Draft Chairman's Conclusions

Working Table II of the Stability Pact for South Eastern Europe (WT II) held its second plenary meeting of 2004 on 18 November in Skopje under the chairmanship of Mr. Fabrizio Saccomanni, Vice-President of the EBRD. Participants welcomed the appointment as Co-Chairman of WT II of Professor Andras Inotai, Director of the Institute for World Economics of the Hungarian Academy of Sciences, who brings to WT II an in-depth knowledge of the transition process.

Further to the preceding meeting of WT II in Portoroz, Slovenia, in June, it was noted that the political framework and criteria for a range of reform efforts in South Eastern Europe (SEE) had been agreed under the auspices of different WT II initiatives. However it is the implementation of reforms that drives economic growth and the WT II initiatives were asked to focus their activities on the sometimes less glamorous area of implementation.

The meeting provided an opportunity to take stock of progress on implementation; satisfaction was expressed that, in general, the WTII initiatives had done what they were asked and could show some specific results. However, the importance of monitoring and publicising the implementation of agreed reforms was again highlighted in view of the pressing need to increase investment flows, particularly greenfield investment, necessary for sustainable economic development.

Three main topics were discussed at the WT II meeting - trade, energy co-operation and the “umbrella” theme of enterprise development and employment generation.

Turning first to trade, the Chair of the Trade Working Group, Mrs. Adriana Civici of Albania, reported that attention had now shifted from the finalisation of the agreements to addressing implementation issues and in particular tackling the issue of non-tariff barriers. This work was hugely important: as Co-Chair Professor Inotai put it “we must not have a situation where we have trade liberalisation on paper and where countries slide backwards by seeking protection at a sectoral level”. Professor Inotai also reminded the meeting that trade liberalisation could have a very significant impact on growth and foreign direct investment, enhancing the process of structural change needed for global competitiveness and this was particularly true for small countries.

In line with the request from SEE Trade Ministers in Rome in 2003, the Trade Working Group was exploring ways to improve the economic efficiency of the free trade process. There was a consensus that a move to a multilateral free trade agreement would greatly improve the economic efficiency of the liberalisation process. The importance of the discussions under way in this connection was stressed Among the options being discussed were the geographic expansion of the CEFTA agreement or the evolution of the existing network of bilateral free trade agreements into a new multilateral agreement - the South East Europe Free Trade Agreement – SEEFTA. In line with the views of the European Commission, it was felt that the process should not get distracted by labels but should ensure that the option selected extend the degree of liberalisation achieved under the MoU and do not exclude any SEE country due to outdated membership criteria.

The discussions on the energy initiative – otherwise known as ECSEE, Energy Community in South Eastern Europe - were wide ranging. Firstly, participants welcomed the ambitious nature of this exercise and in particular the progress in the negotiations on the treaty that will be signed by the SEE countries and the European Union. In addition to the important negotiation process, Dr Bruno Zluwa, Director General of the Energy and Mining Directorate in the Austrian Federal Ministry of Economy and Labour, the current holder of the Presidency of this initiative, highlighted the range of activities that are underway as countries seek to fulfil the commitments that they have taken under the Athens Energy MoUs of 2002 and 2003. These include issues such as the creation of independent regulators and the unbundling of transmission, generation and distribution activities. Finalisation of the Treaty in 2005 was encouraged.

However, the interventions by IFI representatives highlighted that we should not just focus on the legal and regulatory mechanisms. We must look at the adequacy of infrastructure for generation, transmission and distribution of electricity and gas. The IFIs confirmed their support to the process provided the countries would fulfil their commitments under the ECSEE treaty. The physical reconnection of the electricity grid between the EU and SEE that took place on 9 November deserved special mention – electricity could now flow from Lisbon to Sofia, from Athens to Helsinki. Now we had to ensure that it could be produced and traded economically in SEE, including determining what were the investment requirements and how could we begin to develop better energy efficiency. We also had to examine issues such as what should the electricity tariff rates be – how did we ensure that tariffs would be paid, - what types of social safety nets could be put in place to protect vulnerable groups.

It was clear from the discussions that the creation of an integrated energy market in SEE could only be a gradual and co-ordinated process and that it would continue to be a highly political issue in the region. Dr. Vesna Borozan, Member of the Parliament of the former Yugoslav Republic of Macedonia, outlined the important role of Parliamentarians in developing and implementing ECSEE, while the representative of the ETUC, Mr Gradev pleaded for the inclusion of a social dimension in the draft Treaty. The meeting concluded that gaining public understanding and acceptance of the energy sector integration process was crucial. This meant ensuring greater transparency of the process and early involvement of different stakeholders such as parliamentarians and social partners. The recent Bucharest conference on the ECSEE, co-organised in October 2004 by the Stability Pact, the Romanian Chairmanship-in-office of the SEECP and the European Commission, was welcomed as a first step in this process but more such activities were needed.

Mrs. Miet Smet, former Belgian Minister of Employment and Labour and Chair of the SP Initiative for Social Cohesion (ISC), provided the meeting with a comprehensive overview of the key challenges facing the region in terms of enterprise development and employment generation, as well as outlining some specific work being done on employment policy and social dialogue under this initiative. She pointed out that the key reason for launching in 2004 the cross-initiative theme of “Enterprise Development and Employment Generation in SEE” was the understanding, shared by all WT II participants, that economic development in SEE had to go hand in hand with the development of appropriate social policies. It was the only way to ensure the sustainability of the various reforms ongoing in the region and to offer light at the end of the transition tunnel for those countries that still had some time to go before they could join the EU. The umbrella theme had been devised in a way that built on, complemented and enhanced existing WT II initiatives such as the Investment Compact, the European Charter for Small Business and the Co-operation Process on Employment Policies initiated by the Ministerial Conference of Bucharest in October 2003.

