Initial Sectors

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					Sector

 1   Tourism
 2   Auto Parts
 3   ICT/engineering
 4   Education
 5   Energy, especially renewables
 6   Construction
 7   Textile and apparel
 8   Logistics, warehousing and transport
 9   Film and production
10   Medical supplies and devices
11   Building materials
12   Wood processing
Comments

Business, leisure, spa, city breaks, convention
OEM and replacement, non-electronic
Software development, design services, BPO
Adult and continuing, executive, online, skills training
Renewables, bio-fuels, cogeneration and waste disposal
Engineering, management, regional EU accession projects
Original design, and full package contracting
Warehousing, transportation, tracking, business supply/delivery
Sets, location, digital animation, production
Bandages, surgical tools, test kits
Tiles, fixtures, windows and flooring
furniture, etc.
Ranking Criteria

Criteria are ranked from 1 to 10, with 1 meaning very low level of success indicators, and 10 representing a nearly
perfect situation vis a vis competitors.
Rankings are necessarily subjective, based in best knowledge of the home and global industries.



I. Global Prospects in Sector

1. Historic revenue and growth in 1 Negative CAGR over a period of 5
the (sub)-sector                    years.



2. Barriers to entry in major new   1 Markets significantly locked up by
markets                               existing players, with entry very
                                      difficult for new firms


3. Sector prospects and trends,     1 Trends forecast to make industry
shifts                                much less attractive




4. Profitability and added value    1 Very high level of competition and
                                      low level of profitability. Many firms
                                      failing or expected to fail.


II. Local Market Conditions

5. Cost differential                1 Multiple factors indicating lack of
                                      cost competitiveness.



6. Skills present or gap            1 Necessary skills lacking and unlikely
                                      to be developed in near term.


7. Financing and investment         1 No or little capacity to finance
potential                             growth in the sector and poor
                                      prospects for investment.


8. Infrastructure, supply and       1 Infrastructure and resources not
resource constraints, cost and        adequate to support even moderate
availability                          growth.


9. Policy constraints               1 Policy environment creates
                                      considerable barriers to growth.
10. Historical capacity (overall)    1 Negative historical experience,
                                       conditions not changed.


11. Historical (five year) and       1 Little to no historical product or
current competitiveness (all           service exports from sector, or very
markets)                               low value


12. Employment impact                1


III. Combined Analysis

1. Ability to move sustainably into 1 Little to no ability
higher value markets, domestic
and international

IV. Program Impact Analysis

1. Ability of GOS Serbia programs 1 Little to no ability
to attributively impact the sectors




2. Time frame for impact to be       1 Potential for quick wins
realized


3. Regional, gender or youth         1 Negative
impacts

V. Possible Binary Excluders

1. Other donors very active in
sector

2. Potential to compete in a high
profile manner with US products

3. Aggregated subjective
assessment of sufficiency of clear
ROI indicators

4. Inadequate number of
firm/counterparts
ow level of success indicators, and 10 representing a nearly

owledge of the home and global industries.




                      Moderate (3 percent) CAGR over a         # High (>8 percent CAGR over a
                      period of 5 years.                         period of 5 years.



                      Entry difficult, but feasible            # Entry free with no significant barriers
                                                                 to sale of product providing other
                                                                 conditions are met


                      Trends neutral                           # Trends forecast to make industry
                                                                 much more attractive.




                      Profitability and competition            # Profitability very high with
                      reasonable                                 competition low, given specific,
                                                                 identified advantages.




                      Cost competitiveness approximately # Costs expected to be significantly
                      equivalent to competition.           below competitors.



                      Skills at approximately same level       # Advantage in skills, greater than
                      as competitors, esp. relative to           competitors, esp. relative to wages.
                      wages.

                      Can finance moderate growth and     # Financial sector can finance growth
                      with good prospects for investment.   competitively and at volume, and
                                                            very strong opportunities for high
                                                            levels of investment

                      Infrastructure and resources             # Infrastructure and resources
                      adequate to support moderate               adequate to support high growth.
                      growth.


                      Policy environment supportive of         # Policy environment much better than
                      growth, no significant barriers.           competitors in supporting growth.
Historical growth moderate          # Long history of success in this or
                                      related industry.


Moderate history of product or      # Strong history of product or service
service exports from sector, into     exports from sector, into high value
medium or mixed markets               markets


                                    #




Moderate ability                    # High ability




Moderate ability                    # High ability




Will take at least a year before    # Significant results will not be
significant results are realized      realized until nearly end of project or
                                      after

None                                # Significantly positive
Comments and Clarifications                        Suggested Sources of Data




Requires examination of both primary, and          OECD, EU statistics. World Bank, World
secondary and niche markets in the sector          Development Indicators, analyst reports, trade
                                                   publications and websites, Nexis sources, rfe.org.

As above. Also requires understanding of           WTO site, OECD data
distribution, trade barriers, legal issues,
minimum capitalization, cultural preferences or
fears, recent market entry by others, etc.

As above. May be shifts to substitute              Trade publications, Nexis sources, analyst
products, forecast lower demand for                reports, analyst or "expert" interviews
documented reasons, trends toward
production in other markets, changing
preferences, etc. Need to understand
positions of Serbian products.
As above. Completion of this section requires      Trade publications, public filings, analyst reports,
a clear understanding of actual and relative       Nexis
position in the market, competitive advantages
and disadvantages



Understand role of labor, labor rates, labor       End market product catalogues, interviews with
productivity, trade barriers, logistics costs to   traders or buyers (actual or potential), company
main markets, key factors of production and        interviews
costs relative to main competitors

Need to assess both presence of skills and         Company interviews, comparisons with competitor
difficulty in developing needed skills with        firm capabilities
resources of and during life of project

Requires knowledge of type of financing            Bank interviews, company interviews, central
conducive to growth, long-term, collateral         bank statistics, analysis or needs versus market
based, working capital, leasing, etc., and         offerings
matching to availability

Presence of local materials, if needed,            Company interviews, trade organization
effective supply chains for goods and              interviews, Chamber of Commerce
services, transportation, power,
communications systems, etc.

                                                   Company interviews, "Doing Business" indicators.
Growth trends in sector, which products          Official statistics, company interviews, trademap
succeed in which markets. Number and size        statistics
of firms. Capacity.

Growth trends, identifying market segments       Target market interviews, product mapping
(high and low value), and identifying current    against broader sector, official data, company
and possible future product mix, marketing       interviews
and sales capacity

Combines total employment and estimates of       Official sector statistics
current and future average wages



Requires a subjective compilation of above       Own analysis
factors. Assessment will be conducted on the
basis of prepared materials and discussion.




Consider range of possible activities under      Own analysis
GOS and whether this is was is needed to
improve sector performance. Also assess firm
and counterpart importance and commitment
to success.

May consider staggering results. A "10" may      Own analysis
not be negative if results are significant and
DCF indicates strong future

Document thoroughly                              Own analysis




                                                 Donor interviews


                                                 Own analysis


To be maintained internal to project             Own analysis
Impact Criteria                                         Tourism       Auto Parts       ICT/Eng

I. Global Prospects in Sector

1. Historic revenue and growth in the (sub)-sector                9                4             5

2. Barriers to entry in major new markets                         8                4             7

3. Sector prospects and trends, shifts                            7                6             8

4. Profitability                                                  7                2             4

II. Local Market Conditions

5. Cost differential                                              5                4             7

6. Skills present or gap                                          5                6             7

7. Financing constraints                                          4                5             5

8. Infrastructure, supply and resource constraints,               4                5             8

9. Policy constraints                                             8                7             7

10. Historical capacity (overall)                                 7                4             7

11. Historical (five year) and current                            6                6             6

12. Employment impact                                             7                4             7

III. Combined Analysis

1. Ability to move sustainably into higher value
markets, domestic and international

IV. Program Impact Analysis

1. Ability of GOS Serbia programs to attributively

2. Time frame for impact to be realized

3. Regional, gender or youth impacts

V. Possible Binary Excluders

1. Other donors very active in sector

2. Potential to compete in a high profile manner with
3. Subjective assessment of sufficiency of clear ROI
indicators
4. Inadequate number of firm/counterparts

I.                                                     31   16   24
II.                                                    46   41   54

III.
IV.

V.

I. + II.                                               77   57   78
Education       Construction Renewables Tex/Apparel       Logistics       Film/Producti Medical
                                                                          on            Supplies


            8             5           5               4               7              8             5

            6             4           7               6               5              6             3

            6             5           7               5               6              8             4

            8             6           3               2               7              8             5



            6             5           8               4               3              6             4

            5             8           7               7               8              7             8

            5             4           7               5               4              7             3

            5             5           8               6               4              4             5

            8             5           6               6               3              6             7

            6             7           2               5               6              6             4

            5             6           5               6               4              7             3

            5             4           4               8               0              3             4
28   20   22   17   25   30   17
45   44   47   47   32   46   38




73   64   69   64   57   76   55
Building Mat. Furniture/Wo
              od


           2             5

           3             3

           4             6

           2             3



           2             5

           3             7

           4             2

           2             5

           0             7

           7             4

           7             4

           5             0
11   17
30   34




41   51
Tourism

Targeted Subsector(s)
Business, leisure, spa, city breaks, convention



Impact Criteria                                   Determining Factors and Rationale                                                            Default Ranking Weighted
                                                                                                                                               Weight          Rank

I. Global Prospects in Sector

1. Historic revenue and growth in the (sub)-      The global tourism and travel industry accounted for 3.6% of the world's GDP, employed       100%   9       9
sector                                            234 million people (8.7% of total world employment) and realized expenditures by
                                                  incoming tourists/visitors of USD 631.8 billion in 2006, an 8.5% increase from 2005.                                    RH

2. Barriers to entry in major new markets         Barriers are low in principle due to technological advances, travel deregulation,            100%   8       8
                                                  information availability and sophisticated demand preferences. Currently, eight out of ten
                                                  people in the U.S. use internet as their main resource when planning to travel. 74% of
                                                  U.S. consumers buy their airline tickets online and 73% make online hotel reservations.
                                                  Yet one should note that only several hotels in Serbia have online booking systems.
                                                                                                                                                                          JK, AT

3. Sector prospects and trends, shifts            Sector will continue to grow with expenditures by incoming tourists/visitors reaching USD 100%      7       7
                                                  841.3 billion annually by 2011. Much of the growth in the industry is due to increased
                                                  wealth in emerging markets, particularly China. Nation/Place branding efforts are
                                                  increasing rapidly, as countries, regions and cities compete for tourism dollars. 'City
                                                  breaks' tourism is on the increase in Europe, and Belgrade is likely to attract portion of this
                                                  growth.                                                                                                                 JK

4. Profitability                                  The large projected increase in travelers and tourists worldwide is creating new           100%     7       7
                                                  opportunities on a global scale. However, competitiveness within the global marketplace is
                                                  high, technology is enabling more consumer choice, which increases the importance of
                                                  value and price, ultimately effecting the profitability of SMEs in the sector.                                          JK

II. Local Market Conditions

5. Cost differential                              In Serbia, costs are often higher than what visitors expect, which may prevent Serbia from 100%     5       5
                                                  being a truly "mass market". There are concerns about "value for money". Yet, the more
                                                  unique the offering (Belgrade as a city break location, or festivals), smaller price elasticity.
                                                                                                                                                                          JK
6. Skills present or gap                 A significant skills gap exists, especially in management, customer service, PR and           100%   5   5
                                         marketing, as well as in foreign language capabilities in rural areas/standardization of
                                         service. However, Serbia does graduate about 52,000 students annually in a wide range
                                         of skill areas that could be applied to tourism (there are tourism vocational high schools, a
                                         private Faculty for Tourism at the University of Singidunum, etc) and English proficiency in
                                         Belgrade and other towns is relatively high (according to 2003 survey by Gallup
                                         International, 42% of the literate population in Serbia is able to communicate in English,
                                         which is far above other CEE and SEE countries). The low pay does not attract the best
                                         people. Note: many tourism facilities do not recognize the skills gap/poor service as an
                                         area that requires improvement.                                                                              JK, AT

7. Financing constraints                 Access to financing is not a major barrier to growth for larger firms, though high interest 100%     4   4
                                         rates can be a disincentive to borrowing the money needed to grow. For SMEs, access to
                                         finance is a more serious impediment and SMEs play an important role in the tourism
                                         sector. This could keep facilities from being expanded and improved as quickly as
                                         possible.                                                                                                    JK,AT

8. Infrastructure, supply and resource   Infrastructure needs improvement, especially roads, highways, trains and signage. In        100%     4   4
constraints, cost and availability       Western Serbia renovation of Ponikve airport close to Zlatibor would significantly increase
                                         location attraction/foreign tourists inflow. Accommodation could be improved immensely
                                         and there is little concern for the environment in the sector. Many locations lack
                                         accompanying services and attractions. Finally, Serbia's image can be an impediment to
                                         further growth (sector sensitive to political climate).                                                      JK,AT

9. Policy constraints                    Overall legislation is up-to-date and the Open Skies agreement (enabling low-cost carriers 100%      8   8
                                         to operate in Serbia) will be in force as of 2008. Some issues remain with sub-sectors (i.e.
                                         spas), certain privatizations, etc. and some firms advocate greater regulation of the sector
                                         to enhance quality of service providers. The requirement for tourists to register with the
                                         police should be changed.                                                                                    JK,AT

10. Historical capacity (overall)        The sector has been doing quite well over the past five years and the government is          100%    7   7
                                         showing somewhat stronger support, in terms of promotion, infrastructure and
                                         conventions. Currently the tourism industry's share of Serbia's GDP is between two and
                                         three percent. In Serbia, local tourists provide a majority of the tourism revenue and
                                         account for most of the total arrivals. However, though the domestic industry is flagging,
                                         tourism was one the fastest growing and one with the highest volume of exports.                              JK
11. Historical (five year) and current          Competitiveness has been hurt by poor international image and lack of low-cost airlines. 100%         6   6
competitiveness (all markets)                   However, exports have increased four times over the last five years and measured by
                                                sector revenue, tourism is expected to grow 20% in 2007. Regardless, the sector has not
                                                recovered its pre-1990 levels. The potential to bring in foreign tourists is high because of
                                                offerings that have still not been exploited, world trends in growth of special interest
                                                tourism segments that Serbia can offer and ease of access (the existence of a national
                                                carrier, proximity to Europe/crossroads). The potential for re-establishing some high-yield
                                                segments of business tourism looks good. Key challenges include improvements to
                                                accommodations/infrastructure, efficiency of services, lack of information for tourists and
                                                language skills. Weak standard of service generally and lack of customer and market
                                                oriented business thinking will have to be addressed. Any future political instability related
                                                to Kosovo can significantly impact growth in this sector.
                                                                                                                                                              JK,DP

12. Employment impact                           Total employment is relatively high (25,930 registered employees, including hotels, tourist 100%      7   7
                                                agencies and catering; this is 2.4% of total employment), though wages are low
                                                historically, among the lowest in Serbia. This is not expected to change, with pure job
                                                creation high, but at the lower end of the wage scale. Some exceptions are in medical
                                                (spa) tourism and in the management side of the convention business.
                                                                                                                                                              AV

III. Combined Analysis

1. Ability to move sustainably into higher      Most markets that Serbia will be competing in are not particularly high value in
value markets, domestic and international       international terms, but can still drive strong growth in-country. Domestic tourism could be
                                                another source of growth.

IV. Program Impact Analysis

1. Ability of Program to attributively impact   The sector has multiple opportunities for programs of the size and scope of the Project.       100%       0
                                                Past experience indicates that impact from such programs can be strong.


2. Time frame for impact to be realized         Tourism in the region is increasing, allowing Serbia to tap in relatively easily to some       100%       0
                                                markets (spas, city breaks, religious), though others will require a longer term payoff
                                                (convention).

3. Regional, gender or youth impacts            Reasonable employment potential in rural areas, and many small businesses in the               100%
                                                industry are managed by women. Large manifestations (sports, cultural etc) are a source
                                                of temporary employment/work experience for young people.

V. Possible Binary Excluders
1. Other donors very active in sector            Other donors are active (SCOPES, GTZ), but the sector is very large. Given the needs,           100%                  0
                                                 pooling donor resources can lead to the best impact.



2. Potential to compete in a high profile        None                                                                                            100%                  0
manner with US products


3. Subjective assessment of sufficiency of       Available                                                                                       100%                  0
clear ROI indicators


4. Inadequate number of firm/counterparts        Available                                                                                       100%                  0




Key Supporting Data                                                                                                                              References
1. (a) Worldwide, the travel and tourism industry realized expenditures by incoming tourists/visitors of 582.3 billion USD in 2005 and           Economist Intelligence Unit -
631.8 billion in 2006.                                                                                                                           Tourism & Travel Outlook 2007    JK
1. (b) Consumer expenditures on hotels and restaurants was 1.9 trillion USD in 2005 and 2.1 trillion USD in 2006.                                Economist Intelligence Unit -
                                                                                                                                                 Tourism & Travel Outlook 2007    JK
1. (c) International tourism (based on the total # of arrivals) has increased from 585.4 million visitors in 2002 to 690.8 million visitors in   Economist Intelligence Unit -
2006.                                                                                                                                            Tourism & Travel Outlook 2007    JK
1. (d) Travel and tourism accounts for 3.6% of world GDP and employees 234 million people, or 8.7% of total world employment.                    Economist Intelligence Unit -
                                                                                                                                                 Tourism & Travel Outlook 2007    JK
2. (a) eight out of ten people in the United States (largest market in regards to potential tourists) who plan to travel in the next three       Research Alert 2007
months will use the Internet as a resource during their planning process.                                                                                                         JK
2. (b) More than half of travelers between the ages of 25-35 say the Internet will be their primary travel resource, 41% of travelers over       Research Alert 2007
55 plan on using the Internet as their primary travel resource.                                                                                                                   JK
2. ($) 74% of U.S. consumers buy their airline tickets online (2007) and 73% make hotel reservations online (2007).                              Research Alert 2007
                                                                                                                                                                                  JK
2. (d) International travel remains strong, healthy growth in Europe and Asia is compensating for the slowly U.S. economy (as of April           Air Transport World, July 2007
2007); total international passenger traffic rose 6.7% in the first four months of 2007                                                                                           JK
3. (a) Worldwide travel and tourism industry expenditures by incoming tourists/visitors is expected to reach 738.1 billion USD 2007 and          Economist Intelligence Unit -
841.3 billion by 2011.                                                                                                                           Tourism & Travel Outlook 2007    JK
3. (b) Consumer expenditures on hotels and restaurants is projected to increase to 2.7 trillion USD by 2011.                                     Economist Intelligence Unit -    JK
3. (c) Much of the growth in tourism is due to increased wealth in emerging markets (i.e. China).                                                Economist Intelligence Unit -    JK
3. (d) The airline industry was forced to adapt after Sept. 11, the industry is back on track with some major carriers recently achieving        Economist Intelligence Unit -
profitability.                                                                                                                                   Tourism & Travel Outlook 2007    JK
3. (e) Major hotel chains continue to expand rapidly, mainly in emerging markets, particularly China. Travel agents must adapt to the            Economist Intelligence Unit -
trend of "dynamic packaging" - meaning customers book each component of the trip independently on the Internet.                                  Tourism & Travel Outlook 2007    JK
3. (f) Continued growth in the industry will be closely associated with any large-scale geopolitical events, such as a major terrorist attack   Economist Intelligence Unit -
or a worldwide health epidemic, these type of events could alter forecasts.                                                                     Tourism & Travel Outlook 2007    JK
3. (g) The continuing debate over the "Open Skies" agreement could influence tourism in certain regions due to increase in low-cost             Economist Intelligence Unit -
carriers, etc.                                                                                                                                  Tourism & Travel Outlook 2007    JK
3. (h) The proportion of travel booked online is expected to rise from 25% to 50% by 2010. Online bookings through agents and                   EYE For Travel- Trade
operators across Europe are expected to account for about a third of online bookings over the next three years.                                 Publication, August 2007         JK
3. (i) Positive brand images have helped many economies boost their exports and attract investments, businesses, factories, visitors,           Place Branding and Public
residents and talented people                                                                                                                   Diplomacy, 2007                  JK
3. (j) With the emergence of "nation branding", "regional branding" and "sector branding", the global tourism/travel market is increasingly     Place Branding and Public
competitive.                                                                                                                                    Diplomacy, 2007                  JK
3. (k) Place branding is the management of place image through strategic innovation and coordinated economic, commercial, social,               Place Branding and Public
cultural and government policy -Simon Anholt                                                                                                    Diplomacy, 2007                  JK
3. (l) Competitive Identity (CI) is the term used to describe the synthesis of brand management with public diplomacy, and with trade,          Place Branding and Public
investment, tourism and export promotion. - Simon Anholt                                                                                        Diplomacy, 2007                  JK
3. (m) Serbian operator expects Belgrade market to increase by 20 percent in coming year, where 20- 30 percent outside Belgrade,                Source????
starting from a lower base.                                                                                                                                                      AV, AT
3. (n) TOB says that city tourism is the only part of European tourism that is growing. Belgrade expected to go 30 percent this year.           InterviewToB.doc
                                                                                                                                                                                 DP, AV
4. (b) The large projected increase in visitors, could create new opportunities on a global scales, however, competitiveness in market is
very high and in general, tourism is increasingly managed by the individual, who is extremely focused on price, which could effect SMEs Economist Intelligence Unit -
in the sector.                                                                                                                                  Tourism & Travel Outlook 2007    JK
4. (c) The emergence of low-cost carriers in Europe will drive "value-for-money" weekend trips within Europe.                                   Economist Intelligence Unit -
                                                                                                                                                Tourism & Travel Outlook 2007    JK
4. (d) Financial benefits of the activities the sector is involved in spreads to and benefits directly and indirectly other Serbian sectors and
industries. For example, it is estimated that on average each person visiting Serbia (business meeting/conference or similar) daily
spends 300-500 dollars. They stay in Serbia three days on average. Hotels, restaurants, entertainments, airports and airlines, tourist
agencies, souvenir shops, taxi companies benefit most. Increased economic activity generates growth.                                            Interview with Sava Center       DP
5. (a) cost are often higher than what visitors expect, and comparable to other markets especially for accommodation. This may keep
Serbia from being a truly mass market (6)                                                                                                       AnaIlicInterview                 AV, AT
5. (b) Costs are reasonable for the experience, (7/8)                                                                                           TourismInterviewVerano
                                                                                                                                                                                 AV, AT
5. (c Serbia offers quality products at a great price. The country has many cultural products, such as wine, homemade & organic food            Interview with Astakos 26 Oct.
that are attractive for tourists. The nightlife here is also some of the best in Europe.                                                        2007                             RH
5. (d) notes high accommodations costs for the money                                                                                            Interview_Smart.doc
                                                                                                                                                                                 DP, AV
6. (a) significant skills gap exists, especially in foreign languages in rural areas. Also gaps in management, customer care, PR and
marketing. (3)                                                                                                                                  AnaIlicInterview                 AV, AT
6. (b) Significant skills gap exists (3)                                                                                                        TourismInterviewVerano
                                                                                                                                                                                 AV, AT
6. (c It is difficult to find young people who are highly educated and want to work seriously and “think” about the business as they need to Interview with Astakos 26 Oct.
interact with people (I understood this as having a good sense of customer service); Skills there, but problem attracting workers to         2007
domestic firms
                                                                                                                                                                                 RH
6. (d) Serbia graduates students in a wide range of skill areas that could be applied to tourism. Total estimated number of annual            EducationDataSectorRelevanceFi
graduates is 52,134. Higher education is not required in many tourism related jobs. Also, retraining is possible from most other fields.                  nal.xls
The real issues seems to be if that takes place, and if graduates with the most relevant skills do actually go into this field.
6. (e) Education is good overall. The low pay does not attract the best people. Those it does attract want to go into management more         Interview_Smart.doc
quickly than is feasible, and they become disillusioned. Real impact is that hard to get and obtain good people.                                                               DP, AV
6. (f) Felt that overall, the quality of education was not very good. However, also thought that Singidunum had a very good program.          InterviewToB.doc
                                                                                                                                                                               DP, AV
7. (a) Access to financing not a major barrier to growth
                                                                                                                                              AnaIlicInterview                 AV, AT
7. (b) Access to financing important, but not major                                                                                           TourismInterviewVerano
                                                                                                                                                                               AV, AT
7. (c High interest rates are a disincentive to borrow monies needed to grow                                                                  Interview with Astakos 26 Oct.
                                                                                                                                              2007                             RH
8. (a) Accommodation poor. Infrastructure needs improvement, especially roads, signage. Functional, but needs to be managed much
better.                                                                                                                                       AnaIlicInterview                 AV, AT
8. (b) Holding tourism back, is the need for more/better hotels, highways, and trains.                                                        Interview with Astakos 26 Oct.
                                                                                                                                              2007                             RH
8. (c) lack of accommodations cited, as well as poor concern for the environment                                                              Interview_Smart.doc
                                                                                                                                                                               DP, AV
8. (d) Center believed barriers to growth/competitiveness include limited number of international flights, limited number of good quality     Interview Sava Center
hotel accommodation, the fact that visas were still required to enter Serbia by citizens of a number of countries, limited tourist offer in
Serbia
                                                                                                                                                                               DP
9. (a) The overall legislation governing tourism is up to date. Main issues are with some specialty areas (spas), issues with ongoing
privatization, and concessions.                                                                                                               AnaIlicInterview                 AV, AT
9. (b) the police registration requirement should be changed.                                                                                 Interview_Smart.doc
                                                                                                                                                                               DP, AV
9. (c) This interviewee was very critical of the regulations, though in a non-specific way.                                                   InterviewToB.doc
                                                                                                                                                                               DP, AV
9. (d) Visas required by visitors to enter Serbia seen as a potential barrier for Congress tourism                                            Interview Sava Center
                                                                                                                                                                               DP
9. (e) Complicated government procedures and bureaucracy hurt efficiency of tourist agencies: each contract they make has to be               Interview Smart
forwarded to the Ministry, together with invoice and other paperwork for verification purposes (this check can easily be done via banking
system)                                                                                                                                                                        DP
9. (f) The Law on Tourism needs improvements: right now any unqualified person is able to open a tourist agency, and this should not be Interview Smart
the case (need qualified personnel, like any other industry). Consumers are protected, but agencies have no protection whatsoever.
Tourist associations need to be regulated, currently they are not (the purpose of the association should be to protect interests of tourist
agencies, independently of the Government-and impartially). They suggest that qualified people from the branch should be included in
drafting the law.                                                                                                                                                              DP
9. (g) The legislation that will regulate relations in the sector is required (licenses for congress events, jobs of foreign vs domestic tour Interview Smart
operators, list of qualified tour guides, percentage of discount to domestic and foreign tourists, etc.)
                                                                                                                                                                               DP
10 (a) Hotel capacity increasing in Belgrade with Holiday Inn to open soon; InterCon opening 2010; Metropol under renovation; former          TOS Interview
Yugoslavia Hotel on Danube is now casino and could be renovated (?).                                                                                                           SV
10 (b) Has been doing quite well over the last five years, and government now showing strong support to maintain this.
                                                                                                                                             AnaIlicInterview                      AV, AT
10 c) Tourism industry's share in a country's GDP typically ranges from 2 to 3%. In Serbia, local tourists provide a majority of the tourism
revenue and account for 80% of total arrivals and 87% of total number of overnights.                                                         Siepa/Tourism Industry                PZ
10 d) Number of arrivals and overnights in 2006 was only 91% of what was achieved in 2002.
                                                                                                                                             Statistical Data Tourism              PZ
10 e) The tourism industry directly employs around 8% of the active population in Serbia.
                                                                                                                                             Siepa/Tourism Industry                PZ
11. (a) Competitiveness has been hurt by an ongoing poor image internationally and the lack of low cost airlines
                                                                                                                                             AnaIlicInterview                      AV, AT
11 (b) Tourism sector revenue expected to grow 20% in 2007. 1st 7 months of 2007 was $274 mn and projected to be $500 mn for the Interview with TOS-site source - in
year (verify Serbian)                                                                                                                        Serbian so need to check              SV
11 (c) Serbia has not recovered to pre 1990 levels. Suffers from image problem.                                                              Statistical Agency Data
                                                                                                                                                                                   SV
11. (d) Improved greatly over time period, adequate supply chain for the industry, decent price and reliability.                                  TourismInterviewVerano
                                                                                                                                                                                   AV, AT
11. (e) Serbian tourism industry is better each year; it is completely different/better than five years ago; The “export” or potential to bring   Interview with Astakos 26 Oct.
in foreign currency through tourism is very high because of the unique, diverse, and many different opportunities.                                2007                             RH
11. (f) Kea challenges are: standard improvements in the following areas :accommodation, efficiency of services, lack of information for          EBRD/Overviews Kea Industry
tourists, language skills, weak transport facilities and disharmonized quality and price categorization.                                          Sectors                          PZ
11. (g) Centralized administration system leaves local communities with insufficient power to market themselves, neither nationally nor           EBRD/Overviews Kea Industry
internationally.                                                                                                                                  Sectors                          PZ
11 (h) Sector has much improved over the last few years, good prospects for the future. Can compete.                                              InterviewToB.doc
                                                                                                                                                                                   DP, AV
11(i) See chart below

12 (a) See charts below

12 (b) 25,930 registered employees, including hotels, tourist agencies and catering; this is 2.4% of total employment. 2,900 (11.2% from Serbian Chamber of Commerce
total number in tourism/hotels/catering) are employed in tourist agencies, etc.                                                                                                    DP
Spas

1.(a) More than one quarter of Americas (26% - 57 million) visited a spa in 2006. The vast majority of spa goes visit clay spas (77%) or          Research Alert, October 2006
hotel/resort spas (64%). 3 out 10 spa-goers in 2006 were men.                                                                                                                      JK
2. (a) There are nearly 100 million spas worldwide. Men account for over 40% of spa-goers in Germany, Austria, Australia, Japan,                  International Spa Association,   JK
Singapore, Spain and Thailand.                                                                                                                    2007
3. (a) 73% of women who take women-only trips visit a spa during their vacation (USA consumer surveyed, but indicates is true in EU               Research Alert, August 2007
countries as well.                                                                                                                                                                 JK
3. (b) As a whole, the industry is embracing the addition of "healthy cuisine" and "local products" (i.e. local ingredients exclusive to the      International Spa Association,
spa's location".                                                                                                                                  2007                             JK
4. (a) Spas are increasingly mainstream and the market is saturated in some cases. Customization will be the key for future growth and            International Spa Association,
profitability.                                                                                                                                    2007                             JK
Conventions

