of Lika-Senj has reached the GDP per capita level above the Croatian average. The least developed counties are Vukovar-Srijem and Slavonski Brod-Posavina, where the GDP per capita levels are less than 60% of the national average. Compared to the average EU-25 average GDP per capita Croatian levels range from 81% in the City of Zagreb to 26% in the Counties of Vukovar-Srijem and Brod-Posavina. According to Central Bureau of Statistics, in 2003 Croatian levels of GDP per capita (in PPP) compared to the average GDP per capita in EU 25 ranged from 82% in the City of Zagreb to 26% in the counties of Vukovar-Srijem and Brod-Posavina.

The above mentioned differences among regions are due, inter alia, to geographic characteristics, the legacy of wide variations in socio-economic development at the time of independence in 1991 and the effects of the homeland war in the form of economic and social devastation of many parts of the country. The war had especially significant impact on the difference of GDP and unemployment levels amongst the counties (see Annex 2 – Tables 6 and 8). The areas lagging behind the national development average face the problems of poor basic infrastructure, mine contamination, lack of social and human capital caused by depopulation trends and long-term unemployment.

In order to address the above mentioned problems and disparities, it is important to secure increased growth and balanced development of various counties. One of the key preconditions for this is the development of private sector. Nowadays, the majority of private companies in Croatia are small and medium enterprises (SMEs). Out of the total number of registered business entities in Croatia 99% are SMEs, which compares with EU-15 where SMEs account for 99.6% of the enterprises. Most SMEs are micro-enterprises and they have significant potential to contribute to increased competitiveness and employment over the coming years. In the period between 2002 and 2004, the number of entrepreneurs in Croatia has increased by almost 8%, while, in the same period, the number of employees in the entrepreneurial sector has increased by 6%, i.e. from 771.135 to 820.219 employees. The sector’s contribution to the GDP has been continuously increasing, up to some 44% by the end of 2005, while its contribution to export reached 60% of total exports.

Despite those positive trends, SMEs in Croatia face many challenges. Some of the internal problems of the SME sector include insufficient entrepreneurship (especially in sectors with considerable growth potential, including technologically based entrepreneurship) and low levels of education among entrepreneurs. External problems faced by the SMEs include administrative barriers and underdevelopment of financial products specifically for the SMEs. The SME sector in general suffers from insufficient cooperation and networking, both with business and other institutions (for example the research and tertiary educational sectors). SMEs located in disadvantaged areas face additional problems such as lack of adequate communal and business support infrastructure, and insufficient number of programmes encouraging investments into the productive sector.

Croatian Government started a series of incentives with a view to tackling some of these challenges. Business-related services are currently provided by MELE and Croatian Agency for SMEs (HAMAG). Building entrepreneurial infrastructure also stays as one of the top Government priorities in the SME sector. Currently, the entrepreneurial infrastructure comprises 27 business centres, 16 business incubators and 6 regional development agencies. In addition, there are 15 economic free zones and 235 entrepreneurial zones, of which 140 are fully functioning. Furthermore, in 2005 MELE continued to support new and existing clusters.

Essential part of supporting private sector and improving business climate is the creation of transparent and efficient institutional framework for business activities, where public administration primarily serves the interests of entrepreneurs and citizens. Consequently, in summer 2006 the Croatian Government has launched a project called “Regulatory Guillotine” (HITROrez) in order to remove unnecessary and obsolete laws and regulations which represent obstacles to entrepreneurship. Furthermore, the Government has also undertaken an initiative (e-Croatia 2007) with the objective of transforming Croatia into a modern information society by simplifying administrative procedures and creating improved access for all citizens to public administration services. This initiative entails a series of activities including the launch of a one-stop-shop programme named HITRO.HR (launched in May 2005). Among electronic HITRO.HR services are the establishment of e-REGOS, e-Pension Registration, e-Cadastre, e-Nautica, e-VAT, e-CUSTOMS e-Judiciary, e-Craft and e-Court Registry, services aimed to facilitate entrepreneurship (e.g. registering companies and conducting business activities) and communication with public administration by cutting red tape and reducing corruption.