It was emphasised that generating employment in SEE was the shared responsibility of all WT II initiatives - trade, investment compact, social cohesion, private sector and infrastructure development. All WT II partners were involved - the SEE countries, the EC, IFIs, bilateral donors, the business community, parliamentarians and social partners.
The meeting commended WT II for the improved co-operation among its various initiatives and with initiatives from other Working tables: the recent seminar in Skopje had brought together the Investment Compact and the employment and the social dialogue sectors of the Initiative for Social Cohesion and the IFIs to discuss the impact of industrial restructuring and how to deal with it at a local level. The Investment Compact’s network of Foreign Investor Councils and the Business Advisory Council (BAC) were exchanging views with the Trade Working Group, the IFIs and the national governments. The Investment Compact and the Trade Working Group were planning joint events in 2005. Another “Enterprise Development and Employment Generation” seminar, co-organised with the European Training Foundation and planned for March 2005, would involve the ISC, the Investment Compact and the Working Table I Education and Youth Task Force to examine how education and training could be made more responsive to the needs for employability. This was exactly the type of networking and co-ordination that would enhance the SP efforts to stimulate employment creation.

Reference was made to the policy improvements and to the regional projects promoted by the ISC SEE Health Network and the importance of health for economic development was stressed: the Council of Europe Development Bank informed the meeting that it would organise with the Council of Europe a ministerial meeting on that subject in the autumn of 2005. More generally, the updated Action Plan of the ISC was welcomed, as providing a platform for the exchange of experiences, the development of regional projects and the promotion of best policies in social policy. Reference was also made to the recent High Level Conference on the Regularisation of Informal Settlements in the Western Balkans and to the decision to launch a regional mechanism for capacity building in this area.

Looking forward, the Chairman expressed interest in seeing the results of these efforts translated into quantifiable results and instructed each and every WT II initiative to ensure that its progress report in the future contain more figures. It was for instance important to know how the trade flows among the SEE countries were developing with the implementation of the FTAs, how much of foreign direct investment flows was greenfield investment, what was the rate of SME start-ups, what were the priority investment needs under the different infrastructure sub-sectors and so on. This would allow WT II to have more focused discussions on economic issues and policies rather than a survey of needs and objectives.

The Chairman also proposed that the next WT II meeting be devoted to a review of the situation and prospects for investment in infrastructure, an issue that was the core of the Infrastructure Steering Group mandate. In this connection, reference was made to the Meeting of the Ministers of Transport of the Western Balkans on 11 June 2004, who signed the MoU on the Core Transport Network, establishing, among others, a regional monitoring mechanism, as well as to the Ministerial Meeting of the Danube Cooperation Process in Bucharest on 14 July 2004, recommending actions in specific areas. The Special Co-ordinator encouraged members to take concrete steps so that the Danube can play an important role as an in-land waterway on Corridor VII. Mr. Otto Schwetz, General Manager of TINA Vienna Transport Strategies, briefed the meeting on the recent developments concerning Corridor management. Encouragement was also given to the use of pilot projects to promote PPPs in SEE, the task which the recently created PPP Task Force, composed of representatives of the IFIs and of the BAC, has set for itself.

The meeting concluded on a more general note, sparked by Dr. Busek’s comment that some businessmen believed it was easier and more convenient to invest in China or India than in SEE and by Professor Inotai’s warning that there was a fierce global competition, which SEE had to engage in, among emerging countries to attract foreign investment. These were facts of life; SEE had before it a window of opportunity to get its fair share of foreign capital, because of its growth potential and its political and economic linkages to the EU, the EIB, the EBRD and the other IFIs co-operating within the Infrastructure Steering Group. This window of opportunity, which had been referred to in the Chairman’s conclusions a year ago in Tirana, was still there if the region could quickly deliver on the implementation of reforms. However, time is of essence, the window would not remain open forever. Indeed, as the Chairman reminded the meeting, the economic horizon was clouded by structural payments imbalances, by unsettled currency relationships, by rising oil prices, which could pose a threat to world economic recovery, with negative consequences for growth and transition in SEE.

As outlined in the just published EBRD Transition Report and also in the recent positive evaluation of the Pact’s Investment Compact – the economic evidence was clear – the countries securing the majority of investment flows were those that were further along in the reform process. In this connection the meeting welcomed the 2005-2006 strategy of the Investment Compact with its emphasis on FDI policy reform and enterprise and SME development. More generally, the Investment Compact emphasis on the importance of a structured dialogue between the governments and the private sector was endorsed and WT II was encouraged to intensify its activities in this regard, using the various instruments at his disposal, e.g. the regional Network of Foreign Investors Councils, set up under the auspices of the Investment Compact, and the BAC. In his presentation, outlining their priorities for 2005-2007, the representative of the BAC, Mr.Svetozar Janevski urged governments to move as quickly as possible with the reform process as this would minimise the costs in the long-run.

The region could count on the support of the Stability Pact and, in particular, WT II in its efforts to implement reforms and to communicate results to the international community and global investors.