1. (a) Revenues for the conference center segment increased by 13.7% in 2005 (from 2004) and profits increased by more than 39%.
                                                                                                                                               Lodging Hospitality, July 2006    JK
3. (a) Operator expects at least 30 percent growth in MICE business in Serbia in coming year.                                                  TourismInterviewVerano
                                                                                                                                                                                 AV, AT
8. (a) Center believed barriers to growth/competitiveness include limited number of international flights, limited number of good quality      Interview SavaCentar
hotel accommodation, the fact that visas were still required to enter Serbia by citizens of a number of countries, limited tourist offer in
Serbia
9 (a) Need a Public Private Partnership law to allow a Convention Bureau.
                                                                                                                                               Interview with TOS                SV
9. (b) Visas required by visitors to enter Serbia seen as a potential barrier for Congress tourism
                                                                                                                                          Interview Sava Center                  DP
9. (c) In the opinion of Sava Center the Government is not doing enough on promoting Serbia as an attractive (international) conventions
destination.                                                                                                                              Interview with Sava Center             DP
10.(a) Serbia has one of the best facilities in the region for large conventions (capacity 7000). Similar facilities exists in Sofia, but
Croatia, Slovenia, Macedonia and Bosnia have much smaller capacities.                                                                     Interview with Sava Center             DP
10.(b) The requests for large conventions (over 3000 participants) cannot materialize since Belgrade is unable to accommodate all
participants in present hotel capacities (current capacity: 2200 good quality rooms).                                                     Interview with Sava Center             DP
10.(b) EBRD Annual meeting which took place in 2005 received a positive feedback by participants and EBRD organizers. Belgrade            EBRD staff and participants of the
competed with Croatia and other countries in the region.                                                                                  meeting                                DP
City Breaks



2. (a) Travel agencies are promoting more destinations as good "city breaks", this is particularly true in Europe.
                                                                                                                                               Yorkshire Evening Post, October
                                                                                                                                               2007                              JK
2. (a) The infrastructure in Europe, particularly low-cost carriers and the highly-integrated and efficient rail system allows for ease of
travel. Also, EU regulation has made it incredibly easy to travel hassle free across many borders in Europe.                                   Sunday Times, October 2007        JK
3. (a) Consumers are driving the research for "city breaks". In fact many reporters who cover the industry are asking, "are there really any
city-break travel agents left". The increased availability to research destinations and compare prices via the web has created an              Sunday Times, October 2007
3. (b) When comparing city break packages that are designed by travel agents with packages created by the consumer, the consumer is
usually able to find a much cheaper deal. The availability of information is very favorable to the consumer, specifically in regards to        Sunday Times, October 2007        JK
11. (a) Belgrade is hosting City Breaks Tourism Fair in June 2008. Expect 1000 participants.                                                   Interview with TOS
                                                                                                                                                                                 SV




                                                                  EXPORTS (000 EUR)


  400000
  350000
                                                                                Tourism
                                                                                AutoParts
  300000
                                                                                ICT/Eng (Exc Telco)
                                                                                Education
  250000
                                                                                Energy, especially renewable
                                                                                Construction
  200000                                                                        Textile and apparel
                                                                                Logistics, warehousing and transport

  150000                                                                        Film and production
                                                                                Medical supplies and devices
                                                                                Building materials
  100000
                                                                                Bldg Matls w/o CLP
                                                                                Wood processing and furniture
      50000


          0
              2002   2003   2004          2005         2006   2007 (1-VIII)
                                   Year
                                      Average Gross Wage




  710
                                                                              Tourism (Average)
                                                                              AutoParts (NACE)
  610                                                                         ICT/Eng (Exc Telco)
                                                                              Education
                                                                              Energy, especially renewable
  510
                                                                              Construction (Average)
                                                                              Textile and apparel
                                                                              Logistics, warehousing and transport
EUR




  410
                                                                              Film and production
                                                                              Medical supplies and devices
                                                                              Building materials
  310
                                                                              Bldg Matls w/o CLP
                                                                              Wood processing and furniture

  210
110
      2002   2003   2004          2005   2006   2007 (Est)
                           Year
Auto Parts

Targeted Subsector(s)
OEM and replacement, non-electronic



Impact Criteria                             Determining Factors and Rationale                                                        Default Ranking Weighted
                                                                                                                                     Weight          Rank

I. Global Prospects in Sector

1. Historic revenue and growth in the (sub)- Globally entire industry realized a moderate to low CAGR - 2.2% from 2002- 2006. Sales 100%      4     4
sector                                       of auto parts and equipment dominate components sub-sector, accounting for 94.7% of
                                             the value (Tire & Rubber is second with 5.3% of the value. Europe forms the largest
                                             geographical segment (39.2% of value), followed by the U.S. (37.1% of value).                                      RH

2. Barriers to entry in major new markets   Significant barriers to entry, require scale especially for OEM. Established companies are 100%   4     4
                                            expanding their global reach since the market is equalizing across all regions. Some large
                                            brands enjoy good recognition, but there is little brand loyalty from customers in this
                                            sector, which does lower entry barriers from mid-size companies. This is especially for
                                            spare parts. For Serbian entry, greenfield investment seems to offer a way in.
                                            Certification issues in the EU can be expensive to overcome.                                                        JK

3. Sector prospects and trends, shifts      Eastern Europe is second-fastest growing market (8% annually). Anticipated global          100%   6     6
                                            CAGR over next five years is forecasted at 3%. Serbia's export potential in region (former
                                            YU, Eastern Europe) and wider (Russia) could benefit from the anticipated growth in the
                                            sector. A single car manufacturing company bought EUR 400 million in parts out of a
                                            neighboring country in 2005, while total exports from Serbia were EUR 90 million in the
                                            same period. There are good precedents and a lot of room to grow.
                                                                                                                                                                JK

4. Profitability                            Rising raw material costs and lack of pricing power in industry are likely to squeeze    100%     2     2
                                            profits, making cost control and other advantages more important. Prices are expected to
                                            come under pressure as scale increases and suppliers become increasingly globalized.
                                                                                                                                                                RH

II. Local Market Conditions
5. Cost differential                     The sector is resource intensive, so production costs are mainly determined by prices of 100%      4   4
                                         raw materials and equipment. Except for China, labor costs are comparatively low relative
                                         to productivity. This is likely the main reason the sector's prices have been competitive,
                                         which has enabled an increase in exports over the past few years. In Serbia indications
                                         are that raw material costs are higher than main competitors (i.e. Romania, Turkey,
                                         China). This is likely due to the relatively small size of the sector and weak bargaining
                                         power. The situation should change if Serbia hits scale again. Transportation costs are
                                         not a big issue due to the relatively high value of a product unit and vicinity of major
                                         export markets. Serbia is benefiting from the low prices of energy (the lowest in Europe),
                                         for the time being. Relatively small changes in cost can make the industry uncompetitive.
                                                                                                                                                    JK

6. Skills present or gap                 Work force has experience in both production and administration of business that is       100%     6   6
                                         comparable to Western European standards. 36% of workers in the sector possess either
                                         a technical or professional degree. 8% of employees hold a university degree in a
                                         relevant filed - demonstrates that there is highly-skilled labor available in automotive
                                         supply/parts industry in Serbia. Graduates with skills relevant to auto parts design,
                                         manufacturing and management total 24,645. A main issue would be whether these
                                         qualified individuals would be drawn to the regions where auto parts are made, or whether
                                         better jobs in more desirable areas are available. Should demand and salaries increase,
                                         the basic skills may be there but additional training would be needed on new
                                         technologies.                                                                                              JK, AT

7. Financing constraints                 Sufficient liquidity but rates and other conditions less favorable than in neighboring      100%   5   5
                                         countries leading many firms to borrow abroad and rendering access to finance a
                                         disadvantage for smaller companies. High rates are a big problem in regards to large
                                         investments with long pay-off periods. One important foreign investment will bring
                                         important growth in the sector. Most major investments in the sector are expected to be
                                         driven by FDI, lowering the importance of domestic financing constraints.                                  JK, AT

8. Infrastructure, supply and resource   Majority of production machinery has been imported. Raw materials and intermediate          100%   5   5
constraints, cost and availability       goods used in the industry are also imported. This is not radically different from
                                         competitor countries. However, lack of current scale has led to higher import prices. The
                                         average age of machines in the sector is 21 years. Only 12% of companies in the sector
                                         have machines that are less then 10 years old. Outdated equipment harms productivity
                                         and competitiveness, increases maintenance costs, etc.                                                     JK

9. Policy constraints                    Illegal imports of auto-parts and legal imports with inadequate certification create unfair 100%   7   7
                                         competition in Serbia. Complex administration in setting up company/licensing and
                                         presence of corruption are additional impediments. Monetary policy is also considered an
                                         obstacle to greater exports. Overall, however, there are few significant barriers to
                                         business.                                                                                                  JK,AT
10. Historical capacity (overall)               Serbia had a large, though highly protected and notoriously low quality, auto industry  100%       4   4
                                                before the 1990s. Many legacy plants remain. Currently, the main export destination
                                                within the EU is Italy, 39% of surveyed companies export there. 34% of companies export
                                                to Germany. Outside of the EU, 42% of companies export to Bosnia and Macedonia.
                                                                                                                                                           JK

11. Historical (five year) and current          The sector exported EUR 90 million in 2005, a 45% increase from 2003. Compared to           100%   6   6
competitiveness (all markets)                   EUR 400 million that a single company imported from Romania in the same year, this
                                                may not appear very high, but the prospects for growth look good mainly due to FDI. In
                                                2008, EUR 50 million will be exported to Russia by a single company supported by
                                                French investments. Given the free trade agreement, this could be promising. Domestic
                                                companies will struggle to keep well qualified staff as they enter the competition with
                                                foreign owned companies that offer better pay and work conditions. The potential by
                                                domestic companies is hard to realize due to their inability to produce large volumes and
                                                play more significant roles on the foreign markets.                                                        JK,DP

12. Employment impact                           Overall contraction in the sector will likely lead to lower employment overall. However,    100%   4   4
                                                new plants and increased exports will lead to more jobs, mostly at the middle range,
                                                which can be good for plants located outside of Belgrade as most are. Job increases not
                                                expected to be high.                                                                                       JK

III. Combined Analysis

1. Ability to move sustainably into higher      Most markets are high volume and low profit. There are few high value markets available
value markets, domestic and international       for manufacturers to move into. This requires a more extensive R&D infrastructure and
                                                very close contacts with primary auto makers.

IV. Program Impact Analysis

1. Ability of Program to attributively impact   There are a few activities in investment promotion and supply chain linkages that the       100%       0
                                                Project could get impact from. Most plants currently working in Serbia, however, are not
                                                well suited to take advantage of global trends.

2. Time frame for impact to be realized         With investment and linkage work, time frame could be short (few months) to longer with     100%       0
                                                investment promotion (few years)



3. Regional, gender or youth impacts            Expected to be neutral                                                                      100%



V. Possible Binary Excluders
1. Other donors very active in sector           GTZ is active here, Norwegian Government, TAM/BAS also believed to do some firm                 100%                  0
                                                level assistance. Many of the more traditional donor type activities are being done.



2. Potential to compete in a high profile       Very little                                                                                     100%                  0
manner with US products


3. Subjective assessment of sufficiency of      Available                                                                                       100%                  0
clear ROI indicators


4. Inadequate number of firm/counterparts       Around 40 good companies out of 120. Adequate.                                                  100%




Key Supporting Data                                                                                                                             References

1. (a) Grew by 2.5% in 2006, representing a CAGR of 2.2% for 2002-2006; sale of auto parts and equipment dominate the auto                      Datamonitor Global Auto
components industry, accounting for 94.7% of value, then Tire & Rubber = 5.3%; Europe forms largest segment, generating 39.2%,                  Components Industry Profile
then the US with 37.1%, then Asia-Pacific with 13.8% (but Asia will develop rapidly with China and India rising consumer demand.                March 2007                      RH
1. (b) global tire consumption of natural rubber (NR) has been growing more strongly than the 2.6% originally forecasted for the 2nd            Economist Intelligence Unit -
quarter of 07. US consumption has been falling, but the decline has been more than offset by growth elsewhere - particularly China (but         Industry Briefing, Oct. 2007
also in Japan, EU and Latin America.
1. (c) China is by far the biggest market for natural rubber, thanks to it rapidly expanding tyre and vehicle production. Its share of global   Economist Intelligence Unit -
consumption has more than doubled (to 26%) in the past ten years.                                                                               Industry Briefing, Oct. 2007
1. (d) EU demand for natural rubber has revived much more strongly than expected, especially in the Euro zone.

2. (a) Many companies are expanding their global reach as the market equalizes across regions; India seems the most promising;                Datamonitor Global Auto
aftermarket sector has low level of consolidation among retail channels, both at a global and local level; large brands enjoy better good Components Industry Profile
brand recognition than the retail outlets that sell goods, but complain of little brand loyalty; tire market is more highly concentrated than March 2007
overall auto component market, with top 4 manufacturers accounting for ~65% of mkt's revenues
                                                                                                                                                                                RH
2. (b) consolidation and scale will mean that many suppliers will have to make significant investments to keep up. One exception may
be in vehicle interiors, where there are many second and third teir suppliers.                                                             GlobalAutoPartsAnalysis.pdf          AV
2. (c) for many of the more sophisticated components, design and engineering responsibilities are being put on the suppliers. If Serbian
companies cannot do that, they will be relegated as lower teir suppliers if that.                                                          GlobalAutoPartsAnalysis.pdf          AV
3. (a) 2011 forecast for 15.7% increase, with an anticipated CAGR of 3% over the 2006-2011 period; Although industry now recovering Datamonitor Global Auto
from its slow performance at the start of the decade, forecasted demand for replacement parts will also start to rise some years down    Components Industry Profile
the line                                                                                                                                 March 2007                              RH
3. (b) Eastern Europe considered to be one of the more quickly growing markets (8 percent annually), along with China (14 percent).             JohnsonControlsAnalystReport.pd
                                                                                                                                                               f                 AV
3 (c) Industry is highly cyclical, with long periods of low to no profitability. When on down cycle, will be very hard to make a major          JohnsonControlsAnalystReportII.p
impact.                                                                                                                                                       df
3 (d) There is an increasing tendency by the major firms to focus on design and distribution, and outsource the production of
components to specialized firms. These may be in lower income areas or countries.                                                           GlobalAutoPartsAnalysis.pdf    AV
3 (e) scale is going to be very important, since many auto manufacturers are increasingly going toward shared platforms that also share
a large number of parts. These parts will be made in very large numbers. This also "simplifies" spare part production.                      GlobalAutoPartsAnalysis.pdf    AV
3 (f) The total number of suppliers is expected to decrease considerably, while scale increases. Most parts types are dominated by a
limited number of suppliers. "Mega suppliers" are going to be seen emerging. Supplier bases are also anticipated to be more global, as
prices drop. Under these circumstances, it appears that Serbian firms may at best hope for some limited, high volume component
manufacturing work.                                                                                                                         GlobalAutoPartsAnalysis.pdf    AV
3 (g) GM alone bought 400 million and 200 million Euro in parts out of Romania and Bulgaria, whereas total exports from Serbia were
90 million. There are good precedents and a lot of room to grow. Some big investments have been made.
                                                                                                                                          InterviewSIEPAAuto.doc           DP, AV
3 (h) Serbia has a free trade agreement with Russia, where many auto makers are set up. There is also a spare parts market there.
There is a huge demand for spare parts/other products of metal industry such as car carriers in Russia. Russians are not able to satisfy
this increased demand locally, so demand is expected to remain high.                                                                      InterviewSIEPA and Lohr          DP, AV
4. (a) Rising raw material costs and general lack of pricing power in the industry are likely to squeeze profits, making cost control and   BorgWarnerAnalystReport.pdf
advantages more important.                                                                                                                                                 AV
4. (b) Prices are expected to come under extreme pressure, as scale increases and suppliers become increasingly globalized.
                                                                                                                                             GlobalAutoPartsAnalysis.pdf   AV
5 a) As resource-intensive sector, auto parts production costs are determined mostly by the price of row material and equipment. It       Cobest Interview minutes
seems that these costs are higher than at main competitors (Romania, Turkey, China)
                                                                                                                                                                           PZ
5 b) As in other sectors, the industry is benefiting from low price of energy in Serbia (the lowest in Europe) and energy costs per       Cobest Interview minutes
product unit are lower than at main competitors are. However price of the energy in Serbia must reach EU level within next few years      Basis Event Media industriaNo9
and this cost advantage will be lost. Other negative aspect is extremely low energy efficiency in production, Serbian metal (including
auto industry) is using three times more energy per 1$GDP than average in the world.
                                                                                                                                                                           PZ
5 c) Labor cost is comparatively low (with exception of China) and it is the main reason that makes the industry price competitive and    Cobest Company Interview
enable increase of exports in recent years. Yet, there are still no privatized companies with excessive work force and these diminish     minutes
competitiveness of the sector                                                                                                                                              PZ
 5d) Increase of productivity in metal production where this sector belongs was 22% in period August 2006 - August 2007 and it is         Statistical Institute
estimated that only privatized companies have contributed to mentioned productivity growth                                                Cobest Company Interview
                                                                                                                                          minutes                          PZ
5e)Transportation costs are not a big issue due to the relatively high value product unit and vicinity of major export markets.           Cobest Company Interview
                                                                                                                                          minutes
5f) Barriers to entry EU markets are related to certification and homologation of Serbian auto parts. One of the barriers noted is        siepa/automotive suppliers
homologation (when products and/or processes have to be certified against the corresponding auto industry standard) of Serbian Auto
parts. Because certification of Serbian auto parts can*t be done locally, sending samples abroad cause additional transaction costs and
delays in delivery.
5 (g) outdated equipment can lead to higher costs, making the product un competitive                                                      InterviewELMOS.doc               PZ, AV
5 (h) Serbian input costs can be higher, and since labor is often not a large part of production costs, this makes Serbian products un-
competitive.                                                                                                                              InterviewELMOS.doc               PZ, AV
5 (i) Low labor and energy prices are positive, while productivity and fixed costs are low. Serbia can compete for now on the basis of
cost, but also due to currency appreciation, profits are getting very thin.                                                               InterviewTopolaLivar.doc         PZ, AV
5 (j) Local companies can produce auto parts at costs lower or same as competitors but only limited number of companies can meet
quality requirements set by big EU car constructors.                                                                                      Interview YUCIT                  PZ
 6(a) Work force in this industry possess the knowledge and experience in both, production and administration of business that is          siepa/automotive suppliers
compatible with the Western European standards. 36% of workers possess either technical education or higher professional degree. In
addition, 8% of the employees hold a university degree in a relevant field. This kind of information points out the exceptional quality of
labor that is available in an automotive supply industry.

6(b) Graduates with skills relevant to auto parts design, manufacturing and management total 24,645. A main issue would be whether      EducationDataSectorRelevanceFi
these qualified individuals would be drawn to the regions where auto parts are made, or whether better jobs in more desirable areas are             nal.xls
available. Should demand and salaries increase, the basic skills may be there.
6 (c) graduates are behind on both knowledge of latest technologies and on real understanding of working in factories
                                                                                                                                               InterviewELMOS.doc           PZ, AV
6 (d) No problem with workforce, but additional training is provided.
                                                                                                                                               InterviewTopolaLivar.doc     PZ, AV
6 (e) Extremely satisfied with the workers and its productivity. (French company that was able to attract best people due to higher
salaries/better work conditions).                                                                                                              Interview with Lohr          DP
7 (a) Access good, but rates are high.
                                                                                                                                               InterviewSIEPAAuto.doc       DP, AV
7 (b) rates are high, and hard for them not yet being privatized fully. Rates a big problem with large investments with long pay-off
periods.
8 (a) Production machinery have been mainly imported, majority was imported from Germany, then there are domestically produced       siepa/automotive suppliers
machines, Italian, French, SA and UK origin. Row materials and intermediate goods used in the industry are also imported. That makes
the industry highly dependent on import and sensitive to changes in foreign trade and monetary policy. All mentioned factors
subsequently influence production costs and.
8 (b) Among the selected machines considered important by the companies for their production, average age of the machine is 21                 siepa/automotive suppliers
years. Around 24% of the machines are between 21 and 30 years of age. Only around 12% of the companies have machines that are                  Cobest Company Interview
less then 10 years old and approximately the same numbers of companies have machines over 31 years old. Outdated equipment                     minutes
harm productivity and increase maintenance costs in comparison with competitors, apparently quality of a final product remains intact.

8 (c ) Companies with sophisticated equipment have problem with inadequate electricity supply (changes in voltage level) that is               Interview YUCIT              PZ
causing frequent interruption of production.
8 (d) Production/logistics capacities of suppliers is limited. French company is their largest client and also the first client that would like Interview with Lohr
to order large quantities, but suppliers are not able to respond to large orders and/or are unwilling. They prefer to sell to large number
of smaller customers, since profits are higher.                                                                                                                             DP
9 (a) customs can create delays that can be expensive.                                                                                         InterviewTopolaLivar.doc     PZ, AV
9 (b) Local companies don't pay enough attention to labs and research facilities. Laboratory equipment and instruments are essential           Interview YUCIT              PZ
aspects of quality control and development of new products.
9 (c) Customs are not a problem for large companies. According to the experience of a French company, the customs service was very
professional and helpful.                                                                                                              Interview with Lohr                  DP
9 (d) The production and development of this industry has to be supported through efficient banking system: the banks need to feel the
pulse of the industry and act accordingly with stimulating measures, offering favorable interest rates, etc.                           Interview with Lohr                  DP
10 (a) The main export destination within the European Union countries is Italy, where 39% of surveyed companies have exports. 34% siepa/automotive suppliers
of companies export to Germany, which is second ranked among the top export destinations for Serbian companies. Besides EU, very
important markets are Bosnia and Macedonia where 42% of companies export auto parts.
11(a) One of the examples that illustrate new trends in cooperation with major OEMs is Zastava Forgery (Zastava Kovacnica) and GM, siepa/automotive suppliers
to which 10,000 automatic gearbox housings are supplied every month. The product was made with a completely new technology which
made the product more durable. At the same time, plastic, ball bearing, battery, lighting components producers have managed to
achieve similar deals with FIAT and other OEMs.
11(b) The sector itself is extremely export oriented and these companies exported almost 90 million EUR in 2005.This is a 45%                     siepa/automotive suppliers
increase in comparison to 2003, which suggests that an increasing number of companies are being internationally recognized and
entrusted in meeting the requirements of foreign markets.
11 c) This sector is one of few in Serbia in which companies and other institutions have created a cluster. Strong linkages between               pks.komora.net/autoklaster
firms and institutions operating within a cluster can lead to the sharing of ideas, research and development and practical advice on
dealing with markets and operational issues. This allows participating firms to develop increased expertise in terms of skills, learning,
innovation and supply chain depth. Cluster will promote the competitiveness, productivity and efficiency of the cluster as a whole.
Ultimately, solid infrastructure which acts as both a foundation and support mechanism can offers potential for economies of scale.


11 (d) FDI has improved the prospects of the sector
                                                                                                                                                         InterviewSIEPAAuto.doc   DP, AV
11 (e) often don't have certifications needed, and costs are very high up to 100,000k Euro annually
                                                                                                                                                  InterviewELMOS.doc              PZ, AV
11 (f) People are good, but cannot work with such outdated equipment
                                                                                                                                                  InterviewELMOS.doc              PZ, AV
11 (g) see chart below for trends

12 (a) See below.

12 (b) French company offered good salary/benefits package/paid overtime to local workforce, and were able to attract the best people, Interview with Lohr
which is why they received criticism from the local authorities. The increase in the spending power of some 180 families is already
visible (company operational less than a year). Scheduled to employ additional 150 workers in 2008. Salaries in domestic companies
are very low:EUR 100-150.There are 6000 unemployed in Backa Topola, where Lohr is located.                                                                                        DP


                                                                 EXPORTS (000 EUR)


  400000


  350000
                                                                                                                        Tourism
                                                                                                                        AutoParts
  300000
                                                                                                                        ICT/Eng (Exc Telco)
                                                                                                                        Education
  250000
                                                                                                                        Energy, especially renewable
                                                                                                                        Construction
  200000                                                                                                                Textile and apparel
                                                                                                                        Logistics, warehousing and transport

  150000                                                                                                                Film and production
                                                                                                                        Medical supplies and devices
                                                                                                                        Building materials
                                                                                      Building materials
  100000
                                                                                      Bldg Matls w/o CLP
                                                                                      Wood processing and furniture
      50000


          0
                2002    2003   2004             2005          2006   2007 (1-VIII)
                                      Year




                                             Average Gross Wage




  710
                                                                                     Tourism (Average)
                                                                                     AutoParts (NACE)
  610                                                                                ICT/Eng (Exc Telco)
                                                                                     Education
                                                                                     Energy, especially renewable
  510
                                                                                     Construction (Average)
                                                                                     Textile and apparel
                                                                                     Logistics, warehousing and transport
EUR




  410
                                                                                     Film and production
                                                                                     Medical supplies and devices
                                                                                     Building materials
  310
                                                                                     Bldg Matls w/o CLP
                                                                                     Wood processing and furniture

  210



  110
              2002     2003    2004             2005          2006     2007 (Est)
                                      Year
ICT- Engineering

Targeted Subsector(s)
Software development, design services,
BPO



Impact Criteria                             Determining Factors and Rationale                                                       Default Ranking Weighted
                                                                                                                                    Weight          Rank

I. Global Prospects in Sector

1. Historic revenue and growth in the (sub)- Most international growth is from offshore and IT and business processing outsourcing   100%    5     5
sector                                       (BPO), but Eastern Europe has less than 1% of the world's USD 30 billion offshore/BPO
                                             market. University environments in emerging markets have allowed for suitable clusters
                                             for employers and provided points of growth. IT buyers/managers believe that innovation
                                             and the ability to introduce new products and services has increased in Europe.
                                                                                                                                                               RH

2. Barriers to entry in major new markets   Barriers to market entry are medium. One key barrier that remains is the size of the      100%   7     7
                                            Indian market (particularly in regards to BPO). Technical education in emerging markets
                                            mean that initial labor costs remain low, however, they have the potential to accelerate
                                            quickly once a new "IT outsourcing hot spot" begins to mature. Skill requirements will
                                            continue to change radically as new technology and technical solutions emerge. As
                                            markets mature and competition intensifies, government policy will increasingly matter at
                                            the margin especially in terms of how governments use and procure IT services and how
                                            open the market is to new entrants and innovations.                                                                JK

3. Sector prospects and trends, shifts      Large output of skilled workers in emerging markets means talent source could remain      100%   8     8
                                            competitive for at least 15 more years. Public sector IT in CEE is an emerging area of
                                            opportunity for local vendors. IT spending in CEE will reach USD 54 billion by 2009, more
                                            than double the amount from 2004. Moderate CAGR from2006 - 2011, focus on
                                            specialization/niches could present opportunities in sub-sectors, particularly for SMEs.
                                            Western Europe will need to address issues related to developing a talented workforce
                                            and securing the right level of government intervention to promote competition and
                                            innovation - especially since they will be facing talent and intervention pressures from
                                            emerging markets in CEE.                                                                                           JK
4. Profitability                         New and non-members of EU can offer labor cost savings of 40 to 60% to clients. While         100%    4   4
                                         this situation can allow these outsourced markets to make a profit, rapid growth /
                                         investment can accelerate wages & drive up costs (a slippery slope / risk for investors).
                                         Some developing markets are currently seeing wages for experienced workers rising
                                         faster than inflation. Labor costs in Western Europe are leaving IT firms at a global
                                         disadvantage - they are unable to compete with U.S. (innovation) and Asia (scale/price).                      RH

II. Local Market Conditions

5. Cost differential                     In a global context, the sector is competitive across many areas, though not in mass      100%        7   7
                                         markets. Cost is less important as skill levels increase. Productivity is high in ICT and
                                         engineering group, more then three times higher then the Serbian average. ICT also has
                                         highest average gross wage (USD 880 at a monthly level) but still below average wage in
                                         Georgia (USD 1050), Romania (USD 1300), Hungary (USD 2200), Turkey (USD 3600)
                                         and so on.                                                                                                    JK

6. Skills present or gap                 Technical skills (programming, etc.) are good and stable (total graduates in the technical    100%    7   7
                                         areas relevant to ICT work was 26,963 in 2005) but not always up to date with
                                         companies' current programming needs and additional on the job training is required.
                                         This is notable, but has not held the sector back. Major gap identified in regards to the
                                         management level. Hard to find competent managers who have been exposed to
                                         international best practices in both general and project management.                                          JK,AT

7. Financing constraints                 It is a little easier now for businesses to get loans from banks, but some feel like there are 100%   5   5
                                         still substantial roadblocks/red tape and that the interest rate is very high. Currently there
                                         is little VC/PE in the market, although some indicated that there is some fresh investment
                                         in the sector. Note: initial level of investment is not high for this sector though financing is
                                         required for growth. Government provides special incentives for FDI in this sector.
                                                                                                                                                       JK, AT

8. Infrastructure, supply and resource   Much needed investment in the sector has been delayed due to war/sanctions in the             100%    8   8
constraints, cost and availability       1990s and more recent political volatility. The market has yet to open to other service
                                         providers. Investment in infrastructure and privatization of mobile network to Telenor will
                                         have a positive effect on the IT sector and the economy as a whole. In general, the IT
                                         infrastructure works and equipment is available for reasonable cost.                                          JK
9. Policy constraints                           There are still IP-related policy issues that need to be resolved. Privatization is yet to be 100%   7   7
                                                completed. Liberalization is needed in the telecom sector to reduce price, increase speed
                                                of Internet and allow access to other internet providers. State ownership means large
                                                industry also does not invest enough in IT, restricting local growth and experience in large
                                                projects.
                                                                                                                                                             JK, AT

10. Historical capacity (overall)               Serbia had a strong presence in IT in pre-1990 period with large mainframe projects. The 100%        7   7
                                                sector has been growing steadily in recent years. Number of ICT companies increased
                                                for 44%, sales and jobs have doubled and exports increased from USD 11 million to USD
                                                50 million from 2003 to 2006. Currently, some 2000 companies in ICT sector employ
                                                around 150,000 people. WEF statistics on Serbia's Technological readiness/Innovation
                                                are encouraging: Serbia was ahead of most of its neighbors in technological readiness,
                                                and ahead of Bulgaria, Macedonia, Albania, Bosnia on innovation.
                                                                                                                                                             JK

11. Historical (five year) and current          Globally competitive with regard to pricing and worker flexibility with different types of   100%    6   6
competitiveness (all markets)                   projects. Not competitive with regard to quality of work and project management skills.
                                                Seems to be trending upwards, with exports anticipated to increase. Stiff competition on
                                                the low end from India, and middle range from the region will be countered by better
                                                specialized skills and language capability. Serbia is most qualified of ex-Yugoslav
                                                markets, and is expected to capture significant regional business.                                           JK,DP

12. Employment impact                           Candidates for work in IT come from across many fields. With growth, the potential to     100%       7   7
                                                draw them in is strong. Pay tends to be fairly high. Volume is moderate. The top 20
                                                companies in IT have employed additional 325 qualified staff over the last two years, and
                                                this number is likely to grow.
                                                                                                                                                             JK

III. Combined Analysis

1. Ability to move sustainably into higher      Ability is strong. There are a number of good markets that Serbian companies have not
value markets, domestic and international       been able to access, largely due to gaps in management capability and marketing.


IV. Program Impact Analysis

1. Ability of Program to attributively impact   The ITC industry is decentralized and secretive, so often impact is not immediate.           100%        0
                                                However, a broad range of possible programs exist that can help the sector grow. Gaps
                                                are fairly well understood, as are means for addressing.
2. Time frame for impact to be realized         Within the POP of the project                                                                  100%                0




3. Regional, gender or youth impacts            Can be a good provider of youth employment. Most work is centered in Belgrade and              100%
                                                Novi Sad, though there are exceptions. Gender impact is mainly male, though this may
                                                change as more management skills are brought to the industry.