In order to strengthen entrepreneurial sector and thus contribute to the enhanced growth and balanced development, it is essential to use modern technologies in business. An important part of this process is further development of the R&D sector. According to the Annual Competitiveness Report of Croatia 2002, Croatia came out 43rd (out of 80) in technology index, 50th in innovation sub-index and 52nd in its common research and technology position. Such data point to a significant underdevelopment of the country’s R&D sector. The public sector thus employs 90% of all researchers, allocates almost 90% of total investments into science and research, whereas only 10% of the institutes’ revenues and 6% of the faculties’ revenues come from research done for the business sector. At the same time, the public sector invests mostly in isolation from the private sector, meaning that R&D is insufficiently related to market needs. Moreover, World Economic Forum Report ranks technology transfers from universities and research institutions to business particularly low in Croatia.

SWOT Analysis

Strengths:	Weaknesses:
Stable macroeconomic framework (low inflation and stable nominal exchange rate) Significant GDP growth rate and increasing productivity Well developed banking system Fiscal consolidation is progressing No significant disincentive effects from unemployment benefits or taxation Active Government policy on reducing administrative barriers for investment and entrepreneurship development Increasing number of entrepreneurs over the past years Preserved environment and nature, landscape diversity, as well as rich cultural and historical heritage Relatively high quantities of good quality fresh water Low emission levels of greenhouse gases Improving quality of distribution infrastructure, especially highway network and telecommunication infrastructure Favourable geographical position of the country	High level of external debt and public debt Underdeveloped capital markets High unemployment rate combined with a high share of long-term unemployment (particularly among females) and a high level of youth unemployment Social exclusion of long-term unemployed Mismatch between labour market requirements and education system provisions Life-long education neglected as a part of education system, especially adult learning Unbalanced regional growth and development due to lack of basic infrastructure, as well as social and human capital in underdeveloped regions Aging population in general and strong depopulation trends in underdeveloped areas Low level of education among entrepreneurs Insufficient cooperation between the business sector and research institutions; lack of usage of IT technology in the business operations Insufficient level of environment protection (including limited financial resources) Underdeveloped management of waste and waste water Levels of connection to the water supply and sewage network uneven; permeability of networks Poor railway infrastructure causing low commercial speed and delays Rolling stock in need of further modernisation Underutilised transport potential of inland waterways (poor infrastructure and uneven navigation standards)
Opportunities:	Threats:
Liberalised access to the EU market (SAA) Increased attractiveness of domestic market due to the EU accession Continuation of the stable growth pace EU integration process strengthens linkages to the European research and innovation area Vibrant SME sector with high potential to create new jobs Historical and natural characteristics provide long-term sustainable potential for tourism Encouraging trends regarding the development of energy efficiency Potential for use of renewable energy sources Croatia as important transit route traversed by two pan-European corridors/connection of Adriatic ports with great transport nodes Attracting external development financining	Political instability in the region Postponement of structural reforms Growing regional disparities Aging population could lead to the productivity slowdown if life-long learning principles are not implemented swiftly External debt servicing may lead to confidence crisis High dependence on tourism revenue Rising oil prices and insecurity of gas supply High dependence of balance of payments on tourism revenues

5. OBJECTIVES OF THE STRATEGIC COHERENCE FRAMEWORK

Within the overall aim of ensuring that the relevant institutions of the Republic of Croatia achieve readiness for EU membership and develop institutional capacity and practical experience with the management of Structural Funds-type interventions, the following objectives are proposed under IPA Components III & IV in Croatia.

To improve accessibility and promote the free movement of goods and persons within Croatia and between Croatia and the European Union by establishing a balanced transport network that meets international standards and is coherent with emerging European priorities in the field of transport.

To protect and improve Croatia’s natural and living environment and environmental potential as a key element for future development, at the same time enhancing sustainability of energy systems especially by increasing energy efficiency and promoting renewable energy solutions

To achieve higher competitiveness and a balanced regional development by encouraging research and technological development, small and medium-sized enterprises, development of the information society and e-Croatia, alongside with improving overall social and economic conditions in underdeveloped areas

To create more and better jobs. More immediately, to attract and retain more people in employment by increasing human capital investment, reinforcing social inclusion and promoting adaptability of enterprises and workers.