V. Possible Binary Excluders

1. Other donors very active in sector           Norwegian government and GTZ are active here. However, the sector is large.                    100%                0




2. Potential to compete in a high profile       A major strength of US software producers is their tendency to outsource.                      100%                0
manner with US products


3. Subjective assessment of sufficiency of      Obtaining firm level sales data is extremely difficult. Sector growth is available, but due to 100%                0
clear ROI indicators                            grey market activity, no considered to be highly reliable.


4. Inadequate number of firm/counterparts       Many firms exist, usually small.                                                               100%




Key Supporting Data                                                                                                                            References

1. (a) From a global perspective, in terms of e-readiness (which measures how amenable a country is to internet-based business), 28            The Economist, Pocket World in
countries have a score higher than 6 (out of 10), meaning they are amenable to to internet-based business.                                     Figures, 2007 (hard copy)        JK
1. (b) Countries that are highly-amenable to internet-based business include Estonia and Slovenia.                                             The Economist, Pocket World in
                                                                                                                                               Figures, 2007 (hard copy)        JK
1. (c) Eastern Europe has less than one percent of the world's USD30 billion USD market for offshore IT and business process                   McKinsey Report, October 2006
outsourcing (BPO), lagging behind more prominent locations in India, Ireland, Malaysia and the Philippines.                                                                     JK
1. (d) India was responsible for 12.2 billion USD, Ireland 8.6 billion USD, Asia (excluding China/India) 4.1 billion USD, Israel 3.6 billion   McKinsey Report, October 2006
USD of USD30 billion offshore IT and BPO market in 2003.                                                                                                                        JK
1. (e) The university environments in many provincial cites throughout Eastern Europe allow for the creation of suitable clusters of          McKinsey Report, October 2006
employers for university graduates. These options can help companies reduce their labor costs and spread potential risks across a
portfolio of locations with different risk profiles (i.e. political stability, infrastructure, etc.).                                                                           JK
1. (f) The most significant area of improvement for Europe's IT firms appears to be in their level of innovation. More than half of IT        KPMG Technology Report -
managers surveyed believe European firms are improving their ability to introduce innovative new products and services.                       Europe IT Firms, Late 2006
                                                                                                                                                                                JK
1. (g) Within the offshore market, the fastest rates of growth are in the application management and customs application development US-Oman-FreeTradeAgreement-
markets, both of which lend themselves well to remote programming work. The slowest rates of growth are in IT consulting, software as SectorStudy-BoozAllen2007.11
a service, and systems integration, which require closer customer interaction and access to systems (Figure 9 at bottom of page).

                                                                                                                                                                            RH
2. (a) a key barrier to entry remains the size of the Indian market and the ability of established outsourcing and BPO companies to         McKinsey Report, October 2006
expand existing opportunities, therefore cannibalizing regional markets such as Eastern Europe - forcing either specialization, since it is
often difficult for locally-owned companies to handle both domestic and international work at the same time (simply don't have the
resources.)                                                                                                                                                                 JK
2. (b) Skill requirements will continue to change radically as new technology and technical solutions emerge.                               Economist and Business Software
                                                                                                                                            Alliance Report, July 2007
                                                                                                                                                                            JK
2. c) Government policies will need to be closely monitored, legal environment will become a key differentiator.                            Economist and Business Software
                                                                                                                                            Alliance Report, July 2007
                                                                                                                                                                                JK
3. (a) McKinsey estimates that off shoring activity in Eastern Europe could triple to more than 130,000 jobs, from 2005 to the end of         McKinsey Report, October 2006
2008.                                                                                                                                                                           JK
3. (b) Given the relatively low pace of the region's wage inflation, along with abundant output from local universities, this talent source   McKinsey Report, October 2006
could remain economically competitive for at least 15 years.                                                                                                                    JK
3. (c) Eastern Europe is a particularly attractive option for Western European companies, due to geographic proximity and strong              McKinsey Report, October 2006
language capabilities (which are less readily available in India or Southeast Asia.                                                                                             JK
3. (d) Public sector IT in central and eastern Europe is another emerging area of opportunity for local vendors. It is a market where local   KPMG Technology Report -
knowledge still counts a lot.                                                                                                                 Europe IT Firms, Late 2006        JK
3. (e) IDC predicts that IT spending in CEE Region (Central & Eastern Europe) will reach USD54 billion by 2009, more than double the          KPMG Technology Report -
figure of 2004.                                                                                                                               Europe IT Firms, Late 2006        JK
3. (f) General trend seen in wage escalation and staff shortages as skilled labor in the IT market becomes a key restraint to growth;         US-Oman-FreeTradeAgreement-
evidenced by relatively high attrition rates for engineers (more than 30 percent) and high wage inflation (20 percent per annum)              SectorStudy-BoozAllen2007.11      RH
3. (g) In the world market, the past 10 years have seen a marked shift from hardware and networking spending to services spending,            US-Oman-FreeTradeAgreement-
with the share going to packaged software staying fairly flat.                                                                                SectorStudy-BoozAllen2007.11      RH
3. (h) WE will need to address issues related to developing a talented workforce and securing the right level of government intervention      Economist and Business Software
to promote competition and innovation.                                                                                                        Alliance Report, July 2007
                                                                                                                                                                                JK
4. (a) New members of the EU can offer labor cost savings of 40 to 60%. EU-candidate and non-EU developing countries in Europe can          McKinsey Report, October 2006
offer coast advantages of 60 to 80%.                                                                                                                                             JK
4. (b) Larger cities in Eastern Europe are starting to experience wage inflation - wages for experienced workers are rising faster than     McKinsey Report, October 2006
inflation. However, estimates are that beyond well-known capitals, Eastern Europe has 40 to 50 provincial cities with universities. large
enough to supply a highly skilled labor force.                                                                                                                                   JK
4. (c) Competitiveness remains a major issue for European suppliers, particularly when it comes to penetrating markets outside of           KPMG Technology Report -
Europe.                                                                                                                                     Europe IT Firms, Late 2006           JK
4. (d) European IT firms (in general) are at a disadvantage in terms of competitiveness in comparison with U.S. and Asia, labor costs       KPMG Technology Report -
are effecting ability to compete on cost.                                                                                                   Europe IT Firms, Late 2006           JK
5. (a) Salaries are less, which is only advantageous if combined with communications skills and worker flexibility (meaning being able to   Field Interview - Inbox, 10/11/07
handle different types of projects).                                                                                                                                             JK
5. (b) Still need motivation in the market to help increase competitiveness and raise wages - "Serbians don't like to work".         Field Interview - Inbox, 10/11/07           JK
5. (c) Salaries are extremely competitive. On average, software development costs six times less than in the U.S. We are cheaper, butField Interview - Pupin Institute,
"technically superior".                                                                                                              10/12/07                                    JK
                                                                                                                                     Field Interview - Pexim Solutions,
5. (d) Serbia ICT sector understands the market, both regionally and internationally. The sector listens to the market and adjusts prices
accordingly.                                                                                                                         10/11/07                                    JK
5. (e) Costs are competitive, could say "cheap" in a global context.                                                                 Field Interview - Pexim Solutions,
                                                                                                                                     10/11/07                                    JK
5. (f) costs are good compared to developed market economies and competitive with Romania and Bulgaria, but there are other factors: ICT_IDC_Oct162007.doc
The costs of running business in Belgrade (office space etc.), relatively high salaries for ICT managers and experienced developers,
employee turnover rate in Belgrade is also quite high, ICT infrastructure quality and costs                                                                                      AT, AV
5. (g) for very high skill projects, Serbia is very cost competitive                                                                        ICT_IDC_Oct162007.doc
                                                                                                                                                                                 AT, AV
5. (h) Serbia cannot compete at very low end, China, India, Egypt are cheaper by 20-30 percent.                                             ICT_Guidance_Oct92007.doc
                                                                                                                                                                                 AT, AV
5. (i) Serbia is price competitive with EU and US, but with CEE, much less so. No clear cost advantage, though quality can make up for ICT_Saga_Nov7_2007.doc
that.                                                                                                                                                                            AT, AV
5. (j) Productivity is high in ICT and engineering group, more then three times higher then the Serbian average. ICT and engineering        RIZ Concept Document/BAH
group also has highest average gross wage (USD880 at a monthly level) but still below average wage in Georgia (USD1050 gross)
Romania (USD1300), Hungary (USD2200), Turkey (USD3600) and so on.                                                                                                                PZ
                                                                                                                                            Field Interview - Inbox, 10/11/07
6. (a) Needs to be a major improvement in managerial skills, programmers are easy to find, adequate managers is much more difficult.                                             JK
6. (b) If the situation in regards to having enough employees with managerial skills does not improve, the sector and possibly the entire Field Interview - Inbox, 10/11/07
Serbian economy will suffer.                                                                                                                                                     JK
6. (c) There are great universities here in Serbia that focus strongly on technical education.                                              Field Interview - Pupin Institute,
                                                                                                                                            10/12/07                             JK
6. (d) Programmers/technical workers in Serbia are highly-educated from university and willing to put theory to practice.                   Field Interview - Pexim Solutions,
                                                                                                                                            10/11/07                             JK
6. (e) Market needs are huge, however, very hard to find competent managers who understand international management best                    Field Interview - Pexim Solutions,
practices.                                                                                                                                  10/11/07                             JK
6. (f) Total graduates in the technical areas relevant to ICT work equaled 26,963 in 2005.                                                          EducationDataSectorRelevanceFi
                                                                                                                                                                nal.xls
  6. (g) Serbian companies are familiar with latest technologies, and quick in catching up with the existing workload/pending projects.            ICT_IDC_Oct162007.doc
                                                                                                                                                                                        AT, AV
6. (h) company size is very small. This has a lot to do with management and workforce issues. Managers have trouble building larger                ICT_IDC_Oct162007.doc
companies. Can be very hard to get the right employees.                                                                                                                                 AT, AV
6. (i) ICT education is outdated. Many good skills, but need to retrained on the job.                                                              ICT_Guidance_Oct92007.doc            AT, AV
6. (j) Middle and top level management needs to be improved, especially in HR and finance. Graduates are technically pretty good, but ICT_Saga_Nov7_2007.doc
still need additional training.                                                                                                                                                         AT, AV
6. (k) Serbian ICT companies must develop stronger management, sales and marketing skills. Educational institutions must link more                         USAID ICT Report
closely with the private sector, in order to respond to workforce needs. The problem of brain drain is a serious threat to the industry’s
future. Finally, the country needs more “good press” to attract investment and counter internationally held stereotypes.
                                                                                                                                                                                        ZS
6 (l) Qualified engineers who left the country in the 90's now occupy middle and top management positions in large IT companies in                 Interview with GTZ
USA and Canada. They are potential source of knowledge and expertise for Serbia that should be utilized. They could assist
development of IT sector in Serbia.                                                                                                                                                     DP
7. (a) It is a little easier now in the past, but the banks are still "asking for a kidney" in regards to business loans. There is still no VC     Field Interview - Inbox, 10/11/07
and private connections still seem to be the preferred method.                                                                                                                          JK
7. (b) It is very difficult to secure financing. Banks will give loans that have very high interest rates (on avg. 25% annually), so it makes it   Field Interview - Pupin Institute,
difficult to develop private sector effectively.                                                                                                   10/12/07                             JK
7. (c) There is fresh investment currently taking place in the sector. In fact, some vendors/international companies are now acquiring             Field Interview - Pexim Solutions,
local companies.                                                                                                                                   10/11/07                             JK
7. (d) for a lot of types of companies, financing is not that important.                                                                           ICT_IDC_Oct162007.doc
                                                                                                                                                                                        AT, AV
8. (a) Have a giant, "Telecom" that is still not privatized. All providers have to go through Telecom, there is no second choice.                  Field Interview - Inbox, 10/11/07
                                                                                                                                                                                        JK
8. (b) A lot of key/critical infrastructure has been delayed due to the war period (1990-2000).                                                    Field Interview - Pupin Institute,
                                                                                                                                                   10/12/07                             JK
8. (c) Government/political situation is still very volatile, this effects infrastructure improvements that could improve not just the ICT         Field Interview - Pexim Solutions,
sector, but the entire Serbian economy.                                                                                                            10/11/07                             JK
8. (d). Hardware providers need to improve pricing and spare parts availability.                                                                   ICT_Guidance_Oct92007.doc
                                                                                                                                                                                        AT, AV
8. (e) Good phone access, new broadband access and good mobile phone network. Poor broadband access, limited wireless                                      USAID ICT Report
broadband.                                                                                                                                                                              ZS
8. (f) The 24% Internet penetration among the populace, 41% among households, matches some countries where access has been far                             USAID ICT Report
easier and more actively promoted.                                                                                                                                                      ZS
9. (a) Still no movement on Telecom after three years, so-called "openness" does not exist                                                         Field Interview - Inbox, 10/11/07    JK
9. (b) There are still a lot issues surrounding IP. UNDP tried to develop new policy for IP, but in the opinion of the Institute it was "cookie    Field Interview - Pupin Institute,
curtter" - did not meet the needs of the sector.                                                                                                   10/12/07                             JK
9. (c) Still major IP issues, Serbia needs to join to correct them if we expect to join the EU. There are still a few "bad things from the         Field Interview - Pexim Solutions,
past", privatization needs to be completed.                                                                                                        10/11/07                             JK
9. (d) connections to outside are still slow and expensive due to monopoly (also section 8)                                                   ICT_Guidance_Oct92007.doc            AT, AV
9. (e) the de facto telecom monopoly is a problem. Need to allow access to alternative networks.                                                ICT_Telenor_Nov2_2007.doc          AT, AV
9. (f) lingering state ownership of many large industries, oil, telecom, manufacturing, means that IT investment is lower here, keeping       ICT_Saga_Nov7_2007.doc
local firms from gaining experience in large projects.                                                                                                                             AT, AV
9. (g) A number of regulations are missing, electronic signature and internet shopping, and also egovernment is not well developed            ICT_Saga_Nov7_2007.doc
                                                                                                                                                                                   AT, AV
9. (h) RATEL (Telecommunication regulator) is still weak and needs to be strengthening in order to implement liberalization of                        USAID ICT Report
telecommunication market as provided by the Telecommunication law. RATEL must ensure fair utilization of Telekom Serbia’s
modernized network, enable independent access to the international Internet, and legalize voice-over-Internet-protocols (VOIP).
                                                                                                                                                                                   ZS
9 (i) Two major complaints by investors are: corruption in state institutions and complicated administration. Foreign companies like to       Interview with GTZ
cooperate directly with local companies, without the Government in the middle.
                                                                                                                                                                                   DP
10. (a) Sector changed slowly over the past five years. "If government quits pushing the pause button, they will not be able to stop us."     Field Interview - Inbox, 10/11/07
                                                                                                                                                                                   JK
10. (b) Historically, the industry struggled over the past years to regain the export levels and innovation it achieved prior to the war      Field Interview - Pupin Institute,
period (1990 - 2000). It will get better, but "we" have a ways to go.                                                                         10/12/07
                                                                                                                                                                                   JK
10. (c) The sector now needs to start "seizing opportunities", which was not the case after the stagnation caused by politics in              Field Interview - Pexim Solutions,
2001/2002. Many missed opportunities over the last five years.                                                                                10/11/07                             JK
10. (d) When measuring Technological readiness (the agility with which an economy adopts existing technologies to enhance the                    WEF Global Competitiveness
productivity of its industries) WEF ranked Serbia 57 better than most of its neighbors (Greece (58), Romania (59), Bulgaria (65),                            index
Albania (74), Macedonia (90) and Bosnia (110)) and worst than Slovenia (29), Hungary (41), Montenegro(48), and Croatia (49). This is
one of the better rankings among 12 indicators comprising WEF Global Competitiveness index.                                                                                        ZS
10. (e) On innovation (private, high-quality scientific research institutions, collaboration in research between universities and industry,     WEF Global Competitiveness
and protection of intellectual property) in the WEF Global Competitiveness index Serbia ranked 78 is lagging behind Slovenia (30),                        index
Hungary (37), Croatia (50), Greece (63), and Romania (76), and is in front of Bulgaria (88), Macedonia (92), Montenegro (104), Bosnia
(121) and Albania (131).                                                                                                                                                           ZS
10 (f) Local market has been small, so domestic firms do not get much opportunity to increase their skills or work on large projects          ICT_Guidance_Oct92007.doc
before going international.                                                                                                                                                        AT, AV
10. (g) Despite the constraints they face, Serbia’s ISPs have created the epitome of vibrant competition. More than 50 ISPs vie for                   USAID ICT Report
customers, and several ISPs are ready and willing to compete vigorously with Telekom Serbia. Two have already taken steps to
develop infrastructure linking to the international Internet independent of Telekom Serbia.                                                                                        ZS
10 (h) A27                                                                                                                                    Interview with GTZ
                                                                                                                                                                                   DP
11. (a) Competitive in regards to pricing in flexibility, which should increase exports. However, Serbia is not competitive in regards to     Field Interview - Inbox, 10/11/07
quality of work and project management skills.                                                                                                                                     JK
11. (b) We are currently still not at pre-war levels, before the war there was an 30% annual average of growth in exports, now, over the      Field Interview - Pupin Institute,
past few years, the average is 12%.                                                                                                           10/12/07                             JK
11. (c) Political stagnation is over, now there is a much better window of opportunity to increase exports - it seems to be trending          Field Interview - Pexim Solutions,
upwards.                                                                                                                                      10/11/07                             JK
11. (d) software potential and capability very high, hardware much less so                                                                     ICT_IDC_Oct162007.doc
                                                                                                                                                                                    AT, AV
11. (e) sector used to have a lot of problems with marketing, these are being overcome slowly.                                                 ICT_IDC_Oct162007.doc
                                                                                                                                                                                    AT, AV
11. (f) Serbian companies are too small to compete in larger projects and cannot seem to work together. Firm recently met with a Polish ICT_Guidance_Oct92007.doc
company with 2000 employees. There is nothing close in Serbia.                                                                                                                      AT, AV
11. (g) see chart below for trends
11 (h) Some foreign companies that are interested in coming to work in Serbia are not reassured when they hear that local companies            Interview with GTZ
do not have a CMMI-sector specific certificate
                                                                                                                                                                                    DP
12. (a) Hiring four types - programmers, web designers, web developers and project managers. First two categories are very easy to fill,       Field Interview - Inbox, 10/11/07
last two are very difficult.                                                                                                                                                        JK
12. (b) Seeking top-quality, research/academic driven candidates, this is important due to the highly advanced developing around many          Field Interview - Pupin Institute,
niches in the market.                                                                                                                          10/12/07                             JK
12. (c) Mainly seeking technical skills. However, we are seeing a real lack of experience on the market, only theory-based knowledge           Field Interview - Pexim Solutions,
based on time at university. For every job opening we post, on average we get about two qualified candidates.                                  10/11/07
                                                                                                                                                                                    JK
12 (d) See chart below
12 (e) Top 20 companies in IT have employed additional 325 qualified staff over the last two years                                             Interview with GTZ                   DP




                                                               EXPORTS (000 EUR)


  400000


  350000
                                                                                                                     Tourism
                                                                                                                     AutoParts
  300000
                                                                                                                     ICT/Eng (Exc Telco)
                                                                                                                     Education
  250000
                                                                                                                     Energy, especially renewable
                                                                                                                     Construction
  200000                                                                                                             Textile and apparel
                                                                                                                     Logistics, warehousing and transport

  150000                                                                                                             Film and production
                                                                                                                     Medical supplies and devices
                                                                                                      Medical supplies and devices
                                                                                                      Building materials
  100000
                                                                                                      Bldg Matls w/o CLP
                                                                                                      Wood processing and furniture
      50000


          0
                2002    2003   2004             2005          2006        2007 (1-VIII)
                                      Year




                                             Average Gross Wage




  710
                                                                                                     Tourism (Average)
                                                                                                     AutoParts (NACE)
  610                                                                                                ICT/Eng (Exc Telco)
                                                                                                     Education
                                                                                                     Energy, especially renewable
  510
                                                                                                     Construction (Average)
                                                                                                     Textile and apparel
                                                                                                     Logistics, warehousing and transport
EUR




  410
                                                                                                     Film and production
                                                                                                     Medical supplies and devices
                                                                                                     Building materials
  310
                                                                                                     Bldg Matls w/o CLP
                                                                                                     Wood processing and furniture

  210



  110
              2002     2003    2004             2005          2006            2007 (Est)
                                      Year




                                                                       CAGR

                                                             $140.9M
                                                                       6.1%    Systems Integration
                                                  $135.0M
                                                      Year


Figure 9
Source: US-Oman FTA Sector Study Booz Allen Hamilton Nov. 2007
                                                                                   CAGR

                                                                         $140.9M
                                                                                   6.1%   Systems Integration
                                                               $135.0M

                                                     $121.4M
                                           $112.4M                                 3.1%   SW as Service
                                 $104.6M
               $97.5M                                                              7.4%    IT Consulting



                                                                                   7.7%   Custom App Development




                                                                                   9.1%   Application Management




                 2004               2005    2006      2007      2008      2009

              Source: IDC (2005)
              Note: Includes all of MEA
Education

Targeted Subsector(s)
Adult and continuing, executive, online, skills
training



Impact Criteria                                   Determining Factors and Rationale                                                            Default Ranking   Weighted
                                                                                                                                               Weight            Rank

I. Global Prospects in Sector

1. Historic revenue and growth in the (sub)-      At a global level, the sector grew by 8.4% in 2004 to reach a value of USD 110.6 billion.    100%   8          8
sector                                            The leading revenue source for the sector is the technical/trade school sub-markets,
                                                  which accounts for 24.5% of the sector's total global value. From 2000 to 2004, sector's
                                                  CAGR was 7.8%. CAGR for the period of 2004 to 2009 is expected to be 8%.                                                  RH

2. Barriers to entry in major new markets         High education portion of the sector is highly competitive worldwide, particularly between   100%   6          6
                                                  small and large universities. In the short term, local entities are not expected to see
                                                  barriers to entry, however, they could face international competition as the market
                                                  matures.                                                                                                                  JK

3. Sector prospects and trends, shifts            Post-secondary education is increasing worldwide, barriers are reduced due to e-        100%        6          6
                                                  learning/web-based curriculum, which is increasing education opportunities for non-
                                                  traditional students. The demand for spoken/written English is increasing in emerging
                                                  markets. Demand for healthcare-related degrees is expected to grow faster (though 2010)
                                                  than any other occupation in the world, due to ageing population. Serbia is expected to
                                                  follow these trends, though with a lag.                                                                                   JK

4. Profitability                                  Two key drivers of growth are the increasing popularity in computer training and rising   100%      8          8
                                                  levels of ambition among consumers driving people to return to education. If rapid
                                                  economic growth, particularly in emerging markets continues, growth opportunities will
                                                  emerge, particularly within business and computer schools. Low barriers to entry may hurt
                                                  profitability, but building a reputation can help preserve it.                                                            JK

II. Local Market Conditions
5. Cost differential                     This sector is not expected to compete with foreign firms in the short term. Most entrants 100%       6   6
                                         would likely partner with a Serbian institution. Cost is critical in terms of affordability in the
                                         market and whether the market can thrive at the cost of delivery plus profit. The product
                                         has to be competitive versus the alternative of not attending. There is a resurgent interest
                                         in executive education among top firms in Serbia, led by foreign firms. It is believed that
                                         the costs can be met.                                                                                         JK

6. Skills present or gap                 From a business development perspective, it is estimated that there were over 15,000           100%   5   5
                                         qualified graduates in 2005. However, for the higher level faculty positions, often the skills
                                         needed by business and those produced by educational institutions are not aligned.
                                         Faculty is adapting curricula, etc. in line with wider European education reforms (Bologna
                                         Process), but need greater input from the business sector to match the real needs.
                                         Management education started at several faculties, both state and private, but needs to be
                                         further developed, with special attention paid to executive education (professional
                                         associations play an important role here). Major problem at state universities are a sufficit
                                         of more senior, less flexible faculty impeding more apt junior faculty to advance/impact
                                         change.                                                                                                       JK, AT

7. Financing constraints                 Financing is available, but rates are high. In state universities salaries are not based on    100%   5   5
                                         merit and can be relatively low, discouraging change. Private universities finance
                                         management programs with tuitions. Yet it should be noted that for professionals in
                                         sectors like film, executive education and additional technical trainings tend to be too
                                         expensive.                                                                                                    JK, AT

8. Infrastructure, supply and resource   Accommodations is a big problem for students coming abroad to Belgrade (or from                100%   5   5
constraints, cost and availability       different regions of Serbia and former YU). Classroom space is also getting expensive,
                                         though not always good facilities can be leased from public institutions. Internet and
                                         computer penetration allow development of online and partial online education.                                JK

9. Policy constraints                    Policy environment is poor (law on higher education to be revised). There are many             100%   8   8
                                         regulations on how many faculty must be full-time, what types of classes need to be
                                         taught, maximum amount of hours a professor can teach, etc. It is also difficult to establish
                                         research centers. Generally, existing state-financed institutes lack incentives that
                                         encourage research efforts. Nonetheless, it is still possible to create and operate attractive
                                         education programs that are not linked officially to higher education and are not
                                         accredited. For adult education, regulations are not expected to be a major issue.                            JK, AT

10. Historical capacity (overall)        The current curriculum for continuing and executive education needs to be updated. In          100%   6   6
                                         previous periods, Serbia was able to attract many students from abroad - this could
                                         happen again if political issues are resolved, etc. In terms of enrollment rates and quality
                                         of education , Serbia ranked higher than Bosnia and Albania, but other countries in the
                                         region, including Slovenia, Hungary, Greece, Croatia, Bulgaria, Macedonia and
                                         Montenegro scored higher than Serbia                                                                          JK
11. Historical (five year) and current          Many schools lack capability to effectively conduct online education that may cater to busy 100%   5   5
competitiveness (all markets)                   managers. Sector was very competitive in the 1980s, but has made a come back over the
                                                past five years. University of Novi Sad has had a MBA program that includes studying in
                                                Brussels for working professionals (approximately 20 to 30 students annually). There is
                                                not much of an export market for Serbia's education sector (lowest exports in sectors
                                                being assessed). Basic capacity seems to be there, but that and the demand side have
                                                not been well tested.                                                                                      JK,DP

12. Employment impact                           The main employment effect from this sector would be expected to be at the firm level, as 100%     5   5
                                                a result of impact from the trainings. Impact would depend on the extent to which the
                                                demand side can be developed.                                                                              JK

III. Combined Analysis

1. Ability to move sustainably into higher      As noted, the supply side seems to be falling into place, but demand side and potential
value markets, domestic and international       size of the market is largely untested.


IV. Program Impact Analysis

1. Ability of Program to attributively impact   Main needs are online system, curriculum development, teacher training, all of which are   100%        0
                                                well within the scope and capabilities of the project.


2. Time frame for impact to be realized         Well within the POP, though largely depends on unknowns related to demand growth.          100%        0
                                                Expandable structures will be in place.


3. Regional, gender or youth impacts            Largely unknown. Online education may increase access to quality higher education in the 100%
                                                region.



V. Possible Binary Excluders

1. Other donors very active in sector           EAR has a VET program. UNDP innovation partnerships. No one in executive education         100%        0




2. Potential to compete in a high profile       Not relevant                                                                               100%        0
manner with US products
3. Subjective assessment of sufficiency of     Measuring ROI is a challenge since main impact is at the firm level following the program. 100%                  0
clear ROI indicators                           A series of surveys can track impact, while improving program design.


4. Inadequate number of firm/counterparts      Potential counterparts are few, but sufficient and interested                              100%




Key Supporting Data                                                                                                                       References
1. (a) In 2000, EU leaders launched the Lisbon Agenda to turn EU into "the worlds most competitive knowledge-based economy" by              Global Insight-Educational
2010.                                                                                                                                       Services, 2007                  JK
1. (b) One of the key components of the Lisbon Agenda is a commitment to life long education.                                               Global Insight-Educational
                                                                                                                                            Services, 2007                  JK
1. (c) Overall, employment is decelerating in the industry and will turn negative in the long run.                                          Global Insight-Educational
                                                                                                                                            Services, 2007                  JK
1. (d) Labor and employment costs usually exceed tuition revenue, therefore other sources of funding (gifts, contributions, etc.) are often Global Insight-Educational
required.                                                                                                                                   Services, 2007                  JK
1. (e) Tuition and other school fees are rising steadily, growing in the U.S. at a 6%-plus annual pace since 2002.                          Global Insight-Educational
                                                                                                                                            Services, 2007                  JK
1. (f) The education services sector grew by 8.4% in 2004, reaching a value of 110.6 billion USD.                                           Data Monitor Global Education
                                                                                                                                            Services Profile, May 2005       JK
1. (g) In terms of value, the U.S. account for 34.3% of the global education services sector.                                                 Data Monitor Global Education
                                                                                                                                              Services Profile, May 2005     JK
1. (h) The leading company in the global education services sector is Colegios Peterson - they account for approximately 6.8% of market Data Monitor Global Education
value share.                                                                                                                                  Services Profile, May 2005     JK
1. (i) The largest sub-market within the sector is technical/trade schools, which accounts for 24.5% of the sector's global value.            Data Monitor Global Education
                                                                                                                                              Services Profile, May 2005     JK
1. (j) In the EU, Vocational Education and Training (VET) is the primary means of secondary and post-secondary education. This is             REassessingVocationalAndEdTrai
expected to increase with the aging population as more marginal workers are employed and older workers need to be retrained. 30               ningEurope.pdf
percent of workforce is considered not qualified, so need for VET is very high. It is not expected that these figures are any less for
Serbia.                                                                                                                                                                      AV
1. (k) Between 2000 and 2004, the sector had a CAGR rate of 7.8%                                                                              Data Monitor Global Education
                                                                                                                                              Services Profile, May 2005     JK
2. (a) The higher education sub-sector is highly competitive throughout the globe - particularly among both small and large universities. Data Monitor Global Education
                                                                                                                                              Services Profile, May 2005     JK
2. (b) Besides Colegios Peterson, the remaining "players" in the market have a total sector share of less than 2.5%.                          Data Monitor Global Education
                                                                                                                                              Services Profile, May 2005     JK
2. (c) Having courses where credits can be transferred across institutions in Europe (according to the Bologna Process) will be more          TrendsInHigherEducation.pdf
difficult, but will also give higher value. Should be looked into.                                                                                                           AV
2. (d) the main barriers to entry and improvement of offerings are finding qualified instructors, in particular in the main areas: technical, REassessingVocationalAndEdTrai
languages, and ICT.                                                                                                                           ningEurope.pdf                 AV
3. (a) Post-secondary education is increasing the use of distance learning and web-based technology to conduct courses, expanding           Global Insight-Educational
opportunities in education for a variety of different lifestyles and life stages.                                                           Services, 2007                    JK
3. (b) Further growth in the sector is expected due to emerging economies producing the demand for spoken and written English.              Data Monitor Global Education
                                                                                                                                            Services Profile, May 2005        JK
3. (c) Because of the aging population, demand for nursing and healthcare degrees is expected to grow faster than for any other             Data Monitor Global Education
occupation through 2010.                                                                                                                    Services Profile, May 2005        JK
3. (d) Adult education is on the rise, with most of that being in work related areas, as skills requirements change.                        TrendsInHigherEducation.pdf
                                                                                                                                                                              AV
3. (e) Economic progress across Europe will require new skills, and integrating education into the workplace will be key. Education will    StrategiesForVocEdInEurope.pdf
be highly decentralized and an increasing focus on "self-learning" and taking responsibility for own training.                                                                AV
4. (a) Business/Computer schools achieved considerable growth in 2004, total value of 26.4 billion USD.                                     Data Monitor Global Education
                                                                                                                                            Services Profile, May 2005        JK
4. (b) Internally to Serbia, trends are expected to be away from state and more toward private providers. Private is growing and            Interview_Singidunum.doc
beginning to get more quality students (previously often took those who could not get into state schools).                                                                    DP, AV
5.(a) in terms of places to study for foreign students, believes that Serbia offers excellent value for money                               Interview_Singidunum.doc
                                                                                                                                                                              DP, AV
6 (a) numbers on qualified graduates for this kind of work are very difficult to obtain. Most adult education is conducted by skilled and   EducationDataSectorRelevanceFin
experienced teachers, or should be anyway. For the admin and business development side, it is estimated that there were over 15,000                      al.xls
qualified graduates in 2005.
6 (b) In terms of faculty, the best can adapt to new ways, but it can be very hard to hire good people.                                     Interview_Singidunum.doc
                                                                                                                                                                              DP, AV
7 (a) financing is there, but not cheap                                                                                                     Interview_Singidunum.doc
                                                                                                                                                                              DP, AV
7 (b) though tuition can be high, students do pay for continuing education in specific technical areas. In digital animation, tuition cost can
be several thousand Euro, but classes are still often full.
8 (a) for students coming from abroad to Belgrade, accommodations is a big problem.                                                            Interview_Singidunum.doc
                                                                                                                                                                              DP, AV
8 (b) The limited access to internet of end users may be an issue with online education                                                     Team discussion 8 November
                                                                                                                                                                              DP
9 (a) Policy environment very problematic, very restrictive. Many regulations on how many faculty must be full time, what types of classes Interview_Singidunum.doc
need to be taught, maximum hours a professor can teach, and other issues.                                                                                                    DP, AV
10 (a) Lacking in updated curriculum for continuing and executive education (can be resolved)                                               Sector%20Interviews/Education/Ed
                                                                                                                                            ucation_FEFA_Oct2007.doc         AV, AT
10 (b) In previous periods, Serbia was able to attract many students from abroad, and this could happen again. (note: there were also
political reasons for this, and many were not paying)
10. (c) Measuring secondary and tertiary enrollment rates as well as the quality of education as assessed by the business community           WEF Global Competitiveness
(Higher education and training indicator of Global Competitiveness index) WEF ranked Serbia (82), better than Bosnia (98) and Albania                   index
(103) while all other countries in the neighborhood (Slovenia (24), Hungary (33), Greece (39), Croatia (46), Romania (54), Bulgaria (66),
Macedonia (75) and Montenegro(79)) scored better.                                                                                                                             ZS
11 (a) Many schools lack capability to effectively conduct online education. This is in the technical, materials and delivery sides.        SEDP experience
                                                                                                                                                                              AV
11 (b) Was very competitive in the 1980s, but now in the last five years is coming back                                                     Interview_Singidunum.doc
                                                                                                                                                                              DP, AV
11 (c) University of Novi Sad since 2003 has had an MBA program with program in Brussels mainly for working professionals. Profs              Education_UNS_Nov2_2007.doc
come in from Brussels as well. 20-30 students annually.                                                                                                                     AT, AV
11. (d) See chart below for trends




                                                                 EXPORTS (000 EUR)


  400000


  350000
                                                                                                                   Tourism
                                                                                                                   AutoParts
  300000
                                                                                                                   ICT/Eng (Exc Telco)
                                                                                                                   Education
  250000
                                                                                                                   Energy, especially renewable
                                                                                                                   Construction
  200000                                                                                                           Textile and apparel
                                                                                                                   Logistics, warehousing and transport

  150000                                                                                                           Film and production
                                                                                                                   Medical supplies and devices
                                                                                                                   Building materials
  100000
                                                                                                                   Bldg Matls w/o CLP
                                                                                                                   Wood processing and furniture
   50000


        0
                2002            2003            2004               2005          2006         2007 (1-VIII)
                                                         Year




                                                                Average Gross Wage




  710
  710
                                                               Tourism (Average)
                                                               AutoParts (NACE)
  610                                                          ICT/Eng (Exc Telco)
                                                               Education
                                                               Energy, especially renewable
  510
                                                               Construction (Average)
                                                               Textile and apparel
                                                               Logistics, warehousing and transport
EUR




  410
                                                               Film and production
                                                               Medical supplies and devices
                                                               Building materials
  310
                                                               Bldg Matls w/o CLP
                                                               Wood processing and furniture

  210



  110
        2002   2003   2004          2005   2006   2007 (Est)
                             Year
Construction

Targeted Subsector(s)
Engineering, management, regional EU accession projects



Impact Criteria                                Determining Factors and Rationale                                                         Default Ranking Weighted
                                                                                                                                         Weight          Rank

I. Global Prospects in Sector

1. Historic revenue and growth in the (sub)-   Construction industry achieved a CAGR of 2.8% for 2002-2006. Civil engineering            100%     5     5
sector                                         generates majority of revenues (accounted 50.6% of industry value in 2006). European
                                               industry grew by 3.1%, dominated by growth in the non-residential sector (58.3%). EU
                                               invests in infrastructure through cohesion and structural funds in order to support
                                               balanced economic growth and aids new entrants to achieve economic progress through
                                               its pre-accession assistance where infrastructure projects also tend to dominate.


2. Barriers to entry in major new markets      Capital required for entry is not prohibitively large (i.e. rent equipment, hire temporary  100%   4     4
                                               workers). In some cases, complex EU regulations weaken the incentive to enter the
                                               market. Most major projects require demonstration of past performances, which could
                                               place pressure on emerging firms and increase barriers or entry for companies without
                                               extensive project portfolios. A potential solution is partnering with established company,
                                               but that forces "niche" approach and could potentially weaken growth/profit opportunities .


3. Sector prospects and trends, shifts         CAGR of 5.2% between 2006 - 2011 period (reaching a value of 2.4 trillion USD). Asia & 100%        5     5
                                               European markets expected to grow 6.7% and 3.3% respectively in the same period. In
                                               Serbia, the construction engineering is expected to grow 15-20 % a year. The success will
                                               depend on the firms' ability to hook in with EU firms for more work and their ability to take
                                               advantage of the regional growth in construction and the demand for services due to
                                               increase in EU funding.

4. Profitability                               Potential for profitability exists thanks to flexible business strategies (i.e. renting  100%      6     6
                                               equipment and temporary workers); except for a few large companies, industry is
                                               fragmented and presents opportunities for emerging enterprises that could take advantage
                                               of Serbia's and region's infrastructure book, supported in part by EU financing.



II. Local Market Conditions
5. Cost differential                     Professional wages in the construction services sector can be lower than in other             100%    5   5
                                         countries. However, cost of labor in the sector is higher than competitors. Imported labor is
                                         even being used in Serbia. Serbian companies often are less efficient and engage large
                                         numbers of workers on sites. Expensive bank guarantees and operational capital loans
                                         increase the price and makes companies less competitive in export markets. The
                                         engineering services area is less price sensitive and Serbian engineers offer good value
                                         for money.

6. Skills present or gap                 Relatively high skill level in terms of engineering (and architectural) knowledge but some    100%    8   8
                                         onsite training still required. Significant gap exists in project management. Low cost of
                                         skilled labor in this sector, historical reputation and past-experience that bring know-how
                                         are a major asset. The industry totaled 30.000 graduates in 2005 with the relevant skills.
                                         Further challenge is to adapt the curricula to the needs of the industry and address the
                                         real gaps in higher level skills.                                                                             AT

7. Financing constraints                 High interest rates of commercial banks and difficulty in obtaining bank guarantees/loans     100%    4   4
                                         from international financial institutions are impediments to growth. To be able to
                                         participate in international tenders the company must be able to secure at least 30% of
                                         total contract value. This limits Serbian companies to compete internationally. Setting up
                                         a program of state guarantees is an option worth considering.                                                 AT

8. Infrastructure, supply and resource   Privatized and companies with foreign capital are moderately well equipped for doing          100%    5   5
constraints, cost and availability       construction works abroad, whereas state companies mainly work with outdated
                                         equipment and machinery. Software design packages are available. Common building
                                         materials (cement, stone, bricks, blocks, ceramics) are available at reasonable cost in
                                         Serbia, while advanced materials (based on aluminum, plastic, carbon fiber, plasters,
                                         construction elements) are imported.

9. Policy constraints                    Serbian firms suffer from Serbia’s poor image abroad. The image could be improved for          100%   5   5
                                         engineering services if Serbia established a national chapter of FIDIC (important for
                                         recognition of licenses) and if legislation were changed to allow for professional liability
                                         insurance. In Serbia, competitiveness could be improved if public procurement law were
                                         simplified and applied more transparently and if inspection services became more
                                         efficient. Generally, laws affecting construction in Serbia require improvement. A number
                                         of Serbian companies do construction work around the world through off-shore companies
                                         and pay their workers in a fashion that is not completely legal, which is why the Ministry of
                                         Trade and Services is preparing a Law on undertaking Investment Projects that would give
                                         tax and social contributions incentives to these firms so that they register their business in
                                         Serbia and operate in accordance with the law; this act would not only raise tax collection
                                         but also assist employment and hopefully encourage more exports in this sector that is
                                         perceived to have great potential.
                                                                                                                                                       AT
10. Historical capacity (overall)               Serbian civil engineering industry has been recording increases, both on domestic and    100%          7   7
                                                export markets. Sales in 2006 were 117% higher in relation to 2002. In 2006 construction
                                                industry constituted 3.5% of the total GDP and recorded growth of 9.3% in relation to
                                                2005. Value of construction works abroad in 2006 was USD 138 million, which is increase
                                                of 64% in relation to 2005. The main markets in 2006 were Kazakhstan, Morocco, Russia,
                                                Montenegro, Peru, Algeria.

11. Historical (five year) and current          Compared to the pre 1990 levels, the level of exports is relatively low (EUR 115 million in 100%       6   6
competitiveness (all markets)                   2006), but increasing. If the same amount of activity were present, the total value of
                                                exports would be EUR 1 billion annually, and 20,000 additional people employed abroad.
                                                As the demand for the construction industry increases domestically, so will the capacity of
                                                domestic companies and their ability to compete abroad. Domestic companies need
                                                assistance with securing financial guarantees so that they are able to successfully
                                                compete domestically and abroad. Serbian companies have good reputation abroad and
                                                they are able to get contracts in UAE, Quatar, Oman, Tunisia, Nigeria, ex Russian
                                                Republics, etc.                                                                                                DP

12. Employment impact                           Much of the employment will be in a limited way, but in high value areas. If workers and        100%   4   4
                                                middle management follow a construction services job, the figures will be much greater.
                                                The sector will continue to absorb low skilled labor from other sectors due to
                                                privatization/restructuring efforts.


III. Combined Analysis

1. Ability to move sustainably into higher      On both the international and domestic markets, Serbian companies have failed to get
value markets, domestic and international       back to where they were 20 years ago. The opportunities are likely there. Those
                                                companies that are in those markets are not officially registered in Serbia, but have fled to
                                                offshore havens during the war period.

IV. Program Impact Analysis

1. Ability of Program to attributively impact   There are likely few, high impact areas for the project to work here.                           100%       0




2. Time frame for impact to be realized         Given trends in EU accession financing and the continuing boom in the ME and CIS, there 100%               0
                                                should be opportunities for growth



3. Regional, gender or youth impacts            Gender impact is mainly male, though this may change as more management skills are              100%
                                                brought to the industry.
V. Possible Binary Excluders

1. Other donors very active in sector          Norwegian government has a "cluster" program, DANIDA, that supports export expansion 100%                         0
                                               by developing cluster linkages among enterprises, R&D institutions and business
                                               associations.

2. Potential to compete in a high profile      Not relevant                                                                                 100%                 0
manner with US products


3. Subjective assessment of sufficiency of     Contract value most clear indicator                                                          100%                 0
clear ROI indicators


4. Inadequate number of firm/counterparts      There are 15 - 25 firms in the construction engineering sector. They have from 5 -80         100%
                                               employees.




Key Supporting Data                                                                                                                         References

1. (a) In 2006, Global construction & engineering industry value grew by 5.8%, reflecting a CAGR of 2.8% for 2002-2006. Civil               Datamonitor Global Construction
engineering sector generates the majority of revenues - in 2006, the sector accounted for 50.6% of the industry's value.                    & Engineering Industry Profile
                                                                                                                                            May 2007                              RH
1. (b) European construction & engineering industry grew by 3.1% in 2006; Non-residential segment is dominant with a 58.3% share of         Datamonitor Construction &
market value; Germany is leading with a 16% share of market                                                                                 Engineering in Europe May 2007        RH
1. (c) Although industry grew by 1.2% in 2006, the industry has been in a state of decline since 2004 (2002-06 has 7.3% CAGR); private Datamonitor Global Homebuilding
sector most lucrative in '06 with 82.2% of overall value                                                                                    June 2007                             RH
1. (d) Europe homebuilding industry has seen steady growth in recent years - 2006 grew by 4%; private segment accounts for 59.4% of
                                                                                                                                            Datamonitor Homebuilding in
total value; France has the largest industry w/ 23.8% of regional industry AND Italy is 4th w/ 13.8%; 2002-06 CAGR of 3.5%
                                                                                                                                            Europe July 2007                      RH
1. (e) As documented in research by Altis Capital in 2004, industry (i.e. “Value of Construction Works”) has grown by 20% annually for      Interview with Altis Capital - Oct.
CAGR since ’04 and projected for the same next year. Energoprojekt is growing by 15/20% annually alone at a 60/40 (Int’l/Domestic)          22, 2007
split. Not seeing many new projects in the region (i.e. South Eastern Europe).                                                                                                    RH
1. (f) CEE construction market will continue to grow by 8 -10 percent annually. Best prospects are in Russia, though others good due to CEEConstructionForecasts.pdf
inflow of EU funds. Part will be in civil works and part in the ongoing upgrading of residences. Non-residential and civil expected to be a
bit slower.                                                                                                                                                                       AV
1. (g) the hope of a boom driven by EU accession funding may be more optimistic than the reality, given the bureaucratic obstacles to       CEEConstructionMarketTrends.p
getting the money in place. Czech republic, Romania and Hungary, despite some barriers, have some good prospects here.                      df
                                                                                                                                                                                  AV
2. (a) Prospect of new entrants different for each market depending on growth rate; capital required to entry is not prohibitively large (i.e.
moderate capital outlay = low sunk costs) - strategies such as renting equipment & hiring temporary workers as needed rather than
incurring fixed costs of buying capital items & retaining large workforce; threat of substitutes is weak; despite some large players, the          Datamonitor Global Construction
industry is fragmented in every country, and it's profitable at both large and small scales; overall, rivalry is the global industry is moderate   & Engineering Industry Profile
but it depends on the market growth                                                                                                                May 2007                          RH
2. (b) Same as above, but stringent & complex EU regulations weaken the incentive to enter the market (Ex// above certain thresholds,              Datamonitor Construction &
the EU Public Procurement Directives must be complied with)                                                                                        Engineering in Europe May 2007    RH
2. (c) May be restrictions on foreign players entering a particular country's homebldg industry                                                    Datamonitor Global Homebuilding
                                                                                                                                                   June 2007                         RH
2. (d) Same as above                                                                                                                               Datamonitor Homebuilding in
                                                                                                                                                   Europe July 2007                  RH
2. (e) For Serbian and possibly Bosnian work, there may be advantages as foreign firms may tend to work through local firms to deal                CEEConstructionMarketTrends.p
with corruption and bureaucracy.                                                                                                                   df                                AV
3. (a) Global Construction and engineering industry set to grow steadily; 2011, the industry is expected to reach a value of $2,409 billion, Datamonitor Global Construction
which equates to a CAGR of 5.2% in the 2006-2011 period.                                                                                     & Engineering Industry Profile
                                                                                                                                             May 2007                                RH
3. (b) By 2011, industry forecast an increase of 18.9%                                                                                       Datamonitor Construction &
                                                                                                                                             Engineering in Europe May 2007          RH
3. (c) Performance expected to decelerate with anticipated CAGR = 3.4% for 2006-2011; Asia and Europeans markets expected to grow Datamonitor Global Homebuilding
6.7% and 3.3% respectively                                                                                                                   June 2007                               RH
3. (d) By 2011, industry expected to grow by 17.6% since 2006; however, performance forecasted to decelerate with lower CAGR as              Datamonitor Homebuilding in
above, but Asia growing…                                                                                                                     Europe July 2007                        RH
3. (e) See 1. (f) and 1. (g) above. The main trends of interest here would be a regional increase in construction and demand for services
due to EU accession funds. Whether Serbian companies can capture that or not will depend on the factors discussed below.                                                             AV
3. (f) In Serbia construction engineering expected to grow 15-20 percent a year. Trends are good, and will depend on ability to hook in      Construction_Fideco-
with EU firms for more work. This can be done.                                                                                               Tahal_Oct162007.doc                     AT, AV
5 a) Wages in Serbian construction sector are lower than in other countries, paradox ally, cost of labor in the sector is higher than at     Construction Faculty
competitors. Our companies are used to engage large number of qualified workers on construction sites, unlike western companies              Subotica/Investment projects in
which have much less people on site.                                                                                                         EU &SEE                                 PZ
5 b)Labor costs of Serbian firms are generally lower, except on Middle East and Africa where local people work for 150 - 200$ monthly,             Construction Faculty
our companies can't go that low.                                                                                                                   Subotica/Investment projects in   PZ
5 c) Expensive bank guaranties and operational capital loans increase price on export markets and make our companies less                          EU &SEETrasa
                                                                                                                                                   Interview
competitive.                                                                                                                                                                         PZ
5 d) It seems that ownership status define costs as well, privatized companies have been able to reduce costs much more efficiently                Construction Faculty
than big state companies, especially in labor and row material.                                                                                    Subotica/Investment projects in   PZ
5 (e) Serbian companies are highly price competitive in the EU, but the market is protected. Also relevant for 2. above.                           EU &SEE
6. (a) Greatest strengths of sector: 1. Cost of labor – could export labor as lead or subcontractors; 2. Skilled labor (engineering and    Interview with Altis Capital - Oct.
architects); 3. Historical reputation & past-experience – as in North Africa (Planum starting to win more bids there, and possibly Napred) 22, 2007
                                                                                                                                                                                     RH
6. (b) Work force in construction sector is characterized with the absence of high quality labor, especially project managers. International Construction Faculty
companies have registered their branches in Serbia and offer better compensation packages so the best experts leave local companies. Subotica/Investment projects in
                                                                                                                                             EU &SEE
                                                                                                                                                                                      PZ
6. (c) The industry is characterized by a few highly skilled and paid managers, and many lower paid personnel. Serbian schools graduate EducationDataSectorRelevanceFi
fewer of the former and more of the latter. The figures given here are for the lower level, but with the background to be trained to a higher       nal.xls
level if needed and of the opportunity exists. In 2005, Serbian schools graduated over 30,000 such graduates. Unfortunately, the real
gaps are at the higher levels.
6 (d) Many of the most highly qualified staff left Serbia during the crisis times. Curriculum is a bit outdated and it takes around a year to   Construction_Fideco-
train a new graduate now.                                                                                                                       Tahal_Oct162007.doc
                                                                                                                                                                                      AT, AV
7. (a) In comparison with other sectors, construction was not attractive to foreign investors due to the outdated technology, low profit        Construction Faculty
margin in the industry and excessive work force.                                                                                                Subotica/Investment projects in
                                                                                                                                                EU &SEE                               PZ
7. (b) Other factors that determine low competitiveness are inability to provide bank guaranties, references and to compete with price          Construction Faculty
and deadlines.                                                                                                                                  Subotica/Investment projects in
                                                                                                                                                EU &SEE                               PZ
7. (c) To be able to participate in international tenders the company must be able to secure at least 30% of total contract value. This         Interview with Serbian Chamber
limits Serbian companies to compete internationally. The government should be more proactive in setting up a program of state                   of Commerce
guarantees.
                                                                                                                                                                                      DP
8. (a) Common building materials (cement, stone, bricks, blocks, ceramics) are available at reasonable cost in Serbia, advanced                 Interview Trasa
materials (based on aluminum, plastic, carbon fiber, plasters, construction elements) are imported.                                                                                   PZ
8. (b) Mechanization and equipment is outdated in state companies, privatized and companies with foreign capital are much better                Construction Faculty
equipped                                                                                                                                        Subotica/Investment projects in       PZ
8 (c) Rental levels of Class A office properties stand at EUR 21 per square meter per month (07/06).                                            EU &SEE
                                                                                                                                                US Department Commerce
                                                                                                                                                Residential and Office                DP
9. (a) Constraints in Serbian sector: Formal issues set on tenders (i.e. Bank guarantees in short time span); Regulation, especially for        Interview with Altis Capital - Oct.
company acting as investors (i.e. land ownership, taxation);                                                                                    22, 2007                              RH
9 a) Law and technical regulations in construction are very bad which can be seen through practical experience with Law planning and  Construction Faculty
construction, Law on public procurement, Low on obligations etc.                                                                      Subotica/Investment projects in
                                                                                                                                      EU &SEE                                         PZ
9 b)Government services, especially inspections are not equipped (human and material resources) to support complex projects and that Construction Faculty
fact contribute to many problems such as bad design on a site, inadequate safety and protection, building materials and equipment. In Subotica/Investment projects in
addition, it is very hard to secure all needed permits and documents for starting construction.                                       EU &SEE                                         PZ
10. (a) Serbian sector seeing the most growth in road infrastructure, accounting for more than 50% of the civil engineering work, and           Interview with Altis Capital - Oct.
more work in the pipeline for bridges. Serbian construction market is dominated by Energoprojekt and road construction group PZP Nis /          22, 2007
PZP Beograd, and Energoprojekt is the only provider of broad spectrum of civil engineering/infrastructure services. Serbian civil
engineering industry is strong, and one of the few to w/stand successfully the 1990s, and has come to be one of the engines of Serbian
economy in recent years and one of the fastest growing industries in Serbia. Serbian general contracting industry is dominated by
Energoprojekt, and its main competitors, Planum and Gemax, lag behind in ~40 million Euros in revenue in 2006.                                                                        RH
10. (b) Value of construction works in 2006 was $138 mil ($=60din), which is increase of 64% in relation to 2005. The main markets in           Statistical Institute
2006 were Kazakhstan, Morocco, Russia, Montenegro, Peru, Algeria - in descending order.                                                         Serb/Construction abroad 2006         PZ
10. (c) In 2006 construction industry constituted 3.5% of the total GDP and recorded growth of 9.3%.
                                                                                                                                                Siepa/Construction                    PZ
10. (d) During the first six months of 2006 value of construction works completed grew 20.1 %. The construction of transport
infrastructure has showed the fastest growth, constituting 49.8% of total construction activities, followed by non residential buildings with
20.2%, then pipelines and electric power lines and residential buildings with 12.5% and other constituting the smallest share of 5%.
                                                                                                                                        Siepa/Construction                            PZ
10 (e) Looking at the contracted works abroad, the total value in 2005 was more than $204 million. The majority of Serbian companies
carry out construction works in Asia: Kazakhstan and Uzbekistan, then Europe: Russia, Germany, and Ireland; Africa: Uganda, Morocco
and Nigeria and in America, mainly in Peru.                                                                                             Siepa/Construction                            PZ
10. (f) In the period before 90’s Serbia’s construction industry was well known in the Middle East and other oil rich countries.
Cooperation was very good between Serbian (then Yugoslavian) companies, mainly Energoprojekt, and others. Energoprojekt and other
construction companies worked on large projects in Yugoslavia and abroad. During the 90’s the demand for construction services fell
dramatically, and the sanctions prohibited Serbian companies form taking part in tenders abroad. The situation following the changes in Interview with Serbian Chamber
2000 is improving.                                                                                                                      of Commerce                                   DP
11. (a) Energy related construction services has potential, as Serbia was traditionally a net-exporter of energy, but since no investment in    Interview with Altis Capital - Oct.
past 10-15 years, then some challenges exist. However, investments are in the pipeline, for example EPS is expected to build 2 new              22, 2007                              RH
11. (b) On Competition: Domestic bidding – Serbian companies could provide a full-range of services AND partner with international
thermo-power facilities.                                                                                                                        Interview with Altis Capital - Oct.
companies on bids to provide these local services and labor benefits. Internationally – Serbian companies lack the knowledge/practice           22, 2007
of “formal rules” (i.e. loan guarantees); toughest competitors in US (particularly in the MidEast) and Western European countries
(France, Spain, Austria) and locally – Russian companies                                                                                                                              RH
11 (c) Office Space Market - More than 55,000 square meters A class office space is expected to be developed in the next five years in
                                                                                                                                                US commercial
Belgrade. In addition more than 350,000 square meters of high-quality commercial space was announced for construction on the mid                service/Residential and Office
term in different city areas.                                                                                                                   Construction in Serbia
                                                                                                                                                                                      PZ
11. (d) Residential Space Market every year 30,000 new buildings should be built in order to keep the number of apartments at the same
                                                                                                                                          US commercial
level. However, with the improving availability of housing credits and more favorable interest rates offered by a large number of foreign
                                                                                                                                          service/Residential and Office
and domestic banks present in the market, the demand is increasing on a daily bases.
                                                                                                                                          Construction in Serbia
                                                                                                                                                                                      PZ
11. (e) The residential and office space market in Serbia today is very dynamic and has great development potential, in April 2006,
                                                                                                                                                US commercial
Serbia’s capital Belgrade won the Financial Times’ award as the southern European City of the Future. This title carries a
                                                                                                                                                service/Residential and Office
recommendation for the biggest future investment location, by the most recognized financial newspaper in the world. Belgrade
                                                                                                                                                Construction in Serbia
impressed the judges with its recent high levels of FDI (€788 million in 2004)                                                                                                        PZ
11. (f) It seems necessary for our companies to form consortiums when compete for big projects in order to increase their                       Construction Faculty
competitiveness on all markets.                                                                                                                 Subotica/Investment projects in
                                                                                                                                                EU &SEE
                                                                                                                                                                                      PZ
11. (g) Serbian firms have a currently poor reputation that keeps them from getting more work. This needs to be countered with a strong Construction_Fideco-
campaign and membership in professional organizations like FIDIC.                                                                       Tahal_Oct162007.doc
                                                                                                                                                                                      AT, AV
11. (h) See chart below for trends.

11. (i) Estimates are that until 2012 up to 4 billion EUR will be spent on road construction and repair. Only on the finishing of the                    Ekonomist article
Belgrade highway belt until 2011 around 370 mln EUR will be spent.
                                                                                                                                                                                      ZS
12. (a) (As heard from clients) Problems with age structure with too many people over 50. It is hard to lay off workers, hard finding                   Interview with Altis Capital - Oct.
qualified/skilled workers, but this gap is easy to fill. It is difficult to find non-core or non-full time staff for skilled positions on new projects. 22, 2007
Many smart fresh graduates go to work for the local subsidiary of international companies because the salary is higher. Good managers
and financial officers are lacking. no local companies have HR department
                                                                                                                                                                                              RH
12. (b) see chart below




                                                                       EXPORTS (000 EUR)


  400000


  350000
                                                                                                                                  Tourism
                                                                                                                                  AutoParts
  300000
                                                                                                                                  ICT/Eng (Exc Telco)
                                                                                                                                  Education
  250000
                                                                                                                                  Energy, especially renewable
                                                                                                                                  Construction
  200000                                                                                                                          Textile and apparel
                                                                                                                                  Logistics, warehousing and transport

  150000                                                                                                                          Film and production
                                                                                                                                  Medical supplies and devices
                                                                                                                                  Building materials
  100000
                                                                                                                                  Bldg Matls w/o CLP
                                                                                                                                  Wood processing and furniture
   50000


        0
                  2002              2003               2004              2005               2006           2007 (1-VIII)
                                                                Year




                                                                    Average Gross Wage
  710
                                                               Tourism (Average)
                                                               AutoParts (NACE)
  610                                                          ICT/Eng (Exc Telco)
                                                               Education
                                                               Energy, especially renewable
  510
                                                               Construction (Average)
                                                               Textile and apparel
                                                               Logistics, warehousing and transport
EUR




  410
                                                               Film and production
                                                               Medical supplies and devices
                                                               Building materials
  310
                                                               Bldg Matls w/o CLP
                                                               Wood processing and furniture

  210



  110
        2002   2003   2004          2005   2006   2007 (Est)
                             Year
Renewables

Targeted Subsector(s)
Bio-mass, bio-fuels, cogeneration, recycling mini-hydro and waste disposal



Impact Criteria                                Determining Factors and Rationale                                                          Default Ranking Weighted
                                                                                                                                          Weight          Rank

I. Global Prospects in Sector

1. Historic revenue and growth in the (sub)-   Aggressive regulation, related to mandatory consumption of bio-fuels and EU diesel          100%    5     5
sector                                         shortage have supported bio-diesel's strong growth over the past two years. Government
                                               incentives derived from environmental concerns, and surging fossil fuel price have been
                                               the major catalysts for the 46% CAGR of global bio-diesel market in 1991-2005. Ascribed
                                               to the EU Directive, the European region is expected to lead the global demand growth.
                                               An independent research institute estimates that the global bio-diesel market will maintain
                                               a 30% CAGR in production between 2005 and 2010.


2. Barriers to entry in major new markets      Barriers to entry are medium. Policy intervention and regulatory support is absolutely     100%     7     7
                                               crucial for entering, staying and growing in the market. Governments should take steps
                                               necessary to enter the carbon markets, such as creation of a National Regulatory
                                               Authority under the Kyoto Protocol, as these markets are expanding and are a source of
                                               finance for energy sector projects.

3. Sector prospects and trends, shifts         The EU is increasingly becoming a low-carbon regulated economy. Solar, bio-fuels and         100%   7     7
                                               wind are most attractive investment opportunities in the short term. Bio-Fuels is expected
                                               to sustain high growth as the support from national governments in the EU is extended
                                               and certain policy/sustainability goals are reached. Europe is the largest bio-diesel market
                                               in the world. The main feedstocks used in Europe are rapeseed oil and canola oil. Under
                                               the 2003 EU Bio-fuels Directive, the EU’s biodiesel consumption will reach 9.2 million tons
                                               per year in 2010. Eurostat and European Union Directorate General Energy estimate that,
                                               according to the EU directive, EU’s bio-diesel consumption will increase dramatically from
                                               3.8 million tons in 2006 to 11.5 million tons in 2011, reflecting a CAGR of 24.75%. Ethanol
                                               production is growing at a fast pace 25% per year. Lots of “opportunistic” capacity
                                               additions currently betting on sustained high oil prices and favorable fiscal policy to meet
                                               2010 EU target (5.75% bio-fuels).
4. Profitability              Only 40% of EU consumers are prepared to pay a premium for green energy (of these,             100%   3   3
                              90% will not pay more than a 5% premium). Without regulatory support, the market
                              potential for RES is limited since cost premium exceeds value premium. Growth and
                              profitability of the solar PV market is driven by regulatory incentives and technology
                              improvements. Effective regulatory support must raise RES market price or lower cost
                              through subsidy. In the long term, alternative feedstock are expected to create a cost
                              structure competitive with fossil fuels and liberate supply constraints.