To improve the capacity and efficiency of those Croatian public institutions that have responsibilities for the promotion of the four preceding objectives, at both the national and sub-national level.

The above priorities will be implemented by four Operational Programmes. The main priority axes under each of the Operational Programmes for the period 2007-2009 are listed below.

6. OPERATIONAL PROGRAMMES

6.1. THE REGIONAL COMPETITIVENESS OPERATIONAL PROGRAMME

Croatia is at a disadvantage on two levels in relation to “regional competitiveness”: first, as a still relatively less developed economy within the European context; and, second, as a country wherein some regions are lagging behind the national average level of development. While it is proposed to concentrate IPA resources under this Operational Programme both geographically and sectorally, one cannot ignore either the support to Croatia’s overall competitiveness in the wider European context or the need to ensure a balanced approach to socio-economic cohesion between the regions of Croatia. In addition, the Operational Programme needs to address support for OP management and for preparation of mature projects for both, IPA funds and the Structural Funds in the future.

Geographical concentration will be achieved through focusing on the ten counties that have more than 50% of their surface area categorised as an Area of Special State Concern. This approach is consistent with the legal basis of the existing Act on the Areas of Special State Concern, in line with the draft National Strategy for Regional Development and referred to in the Multi-Annual Indicative Programme. Moreover, all ten counties are within the two NUTS II regions whose GDP is below the national average (East /Panonian/ Croatia and Adriatic Croatia). It is envisaged to focus roughly half of the funding under the Operational Programme on these lagging areas. Priority Axis 1 will concentrate exclusively on these counties while Priority Axis 2 will aim to target a significant portion of funding on these counties. In these areas there is also a significant project pipeline developed (through previous EU assistance) which is eligible under IPA.

Priority Axis 1: Improving development potential of lagging regions

Measure 1a. Business-related support systems

The measure envisages support for establishing and improving public business-related infrastructure in ten counties which are least developed within the two NUTS II (East /Panonian/ and Adriatic) regions targeted by this Priority. The measure will operate as a grant scheme supporting regional and municipal authorities and institutions with the development of business-related support systems, i.e. capital and infrastructure investments as well as investments into the accompanying services. It will primarily support investment in the development of new and existing business and related infrastructure in support of the region’s perspective economy branches. The component will focus on investments which improve the efficiency, capacity, quality and attractiveness of the business support infrastructure in question.

Measure 1b. Promotion of business and investment climate

In order to address the unequal distribution of investments within Croatia, the measure proposes to support county staff with gaining the skills and improving the information necessary for investment promotion. The measure envisages certification of professional regional structures that will enable regional authorities and other organizations relevant to local and regional economic development to match their investment requirements with regional strengths and opportunities. The measure will entail training, consultancy and other TA for a number of counties within the two NUTS II regions targeted by this Priority.

In addition, both measures will support the preparation of project pipeline and support relevant institutions and potential beneficiaries in the preparation of tender documentation in the field of this and future Operational programmes. This includes the generation of project ideas and their elaboration into mature and high-quality proposals.

Priority Axis 2: Enhancing the competitiveness of Croatian economy

Measure 2a. Support services for existing enterprises

The measure focuses on services to existing SMEs, particularly those with potential for growth and export. Assistance will be extended in areas underpinning SME competitiveness – use of ICT in business (e-business), scope for clustering and enhancement of general business advisory skills and services. Assistance will target individual SMEs as well as the relevant institutional infrastructure in order to enhance the business services and make them more accessible to SMEs.

Measure 2b. Technology transfer and support services for knowledge-based start-ups

The measure will contribute to building technology transfer and commercialization capacities of higher education institutions and public research organizations in order to contribute to knowledge-based economic development. The measure will also reinforce clustering of SMEs and start-ups in high value addded sectors and public research centres and universities. The measure envisages assistance through both grant schemes and single tenders.

In addition, both measures will support the preparation of project pipeline and support relevant institutions and potential beneficiaries in the preparation of tender documentation in the field of this and future Operational programmes. This includes the generation of project ideas and their elaboration into mature and high-quality proposals.