II. Local Market Conditions

5. Cost differential          There are no records or indicators about production costs relative to competitors in hydro, 100%      8   8
                              wind, solar and geothermal renewables. Since these are resource (technology) intensive
                              industries, the lower wages do not play major role. Feedstock costs make over 80% of
                              total cost in bio-fuels, and bio-fuel production costs will not be higher than at competitors
                              due to great natural resources only. Production costs of bio-diesel in Serbia are
                              competitive at estimated 0.60 Euros/lit. The Serbian Government abolished excise tax on
                              bio-diesel fuels and is looking to reduce VAT. Other expected regulations to be
                              undertaken are related to mixing of bio-fuels and fossil fuels and regulation on mandatory
                              use of bio-fuels. Few renewable energy projects are bankable without a price support
                              mechanism unless world oil prices are substantially and consistently above 100 USD/bbl.



6. Skills present or gap      Relevant graduates in this area are hard to identify but it is estimated that there were over 100%    7   7
                              20,000 graduates with relevant skills in 2005. On the other hand, experience is almost
                              completely lacking. Nonetheless, foreign FDI tends to bring the know-how. Important gap
                              in Government administration (the technical staff with experience in renewable energy
                              project development in the relevant ministries and agencies of Government) will have to
                              be addressed.                                                                                                 AT

7. Financing constraints      Local private investors are reluctant to invest in renewables due to the high initial          100%   7   7
                              investment in equipment and slow ROI. Most funding is expected to come from
                              international investors due to interest in renewable projects in Serbia. Recently, two large
                              FDI were realized in Serbia: bio-fuel plant was supported by IFI's loan of EUR 45 million,
                              while EUR 380 million was invested in bio-ethanol plant. Specialty funds may be enticed
                              to invest in mini-hydro projects in Serbia. The realization of additional renewable energy
                              projects in Serbia will depend on the ability of the Government to address low industrial
                              electricity tariff (currently around 2.7 EUR cents/kWh), securing of debt finance and
                              establishing a price support mechanism that enables producers to compete with
                              conventional energy providers.
                                                                                                                                            AT
8. Infrastructure, supply and resource   Major reserve of Serbia energy from renewable is bio-mass: 2,58 million tones of oil        100%     8   8
constraints, cost and availability       equivalent a year from residues. There are also good resources for bio-fuels. Other
                                         reserves are related to hydro energy (0.4 million tones on 900 locations) and geothermal
                                         energy (0.18 million tones) of oil equivalent. Transportation, power, communications
                                         systems and other supporting industries exist.


9. Policy constraints                    Slow and difficult to obtain permits for construction of mini power plants (hydro, wind,    100%     6   6
                                         solar). Generally, firms complain regarding procedures for issuing permits and registration
                                         and hope for government incentives for producers in the sector, including tax incentives
                                         for end users. The weaknesses in the Concession Law are to be improved to enable
                                         development of energy sector. Currently the law serves well large concessions, but does
                                         not provide sound framework for small energy projects. Serbia still has to adhere to EU
                                         directive and set a renewable energy targets such as mandatory use of biofuels and
                                         mixing of biofuels and fossil fuels (July 2007 target missed).                                               AT

10. Historical capacity (overall)        There is almost non historical capacity in production of energy from renewable resources. 100%       2   2
                                         The only exceptions are small hydro plants that produce symbolic amount of energy (1,6%
                                         of total electricity production). There are only isolated attempts of getting the energy from
                                         waste, wind, geothermal and other sources and two big business ventures in bio-fuels.


11. Historical (five year) and current   Difficult to make the assessment given lack of history. However, most non-regulatory          100%   5   5
competitiveness (all markets)            pieces are in place that could make the sector work in Serbia.Renewable energy systems
                                         are specifically attractive for standalone applications in Serbia. Installation of generators
                                         supplied by hydro, solar or wind energy is cost effective and currently one of the most
                                         attractive investment opportunities in the Serbian energy sector. Total potential of new
                                         renewable sources of energy in Serbia has been estimated by Serbian Ministry of energy
                                         at 3.8 million toe per year (1 ton toe = 1 ton of equivalent oil, 1 toe = 6.85 barrel of oil
                                         equivalent). Converted into current oil prices of 100 USD per barrel it can be valued at
                                         around 2.6 billion USD. From this amount 62.7 % comes from bio-mass, 16.7 % sun
                                         energy, 10.2 % mini hydro plants (construction of small hydro plants-up to 10 MW- with
                                         production of 1,800 GWh/year is possible on almost 900 locations), 5.2 % comes from
                                         geothermal sources (estimates are that exploration and drilling of exploitation drill can be
                                         done for EUR 1 million per drill for drills between 1500 and 2000 meters), 5 % is wind                       DP
                                         energy.
12. Employment impact                    The industries are largely capital intensive and do not employ large numbers of people      100%     4   4
                                         directly. Some exceptions may be in recycling.


III. Combined Analysis
1. Ability to move sustainably into higher      The markets are fairly well defined and not highly differentiated. Serbia does appear to
value markets, domestic and international       have the ability to move into these.


IV. Program Impact Analysis

1. Ability of Program to attributively impact   Given the very high fixed cost and global nature of the industry, the potential for program   100%         0
                                                activities is limited. There are a handful of potentially high impact activities.


2. Time frame for impact to be realized         Investment horizons are long for some projects (mini-hydro, due to regulatory issues) and 100%             0
                                                shorter for others involving off the shelf plants (bio diesel). The project can see results by
                                                the end, but there are few "quick wins" here.

3. Regional, gender or youth impacts            Neutral                                                                                       100%




V. Possible Binary Excluders

1. Other donors very active in sector           Not a significant presence outside USAID agricultural project                                 100%         0




2. Potential to compete in a high profile       Not applicable                                                                                100%         0
manner with US products


3. Subjective assessment of sufficiency of      Mainly investment and production values. Should be available on an ongoing basis.             100%         0
clear ROI indicators


4. Inadequate number of firm/counterparts       Very few, mostly international and an investment promotion effort                             100%




Key Supporting Data                                                                                                                           References
1. (a) Current renewables not competitive with convential resources, but improving cost structures and government regulation support is
stimulating growth; OECD countries pushing alternative energy (AE) solutions across many industries; Target sectors included: Ground
fuels, aviation, marine bunkering, power sector, heavy manufacturing, automobiles etc.; 1st Generation biodiesel capacity has grown
faster than expected – excess capacity will put pressure on cost position; Margins have recently moved to vegetable oil refiners who          Alternative Energy Overview BAH
capture the highest margins in the value chain today                                                                                          PPT Stockholm April 2007        RH
1. (b) Conventional biofuels raise substantial quality and performance issues, so penetrating transportation fuel pool; Market studies
show that consumers are unwilling to pay significant premiums purely for environmental benefits; EU tax rebate policies uncertain and
uncoordinated between countries – overall, only Germany, Austria and France appear clearly committed to growing bio-ethanol;
Concerns regarding availability of rapeseed oil required to meet 2010 EU Biofuels Directive indicative target which may be an                 BioFuels Market Dynamics &
opportunity for Serbia as a potential supplier; Unlike the US, the EU ethanol upstream is dominated by the large seeds and pesticide          Prospects BAH PPT London Feb.
producers; The European ethanol industry is already fairly concentrated with three players totalling more than 70% of the conversion          2006                          RH
1. (c) Rapeseed-based biodieselover the past four years; Land to maintain to grow ethanoleconomies; Most European countriesthe main
capacity; dramatically increased in Western Europe good way availability domestic rural feedstock (wheat, sugar beet) is not are              Biofuels in the EU
moving from using tax incentives to obligations – re-enforcing demand in the short term; Aggressive regulation and EU diesel shortage         European Trends and
have supported bio-diesel’s strong growth in the past two years;                                                                              Perspectives BAH PPT London
                                                                                                                                              July 2007                     RH
1. (d) The photovoltaic (PV) industry grew above 40% annually between 2001 and 2005, despite high costs compared to fossil fuels and
other alternative energies; This growth was ~90% concentrated in Japan, Germany and the US and was driven mainly by strong                    Overview Clean Tech Markets
regulatory incentives; Issues around hydrogen production have become the main bottleneck for the full development of the hydrogen/fuel        BAH PPT London/Amersterdam
cell market; New low cost producers from Poland & the Czech Republic will increase plant capacity in the EU biodiesel sector;                 October 2006                     RH
1 (e) Government incentives derived from environmental concerns, and surging fossil fuel price have been the major catalysts for the           SectorResearch/Energy%20and
46% CAGR of global biodiesel market in 1991-2005. Ascribed to the EU Directive, the European region is expected to lead the global            %20Renewables/2006_09_Globa
demand growth. An independent research institute estimates that the global biodiesel market will maintain a 30% CAGR in production            l_Biofuel_incl_China_Credit_Suis
between 2005 and 2010.                                                                                                                                      se.pdf             ZS
2. (a) To date, capital requirements for entry in many AE sectors have been relatively low making it a very exciting area for VC/PE
investment capital ... particularly with regulatory support; Capacity constraints drive capex investments as well as steer rent allocations
creating opportunities for investment; Securing low cost feedstock is paramount as cost of feedstock represents 80% of unit cos               Alternative Energy Overview BAH
                                                                                                                                              PPT Stockholm April 2007        RH
2. (b) Land dedicated to non-food bio-resources required to achieve biodiesel requirements and the commercial development of
advanced conversion routes of lignocellulosic biomass into fuels; policy intervention is likely to remain the main driver for biofuel
penetration in the transportation fuel pool                                                                                                                                  RH
                                                                                                                                              BioFuels Market Dynamics & Prospects BAH PPT London Fe
2. (c) Intermiedate technology needed to meet the end needs of diesel and gasoline on biomass feedstock; Development of new                   Biofuels in the EU
conversion technology and/or alternative feedstocks are the two ways to liberate the feedstock constraint; Current biofuels cause supply      European Trends and            RH
2. (d) The silicon supply constraint and no significant technology breakthroughs in the short-term will concentrate high margins in the       Overview Clean Tech Markets
upper segments of the PV value chain up to 2010; Today, high margins reside at the top end of the value chain due to supply                   BAH PPT London/Amersterdam RH
2. (e) As seen with the Oman study, governments should take steps necessary to enter the carbon markets, such as creation of a                US-Oman-FreeTradeAgreement-
National Regulatory Authority under the Kyoto Protocol, as these markets are expanding and are a source of finance for energy sector          SectorStudy-BoozAllen2007.11
projects.                                                                                                                                                                    RH
3. (a) Current environment and push for AE should allow for significant growth in many of the target sectors above; Without regulation,
there is currently no viable market for renewable energy sources (RES); Solar, Biofuels and Wind show the most attractive
characteristics for investment opportunities in the short term; The Biofuels market is expected to sustain high growth as EU governments
support is extended and goals increased and biodiesel is choice - The growth in Europe has been faster than expected - capacity is
expected to surpass the level required by EU target in 2009; Economic growth will drive increased global demand for electricity, creating
an opportunity- 50% of the needed capacity has yet to be built; EU increasingly becoming a low carbon regulated economy; Carbon
trading is expected to grow aggressively -- regulation continuity is the biggest risk - many opportunities: nascent market, banks
increasingly becoming liquid, natural extension of weather and energy trading & services; high impact actions/opps in UK were in the
                                                                                                                                              Alternative Energy Overview BAH
Steel, Plastics, Organic Chemicals, Meat Processing & Metal Recycling sectors
                                                                                                                                              PPT Stockholm April 2007           RH
3. (b) Increasing dependence on imported fuel sources creates more desire for indigenously grown fuel = biodiesel; Ethanol production
is growing at a fast pace 25% pa. Lots of “opportunistic” capacity additions currently betting on sustained high oil prices and favourable
                                                                                                                                              BioFuels Market Dynamics &
fiscal policy to meet 2010 EU target (5.75% bio fuels); Planned capacity addition, though double the installed base, remains well bellow
                                                                                                                                              Prospects BAH PPT London Feb.
indicative EU targets; Sharp increase of rapeseed demand in Europe likely to drive higher imports and price
                                                                                                                                              2006                               RH
3. (c) Significant room to grow capacity to meet EU demand; however, potential for overcapacity in biodiesel by 2008-2010; Rapid growth
in bioethanol capacity will create opportunities for growth with conversion players; Bio-ethanol supply is expected to meet demand by         Biofuels in the EU
around 2010; Bio-ethanol will capture 20% of wheat acreage in the EU. Wheat is also used to produce Biobutanol, likely to replace bio- European Trends and
ethanol long term; Integrated play between feedstock crushing, oil primary refining and primary distribution to deliver refined vege oil to Perspectives BAH PPT London
biodiesel producers presents OPPS                                                                                                             July 2007                          RH
3. (d) The solar photovoltaic (PV) sector will experience strong growth with solid margins in the next 5 to 10 years; The global footprint is
likely to change as mature technologies move to areas of cheaper production; (as in 4.d) European regulatory support is unlikely to
change since the cost is outweighed by economic returns from the solar PV industry; Biomass and IGCC will have a substantial size by Overview Clean Tech Markets
2030, geothermal is constrained by location; The biodiesel market is expected to grow by 8.5% annually until 2010 - imported palm oil is BAH PPT London/Amersterdam
potentially needed to meet EU targets                                                                                                         October 2006                       RH
3. (e) Europe is the largest biodiesel market in the world. The main feedstocks used in Europe are rapeseed oil and canola oil. Under the SectorResearch/Energy%20and
2003 EU Biofuels Directive, the EU’s biodiesel consumption will reach 9.2 mn t.p.a. in 2010. Eurostat and European Union Directorate          %20Renewables/2006_09_Globa
General Energy estimate that, according to the EU directive, EU’s biodiesel consumption will increase dramatically from 3.8 mn tons in        l_Biofuel_incl_China_Credit_Suis
2006 to 11.5 mn tons in 2011, reflecting a CAGR of 24.75%. Despite the fact that the EU’s biodiesel production accounts for around 90%                       se.pdf
of global production, the current production capacity of 2.1 mn t.p.a. is still well short of the 9.2 mn ton consumption per year in 2010, as
outlined by the EU directive.
                                                                                                                                                                                 ZS
4. (a) The value premium for renewables is less than 5%; Only 40% of EU consumers are prepared to pay a premium for green energy;
Of these, 90% will not pay more than a 5% premium; Without regulatory support, the market potential for RES is limited; Cost premium Alternative Energy Overview BAH
exceeds value premium; Effective regulatory support must raise RES market price or lower cost through subsidy; 2nd generation              PPT Stockholm April 2007              RH
feedstock can create a biofuels become competitive vs. conventional refining at crude prices above $50/bbl; In the US/EU tax incentives
4. (b) Excluding Brazil, cost structure competitive with fossil fuels and liberate supply constraints                                      BioFuels Market Dynamics &
are bringing down the break-even points for bio-fuels to $30-40/bbl crude; Biodiesel - cost of production driven by feedstock price,       Prospects BAH PPT London Feb.
typically 2x fossil fuel’s                                                                                                                 2006                                  RH
4. (c) Feedstock dependency and related costs is a key differentiation point for each technology; In the long term, alternative feedstocks Biofuels in the EU
are expected to create a cost structure competitive with fossil fuels and liberate supply constraints;                                     European Trends and
                                                                                                                                           Perspectives BAH PPT London           RH
                                                                                                                                           Overview Clean Tech Markets
4. (d) Growth and profitability of the solar PV market is driven by regulatory incentives and technology improvements; however,            BAH PPT London/Amersterdam
European regulatory support is unlikely to change since the cost is outweighed by economic returns from the solar PV industry              October 2006                          RH
4 (e) Cost of biodiesel vary depending on feedstock used. The cost per barrel varies from 38$ for waste vegetable and cooking oil                SectorResearch/Energy%20and
biodiesel, 66.57$ for palm oil biodiesel to the 130$ for Rapeseed biodiesel.                                                                    %20Renewables/2006_09_Globa
                                                                                                                                                l_Biofuel_incl_China_Credit_Suis ZS
4 (f) The unit total costs of Chinese biodiesel producers are significantly lower than international competitors’. And the main factor is the    SectorResearch/Energy%20and
different feedstock used in China. Feedstock accounts for more than 80% of the biodiesel production costs, and the costs of vegetable           %20Renewables/2006_09_Globa
oil offal and used cooking oil, which are the main feedstock used in China for biodiesel production, are much lower                             l_Biofuel_incl_China_Credit_Suis
than other feedstock.                                                                                                                                         se.pdf             ZS
4 (g) The construction investment requested by the biodiesel processing industry with a production capacity of 10.65 mn t.p.a. is to be          SectorResearch/Energy%20and
calculated with €6 bn, meaning approximately US$715 per ton of annual capacity. And the ratio of annual production value to the total           %20Renewables/2006_09_Globa
investment is about 1:1, higher than in traditional energy industry, which is about 0.4:1 in thermal power generation.                          l_Biofuel_incl_China_Credit_Suis
                                                                                                                                                                                 ZS
                                                                                                                                                              se.pdf
5 (a) Energy from renewable sources participate with symbolic 1,6% (from mini hydro plants) in energy production in Serbia. There are           Interview_Chamber of
no records or indicators about production costs relative to competitors in biofeul, wind, solar, geothermal and other renewables.               Commerce                         PZ
5 (b) Bio diesel retail price in EU is €0.96 while bio diesel retail price in Serbia is € 0.86 which means that 8% lower price of bio diesel
can attract customers and can compensate lower energy power.                                                                                                                        PZ
                                                                                                                                                  ekonomist.co.yu/prezentacije/Vladimir_Cupic.ppt
5 (c) Given the fact that feedstock costs make over 80% of total cost in bio fuels, it can be assumed that bio fuel production costs will not
be higher than at competitors thanks to great natural resources. Some analyses say that lit of biodisel production costs in Serbia would
be about 0.60 Euros/lit.                                                                                                                                                            PZ
                                                                                                                                                  ekonomist.co.yu/prezentacije/Vladimir_Cupic.ppt
5 (e) It seems there are no significant barriers to entry EU and other markets.
                                                                                                                                                                                    PZ
5 (e) Few renewable energy projects are bankable without a price support mechanism unless world oil prices are substantially and                  Serbia ESMAP Draft Report June
consistently above 100$/bbl.                                                                                                                      2007                              PZ
5 (f) As per price support, Serbian Government abolished accise tax (10% on production cost) on biodizel fuels. Producers expect further Interview Victoria Oil
support through VAT reduction.                                                                                                                                                      PZ
5. (g) Estimates are that investment cost per kW capacity of a mini hydro is between 600-1100 EUR, which means that one 1 MW mini                       Min. of Energy memo
hydro costs between 0.6 and 1.1 million EUR.)                                                                                                                                       ZS
5. (h) Estimates are that exploration and drilling of exploitation drill for geothermal energy can be done for 1 million EUR per drill for drills       Min. of Energy memo
between 1500 and 2000 meters.                                                                                                                                                       ZS
5. (i) Using recent German cost data, a wind project with annual load factor of 20% requires a tariff of about 8 €cents/kWh for financial         Serbia ESMAP Draft Report June
viability; a 28% load factor would bring this down to around 5.8 €cents/kWh. (currently in Serbia it is around 5€cents/kWh). Only one site 2007
in Serbia is reported to meet this criteria.                                                                                                                                        ZS
5. (j) According to the WB study, post-tax financial return to equity in one pilot project for small hydro plant is 25.5%.                      Serbia ESMAP Draft Report June
                                                                                                                                                2007                           ZS
5. (k) Replacing electric boilers with solar collectors in domestic homes is uneconomic; electricity prices would need to be                    Serbia ESMAP Draft Report June
8.5€cents/kWh to achieve a 10% return on investment.                                                                                            2007                           ZS
6 (a) Relevant graduates in this area are very hard to identify. On the one hand, many technical areas are potentially relevant for             EducationDataSectorRelevanceF
applying existing technologies. It is estimated that there were over 20,000 graduates with relevant skills in 2005. On the other hand,                      inal.xls
experience is almost completely lacking. Using the potential of those graduates would require a possible more mature industry.
6. (b) The barriers for renewables range from problems raised by the Concession Law, distortions in the electricity tariff, and lack of         Serbia ESMAP Draft Report June
technical staff with experience in renewable energy project development in the relevant ministries and agencies of Government, to lack          2007
of public awareness and of technical standards.                                                                                                                                   ZS
7(a)Latest FDI developments in this sector - the largest FDI on Balkans is in bio ethanol plant in Zrenjanin. Total cost of the investment is Glas Javnosti
€380 million, investor is consortium of seven Hungarian companies, a US firm and a German bank. Second big investment in the bio
fuel production has been supported by EBRD loan of €45 mil and that is the largest loan to a private company in Serbia by EBRD.
                                                                                                                                                                                 PZ
7 (b) Local private investors are reluctant to invest in renewables due to the high initial investment in equipment and slow ROI.     Interview_Chamber of
                                                                                                                                      Commerce
7 (c) Apparently, FDIs can be expected in wind sub sector, the main precondition is to complete complex measurement of wind potential Interview Energy Efficiency
in different regions.                                                                                                                 Agency
7. (d) There are three main financial barriers to the realization of renewable energy projects. The first is the absence of a price support     Serbia ESMAP Draft Report June
mechanism (subsidies), without which renewable energy producers cannot compete with fossil electricity generation (whose price does             2007
not reflect their environmental damage costs). The second is the difficulty of securing debt finance. Even with revenue streams assured
by a price support mechanism, developers find it difficult to secure long term loans, with transaction costs that may be appropriate for
larger projects, but which are inappropriate for small renewable energy projects. The third barrier is the low industrial electricity tariff,
presently around 2.7€cents/kWh.                                                                                                                                                  PZ
8 (a) The energy potential of the bio mass has a remarkable value compared with the value of energy consumption in Serbia. Presently thermal science/THE STATE OF
in Serbia a lot of available bio mass residues deriving in wood and agricultural product processing companies are not used for energy        BIOMASS ENERGY IN SERBIA
production. In spite of availability of biomass residues these companies very often use other fuels for heat production. In these cases,
the price of bio mass fuel is this type ofzero. With the exclusively of bio mass fuel makes over 80% of initial investmentcan be higher, and Bio fuels in the EU/BAH
8 (b) Equipment makes for practically production is zero price imported and it the investment in bio mass facilities in a bio fuel plant.

8 (c) Transportation, power, communications systems and other supporting industries exist.

8 (d) Other reserves are related to hydro energy (0.4 mil tones) and geothermal energy (0.18 mil tones) of oil equivalent. Potential in         Interview Energy Efficiency
solar and wind energy also exist thanks to 2300 sunny hours and 120 – 140 windy days annually.                                                  Agency
                                                                                                                                                                                 PZ
8 (e) Local private investor are reluctant to invest in renewables due to the high initial investment in equipment and slow ROI.                Interview_Chamber of
                                                                                                                                                Commerce                     PZ
8 (f) investment fund sees mini hydro as one of the most attractive areas going forward. This can lead to good investment ROI, plus             SintezaInvest_Oct2007.doc
value of energy.
9 (a) Non-price barriers range from problems raised by the Concession Law, distortions in the electricity tariff, and lack of technical staff Serbia ESMAP Draft Report June PZ
with experience in renewable energy project development in the relevant ministries and agencies of Government, to lack of public              2007
awareness and of technical standards.
9 (b) Legal framework which regulates mixing of biofuels and fossil fuels (mixing is prohibited now, only pure biodozel can be sold on        Interview Victoria Oil         PZ
petrol pumps) is not put in place. Some neighboring countries have already adopted such regulation (i.e. Croatia, Slovenia).
9 (c ) Mandatory use of biofuels that would be in line with EU regulations doesn't exist. Srbia should set targets as all other countries did. Interview Victoria Oil            PZ

9 (d) The Energy Community Treaty between the EU and nine southeast European countries3 was signed in Athens on October 25,                     Serbia ESMAP Draft Report June ZS
2005, and ratified by Serbia on 14 July 2006. This requires adherence to a number of EU directives that relate to renewable energy: for         2007
example, under Article 20 Serbia is obliged to set a renewable energy target by 14 July 2007.
9 (e) Serbian Concession law applies when a power plant (mini hydro, wind…) is being built. The law is designed for large concessions           Serbia ESMAP Draft Report June ZS
and does not provide a sound framework for small projects.                                                                                      2007
10(a) There is almost non historical capacity in production of energy from renewable resources. The only exceptions are small hydro                  Interview_Chamber of          PZ
plants that produce symbolic amount of energy. The state is not even consider those when makes energy balances. There are only                       Commerce
isolated attempts of getting the energy from waste, wind, geothermal and other sources.

11 (a) Renewable energy systems are specifically attractive for standalone applications in Serbia. Installation of generators supplied by            Siepa                         PZ
hydro, solar or wind energy is cost effective and currently one of the most attractive investment opportunities in the Serbian energy
sector. In addition, construction of small hydro plants (up to 10 MW) with production of 1,800 GWh/year is possible on almost 900
locations
11 (b) Another attractive subsector is introducing new heating systems such as a heating pumps, expansion of these systems has                       Interview Energy Efficiency   PZ
recorded annual growth of over 100% in Germany. Export opportunities for domestic producers of this equipments should be explored.                   Agency

11 (c) Total potential of new renewable sources of energy in Serbia has been estimated by Serbian Ministry of energy at 3.8 million toe                      Min. of Energy memo   ZS
(1 ton toe = 1 ton of equivalent oil, 1 toe = 6.85 barrel of oil equiv.) per year. [Converted into current oil prices of 100$ per barrel it can be
valued at around 2.6 bln $]. From this amount 62.7 % comes from biomass, 10.2 % mini hydro plants (approximately 850 potential small
hydro plants could be built in Serbia, with combined power of 449 MW and 1590 GWh, 92 out of those 850 can have capacity of more
than 1 MW with combined power of 225 MW or 715 GWh. Estimates are that investment cost per kW capacity of a mini hydro is
between 600-1100 EUR, which means that one 1 MW mini hydro costs between 0.6 and 1.1 million EUR.), 5.2 % comes from
geothermal sources (estimates are that exploration and drilling of exploitation drill can be done for 1 million EUR per drill for drills
between 1500 and 2000 meters), 5 % is wind energy, 16.7 % sun energy.
11. (d) In following 5-6 years deficit of produced electricity will reach 5-8% (2-3 bln kWh per year).                                                       Min. of Energy memo   ZS
Textile-Apparel

Targeted Subsector(s)
Original design, and full package contracting of apparel



Impact Criteria                                Determining Factors and Rationale                                                          Default Ranking Weighted
                                                                                                                                          Weight          Rank

I. Global Prospects in Sector

1. Historic revenue and growth in the (sub)- Global textiles grew by 3.5% in 2006, reaching a total value of USD 291.9 billion. CAGR 100%         4      4
sector                                       for the market between 2002-2006 was 1.3%. The Asia-Pacific region is the world's
                                             largest textile market, generating 42.8% of the market's revenue in 2006. The European
                                             region generated 31.2% of the textile market's revenue in 2006, Americas generated 26%
                                             in 2006. The Russian market is strong for Serbian apparel designers.

2. Barriers to entry in major new markets     Barriers to entry are moderate due to purchasing/leasing of production equipment and        100%    6      6
                                              finding expertise for highly-efficient facility management. Financing can be difficult to
                                              arrange due to low profit margins and intense competition from all other markets. Some
                                              countries (like Serbia) have preferential access to EU and Russian markets.

3. Sector prospects and trends, shifts        Anticipated CAGR is 3.4% for 2006 - 2011 time period. In Serbia's case, threat of           100%    5      5
                                              increased/continued competition from Asia is countered by the country being well-
                                              positioned to manufacture high-quality, fast turnaround production runs for European
                                              fashion firms. Other countries in the region are doing the same though.

4. Profitability                              Global competition is strong in all areas. Apparel is one of the most competitive industries 100%   2      2
                                              at the supply level. There are zero to low profit margins due to extreme competition in
                                              CMT market. Margins can be much higher if logistic and quality needs can be met for "full
                                              package" market at the higher end. Serbia likely will be able to be profitable in this latter
                                              market for some years.

II. Local Market Conditions

5. Cost differential                          Labor intensive sector, characterized by relatively inexpensive work force and that has led 100%    4      4
                                              to strong exports. Transportation costs are competitive. Overall, textile/apparel not cost
                                              competitive in bulk markets, but need to focus on specialty. 59% of interviewed
                                              companies in the sector think that Serbian products currently have a cost disadvantage
6. Skills present or gap                 The apparel industry of Serbia has highly qualified labor, stemming from a developed       100%          7   7
                                         educational system that includes education both at secondary and university level.
                                         Sewers and technicians are educated in specialized secondary schools, evenly spread
                                         throughout the country. Higher levels of education, at specialized university departments,
                                         offer post graduate education in related fields. Much unskilled labor is available and is
                                         generally used for the workforce but this also implies a need for on the job training.
                                         Graduates of programs that could contribute on the more skilled, technical and managerial
                                         side was over 14,000 in 2005. The challenge is moving these graduates toward a career
                                         in this area. Graduates of specific textile schools equaled 2,173. Finally, there may be
                                         gaps in certain specialized areas, including pattern making and certainly in marketing.


7. Financing constraints                 There are fewer foreign investors in textiles and apparel than in other major industries, but 100%       5   5
                                         apparel, fashion-sensitive investments are on the rise. Local SMEs tend to complain about
                                         expensive commercial lending and red tape. Since working capital of apparel firms tends
                                         to be tied to outside financing this is a key issue for them. Note: some limited export
                                         financing is available through government agencies (AOFI, SMECA) and factoring is a
                                         growing service.

8. Infrastructure, supply and resource   The apparel industry is highly dependant on imported fabrics (cotton, denim, wool) but            100%   6   6
constraints, cost and availability       those fabrics can be obtained fairly easily. This is the issue with their not being a "textile"
                                         industry, but there being an apparel industry. The modern equipment is imported as well,
                                         and a service infrastructure exists. Volumes are high and new foreign investments are
                                         being made. Importantly, Serbian companies can now get Euro customs certification for
                                         fabric from EU countries.

9. Policy constraints                    Serbia has a textiles agreement with the EU since 2005 and can also take advantage of             100%   6   6
                                         diagonal cumulation (rules of origin) relating to CEFTA and a FTA with Russia. Local
                                         companies hope for tax incentives and government funds to support industry growth.
                                         Contractual issues with hiring/firing workers presents serious problems for flexible
                                         companies needing temporary workers, as workers sue based on legacy regulations
                                         (Labor law needs to be modified). Privatization/bankruptcy processes need to be
                                         completed.

10. Historical capacity (overall)        Decentralization of the sector (especially in Novi Pazar) and inadequate reporting lead to 100%          5   5
                                         unclear picture of the sector today. Aggregate figures shows decrease in industrial
                                         production, while at the same time, these goods grew in export value. The sector has
                                         experienced a decrease in CMT exports and an increase in "full package" exports. In
                                         2005, the production of clothing, traditionally one of the most important exporting
                                         activities, fell from third to sixth place (share of apparel in total commodities export value).
                                         Sector participation in overall export has decreased in recent years, the highest
                                         participation in exports 2001 was 10,2% and in 2005 was only 5,4%. New FDI have been
                                         recorded in Serbia.
11. Historical (five year) and current          Serbia is currently competitive in some volume areas, and in the smaller production runs     100%   6   6
competitiveness (all markets)                   with a fast turnaround time, and will likely be so for some time. However, this is a very
                                                difficult, low margin industry and small changes in competitiveness can be devastating.


12. Employment impact                           The apparel sector remains one of the most important employers in Serbia, and one of the 100%       8   8
                                                lowest wage. Though these jobs are not desirable, their loss would be devastating to
                                                many rural economies.

III. Combined Analysis

1. Ability to move sustainably into higher      The market Serbian companies are increasingly targeting in the EU is as high as it will go
value markets, domestic and international       for contract manufacturing. Some Serbian branded companies are doing very well, though
                                                the market is somewhat smaller for the time being.

IV. Program Impact Analysis

1. Ability of Program to attributively impact   There are a range of skills development, management, and market contact activities that      100%       0
                                                can have an impact across the sector


2. Time frame for impact to be realized         Within the POP                                                                               100%       0




3. Regional, gender or youth impacts            Many apparel firms employ women in rural areas. The jobs may be the only ones in a           100%
                                                community.


V. Possible Binary Excluders

1. Other donors very active in sector           GTZ, but only focus on the German market, Norweigian government has a "cluster"              100%       0
                                                program, DANIDA, SDC, possible SCOPES



2. Potential to compete in a high profile       The US market is not a core target market and US made apparel is not well distributed        100%       0
manner with US products                         abroad
3. Subjective assessment of sufficiency of      Basic indicators exist                                                                          100%                 0
clear ROI indicators


4. Inadequate number of firm/counterparts       The industry is made up of hundreds of SMEs                                                     100%




Key Supporting Data                                                                                                                             References
1. (a) Global textiles market grew by 3.5% in 2006, reaching a total value of $291.9 billion USD. The CAGR for this market between              Datamonitor Global Textiles
2002-2006 was 1.3%.                                                                                                                             Industry Profile, September 2007
1. (b) Sales of synthetic fibers accounted for 41.2% of the global textiles market in 2006 (no. 1). Sales of cotton yarn accounted for          Datamonitor Global Textiles
37.6% of the market in 2006. Sales of rayon and acetate accounted for 15.4% of the market in 2006.                                              Industry Profile, September 2007
1. (c) The Asia-Pacific region is the world's largest textiles market- the region generated 42.8% of the market's revenue in 2006. The          Datamonitor Global Textiles
Europe region generated 31.2% of the market's revenue in 2006 and the Americas generated 26%.                                                   Industry Profile, September 2007
1. (d) anything for Russia? Trade data?

1. (e) Apparel data

2. (a) Entry to the textile global market will require investment in production equipment (e.g. fiber extruders, carders, ring spinners), and   Datamonitor Global Textiles
the requirement of maintaining a large factory facility, which will increase fixed costs.                                                       Industry Profile, September 2007
2. (b) From a production standpoint, it is primarily a B2B market, so factors like brand strength don't really matter.                          Datamonitor Global Textiles
                                                                                                                                                Industry Profile, September 2007




3. (a) Global textiles market forecasted to have a value of $344.5 billion USD by 2011, an 18% increase from 2006. The anticipated
CAGR for this market from 2006-2011 is 3.4%. Due to the need for industry-specific production equipment, the exit barriers are high, it         Datamonitor Global Textiles
would be hard to divest specialized assets.                                                                                                     Industry Profile, September 2007
3. (b) The textile industry is highly-automated so there is little need for a highly-skilled workforce. As the market grows, leading and mid-   Datamonitor Global Textiles
size companies, particularly in Asia well-positioned to increase production as needed.                                                          Industry Profile, September 2007
3. (c Exports for apparels (particularly for women’s shirt) have improved over recent years. For example, US & UK buyers are only
asking for women’s shirt, but Italian outlets only selling men’s product.                                                                       Azzaro Interview Oct. 2007
3. (d) need more on apparel and need to be very careful about differentiation between apparel and textile.

3. (e) firm sees growth in both domestic and export markets in next five years, to double production in underwear. Overall market, he is         Textile_Vivatex_Oct152007.doc
much less sure about, but sees some potential. Not as enthusiastic and sees trouble competing due to size and technology issues.
3. (f) sees Russian and EU markets as best                                                                                                       Textile_Vivatex_Oct152007.doc

4. (a) Competition is strong, potential for short/mid-term low margins due to high fixed costs.                                                 Datamonitor Global Textiles
                                                                                                                                                Industry Profile, September 2007
4. (b) Strong indication of a successful apparel sector, especially for established brands like Azzaro that have: a. Good price for high
quality; b. Styles are very fashionable b/c follow trends, some even 1 season ahead; c. Speed to market is high with great adaptability
based on consumer demand                                                                                                                      Azzaro Interview Oct. 2007

5. (a) Price of labor is a strong attribute for Serbia, and this factor is complemented with quality. Many companies in apparel offer better
quality for mid-market (better than Zara, Mango) - more like tailor made vs. mass produced like its competitors.                             Azzaro Interview Oct. 2007
5. (b) Costs for the apparel industry are higher than China, but lower than EU
                                                                                                                                             Azzaro Interview Oct. 2007
5. (c) Apparel industry in Serbia is characterized by relatively inexpensive work force and that leads to export success in part of the      Jefferson Institute Textile
sector that has been privatized. Serbia belongs to the most price competitive countries in the European textiles industry together with      SCEPP cost benefit analyses of
Belarus, while just slightly above wage rates in China (i.e. one production minute in Euro - Croatia 0.15 Serbia 0.06 in 2003). Part of      foreign trade
the sector that remain in social state ownership is struggling with the excessive work force and it is not price competitive.
5 (d) Similarly, due to the high fixed costs (inadequate exploitation of large production capacity) sector as a whole has higher fixed costs SCEPP cost benefit analyses of
than competitors.                                                                                                                            foreign trade
5 (e)The strategic position of Serbia provides quick delivery, while transportation costs are extremely competitive. Hanging transport        Siepa
cost from Serbia to the EU is approximately €0.23 per garment. In comparison with other transportation costs: prices range from €1 to
€3 per garment for goods from Ukraine, Belarus and Moldova and go as high as € 5 per garment for goods originating from China.

5 (f) Firms are not inherently cost competitive. Greater efficiency, experience and discipline is required.                                     Textile_Vivatex_Oct152007.doc
5 (g) There are two main reasons that influence production costs and make our textile sector u uncompetitive. First one is related to         Interview Exit
import of cloth/fabrics. Since there is no or symbolic local production of quality row material, clothing (and other) producers are forced to
import all sorts of fabrics and increase the cost of products and competitiveness. If we want to export our products to EU market, we
must comply with EURO 1 regulation which says that at least 70% of resources must be either local or EU origin. Having in mind that we
can afford import of fabrics only from China, Turkey and other non EU countries, export in Russia and EU is almost impossible.

6a) The apparel industry of Serbia boasts with highly qualified labor, which has its base in the extremely developed educational system Siepa
that includes education both at secondary and university level. Sewers and technicians are educated in specialized secondary schools,
evenly spread throughout the country. Higher levels of education, at specialized university departments, offer post graduate education in
related fields

6 (b) much unskilled labor is available and is generally used for the workforce. Graduates of programs that could contribute on the more EducationDataSectorRelevanceFin
skilled, technical and managerial side was over 14,000 in 2005. The challenge is moving these graduates toward a career in this area.                 al.xls
Graduates of specific textile schools equaled 2,173. It is believed that labor and skills are adequate, though there may be gaps in certain
specialized areas, including pattern making and marketing.
6 (c) those who do come to work in the sector are often very unskilled and this is their last choice. Training is often required.               Textile_Vivatex_Oct152007.doc

7 (a) There are fewer foreign investors in textile than in other industries, during the period of sanctions foreign investors purchased        Chamber of commerce/ tekstilna
cheaply huge capacities in neighboring countries, so they don't need additional capacities. In general, the fact is that Europe has surplus          industrija srbije
of capacities in the sector.
 7 (b) Investors are looking for new investment opportunities after Romania and Bulgaria have been flown with FDIs, Serbia is next in the Interview Design_Info Center
line. This process is not going faster because our huge state companies are not very attractive due with big overemployment and social
programs for redundant workers. Facilities are also in very bad condition and require investments in renovation and reconstruction

8. (a) NO raw materials, no textile factories or buttons, paper, yarn, inter-lining – EVERYTHING imported. This is the issue with their not
being a "textile" industry, but there being an apparel industry.
                                                                                                                                     Azzaro Interview Oct. 2007
8 (b)The apparel industry is highly dependant on imported materials such as cotton, denim, wool. The modern equipment is imported as Jefferson Institute Textile
well, basic infrastructure exists.
9. (a) Not part of the EU which would help to lower trade barriers and raise regulations; Serbia doesn’t have the regulations necessary to
export more; the government is slow to adapt to the needs of exporters (insignificant tax incentives exist) AND no funds supporting
industry growth; high interest rates from banks hinders access to capital [VERY high interest rates; long term = Euribo + 3-5%; short-
term = Euribo + 7% (at least)]                                                                                                             Azzaro Interview Oct. 2007
9. (b) Contractual issues with hiring/firing workers presents problems for foreign companies, and companies needing temporary workers Executive Newsletter - Oct. 24,
(project based), as workers threaten to sue based on legacy regulations - Yumco/Zamber currently in negotiations with local workforce 2007
could set a precedence on how future cases are handled.

10. (a) 30 years ago, the apparels sector was thriving, but the past 5 have been bad
                                                                                                                                                   Azzaro Interview Oct. 2007
10 (b) Statistical data shows that textile sector decreased tremendously form the 1990. In recent years down trend has been less rapid             Stat Office/GDP 1999-2005
but still very visible. Between 1999 and 2005, textiles and textile products decreased its share in national GDP from 1,1% to 0,5%
10 (c) Textile industry has exported for $387,8 mil in 2006, 26% more than in 2005. and128 % more than in 2000.. The most favorable                statistical inst Serb.
change in changed happened in 2003 when Serbia got preferential status on EU market
10 (d)Decomposition of the sector and inadequate reporting lead to unclear picture of the sector today. Aggregate figures shows                    Jefferson Institute
decrease in industrial production (for example, the production of clothing and furs during 2005 shrank by one-fifth compared to 2004,
while at the same time, these goods grew in export value (measured by current dollars) by 51%). he most probable explanation of the
discrepancy is in inadequate recording of official statistics on trends in industrial production. Namely, while foreign trade statistics
register flows in commodity exchange as a whole, statistics on industrial production do not completely cover the scope of industrial
production, both in terms of the structure of the sample and the number of enterprises that actually submit data on production to the
statistics service.
10 (e)In 2005, the production of clothing, traditionally one of the most important exporting activities, felt to from 3rd to sixth place. Sector   Jefferson Institute
participation in overall export has rapidly decreased in recent years, the highest participation in exports 2001 was 10,2% and in 2005
was only 5,4%.
10 (f) Labor-intensive products as textile have lost the importance they had before, and their degree of the cover of imports with exports         Jefferson Institute
has diminished. For labor-intensive products, this is mainly the consequence of the reduction in exports of clothing;
10 (g)The largest trading partner in textile and garments for 2003 was the EU countries (exports – 74.2%, imports – 54.8%) followed by             siepa/textile industry
East European transition countries and then other countries and former SFRY republics. According to official data, twelve firms
accounted for 23.37% of total textile and garment exports and 9.2% of total textile and garment imports in 2003. This illustrates the
highly fractured nature of production – with many small and medium sized private firms.

10 (h) The latest figures for the first seven months of 2007 show that Serbia textile/apparel producers have exported total value of               PKS/Textile
$284,5 mil, but during the same period Serbia imported $440,5 mil of textile/apparel.
11 (a) In the case of Serbia, there are still no indicators that foreign investment has had a more significant impact on the change of                Jefferson Institute
export structure, but data show that it certainly has had a strong impact on growth in export value.

11 (b) The main market for furs is Italy, 76% of total export (164,1 million dollar) were realized there                                              statistical inst Serb.


 11(c) Export of locally produced items (without lohn production), is not price competitive because prices of Serbian products are 68%                SCEPP cost benefit analyses of
(to be checked) lower in comparison with the same products prices on world market.                                                                    foreign trade

11 (d) firms have very poor marketing capability and most seem to wait until buyers come to them still. Overall skills in commerce and                  Textile_Vivatex_Oct152007.doc
negotiations are poor.
11 (e) See chart below for trends

11 (f) According to the latest polls of managers' expectations in Serbian economy, textile/apparel managers are most pessimistic ones                 Stat Office/IN 51
regarding the current situation and near future for their sector.
11 (g) Serbian companies must change thinking, we need to improve products and meet market needs. For example, my company is                Interview Afrodita
trying to adopt and practice a concept of “total look” which means that is not enough to produce e.g. high quality coat, we combine it with
appropriate hat, shoes, accessories and so on.
11 (h) It is essential to develop local production of fabrics (e.g. denim) and other row material cloth factory in Serbia, either to get              Interview Exit
Chinese here or to invest local money.
12 (a) See chart below

                                                                    EXPORTS (000 EUR)


  400000


  350000
                                                                                                                             Tourism
                                                                                                                             AutoParts
  300000
                                                                                                                             ICT/Eng (Exc Telco)
                                                                                                                             Education
  250000
                                                                                                                             Energy, especially renewable
                                                                                                                             Construction
  200000                                                                                                                     Textile and apparel
                                                                                                                             Logistics, warehousing and transport

  150000                                                                                                                     Film and production
                                                                                                                             Medical supplies and devices
                                                                                                                             Building materials
  100000
                                                                                                                             Bldg Matls w/o CLP
                                                                                                                             Wood processing and furniture
   50000
      50000


          0
                2002    2003    2004             2005          2006   2007 (1-VIII)
                                       Year




                                              Average Gross Wage




  710
                                                                                      Tourism (Average)
                                                                                      AutoParts (NACE)
  610                                                                                 ICT/Eng (Exc Telco)
                                                                                      Education
                                                                                      Energy, especially renewable
  510
                                                                                      Construction (Average)
                                                                                      Textile and apparel
                                                                                      Logistics, warehousing and transport
EUR




  410
                                                                                      Film and production
                                                                                      Medical supplies and devices
                                                                                      Building materials
  310
                                                                                      Bldg Matls w/o CLP
                                                                                      Wood processing and furniture

  210



  110
              2002     2003    2004              2005          2006     2007 (Est)
                                       Year
RH
AT




AT




AT
DP
JK

JK

JK




JK

JK




JK

JK

RH




AT, AV

AT, AV

JK
RH


RH

RH




PZ


PZ



PZ
AT, AV




PZ




PZ




AT, AV
PZ


RH




RH




RH

PZ

PZ




PZ


PZ

PZ




PZ


PZ
PZ


PZ


PZ

AT, AV




PZ



PZ

PZ
Logistics-Transport

Targeted Subsector(s)
Warehousing, transportation, tracking, business supply/delivery



Impact Criteria                                Determining Factors and Rationale                                                              Default Ranking Weighted
                                                                                                                                              Weight          Rank

I. Global Prospects in Sector

1. Historic revenue and growth in the (sub)-   Growing demand, increased standards of living and "near sourcing" are boosting the             100%     7     7
sector                                         industry by 20% a year in the CEE. CEE logistics industry has undergone fundamental
                                               changes due to globalization of world trade and rapid improvements/developments in
                                               information technology. Contracts logistics market in CEE was EUR 556 million in 2004 -
                                               market is relatively small due to consumer demand and fragmented nature of region.


2. Barriers to entry in major new markets      Barriers to entry are low due to a movement from rail to road, with a decreased focus on       100%     5     5
                                               heavy industry. Multinationals tend to use Western European companies for more
                                               sophisticated logistics - but, many of these companies either buy or form alliances with
                                               local/regional companies. So while barriers remain low in regards to initially entering the
                                               market, long term realities of sector (e.g. small market in CEE) could prevent smaller
                                               companies in emerging markets from achieving sustainability after initial entry.

3. Sector prospects and trends, shifts         Movement from heavy industry trade to consumer goods is changing the sector - quality        100%       6     6
                                               and speed is becoming increasingly important. EU status of Romania and Bulgaria make
                                               countries outside of the EU less attractive (since EU is such a large logistics market, this
                                               is very important). However, developments in information technology and logistics/supply-
                                               chain science, when combined with "near sourcing" trends, does create opportunity for
                                               non-EU members in CEE. If the current trend towards full EU membership in the Balkans
                                               and CEE continues, EU status in the region will no longer be a competitive advantage, it
                                               will be a given.

4. Profitability                               Due to low barriers to entry, profitability can be low. Need highly efficient organization. Mid- 100%   7     7
                                               sized logistics operators find themselves in a familiar "squeeze": too large to offer tailored
                                               services and too small to compete on price/service with major providers.

II. Local Market Conditions
5. Cost differential                     Wages are lower than with competitors (Hungary, Croatia, Romania, Bulgaria) but lease     100%      3   3
                                         of prime storage space is more expensive than in the region. Tolls also represent a major
                                         factor in overall transport cost. International haulers to and from Greece and Turkey may
                                         choose to skip Serbia due to complex customs procedure and expensive toll system.
                                         Geographical advantage may be compromised with high lease, toll and custom expenses
                                         (lost of time).

6. Skills present or gap                 Transport sector uses mainly fairly unskilled drivers that need to be trained in using basic 100%   8   8
                                         tracking technologies. Transport management/logistics operations are more demanding,
                                         requiring higher managerial and IT skills. Graduates with potential skills in this area do not
                                         appear to be lacking, provided employment incentives are sufficiently high though training
                                         is required (onsite in larger logistics centers e.g. in Hungary) and could be costly. In 2005
                                         the total number estimated is over 20,000. Faculty of Transport at the University of
                                         Belgrade recently introduced logistics as a specialization and are working on an internship
                                         program.                                                                                                    AT

7. Financing constraints                 SMEs complain about expensive commercial loans. Financing constraints not worse than         100%   4   4
                                         other sectors, but are vis a vis competitors.                                                               AT

8. Infrastructure, supply and resource   Infrastructure (roads, ports, telecommunications, warehouse space) is improving but it is    100%   4   4   AT
constraints, cost and availability       still not at desired level. There is lack of storage space: it is estimated that warehouse
                                         space will be doubled over the next couple of years. Custom facilities and pay toll system
                                         must be improved: current situation incurs costs in time and money. These issues affect
                                         international competitiveness, but domestically, most firms have similar issues.
                                         Infrastructure will benefit from restructuring of state railways (railways liberalization
                                         expected in 2009) and requires more systematic positioning of logistics centers (well
                                         planned positioning rather than short-term need-based). Free trade agreement with
                                         Russia perceived as major asset.


9. Policy constraints                    Policy environment is poor in terms of customs clearance times and bureaucracy. Better 100%         3   3
                                         legal procedure is needed for re-exporting items. Also, transport companies complain of
                                         insufficient transport licenses (issued between different countries). Note: these are not
                                         impediments for developing logistic centers to cater to local needs. However, development
                                         of logistic centers must be regulated and government mechanism able to approach the
                                         problem strategically established to avoid expansion of unconcentrated centers that serve
                                         the purpose in short term, but lack long term development perspective.
                                                                                                                                                     AT

10. Historical capacity (overall)        Physical volume indexes of transport and storage are positive last five years. Freight 100%         6   6
                                         transportation in 2005 recorded 65% increase compared with year 2000. New EU member
                                         states (Romania & Bulgaria) have started to increase market share.
11. Historical (five year) and current          Complicated and costly transit through Serbia is largely responsible for the loss of          100%   4
competitiveness (all markets)                   business to neighboring countries. Though Serbia may miss the chance to become a
                                                regional hub, there may be good opportunities for companies to take advantage of the
                                                domestic growth. Improved efficiency here will still have a significant impact on the rest of
                                                the economy. Infrastructure (roads, ports, telecommunications, warehouse space) is
                                                improving but still not on desired level. Geographical advantage good, but growth
                                                constrained by complex customs procedures, large bureaucracy and costly pay toll
                                                system.                                                                                                  DP

12. Employment impact                           Direct impact from domestic growth may be small to moderate. If international             100%       0
                                                opportunities could be seized, impact could be higher. Wages are medium level.
                                                Potentially development of this sector will decrease number of employees, as additional
                                                transport companies are being privatized, new technologies introduced and better
                                                procedures implemented. According to the data from National Statistical Office, number of
                                                employees in transport sector decreased by 2.9%. However, this decrease is to the large
                                                extent due to the reduction of workers in Serbian Railway Company, which is undergoing
                                                restructuring.

III. Combined Analysis

1. Ability to move sustainably into higher      Improved efficiency in the domestic market can drive increased productivity across all
value markets, domestic and international       sectors. With the resolution of regulatory issues, there are good regional markets to move
                                                into.

IV. Program Impact Analysis

1. Ability of Program to attributively impact   Activity types are anticipated to be limited, but can be important. Many firms operate at 100%       0
                                                lower levels of efficiency than would be the case with modern fleet management solutions.
                                                Some activities may be sector specific, only working in this sector as part of solving a
                                                larger problem.

2. Time frame for impact to be realized         Within the POP                                                                               100%    0




3. Regional, gender or youth impacts            Hard to identify impact, neutral                                                             100%




V. Possible Binary Excluders
1. Other donors very active in sector         Technical assistance programmes offered by Hungarian and Italian governments.               100%                  0


2. Potential to compete in a high profile     None                                                                                        100%                  0
manner with US products


3. Subjective assessment of sufficiency of    Can be a challenge, since productivity is hard to measure and this would be the primary     100%                  0
clear ROI indicators                          impact across different sectors.


4. Inadequate number of firm/counterparts     There are numerous small firms and a handful of larger ones.                                100%




Key Supporting Data                                                                                                                       References


1. (a) one source notes that growing demand and standards of living, and "near sourcing" are boosting industry by 20 percent a year in http://docs.google.com/Doc?docid
CEE.                                                                                                                                        =dc9f4qk2_179d9qbrb&hl=en
1. (b) Central & Eastern European (CEE) logistics industry has undergone fundamental changes in recent years due to 'globalization' of
world trade and the development of information technology; Manufactures select where and how they source materials; sophisticated IT
driven supply chains; CEE has no indigenous logistics provider who operate on a global scale, only small indigenous businesses
                                                                                                                                            Central & Eastern Europe -
providing strong logistics support to int'l "incomers"
                                                                                                                                            Transport & Logistics               RH
1. (c) Contracts logistics market in CEE was 556m Euro in 2004; market is relatively small due to consumer demand and fragmented
nature of region                                                                                                                            Transport Intelligence 2006.11.21   RH
1. (d) Road freight sector in CEE major markets = Poland, Czech, Hungary, Romania… in descending order with Poland representing             Transport Intelligence: CEE Road
40% of the total                                                                                                                            Haulage & Trucking 2004             RH
1. (e) domestic growth is at least as important as international in this sector. One firm forecast 15 percent growth over the next three to InterviewLogTeamSekulic.doc
five years. They are making significant investments in centers and vehicles.                                                                                                    DP, AV
2. (a) movement is from rail to road, with decrease in focus on heavy industry. Barriers to entry lower here.                               http://docs.google.com/Doc?docid
                                                                                                                                            =dc9f4qk2_179d9qbrb&hl=en           AV
2. (b) multinationals have tended to use WE companies for more sophisticated logistics, bringing them into markets with them. However, http://docs.google.com/Doc?docid
many of these companies buy or form alliances with local companies.                                                                         =dc9f4qk2_179d9qbrb&hl=en
                                                                                                                                            Interview Kombinovani Prevoz
2. (c) Foreign companies (railways) are not able to enter the market until January 2009                                                                                         DP
3.(a) with transition, movement from heavy industry trade to consumer goods has changed sector, quality is becoming more important, http://docs.google.com/Doc?docid
and basic commodity services less so. Demand is driven by relocating multinationals, mainly. Trend is only beginning in Serbia.             =dc9f4qk2_179d9qbrb&hl=en           AV
3. (b) trade in the region grew faster after entering the EU. Serbia will not become the EU member during the life of the project. Lack of http://docs.google.com/Doc?docid
customs barriers in Romania and Bulgaria, as opposed to Serbia will make Serbia even less attractive.                                       =dc9f4qk2_179d9qbrb&hl=en           AV
3. (c) multinationals have tended to use WE companies for more sophisticated logistics, bringing them into markets with them. However,         http://docs.google.com/Doc?docid
many of these companies buy or form alliances with local companies.                                                                            =dc9f4qk2_179d9qbrb&hl=en        AV
3. (d) independent, small companies can lose out to large entrants in the major logistics markets. This does not mean that the
employment will drop and investment may rise, but ownership and control may not ultimately be local. It also may mean they don't need          http://docs.google.com/Doc?docid
or are not qualified for the project assistance.                                                                                               =dc9f4qk2_179d9qbrb&hl=en
3. (e) "Near Sourcing" a trend in industries concerned about time to market - especially the "fast fashion" industry (i.e. Zara, H&M) -
which is more expensive than sourcing from cheaper labor countries; Central & Eastern European (CEE) moving towards EU, with
introduction of Euro, will be more attractive for int'l investors/manufacturers b/c elimination of currency fluctuations will mitigate trade
risks; high education and appropriately changing institutions have brought many int'l orgs to manufacture, outsource biz processes and         Central & Eastern Europe -
research to take advantage of low costs                                                                                                        Transport & Logistics              RH

3. (f) , Contracts logistics set to grow to 1489 million Euro by 2010 with a CAGR of 20% b/w 2004-08, it is set to double over from 2004-
2009 due to the influx of foreign multi-nationals that are outsourcing their                                                                   Transport Intelligence 2006.11.21 RH

3. (g) Road freight sector expected to grow from 2004-09 with a CAGR of 8% due to strong forecast in region's economy as well as               Transport Intelligence: CEE Road
international trade in EU                                                                                                                      Haulage & Trucking 2004          RH
3 (h) Anticipates that there could be at least a dozen more major logistics centers in Serbia in the future.                                   Toplica_Spasojevic_Oct2007.doc AT, AV
4. (a) Central & Eastern European (CEE) labor ~50-60% lower than west, with Indian about 75% lower; mid-sized logistics operators find
themselves in a familiar "squeeze" = too large to offer tailored services and too small to compete on price/service w/ major providers
                                                                                                                                         Central & Eastern Europe -
                                                                                                                                         Transport & Logistics                    RH
4. (b) Improvements in wholesale trade were the greatest contributor to US productivity growth in the 1990s, and most of this was not    William Lewis, The Power of
related to sophisticated IT solutions (though some was). Though the sector itself did not get more profitable, the impact on the economy Productivity
was great.
5 a) Labor costs are lower than in neighboring countries                                                                                 InterviewMilsped.doc

5 (b) Bulk of revenue of shipping companies in Serbia comes from doing custom clearance. In EU countries due to common custom                      Interview with Intereuropa
area do not need this service for intra EU transport.                                                                                                                             ZS
5 (c) prices are similar to surrounding countries                                                                                              InterviewLogTeamSekulic.doc
                                                                                                                                                                                  DP, AV
5 (d) Lease of storage space in Serbia is 7 EUR per square meter and in the region it is between 4-5 EUR.                                              Article Ekonomist
                                                                                                                                                                           ZS
6. (a) This sector uses mainly fairly unskilled drivers, though in the modern world they must be trained in using basic tracking          EducationDataSectorRelevanceFi
technologies. Organization of the sector on the other hand requires well trained process and IT managers. Graduates with potential skills               nal.xls
in this area do not appear to be lacking, providing incentives are high enough to draw them in. In 2005 the total number estimated is
over 20,000.
6. (b) skills strong in the sector, young, motivated. Does not feel it is a problem. Transport faculty recently introduced logistics as a InterviewLogTeamSekulic.doc
specialization. They are working on an internship program.                                                                                                                 DP, AV
6 (c) Labor force is good, there are examples of hiring drivers and other staff from Serbia in EU countries                                  InterviewVeolijaTransport.doc
                                                                                                                                                                                  PZ
6 (d) The capability of managers/staff to acquire the knowledge/experience, learn new, more advance technologies and ways of working Interview Kombinovani Prevoz
is limited. Not able to see added value from continued development, education, etc. (This problem is common with one part of the
workforce. At the same time the other part of the workforce is different: willing and able to learn new technologies, etc.). Due to young,
motivated, educated people entering this market, the proportion of the latter vs the former is increasing.                                                                          DP
6 (e) We are able to attract good graduates from Universities, but they lack practical knowledge. They need to attend the training in             Interview Kombinovani Prevoz
larger logistic centers, such as logistic centre in Hungary in order to get this. This can be costly for the companies.
                                                                                                                                                                                    DP
7 (a) financing is expensive they say                                                                                                             InterviewLogTeamSekulic.doc
                                                                                                                                                                                    DP, AV
   7 (b) Access to finance is a problem for SMEs, since the banks require guarantees, which small companies are not able to provide                Interview Kombinovani Prevoz
                                                                                                                                                                                    DP
8 (a) Belgrade is short 2 million meters of storage space. This may represent and opportunity for investment as much as anything.                 InterviewLogTeamSekulic.doc
                                                                                                                                                                                    DP, AV
8 (b) in general, the state utilities and infrastructure are a problem: gas, electricity water. Need to be more efficient. Also, road situation   InterviewLogTeamSekulic.doc
not great, esp. with regard to traffic flows.                                                                                                                                       DP, AV
8 c) Infrastructure (roads, ports, telecommunications, warehouse space) is improving but still not on desired level                               InterviewMilsped.doc
                                                                                                                                                                                    PZ
8 d) Custom facilities and pay toll system must be improved, current situation cause lost of time/money                                             InterviewVeolijaTransport.doc
                                                                                                                                                                                    PZ
8 e) Modern technology including software is adopted by the most developed logistic companies in Serbia.                                          InterviewMilsped.doc
                                                                                                                                                                                    PZ
8. (g) Transport cost represent between 25-35% of total costs of products in Serbia. In the EU it is not more than 14%. Main reason for                   Ekonomist article
that unreliable railway system, because most companies must use more expensive road transport.
                                                                                                                                                                                    ZS
9 (a) policy environment poor, in terms of customs clearance times and bureaucracy - non specific.                                                InterviewLogTeamSekulic.doc
                                                                                                                                                                                    DP, AV
9 b) Legal environment is 'full of traps', state doesn't respect contracts always and tends to change agreements-please note the source