Priority Axis 3: Technical assistance

Measure 3a. TA for OP management

The objective of this measure is to ensure efficient and effective OP management, and to develop the institutional capacity for managing and absorbing IPA and the future Structural Funds. The measure envisages several types of TA for the relevant national and regional level bodies: support to OP coordination and management including programming, project preparation, monitoring, information, evaluation, financial management and control; and aid to enhance the specification, collection and use of statistics, which will be necessary for effective monitoring and evaluation under IPA and, subsequently, the Structural Funds.

ANNEX - BASIC MACROECONOMIC INDICATORS FOR CROATIA
Table 1: Basic macroeconomic indicators for Croatia
2000	2001	2002	2003	2004	2005	2006	2007
Gross domestic product, % annual change (real)	2,9	4,4	5,6	5,3	3,8	4,3	4,8	5,6
Gross domestic product, market prices (current)*, mln euros	19.976	22.177	24.468	26.234	28.395	30.949	34.220	37.497
Gross domestic product per capita in euros	4.560	4.998	5.507	5.906	6.397	6.972	7.707	8.452
Consumer price index, annual change, %	4,6	3,8	1,7	1,8	2,1	3,3	3,2	2,9
Average net monthly salary (in kunas)	3.326	3.541	3.720	3.939	4.173	4.376	4.603	4.841
ILO Unemployment rate, annual average, %	16,1	15,8	14,8	14,3	13,8	12,7	11,2	9,5
General government debt % GDP (ep)	-	-	40,1	41,0	43,6	44,2	41,6	-
Average exchange rate EUR/HRK	7,63	7,47	7,41	7,56	7,50	7,40	7,32	7,34
Current account deficit (% of GDP)e	-2,4	-3,7	-8,6	-7,1	-4,9	-6,4	-7,9	-8,6
External debt (% of GDP) (ep)	60,6	60,7	61,5	75,5	80,2	82,5	85,5	87,8
Tourist nights, annual change, %	47,0	11,0	3,0	4,0	2,0	7,6	3,0	6,0
Growth rate of construction works	9,1	3,6	12,8	22,8	2,0	-0,8	9,3	2,4
Industrial production, annual change, %	1,7	6,0	5,4	4,1	3,7	5,1	4,5	5,6
Retail trade, annual change (real), %	14,4	10,0	12,5	3,7	2,6	2,8	2,1	5,3
Sources: Central Bureau of Statistics ep - end period
Ministry of Finance
Croatian National Bank
e Estimate
* Calculated by applying the average annual exchange rate (HRK/1 EUR) to the GDP in kuna terms.

Table 2: Demographic structure on the county level

County	Children % (0-14)	Labour force % (F 15-59, M 15-64)	Senior population % (F above 60, M above 65)
County of Zagreb	17.5	65.7	16.9
County of Krapina-Zagorje	17.1	63.1	19.8
County of Sisak-Moslavina	16.2	62.0	21.8
County of Karlovac	14.6	61.7	23.8
County of Varaždin	17.3	64.2	18.5
County of Koprivnica-Križevci	17.0	63.2	19.8
County of Bjelovar-Bilogora	17.2	62.0	20.8
County of Primorje-Gorski Kotar	14.1	66.3	19.6
County of Lika-Senj	15.4	57.8	26.8
County of Virovitica-Podravina	18.3	62.3	19.5
County of Požega-Slavonia	19.8	60.9	19.2
County of Brod-Posavina	19.8	61.8	18.4
County of Zadar	18.3	62.9	18.8
County of Osijek-Baranja	17.8	64.0	18.2
County of Šibenik-Knin	16.9	59.9	23.2
County of Vukovar-Srijem	19.3	63.0	17.7
County of Split-Dalmatia	18.5	64.2	17.2
County of Istria	15.2	65.9	19.0
County of Dubrovnik-Neretva	18.4	62.6	19.0
County of Međimurje	18.6	64.9	16.5
City of Zagreb	15.8	66.1	18.1
TOTAL	17.1	64.0	18.9

Source: Central Bureau of Statistics (Census 2001)