9 c) Privatization process is not yet finished, tax payers are paying the price of inefficient state companies.
9 (d) Custom procedures are not flexible enough. For example, in Slovenia deadline for paying custom duties is 30 days, while in Serbia      Interview with Intereuropa
it is only 7 days.                                                                                                                                                      ZS
9 (e) serious issues with customs clearance. One firm had to turn down offer to be regional distribution center for major FMCG company Toplica_Spasojevic_Oct2007.doc
due to time lags and inefficiency in clearance. Need better procedure for re export items.                                                                              AT, AV
9 (f) Not be part of the EU is problem for competitiveness of Serbian shipping companies. When the whole region is already in the EU or      Interview with Intereuropa
moving there very fast (like Croatia), foreign (EU) companies are expecting the same rules in Serbia and they are very often surprised
when they realize that in Serbia the rules are different. For example, Intereuropa had a situation few weeks ago, when several German
truck drivers entered Serbia (nobody knows how), without passports, thinking that like in EU countries they can travel only with personal
IDs.                                                                                                                                                                    ZS
9 (g) Development of logistic centers is not regulated. The legislation in this area is poor. The absence of government                   Interview Kombinovani Prevoz
institution/mechanism that is able to approach this problem strategically is seen as a major burden for the development of the sector by
one company director. Private companies are building logistic centers where they think is needed, to satisfy the demand. The result:
unconcentrated centers that serve the purpose in short term, but lack long term development perspective (for example, cannot expand
since the land where the centre is built is bordering the residential area)
                                                                                                                                                                        DP
9 (h) Railway transport/logistics: The decision of Ministry of Capital Investments not to open the railway market to foreign companies until     Interview Kombinovani Prevoz
2009, only damages Serbian railways, and produces large losses to ZTP and Serbian citizens. The management of ZTP is incapable
and unwilling to work on this problem. In fact, they make it very difficult for the private companies, such as Kombinovani prevoz, to work
alongside ZTP and cooperate with them. According to statistics, ZTP has 150 wagons, and requires 150 more in order to meet the
demand.
                                                                                                                                                                                 DP
10 a) The number of transported passengers in 2006, relative to the previous year, increased by 3.5% and it is notable that in                 Statistical Office/Survey SV 10
international transport and domestic transport we saw a significant increase of 5.2%, respective of 3.4%.                                                                        PZ
10 b) The volume of transported goods increased by 5.4%, with the simultaneous operations volume growth of 14%. These trends                   Statistical Office/Survey SV 10
indicate the increased average ton kilometer: from 241.8 km to 261.3 km. The quantity of goods transported notes an increase of 12                                               PZ
10 c) More significant growth rate in goods’ transport by freight transport, of 12.5%, respectively in operations volume, of 21.6%, has        Statistical Office/Survey SV 10
been realized in railway transport. The same is in road transport, where the goods’ freight, compared to the year 2005                                                           PZ
10 d) The total number of employees in this section fell by 9.5%. This trend is notable for all transport branches, except for city transport. Statistical Office/statistic of
The labor productivity increased by 13.3%.                                                                                                     transport                         PZ
10 (e) Growth in sales is expected in the sector. Intereuropa is targeting 20% annual growth in business in upcoming years.                        Interview with Intereuropa
                                                                                                                                                                                 ZS
10 (f) In view of one company director, Serbia does not have true logistic centers. It has centers that have been built unsystematically,      Interview Kombinovani Prevoz
as a stand alone initiatives by private sector in the absence of a bigger plan based on government development strategy.
                                                                                                                                                                                 DP
11 (a) One manager feels that foreign companies have been reluctant to enter Serbia, at least on their own. This will give good      InterviewLogTeamSekulic.doc
opportunities for growth domestically.                                                                                                                                           DP, AV
11 b) Serbian companies lack customer focus, they must repeat the same question over and over again - what do you need, how we          InterviewVeolijaTransport.doc
can improve our service?                                                                                                                                                         PZ
11 (c) Number of vehicles transiting through Serbia has decreased since Bulgaria and Romania joined EU as corridor 4 is used more,            News Article, BIRN
connecting Hungary and Turkey. It is expected that it will decrease further after bridge over Danube between Romania and Bulgaria is
finished by the end of 2009. Since the beginning of 2007 EU road transport through Serbia decreased 20%. It is cheaper (24h transit
through Hungary cost 15 EUR, while transit through Serbia costs 160 EUR) and faster (no custom clearance between Greece and
Germany if trucks go through BG, RO, HUN) to avoid Serbia. State-run Roads of Serbia in January 2007 had lower revenues in amount
of 2.5 million euros.
                                                                                                                                                                                 ZS
11. (d) See chart below for trends.
11. (e) The favorable trade agreement with Russia is viewed by one company director as an area of potential growth of logistics                Interview Kombinovani Prevoz
business in Serbia                                                                                                                                                               DP
11 (f) FDI in railway transport/logistics is expected from January 2009, after the so called 'transformation' of ZTP has been completed        Interview Kombinovani Prevoz
(Germany, Austria, Romania, Slovenia,etc are interested). Largest Germany logistic company already present in Serbia (near                                                       DP
Batajnica). company director thought that being close to the EU, but outside of EU was an advantage for Serbia at the moment, since a
11 (g) One                                                                                                                                     Interview Kombinovani Prevoz
number of companies in EU were moving away from highly regulated markets into those that were poorly regulated (driven by profits).
                                                                                                                                                                                 DP
12. (a) Potentially development of this sector will decrease number of employees, as more transport companies are being privatized,                  Stat. office document
new technologies introduced and better procedures implemented. According to the data from National Stat. Office, number of employees
in transport sector decreased by 2.9%. However, this decrease is to the large extent due to the reduction of workers in Serbian Railway
Company, which is undergoing restructuring. Total reduction of workers in railway transport was 6.3%                                                                             ZS
12 (b) See chart below
                                       EXPORTS (000 EUR)


400000


350000
                                                                                Tourism
                                                                                AutoParts
300000
                                                                                ICT/Eng (Exc Telco)
                                                                                Education
250000
                                                                                Energy, especially renewable
                                                                                Construction
200000                                                                          Textile and apparel
                                                                                Logistics, warehousing and transport

150000                                                                          Film and production
                                                                                Medical supplies and devices
                                                                                Building materials
100000
                                                                                Bldg Matls w/o CLP
                                                                                Wood processing and furniture
50000


      0
          2002   2003   2004             2005          2006   2007 (1-VIII)
                               Year




                                      Average Gross Wage




710
                                                                              Tourism (Average)
                                                                              AutoParts (NACE)
610                                                                           ICT/Eng (Exc Telco)
                                                                              Education
                                                                              Energy, especially renewable
510
  510
                                                               Construction (Average)
                                                               Textile and apparel
                                                               Logistics, warehousing and transport
EUR




  410
                                                               Film and production
                                                               Medical supplies and devices
                                                               Building materials
  310
                                                               Bldg Matls w/o CLP
                                                               Wood processing and furniture

  210



  110
        2002   2003   2004          2005   2006   2007 (Est)
                             Year
Film-Production

Targeted Subsector(s)
Sets, location, digital animation, production



Impact Criteria                                 Determining Factors and Rationale                                                              Default Ranking Weighted
                                                                                                                                               Weight          Rank

I. Global Prospects in Sector

1. Historic revenue and growth in the (sub)-    Global film production increased 1.7% in 2003, reaching a new record of 4,087 feature     100%        8       8
sector                                          films produced worldwide. There was a significant increase in film production in Western
                                                and Eastern Europe (1,071 feature films produced in 2003). Total investment in feature
                                                film productions increased 10.3% in 2003 to USD 22.4 billion. The CAGR in the sector
                                                from 2000 to 2004 was 4.2%. Nominally growth in television advertising (less than 2 %) is
                                                expected in Europe's major advertising markets (UK, Germany, France).
                                                                                                                                                                          JK

2. Barriers to entry in major new markets       Entry is based in principle on the ability to gather the equipment and skills to perform the 100%     6       6
                                                tasks required. Since most countries have some sort of indigenous film industry, this is not
                                                a major barrier. Instead, image is critical, as filming is complex and producers are risk
                                                averse about trying an unknown location. Barriers to entry into the market at a low level
                                                are not high.                                                                                                             JK

3. Sector prospects and trends, shifts          Major changes in the film/production sector are being driven by technology (DVD, home          100%   8       8
                                                theater proliferation, internet-based viewing/purchasing). There is a rise in international
                                                market demand for feature films due to exponential increase of disposable incomes in
                                                emerging markets. Directors are looking for unique locations, and price is a major factor.
                                                Even though internet-based advertising is realizing unprecedented amount of growth,
                                                television advertising, both traditional and web-based, is expected to continue to grow,
                                                particularly in Russia and Eastern European markets.                                                                      JK

4. Profitability                                Average profit ratios of movies have been declining each decade since the 1970s. The           100%   8       8
                                                average return per film was USD 7.6 million in 2004 and USD 6.5 million in 2005.
                                                Profitability plays a critical role, particularly related to location. Incentives will drive
                                                increased productions in particular countries that are good value for money.                                              JK

II. Local Market Conditions
5. Cost differential                     Serbia has cheaper labor than most markets and cost advantages (lodging, food costs,            100%   6   6
                                         etc.). However, producers are looking for relative value for money. Indications are that
                                         Serbia is strong, but still faces very stiff regional competition in all related areas.
                                                                                                                                                        JK

6. Skills present or gap                 There are strong and inexpensive skills available in the local market, though certain         100%     7   7
                                         specialized skill and experience working on international sets are lacking. If training was
                                         done and salaries provided sufficient draw, the industry could attract the portion of over
                                         12,000 estimated graduates in 2005 that have the relevant basic skills. Currently, Serbia
                                         has three private educational institutions in this sector. Much of the talent in the industry
                                         left during the war period but some experts returned, contributing skills in special
                                         effects/making contacts. Current knowledge gap may be reduced through
                                         vocation/educational/training programs. Management skills also need major improvement.
                                                                                                                                                        JK, AT

7. Financing constraints                 Currently, Serbia has no state/government funds dedicated to supporting the industry (e.g. 100%        7   7
                                         by building large studios/post-production labs). This creates a disadvantage because
                                         neighboring countries (Croatia) and most countries within the EU offer several types of
                                         incentives and promote them effectively.Serbian Film Center, the government organisation
                                         working under the patronage of the Ministry of Culture, has been established by the
                                         Serbian government in 2004 to provide strategic guidance of reconstruction and
                                         development of Serbian film industry and work on these issues. They have managed to
                                         secure Serbia access to Eurimage that provides grants for European filmmakers (Serbian
                                         filmmakers won 11 grants in value of EUR 3 million). Notably, one large domestic
                                         investment has been made in this sector (Pink Film International studios) and foreign film
                                         producers come with secured financing (2-3 films produced this year, high growth
                                         expected starting from low base). For domestic filmmakers Sony is providing two-year
                                         interest-free loans for purchasing equipment.                                                                  JK, AT

8. Infrastructure, supply and resource   One firm has built a "state of the art" complex to draw foreign film companies, while the       100%   4   4
constraints, cost and availability       other major complex is run-down, but functional. Getting studio time and permission to
                                         film on the street does not seem to be an issue now, but as the industry grows, limited
                                         capability will become more of an issue. Sufficient equipment exists and is not an issue.
                                         The film laboratory that was recently opened in Serbia is working on attracting the
                                         business which due to political sanctions in the 1990s was lost to Hungary and Austria.
                                                                                                                                                        JK, AT

9. Policy constraints                    Industry not fully regulated (Law on Cinematography drafted but has not been paid               100%       6
                                         sufficient attention by Ministry of Culture). Lack of a government support for the sector (in
                                         terms of building studios but also providing tax incentives as do neighboring competitors)
                                         is a significant constraint but Council for Film has just been established with a goal to
                                         improve policy framework. Visa policy is another impediment that may keep Serbian
                                         employees from moving easily to multiple countries involved in a production.
                                                                                                                                                        JK, AT
10. Historical capacity (overall)               The sector has been recovering in the past 5 years. In 2006 sales are almost 400% higher 100%        6   6
                                                than in 2002. Potential is increasing, and it will get even better as image of the country
                                                improves. The level is still very low, however. It is far from the pre-1990s period when the
                                                Yugoslav film industry was renown.                                                                           JK

11. Historical (five year) and current          There is significant regional competition from Macedonia and Croatia and from               100%     7   7
competitiveness (all markets)                   established film industries in Romania and Bulgaria. Pre 1990, the industry prospects
                                                were promising (Avala studios). Over the last five years the sector is experiencing growth
                                                and the image of Serbia is improving. If able to take advantages of the favorable trends in
                                                Europe, Serbia could be competitive in this sector. Czech Republic, Hungary, Romania,
                                                Bulgaria are becoming more regulated, and more expensive to film producers. Serbia has
                                                good quality studios, post-production expertise and is price competitive. However,
                                                capacity constraints could stifle growth in the short term.
                                                                                                                                                             JK,DP

12. Employment impact                           Wages in the sector are relatively high. However, employment figures are very low so          100%   3   3
                                                impact would be limited.

                                                                                                                                                             JK

III. Combined Analysis

1. Ability to move sustainably into higher      Ability is strong here, in both films and commercials.
value markets, domestic and international


IV. Program Impact Analysis

1. Ability of Project to attributively impact   There are identifiable and resolvable blockages that are within the scope of the Project to   100%       0
                                                address


2. Time frame for impact to be realized         Within the POP, especially for commercial, and toward the end of the POP for films            100%       0




3. Regional, gender or youth impacts            The film industry is a significant employer of women and youth. Regional impact will          100%
                                                depend on location shoots, but is likely to be minimal.



V. Possible Binary Excluders
1. Other donors very active in sector           None                                                                                        100%                  0




2. Potential to compete in a high profile       Outsourcing is a strength of the US industry and Serbia can become another venue            100%                  0
manner with US products


3. Subjective assessment of sufficiency of      Available, though desegregation will be a problem. May need to use proxies.                 100%                  0
clear ROI indicators


4. Inadequate number of firm/counterparts       Limited number of studios, numerous service providers                                       100%




Key Supporting Data                                                                                                                         References
1. (a) Global film production increased 1.7% in 2003, reaching a new record of 4,087 feature films produced worldwide. A significant
increase in film production came from Western and Eastern Europe where production increased to 1,071 feature films in 2003.                 Screen Digest, 2003               JK
1. (b) Total investment in feature film productions increased 10.3% in 2003 to 22.4 billion USD. The total value of investment in feature
film productions in Western Europe increased 57.3% in 2003 to 5.1 billion USD.                                                              Screen Digest, 2003               JK
1. (c) In 2009, the global movies and entertainment sector is forecast to have a value of 173 billion USD, an increase of 33.9% since
2004.                                                                                                                                       Data Monitor Global Movies &
                                                                                                                                            Entertainment Profile, May 2005   JK
1. (d) The home video is a leading sub-sector within the industry, in 2004 it was responsible for 44.6% of the market's value.
                                                                                                                                            Data Monitor Global Movies &
                                                                                                                                            Entertainment Profile, May 2005   JK
1. (e) In 2004, Sony generates the largest revenues within the sector, accounting for 9.4% of the sector's value.
                                                                                                                                            Data Monitor Global Movies &
                                                                                                                                            Entertainment Profile, May 2005   JK
1. (f) In 2003/04 international cinema audiences in Europe and Asia-Pacific grew to 25.9% and 19.9% of the total sector's value
respectively.                                                                                                                               Data Monitor Global Movies &
                                                                                                                                            Entertainment Profile, May 2005   JK
1. (g) Interviewee sees at least 50 percent growth in the sector in the next 3 - 5 years.
                                                                                                                                        Interview_Pink.doc                    DP, AV
1. (h) In 2005, the Czech republic received some 400 million Euro in benefits above and beyond direct spends, from hotels, restaurants,
etc. During the filming of "Cold Mountain" some 80 million Euro was spent only in the Carpathians.                                      Interview_Pink.doc                    DP, AV
2. (a) Globally, in 2003, the average budget per feature film rose 8.4% (from 2002) to 5.49 million USD.
                                                                                                                                        Screen Digest, 2003                   JK
2. (b) Filmmakers and commercial producers are very sensitive in regards to taxes. It is important to know, particularly in Eastern Europe Field Interview - Vonnegut, Oct.
the rules regarding VAT refunds - hurt growth in Romania (because they were not refunded), but helped growth in Hungary (because           23 2007
they were refunded).                                                                                                                                                              JK
2. (c) It is important to know the local rules for filmmaking. For example, some places like NYC, filming on the street is free - in some      Field Interview - Vonnegut, Oct.
developing countries you can pay very little for several extras.                                                                               23 2007
                                                                                                                                                                                  JK
3. (a) Export Potential: Marketing and selling of products abroad is difficult, financing is difficult, but translation of products is easy.
                                                                                                                                       Gemini 3 Interview Oct. 2007               RH
3. (b) Increase in specialty channels, such as History Channel, National Geographic, Documentary films, accessed through headquarters
or local/regional offices, presents opportunity for Serbian products                                                                   Gemini 3 Interview Oct. 2007               RH
3. (c) The sector is growing due to the home entertainment market and steady growth in international cinema audiences are the past few Data Monitor Global Movies &
years.                                                                                                                                 Entertainment Profile, May 2005            JK
3. (d) Sees very good prospects in the Sector, with trends away from now more costly and regulated markets in Eastern Europe. This is
even with new incentives put in place in the region by other governments (Hungary big example where film crew salaries are tax exempt)
                                                                                                                                       Interview_Pink.doc                         DP, AV
3. (e) Four to six years ago if you told anyone that you were thinking about doing a movie in Romania they would think that you are
crazy, so there is always opportunities for new locations to emerge that fit the needs of the industry.                                Weinstein Interview Oct. 2007              JK
3. (f) The UK used to be a great place to produce/film movies due to a tax loophole, however, that loophole has been closed so they
need to think of ways to more competitive, one of which is showcasing creative talent.                                                   Weinstein Interview Oct. 2007            JK
3. (g) Hungary, Poland and Czech Republic have been very popular because of a tradition of filmmaking and incredibly affordable labor.
However, as EU integration increase, labor costs increase, so they need to offer more incentives to stay competitive.                    Weinstein Interview Oct. 2007            JK
3. (h) Is the key to getting notice is simple - marketing. You need to demonstrate to key target audiences your sector's strengths, what
you can do, what you can provide.                                                                                                        Weinstein Interview Oct. 2007            JK
3. (i) Sector growth has been strong over last two year, re. foreign production. Two films in 2006, and three in 2007. low base, but room
to grow.                                                                                                                                     Film_Cinammon_Nov6_2007.doc AT, AV
4. (a) Average profit ratios of movies (feature films) have been declining each decade since the 1970s. Profit ratio in 2001 was 2.7, profit Screen Digest, 2006           JK
4. (b) The average return per title in 2003 was 10.3 million USD, 7.6 million USD in 2004 and 6.5 million USD in 2005.                       Screen Digest, 2006
                                                                                                                                                                           JK
4. (c Independent distributors are most likely to have the highest profit margins / profit margin ratios                                     Screen Digest, 2006
                                                                                                                                                                           JK
4. (d) Incentives are key to drive growth in the sector. A good incentive environment will enhance reputation. Trade show at Cannes is a Field Interview - Vonnegut, Oct.
good place to go to promote sector.                                                                                                          23 2007                       JK
4. (e) Incentives are key to growing and promoting a sector. They help some countries such as Germany, the UK and Central European
ones remain viable in a very competitive market.                                                                                             Weinstein Interview Oct. 2007 JK
See 1. (h)
5. (a) Serbia has cheaper staff than most other markets                                                                                        Gemini 3 Interview Oct. 2007       RH
5. (b) Serbia has good cost advantages (labor, accommodation, food) but high taxes can hurt.                                                   Interview_Pink.doc                 DP, AV
5. (c) access to public filming locations is not problematic and can be secured for low cost.                                                  InterviewFatCatFilm.doc            AV
5. (d) Value for money is very good in the Serbian market. The foreign manager interviewed believed that it is far better than Romania.        InterviewFatCatFilm.doc
5. (e) Cost are reasonable in Serbia all around, both for talent and more equipment. There are no strong unions.                                Film_Cinammon_Nov6_2007.doc       AT, AV
6. (a) Due to the fact that much of the educated workforce within the industry left during the war, there is a lack of technicians to help
with processing, screen writing development, and production finalization; schools and technical programs would help address this, but
demand must exist before this is sustainable                                                                                                   Montage Interview 15 Oct. 2007    RH
6. (b) Technical skills are high compared to the region, but on a global scale, more developed markets have higher skills, such as
US/France.                                                                                                                                     Gemini 3 Interview Oct. 2007   RH
6. (c) The range of skills required is very large, management, logistics, digital processing, sound, production, etc., making it hard to       EducationDataSectorRelevanceFi
estimate the total skill level in the economy. In principle, if specialized skills could be developed and salaries provided sufficient draw,                 nal.xls
there were over 12,000 estimated graduates in 2005 that have basic skills that could be relevant to the industry.
6. (d) Getting some good candidates (BK and Megatrend programs), but need more with international experience. This experience will
be critical to getting to the next level.                                                                                                      Interview_Pink.doc                DP, AV
6. (e) Having talented individuals that are creative and have good skills sets is critical in order to be competitive. Today you need much
more than purely cheap labor, you need cost-effective talented labor that has the appropriate infrastructure to work in                        Weinstein Interview Oct. 2007     JK
6. (f) technical skills good, but not strong in organization and management. Very cost competitive, also for 5. (x)
                                                                                                                                                Film_Cinammon_Nov6_2007.doc      AT, AV
7. (a) Serbia has almost no state funds dedicated to industry as in other (EU) countries – the creation of tax-breaks/incentives for foreign
business would make Serbia more attractive and allow it to compete with other countries in the region                                          Montage Interview 15 Oct. 2007    RH
7. (b) Financing is the #1 constraint for Serbian film companies. More investment is needed to finish film production and establish
outlets to sell content for airing (on specialty channels?). This constraint does not exist for foreign film companies, and in fact cost
advantages in Serbia will help attract those that are cost sensitive.                                                                          Gemini 3 Interview Oct. 2007      RH
7. (c) In the area of filming for foreign firms, finance is not an issue. For equipment, it can be. Sony offers two year financing.            Interview_Pink.doc                DP, AV
7. (d) Offering tax incentives, or some other type of financial incentives helps push a positive decision to film in a particular location or
country. It is expensive to make movies so anything to help offset costs is appreciated.
                                                                                                                                               Weinstein Interview Oct. 2007     JK
8 (a) there are three major and a number of minor, equipment rental firms. This is not expected to be a bottleneck, especially with
advance planning.                                                                                                                              InterviewFatCatFilm.doc           AV
8. (b) Pink TV recently built a very significant new "state of the art" studio/complex that they are hoping to attract foreign film makers to.
                                                                                                                                               Interview_Pink.doc                DP, AV
8 (c) Believes that post production and technical capacity is better in Serbia than Romania and Bulgaria, but prices are about the same.
                                                                                                                                               Interview_Pink.doc                DP, AV
8 (d) Infrastructure is key. You need good post-production facilities, soundstages, and the locations need to be able to "represent"
locations for films (i.e. beaches, castles, countryside, cities, etc.)                                                                         Weinstein Interview Oct. 2007     JK
9. (a) Politically instability and non-transparent business environment creates non-investment friendly climate for film industry and allows
for other more profitabitable, yet illegal, investment opportunities                                                                           Montage Interview 15 Oct. 2007    RH
9. (b) Lack of government support (no political party backing & inefficient tender system), and competition from international companies’
local subsidiaries are huge barriers to success for local companies.                                                                           Gemini 3 Interview Oct. 2007      RH
9. (c) Need tax incentives to compete with other countries doing the same. Some taxes can be refunded, but procedures are complex.
Also, visas can be a problem as can the ongoing need to register with the police upon arrival.                                                 Interview_Pink.doc                DP, AV
9 (d) Law on Cinematography is in draft form since 2003. This would regulate the sector and give greater clarity and incentives for
foreign film producers, among other things                                                                                                      Film_Cvijanovic_Nov7_2007.doc AT, AV
10. (a) Leadership in industry in historical sense                                                                                             Gemini 3 Interview Oct. 2007   RH
10. (b) 15-20 years ago Serbia had a thriving film industry, but the war caused a flight of great talent.                                      Montage Interview 15 Oct. 2007 RH
10 (c) There are more than 70 production houses in Serbia today                                                                                Statistics-Production companies   DP
11. (a) Historical was good, but then declined. Last five years, things have picked up. Still not to potential though image improving.           Interview_Pink.doc              DP, AV
11. (b) Regional competitiveness seen from Macedonia & Croatia now; Globally, Hollywood dominates.                                               Gemini 3 Interview Oct. 2007    RH
11. (c) See chart below for trends.
12. (a) labor costs lower, so presenting Serbia as a cheaper alternative for filming movies (cheaper hotel/travel costs for visiting
production staff) could create jobs.                                                                                                             Gemini 3 Interview Oct. 2007    RH
12. (b) Plenty of skilled labor exists in the workforce; Serbia just needs more jobs to fill the void and encourage more people to pursuit a
career in the industry                                                                                                                           Gemini 3 Interview Oct. 2007    RH


Location

1. (a) Tax incentives or tax-efficient film investment schemes for wealthy individuals have increased UK film industry since 2004; a
compensatory measure was suggested whereby film productions would be able to claim a tax credit worth 20% of a production's budget; Financial Times Business Limited
producers rely on Enterprise Investment Schemes (EIS) vehicles as a way to finance film production;                                            2006                           RH
1. (b) For diversification purposes, gap financing has surfaced as a specialist area with built-in safeguards to ensure investors are
rewarded irrespective of film's critical or commercial success. The investment model works without geographical bounds, as in absolute Financial Times Business Limited
return is sought outside the restrictions of tax incentive schemes. Gap financiers who are last in with financing for film's project are first 2006                           RH
1. (c) Serbia's location is key #1. Former capitol of Yugoslavia where surrounding countries look to for guidance #2 Cheaper labor and
less strict labor laws than EU offers an attractive location for international companies to use production capabilities here #3 Belgrade as
a location could act as a cheap substitute for many EU cities and indoor studio filming could be done at much less cost
                                                                                                                                               Montage Interview 15 Oct. 2007 RH
Sets

2. (a) You need to have the talented craftsmen, etc. in order to drive interest into your particularly market. This is one of the key factors,
of course you can cheap labor, but if you want to remain competitive you need to have people that can build sets, make props, manage
filming, crew, etc. This is very important to long term vitality of the industry.                                                                Weinstein Interview Oct. 2007   JK
3. (a) As producers continue to look for new opportunities, they need to be able to see that the support staff is technical and vocational
enough to sustain a world-class production. If your country has good artisans and craftsmen that can do a lot of non-glamorous work
that is the majority in regards to movies being made, then you have an advantage that needs to be exploited/promoted.
                                                                                                                                                 Weinstein Interview Oct. 2007   JK


Specialties (Digital Animation, etc.)

3. (a) There are really not that many places outside of the United States that have a concentrated sub-sector. Most of the time you see
typical cross-country collaboration on projects and throw supply chains, but nothing specific to a certain sub-sector. For example, no one
outsources all of their post-production work to Germany because German workers do it better. However, German firms may be
competitive so work may go to them, but that is just globalization, not specialization in the macro-sense of the term.                     Weinstein Interview Oct. 2007         JK
                                       EXPORTS (000 EUR)


400000



350000
                                                                                Tourism
                                                                                AutoParts
300000
                                                                                ICT/Eng (Exc Telco)
                                                                                Education
250000
                                                                                Energy, especially renewable
                                                                                Construction
200000                                                                          Textile and apparel
                                                                                Logistics, warehousing and transport

150000                                                                          Film and production
                                                                                Medical supplies and devices
                                                                                Building materials
100000
                                                                                Bldg Matls w/o CLP
                                                                                Wood processing and furniture
 50000



      0
          2002   2003   2004             2005          2006   2007 (1-VIII)
                               Year




                                      Average Gross Wage




710
                                                                              Tourism (Average)
                                                                              AutoParts (NACE)
610                                                                           ICT/Eng (Exc Telco)
                                                                              Education
                                                                              Energy, especially renewable
510
                                                                              Construction (Average)
                                                                              Textile and apparel
                                                               Textile and apparel
                                                               Logistics, warehousing and transport
EUR



  410
                                                               Film and production
                                                               Medical supplies and devices
                                                               Building materials
  310
                                                               Bldg Matls w/o CLP
                                                               Wood processing and furniture

  210



  110
        2002   2003   2004          2005   2006   2007 (Est)
                             Year
Medical Supplies

Targeted Subsector(s)
Bandages, surgical tools, test kits, incubators, sterilisators, x-ray systems and software (diagnostic equipment), disposable materials like
gloves, bandages, dental materials, cotton wool, prosthesis, orthosis, corsets, supports, orthopedic equipment, pocket ECG, software
for visualizing ECG, software for testing drugs re cardiac safety



Impact Criteria                                Determining Factors and Rationale                                                               Default Ranking   Weighted
                                                                                                                                               Weight            Rank

I. Global Prospects in Sector

1. Historic revenue and growth in the (sub)- The global healthcare and supplies market grew by 4.6% in 2006 to 214.2 billion USD.    100%             5          5
sector                                       Total CAGR for the market between 2002 - 2006 was 4.7%. In the same time period,
                                             Europe CAGR was 4.6% and Asia Pacific CAGR was 5.6%. Disposal equipment is the
                                             largest market segment (40.4% of market's total value in 2006) and the Americas account
                                             for 46.3% of the market's global value. The market is very large and diverse, making
                                             market size will not be a limiting factor.

2. Barriers to entry in major new markets      Barriers to entry are relatively high - extensive regulatory controls and relatively high fixed 100%   3          3
                                               costs in many areas (e.g. complex assembly line machinery). Economies of scale are
                                               easy to be achieved, if you are large well-established company. Brand identity is not a
                                               major barrier, customer focus on price over brand loyalty. Most developed markets require
                                               Good Manufacturing Practices (GMP) certification. This is very costly and there is no
                                               certifying body in Serbia, making it even more so. One a very few lines in Serbia are
                                               certified.

3. Sector prospects and trends, shifts         Anticipated CAGR is 4.4% for 06 - 11 time period. Informed consumers, along with new e- 100%           4          4
                                               procurement systems are driving down profit margins and increasing competition between
                                               manufacturers. More and more markets require GMP.


4. Profitability                               Historically, profitablity has been high for local manufacturers due to lack of transparency. 100%     5          5
                                               However, sector buyer power is increasing and such deals seldom add to the bottom line
                                               of the company.

II. Local Market Conditions

5. Cost differential                           Skilled and relatively cheap labor in this sector is available but 63% of interviewed           100%   4          4
                                               companies consider that Serbian companies currently are not cost competitive.
6. Skills present or gap                 Technical skills required for this sector are present in the marketplace. However, the        100%   8   8
                                         difficulty emerges in regards to management skills - a major gap that has a negative
                                         impact on future growth. In addition, Serbia's image needs to be improved for foreign
                                         partners to seriously regard available skills. Generally, companies are not aware of
                                         international standards and in most cases are not able to meet them.