Table 3: Economic indicators on the county level

County	GDP per capita in current prices, 2003 (RoC=100)	Administrative unemployment rate (%) (end March 2005)
County of Zagreb	74.2	15.4
County of Krapina-Zagorje	72.6	14.9
County of Sisak-Moslavina	77.0	30.4
County of Karlovac	77.7	27.2
County of Varaždin	94.2	15.0
County of Koprivnica-Križevci	95.8	18.5
County of Bjelovar-Bilogora	74.7	26.1
County of Primorje-Gorski Kotar	118.1	14.6
County of Lika-Senj	103.4	22.5
County of Virovitica-Podravina	75.4	30.5
County of Požega-Slavonia	72.2	21.8
County of Brod-Posavina	57.5	30.9
County of Zadar	80.1	22.4
County of Osijek-Baranja	75.3	28.0
County of Šibenik-Knin	69.7	28.8
County of Vukovar-Srijem	57.5	33.6
County of Split-Dalmatia	75.3	23.7
County of Istria	137.5	8.8
County of Dubrovnik-Neretva	88.4	20.0
County of Međimurje	80.2	17.0
City of Zagreb	179.2	10.0
TOTAL	100.0	19.0

Source: Central Bureau of Statistics, Croatian Employment Service

Table 4: Infrastructure indicators on the county level

County	Population/ km roads	Density of road network in km/km2	Total water supply per capita (m3/capita)	Waste water from public sewage system (m3/inhab.)	Number of inhab. per one telephone connection
County of Zagreb	160.4	0.6	59.5	113.3	3.9
County of Krapina-Zagorje	151.2	0.8	32.9	10.7	3.1
County of Sisak-Moslavina	90.7	0.5	43.7	34.8	3.2
County of Karlovac	86.6	0.4	50.5	34.0	2.9
County of Varaždin	166.0	0.9	59.3	54.8	3.1
County of Koprivnica-Križevci	112.9	0.6	38.6	52.2	3.1
County of Bjelovar-Bilogora	90.7	0.5	25.4	26.4	3.1
County of Primorje-Gorski Kotar	199.1	0.4	110.3	75.0	2.1
County of Lika-Senj	28.3	0.3	93.8	18.3	2.4
County of Virovitica-Podravina	102.4	0.4	34.7	26.0	3.2
County of Požega-Slavonia	116.6	0.4	37.3	30.0	3.3
County of Brod-Posavina	192.0	0.4	29.1	23.2	3.2
County of Zadar	95.9	0.5	74.2	34.5	2.4
County of Osijek-Baranja	200.0	0.4	43.6	37.3	3.0
County of Šibenik-Knin	92.7	0.4	80.2	38.1	2.5
County of Vukovar-Srijem	195.7	0.4	39.3	18.4	3.5
County of Split-Dalmatia	185.2	0.5	93.8	63.7	2.6
County of Istria	110.8	0.7	121.1	52.8	2.2
County of Dubrovnik-Neretva	124.9	0.5	89.7	32.9	2.5
County of Međimurje	212.9	0.7	39.9	16.0	3.3
City of Zagreb	1039.2	1.2	105.5	112.5	2.1
CROATIA	155.8	0.5	71.7	-	2.7

Source: Central Bureau of Statistics

Map 1: Map of Croatian counties

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The division is in accordance with the Regulation (EC) No 1059/2003 of the European Parliament and of the Council of 26 May 2003 on the establishment of a common classification of territorial units for statistics (NUTS).

Source: Croatian Financial Agency. The data cover the business entities which are subject to the profit tax, thus excluding a significant share of crafts and self-employed people.

The Accounting Act defines categories of companies belonging to SMEs in Croatia. This definition differs to the EU one in terms of max. revenues and assets values. In addition, whereas EU defines micro companies up to 10 employees, in Croatia the category of micro-enterprises is within small enterprises, providing their sufficient revenue and assets values, and thus increasing the total number of SMEs.

It was done by providing finance and training for cluster managers, specifically in the field of shoe production, ICT, boat building, tourism and catering, and wood processing. In 2005, the programme „Common Product“ resulted in opening 10 clusters, including 186 companies with a total of 7,348 employees. Continuing that kind of support and building on the existing achievements is envisaged for 2007.