7. Financing constraints                 Serious financing constraints (no VC, expensive commercial loans). There is little to no      100%   3   3
                                         financing for GMP (good manufacturing practice), which is very expensive. GMP makes
                                         start up costs much higher than for other light industry. Certification risk (see 9. below)
                                         adds to the uncertainty.

8. Infrastructure, supply and resource   Access to imported machinery and raw materials exist but input prices are perceived as        100%   5   5
constraints, cost and availability       high. Basic infrastructure exists although there are complaints about lack of affordable
                                         assembly space. No big constraints exist in supply chain. Supporting industries exist.

9. Policy constraints                    There is a public procurement law in place that is intended to stimulate domestic             100%   7   7
                                         production. Nonetheless, there are issues with corruption and the exchange rate policy.
                                         Serbian companies face large risks in regards to opening a factory, etc. - they don't
                                         receive enough information on what is required, etc. to effectively start a business (this
                                         also slows down the registration process, meaning it takes some business six months to
                                         start operations/production).

10. Historical capacity (overall)        Serbia has moderate historical capacity. Capacity in the sector has increased over the        100%   4   4
                                         past five years. The number of companies, sales and size of market is increasing. There
                                         were 38% more companies in 2006 than in 2002, while sales have been doubled in that
                                         period, unlike the export which is pretty much the same as in 2002. Growth is driven by
                                         economic recovery and increased government spending in health care.

11. Historical (five year) and current   Serbia has a poor international image, but it is slowly improving. Five years ago, very few 100%     3   3
competitiveness (all markets)            companies could get the needed quality certification, making it difficult to export. However,
                                         the situation has improved over the last two/three years, as more firms have received
                                         certifications. Some products from Serbia have received international recognition (e.g.
                                         transport incubator). Serbian Chamber of Commerce believes the prospects for this sector
                                         are weak and that Serbian companies are not able to compete internationally. They
                                         believe many of the problems are regulatory - but sector is not considered important by
                                         current government. Product design, marketing and sales strategies are poor.



12. Employment impact                    Wages in specialty areas are high, so jobs added would be at a greater than average           100%   4   4
                                         salary level. However, firms are not well positioned for expansion, limiting the volume of
                                         the impact.
III. Combined Analysis

1. Ability to move sustainably into higher      To the extent that the Serbian companies would be competitive, many markets exist.
value markets, domestic and international


IV. Program Impact Analysis

1. Ability of Project to attributively impact   Given the high fixed costs of moving forward in the sector and the lack of incentive to   100%         0
                                                move to more competitive international markets at this time, there are few high impact
                                                activities that have been identified in this sector.

2. Time frame for impact to be realized         Unknown largely due to regulatory issues, that there is little incentive to resolve.      100%         0




3. Regional, gender or youth impacts            Neutral                                                                                   100%




V. Possible Binary Excluders

1. Other donors very active in sector           World Bank is working on improving procurement practices in medicine.                     100%         0




2. Potential to compete in a high profile       Not relevant to current target markets                                                    100%         0
manner with US products


3. Subjective assessment of sufficiency of      Available, though not at the level desired                                                100%         0
clear ROI indicators


4. Inadequate number of firm/counterparts       Few good counterpart firms identified, outside of the technology side (software,          100%
                                                diagnostic) that can be covered in ICT and engineering




                                                                                                                                          References
Key Supporting Data
                                                                                                                                       Datamonitor Global Healthcare
1. (a) The global healthcare and supplies market grew by 4.6% in 2006 to 214.2 billion USD. Total CAGR for the market between 2002 - Equipment Industry Profile,
2006 was 4.7%                                                                                                                          September 2007
                                                                                                                                       Datamonitor Global Healthcare
1. (b) Europe CAGR between 2002 - 2006 was 4.6% and Asia-Pacific CAGR was 5.6%.
                                                                                                                                       Equipment Industry Profile,
1. (c) Disposal equipment is the largest segment of the market - 40.4% of the market's total value in 2006 (88.6 billion USD).         Datamonitor Global Healthcare
                                                                                                                                       Equipment Industry Healthcare
                                                                                                                                       Datamonitor Global Profile,
1. (d) The Americas account for 46.3% of the market's global value.                                                                    Equipment Industry Healthcare
                                                                                                                                       Datamonitor Global Profile,
2. (a) The importance of brand identity is minimal given customers concerns over quality and price. Basic products can come from       Equipment Industry Profile,
anywhere.                                                                                                                              September 2007
2. (b) The combination of low customer switching cost, and easy access to suppliers and distribution channels eases market entry.
                                                                                                                                       Datamonitor Global Healthcare
However, there are extensive regulatory controls in many countries and relatively high fixed costs (e.g. complex assembly line
                                                                                                                                       Equipment Industry Profile,
machinery) depending on the product.
                                                                                                                                       September 2007
                                                                                                                                       Datamonitor Global Healthcare
2. (c) Economies of scale are easy to be achieved for large, well-established markets given the disposable nature of many of the       Equipment Industry Profile,
products.                                                                                                                              September 2007
2. (d) For large, national health care systems with centralized purchasing, suppliers may have trouble selling directly. The paperwork
and procurement procedures can be onerous and supply quantities out of range of many producers.
                                                                                                                                       ProcurementUK NHS.pdf
2. (e) GMP is required for most export markets, and even Serbia is requiring the CE mark by 2008. GMP is very expensive to implement Interview_PMCgroup.doc

                                                                                                                                           Datamonitor Global Healthcare
3. (a) The global healthcare equipment and supplies market is forecasted to reach a value of $265.7 billion USD by 2011, an increase of Equipment Industry Profile,
24% from 2006.                                                                                                                             September 2007
3. (b) Anticipated CAGR for the market between 2006 - 2011 is 4.4%. Lack of transparency, which has led to high profit margins may be Datamonitor Global Healthcare
reduced in the near future due to new e-procurment systems, which are empowering buyers with more knowledge of the market, which Equipment Industry Profile,
in turn is driving price competition between manufacturers.                                                                                September 2007
3. (c) A focus on cost control to reign in high health care costs will lead buyers to lower cost markets, where fear of liability may lead
buyers to markets in which they have more faith. Most developed market economies require Good Manufacturing Practices, which can
be very expensive to maintain.                                                                                                                      SEDP Experience
3(d) There is a large potential for growth in the area of diagnostic equipment and supplies. For example, Spektar Cacak, one of the
raising stars in the production of medical supplies has been growing at a rate of 50% per year over the last few years, and this trend is
likely to increase
4. (a) In developed markets, the sector leans towards a moderate degree of buyer power. Customers more concerned about quality and Datamonitor Global Healthcare
price, which when combined with negligible switching costs, favors the buyer.                                                              Equipment Industry Profile,
                                                                                                                                           September 2007
                                                                                                                                           Datamonitor Global Healthcare
4. (b) However, the market has traditionally show little to no price transparency meaning suppliers have dictated prices making high       Equipment Industry Profile,
profit margins common.                                                                                                                     September 2007
5. (a) cost in this area very competitive relative to EU, around 50 percent of cost                                                        Interview_PMCgroup.doc
5 (a) Serbia very cost competitive in key areas, especially skilled labor. This was a technology company. (9)                              Medical_NewCardio_Oct92007.doc
6 (a) Skills present on the technical side, but lacking in management. (9/5)                                                          Medical_NewCardio_Oct92007.doc
6 (b) the skills required are extremely broad and depend on the particular sub sector. The could be managerial, technical in a number of       EducationDataSectorRelevanceFin
different ways, and/or marketing. As such it is hard to determine if Serbian schools are graduating students with the right skills. It would                al.xls
appear that graduates are coming from a broad range of areas that could be relevant. Total estimated in 2005 is over 20,000.

6. (c) very hard to find skilled employees in this are, the Chamber of Commerce says.                                                          InterviewSerbianChambeMedical.d
6. (d) technology based medical company said no problem in recruiting good people.                                                                              oc
                                                                                                                                               InterviewVisaris.doc
6. (e) No problem finding good people. "easy to recuit and build good teams." This quote was from a technology based company.                  Medical_NewCardio_Oct92007.doc
6. (f) The company leaders are not familiar with international standards/technologies and are unable to meet them.                             Interview PMCgroup
7 (a) Serious financing constraints. (2)                                                                                                       Medical_NewCardio_Oct92007.doc

8 (a) no problems here (9)                                                                                                                     Medical_NewCardio_Oct92007.doc

8(b) Approximation to EU advantage. Also, able to deliver equipment at short notice to Russia, due to good cooperation with JAT.               Interview_MedicalSystem.doc

9 (a) no problems here (9)                                                                                                                     Medical_NewCardio_Oct92007.doc

9(b) The public procurement law that envisages giving domestic companies who participate in tenders 'head start' in comparison to              Interview_MedicalSystem.doc
companies from abroad, in order to stimulate domestic production, not implemented in practice
9(c)Domestic companies often excluded from particiaption in public bids, because tender requirements tailored to attract the foreign           Interview_MedicalSystem.doc
company
9(d)Legislation inadequate, a number of areas poorly regulated. Even in cases where the law is good, its implementation and                    Interview_MedicalSystem.doc
interpretation is problematic. Important legislation/regulations are missing.
9(e)The corruption is one of the largest obstacles for the growth in this sector.                                                          Interview_3SInvest, Interview PMC
                                                                                                                                           group, Interveiw Medical System
9(f)Exchange rate policy has been hindering growth: contracts are in euros, fixed consts in dinars. Euro is unstable, we are experiencing Interview_3SInvest.doc
inflation, while dinar is appreciating. Loosing competitiveness against foreigh companies due to uncertainty, some products are cheaper
9 (g) a lot of grey market activity in smaller firms due to high VAT and payroll taxes. )This is an issue of taxation overall and is not   Interview_PMCgroup.doc
specific to the sector.)
9 (h) regulations are not complete here and suppliers operate in a lot of ambiguity. It takes around a year to get a supply approval.      InterviewSerbianChambeMedical.d
                                                                                                                                                            oc
9 (i) Business registration takes very long (6-8 months), and there are no guidelines that would facilitate this process (the owner of the Interview_3SInvest.doc
company who opened a plant for the production of plaster bandages in Nis)
9 (j) Serbian companies not able to get advice/guidance from authorities on obtaining certification.                                           Interview_3SInvest.doc

9 (k) Serbian companies face large risks when starting up a new business/constructing a plant. Uncertainty is high since the companies Interview_3SInvest.doc
do not have any information in advance on what is required. Ex-post they find out what has to be changed, etc. and this costs a lot of
their time and money.
9(l) The regulation environment good for domestic producers, for example, the public procurement law favors domestic companies (they Interview Public Health Association
get 20 points out of 100 at the tender while the foreign company gets 0 points). The quality section can get maximum 10 points, so even of Serbia
if the foreign company offers better quality, they stand little chance to win the tender.
9 (m) Four companies that we interviewed have taken part in tenders and confirmed that 9 (l) is not implemented in practice.                  Interview notes

10 (a) Serbia has moderate historical capacity (7)                                                                                            Medical_NewCardio_Oct92007.doc

10(b) Capacity in the sector has been growing over the last five years.

10 (c) Large world producers of medical equipment have been present on Serbian markets since early 90's. Their position on Serbian            /InterviewVisaris.doc
market is strong. Their portion of market share is high, compared to that of domestic enterprises.
10(d)In the 90s the trade with imported medical equipment was very profitable business. The margins were 3-20 times higher than at            MedicalSuppliesandDevices/Medic
present.                                                                                                                                        al_BiljaKozl_Oct222007.doc
10(e) The number of companies, sales and the size of the market is on the rise.

11 (a) Serbian branding and image poor in the area, but can be fixed.                                                                         Medical_NewCardio_Oct92007.doc

11(b) Five years ago, most firms were unable to export to countries that require certificates of quality. This has changed over the last      Interview_MedicalSystem.doc
year or two, and more and more firms have been able to obtain certification for their products.
11(c)Recognition of quality: transport incubator won 'The best product of the year' Award in 2006                                             Interview_MedicalSystem.doc

11 (d) Chamber of Commerce believes that prospects in sector are rather poor and that Serbian companies will not be able to compete           InterviewSerbianChambeMedical.d
internationally. Many of the problems are regulatory and are not considered important by the government.                                                      oc

11(e) The prospects look good for those firms that are already exporting and have obtained necessary certification (CE, ISO, etc.).
Those firms that do not have certification and are not exporting, could have potential if they received some assistance with certification.
11(f) It has been growing over the last 5-6 years
11 (g) Marketing and sales strategy poor, design of products poor
11 (h) see chart below for trends

                                                                                                                                              Interview PMCgroup
11 (i) According to one company, most products that we produce here can be produced and distributed at lower cost by China. Medical
equipment that we produce locally is of a lower quality, for the same price or higher.
12 (a) See chart below for trends


                                                                  EXPORTS (000 EUR)


  400000



  350000
                                                                                                                          Tourism
                                                                                                                          AutoParts
  300000
  300000
                                                                                    ICT/Eng (Exc Telco)
                                                                                    Education
  250000
                                                                                    Energy, especially renewable
                                                                                    Construction
  200000                                                                            Textile and apparel
                                                                                    Logistics, warehousing and transport

  150000                                                                            Film and production
                                                                                    Medical supplies and devices
                                                                                    Building materials
  100000
                                                                                    Bldg Matls w/o CLP
                                                                                    Wood processing and furniture
      50000



         0
              2002   2003   2004             2005          2006   2007 (1-VIII)
                                   Year




                                          Average Gross Wage




  710
                                                                                  Tourism (Average)
                                                                                  AutoParts (NACE)
  610                                                                             ICT/Eng (Exc Telco)
                                                                                  Education
                                                                                  Energy, especially renewable
  510
                                                                                  Construction (Average)
                                                                                  Textile and apparel
                                                                                  Logistics, warehousing and transport
EUR




  410
                                                                                  Film and production
                                                                                  Medical supplies and devices
                                                                                  Building materials
  310
                                                                                  Bldg Matls w/o CLP
                                                                                  Wood processing and furniture

  210
210



110
      2002   2003   2004          2005   2006   2007 (Est)
                           Year
JK




JK




JK




JK




JK
JK, AT




JK, AT




JK




JK, AT




JK




JK,DP




JK
JK
JK

JK
JK

JK



JK

JK


AV


DP, AV

JK


JK



AV




JK

JK
DP, AV
AT, AV

AT, AV
AV
DP, AV


AT, AV
DP

AT, AV

AT, AV

DP

AT, AV

DP

DP

DP

DP

DP

DP, AV

DP, AV

DP

DP



DP




DP
DP

AT, AV



DP

DP




AT, AV

DP

DP

DP, AV




DP
Building Materials

Targeted Subsector(s)
Tiles, fixtures, windows and flooring



Impact Criteria                                Determining Factors and Rationale                                                           Default Ranking Weighted
                                                                                                                                           Weight          Rank

I. Global Prospects in Sector

1. Historic revenue and growth in the (sub)-   Market grew by 1.8% in 2005, reaching a value of USD 190.2 billion - concrete sales         100%     2     2
sector                                         account for 24.8% of the market's value. Germany accounts for 14.6% of the European
                                               market's value. CAGR from 2001 to 2005 was 2.2%.

2. Barriers to entry in major new markets      Several of the major companies in this sector are multinational, well-established, large      100%   3     3
                                               corporations with revenue in the billions and staff in the thousands. This could block
                                               market entry for small to mid-size companies from emerging economies since labor
                                               incentives are not as strong as in other sectors since concerns on fixed costs in this sector
                                               are related to costs of raw materials, the availability of natural resources and production-
                                               related costs.

3. Sector prospects and trends, shifts         By 2010 the building materials market is forecasted to reach USD 858 billion, an increase 100%       4     4
                                               of 24% from 2005, CAGR of 2.5%. After a sluggish start at the beginning of the decade,
                                               booming economic conditions in Asia-Pacific and Russia has driven increased demand.
                                               Over the next five years, the Asia-Pacific region is expected to slow down marginally.
                                               However, at the same time, the CEE region is expected to drive market growth.


4. Profitability                               Fluctuating costs of raw materials (particularly their exponential increases over the last    100%   2     2
                                               three to five years), the availability of natural resources and major costs associated to
                                               production could pressure profitability. The research trends towards larger companies with
                                               a lot of capital, a small or mid-size company might be working against sector trends and
                                               have too many barriers to market entry to achieve profitability in a sustainable time period.



II. Local Market Conditions
5. Cost differential                     Industry is raw material intensive so major factor of production costs is availability and       100%   7   7
                                         price of natural recourses such as non metal minerals (up to 80% of total cost). Wages
                                         are equal to or lower than the competitors, transportation costs play major role in part of
                                         the sector (facade blocks, bricks, roof tiles and similar). Majority of quality raw materials
                                         can be found in Serbia, except alum and plastic materials. The sector does appear to be
                                         cost competitive, though limited by transport cost for lower value materials.


6. Skills present or gap                 Labor is a combination of unskilled, managerial and marketing. It would appear that if           100%   7   7
                                         salaries provide sufficient incentives for graduates to work in this area, there is no
                                         shortage of the basic higher level skills being taught at universities but lower-skilled labor
                                         is becoming more difficult to find.                                                                             AT

7. Financing constraints                 SMEs complain about expensive commercial loans but much of industry has successfully             100%   5   5
                                         privatized to foreign MNC and have good access to finance.
                                                                                                                                                         AT

8. Infrastructure, supply and resource   No raw material constraints were identified for classical products, domestic non metal           100%   6   6
constraints, cost and availability       mineral resources exist. The sector imports certain quantities of additives, chemical
                                         feedstock and non ferro metals. Equipment is mainly imported and often outdated.


9. Policy constraints                    Policy constraints were not seen as a major issue for the industry.                              100%   8   8

                                                                                                                                                         AT

10. Historical capacity (overall)        There are 550 companies registered with some 20,000 employees. Production of building 100%              6   6
                                         materials has been following domestic market growth in construction industry in past five
                                         years sale, while the export is growing moderately. Annual export in neighboring countries
                                         was USD 30 million in 2006.

11. Historical (five year) and current   This is a broad sector that generally stands to benefit from growth at home and abroad,          100%   5   5
competitiveness (all markets)            however Serbia's not participating in the higher end of the market may limit potential.


                                                                                                                                                         DP

12. Employment impact                    The industry itself if very large and diversified. As such, employment levels and wages   100%          5   5
                                         vary considerably across the sector. Employment levels are high, but much of the industry
                                         is very capital intensive and growth, unless very high, may not have a major impact on
                                         employment.
III. Combined Analysis

1. Ability to move sustainably into higher      Most of the markets are made up of commodity or semi-commodity products where brand
value markets, domestic and international       and other than required levels of quality are not extremely important. There are, however,
                                                higher end markets for ceramics, joinery, and hardware, for example.

IV. Program Impact Analysis

1. Ability of Project to attributively impact   Basic building materials markets are local and usually known to the firms. The Project     100%      0
                                                could make an impact with higher value materials that would be competitive after shipping
                                                costs are taken into account. Impact would likely not be extremely high, as these types of
                                                firms are more limited. Nonetheless, the project could try to attract additional foreign
                                                investment in this sector (several made within the last three years).


2. Time frame for impact to be realized         Within the POP                                                                                100%   0




3. Regional, gender or youth impacts            No particular impact, though many building materials companies are located outside of         100%
                                                Belgrade and Novi Sad.



V. Possible Binary Excluders

1. Other donors very active in sector           None known                                                                                    100%   0




2. Potential to compete in a high profile       Not relevant for regional target markets                                                      100%   0
manner with US products


3. Subjective assessment of sufficiency of      Available                                                                                     100%   0
clear ROI indicators


4. Inadequate number of firm/counterparts       There are a large number of firms overall, but the total number of those with higher value    100%
                                                products or ability to export is unknown. One interview respondent felt that all the export
                                                capable firms had foreign capital (see entry 11 (c) below.)
Key Supporting Data                                                                                                                             References

Building Materials

1. (a) The European building products market grew by 1.8% in 2005, to reach a value of $190.2 billion; Concrete product sales account           Datamonitor Building Products in
for 24.8% of the market's value; Germany accounts for 14.6% of the European market's value;                                                     Europe July 2007
                                                                                                                                                                                   RH
1. (b) CAGR between 2001 and 2005 was 2.2%.                                                                                                     Datamonitor Building Products in
                                                                                                                                                Europe July 2007
2. (a) Sector has three to five major players. All of them are large corporations with revenues in the billions and staff in the thousands.     Datamonitor Building Products in
                                                                                                                                                Europe July 2007
2. (b) Fixed costs are high due to the costs of raw materials, availability of natural resources and production-related costs.                  Datamonitor Building Products in
                                                                                                                                                Europe July 2007

3. (a) In 2010, the market is forecast to have a value of $209.4 billion, an increase of 10.1% since 2005;                                      Datamonitor Building Products in
                                                                                                                                                Europe July 2007                   RH
3. (b) After a sluggish start at the beginning of the decade, booming economic conditions in A/P and Russia have driven increased               Datamonitor Building Products in
demand. A/P region is expected to slow down marginally, while CEE region is expected to drive market growth over the next five years.           Europe July 2007

4. (a) Profitability could be pressured by the availability of natural resources, fluctuating costs of raw materials, and production costs.     Datamonitor Building Products in
                                                                                                                                                Europe July 2007
5(a) Building materials industry is raw material intensive so major factor of production costs is availability and price of natural recourses
such as non metal minerals (up to 80% of total cost). Since majority of row fine quality materials can be found in Serbia , the sector is
price competitive.                                                                                                                              Interview Keramika                 PZ
5(b) As in other sectors, wages are lower than at competitors, privatized companies has eliminated burden of excessive work force.
                                                                                                                                                Interview Alba                     PZ
5(c)Transportation costs play major role in production costs of products with a low unite value (bricks, façade blocks, roof tiles). Export
of these products is profitable only to closest areas in neighboring countries. When is about ceramics, beams, cement, plasters and
other products transportation costs represent smaller percentage of total costs and it also lower than at competitors.
                                                                                                                                                Interview Alba                     PZ
5 (d) Local companies are more competitive when Serbian firms do the full engineering work (design, construction and installment of
building materials or components) and the materials come as part of a package, due to the bigger involvement of labor costs.
                                                                                                                                                Interview Tehnomarket           PZ
6 (a) labor is a combination of unskilled, managerial and marketing. It would appear that if salaries provide sufficient incentives for          EducationDataSectorRelevanceFi
graduates to work in this area, there is no shortage of the basic higher level skills being taught at universities.                                           nal.xls
8 (a) no raw material constraints were identified for classical products, domestic non metal mineral resources exists. The sector imports
certain quantities of additives and chemical feedstock.
                                                                                                                                                Interview Alba                     PZ
8 (b) equipment is mainly imported, in lot of cases outdated (over 50 years old in few factories?!)
                                                                                                                                           Interview Keramika                      PZ
8 (c) basic infrastructure exists, though companies that have better access to railway and especially to ports can decrease transportation
costs significantly                                                                                                                        Interview Alba                          PZ
9 (a) When export in EU countries, local manufacturers of structural materials will have to conform quality characteristics of their                Directive 89/106/EEC
products to harmonized standards and requirements from directive CPD 89/106/EEC.
10 a) Production of building materials has been growing in the following sectors(2006): metal and semi-metal beams for arches (68.3%), siepa
ceramics tiles (49.8%), cement (14.4%), bricks (11.5%), and facade blocks (9.1%).
                                                                                                                                                                                     PZ
10 b)Annual production of cement is about 2,5 million tons of cement, sold predominately on domestic market, 2.2 billion of bricks and              SR Chamber of
facade blocks annually and some $30 mil export in neighboring countries. Large capacities for stone and gravel production also exists.              Commerce_Gradjevinski material
                                                                                                                                                                                     PZ
11. (a) Building material production is tied with construction sector when is about domestic market because 35 - 40 % of construction          Chamber of Commerce
price goes to building materials. Level of overall investment in infrastructure, residential and non residential construction and other trends
in the construction industry greatly affect building materials. Export of these materials is not influenced by these factors.
                                                                                                                                                                                     PZ
11 (b) It seems that there are no big barriers to rich export markets if required standards are met. Lack of domestic certification institute
causes additional transaction costs and endanger contracted delivery times.                                                                         Interview Alba                   PZ
11 (c) It was believed by this interview subject that only the very few large companies, most of which have foreign capital now, had the
capacity to export. The rest were not.                                                                                                              Build-Mat_Sintelon_Nov6_2007.docAT, AV
11. (d) See chart below for trends.

12 (a) See chart below for trends.




                                                                   EXPORTS (000 EUR)

  400000



  350000
                                                                                                                            Tourism

  300000                                                                                                                    AutoParts
                                                                                                                            ICT/Eng (Exc Telco)
                                                                                                                            Education
  250000
                                                                                                                            Energy, especially renewable
                                                                                                                            Construction
  200000                                                                                                                    Textile and apparel
                                                                                                                            Logistics, warehousing and transport

  150000                                                                                                                    Film and production
                                                                                                                            Medical supplies and devices
                                                                                        Building materials
  100000
                                                                                        Bldg Matls w/o CLP
                                                                                        Wood processing and furniture
      50000



          0
                2002    2003    2004             2005          2006   2007 (1-VIII)
                                       Year




                                              Average Gross Wage




  710
                                                                                      Tourism (Average)
                                                                                      AutoParts (NACE)
  610                                                                                 ICT/Eng (Exc Telco)
                                                                                      Education
                                                                                      Energy, especially renewable
  510
                                                                                      Construction (Average)
                                                                                      Textile and apparel
                                                                                      Logistics, warehousing and transport
EUR




  410
                                                                                      Film and production
                                                                                      Medical supplies and devices
                                                                                      Building materials
  310
                                                                                      Bldg Matls w/o CLP
                                                                                      Wood processing and furniture

  210



  110
              2002     2003    2004              2005          2006     2007 (Est)
                                       Year
Wood Processing

Targeted Subsector(s)
Furniture, Parquet, Elements



Impact Criteria                              Determining Factors and Rationale                                                             Default Ranking Weighted
                                                                                                                                           Weight          Rank

I. Global Prospects in Sector

1. Historic revenue and growth in the (sub)- The furniture industry is one of the largest manufacturing industries in the EU. The          100%   5       5
sector                                       turnover was EUR 82,2 billion in 2001, which is 0.9% increase from 2000. The EU
                                             furniture industry accounts for about half the world furniture production. Some markets
                                             are experiencing growth, while some are stagnant or declining. Automation is driving
                                             down costs and increasing competition in the industry.                                                                   RH
2. Barriers to entry in major new markets    Furniture manufacturers need to invest huge amounts of capital to compete as many         100%       3       3
                                             companies are expanding their activities either by purchase or creation of new plants and
                                             most enterprises are investing in automation and computerization to standardize
                                             production, especially in the kitchen and office furniture industry. Th                                                  RH

3. Sector prospects and trends, shifts       Industry concentration process is in progress. Furniture manufacturers are investing          100%   6       6
                                             huge amounts of capital for expanding their activities either by extension/creation or
                                             purchases of existing enterprises.                                                                                       RH

4. Profitability                             On the EU level, material costs and cost of services (services for manufacturing,             100%   3       3
                                             development of products, distribution, etc.) account for more than 60% of the production
                                             value (45% and 15% respectively). The value added represents on average 40% of the
                                             production value. Labor costs account for about 78% of the value added of the sector.
                                             Risk of economic slumps severely jeopardizes this industry due to the ability of buyers to                               RH
                                             postpone purchases.
II. Local Market Conditions

5. Cost differential                         Labor costs are below average, but fragmented processing capacities and low                   100%   5       5
                                             productivity damage competitiveness in the craft side of the industry. In the mass
                                             production side, labor costs are less important as are quality of raw materials. Plants are
                                             generally efficient. Raw material prices are perceived as high due to the monopolistic
                                             position of Serbian Forest public company so high input costs increase overall costs.
                                             Deficiencies in organization and production quality control cause higher residues and
                                             waste.
6. Skills present or gap                 The necessary skill set for wood processing industry is being constantly built on: twenty    100%     7   7
                                         two high schools specialize in wood processing as does the Faculty of Forestry at
                                         Belgrade University. Over 1,200 graduates in wood processing came from the technical
                                         schools in 2005. According to SIEPA, exceptional human capital available at very
                                         competitive prices with high quality raw materials provides opportunities on the domestic
                                         as well as foreign markets. Gaps exist in marketing/promotion and general management
                                         skills as well as in furniture design.                                                                        AT

7. Financing constraints                 Much of the equipment is outdated and major investments are needed, hard to finance           100%    2   2
                                         this industry, since large investments in basic equipment are required initially. Much of the
                                         finance is coming from FDI, rather than local banks that are relatively expensive and that                    AT
                                         require significant paperwork.
8. Infrastructure, supply and resource   Good row material base but forests certified only in Vojvodina. This is increasingly an       100%    5   5
constraints, cost and availability       issue for selling into the EU. Equipment is often inadequately used in private companies.
                                         Access to imported materials is good. Basic infrastructure exists. It is not clear what the
                                         sustainable harvest limits of Serbia's forest land is. However, wood is available from
                                         around the region.

9. Policy constraints                    The main policy constraint relates to the concession practices on public lands. Raw            100%   7   7
                                         materials can end up being costly relative to competitors in other countries. It is not clear,
                                         however, if this is really the case, as there is no reason for concession holders to bid the
                                         prices up to where they cannot compete. Additionally, there is a lack of clear Government
                                         strategy for this sector. The Government must take interest and provide guidance on what
                                         quantity/kind of forests should be grown and cut, what sub sectors are to be supported,
                                         etc.                                                                                                          AT

10. Historical capacity (overall)        Forest based industry has a relatively high share in GDP (1.24%) and industrial            100%       4   4
                                         production (3.63%) but low ratio of value added to production. Modest FDI in the sector,
                                         only 2% of companies have foreign capital. Wood (sawn/chipped) has noted negative
                                         growth over the last few years mainly due to delays in privatisation. On the other hand, a
                                         positive growth has been recorded in export of furniture (in 2005 value of export
                                         increased by 30%).
11. Historical (five year) and current   Productivity and quality of products is lower due to outdated technology and obsolete      100%       4   4
competitiveness (all markets)            equipment. Some SMEs have been efficient in modernizing their asset base, introducing
                                         automation machines and computer aided design and manufacturing. The introduction of
                                         the quality standards (ISO 9000 and ISO 14000) will increase competitiveness in terms of
                                         quality and price. Qualified workforce, large premium forest reserves, geographical
                                         proximity to export markets and large number of small flexible firms that can react
                                         promptly to market needs are positive signs of potential in this sector. This potential is
                                         constrained by the inability of domestic companies to produce large volumes and play
                                         more significant roles on the foreign markets. The management style, marketing and
                                         design is in poor condition, as well as the ability to attract and keep good
                                         graduates/managers.                                                                                           DP
12. Employment impact                           The forest products industry overall can be fairly labor intensive, when traced all the way      100%   0
                                                back through the supply chain. Significant increases in the craft side of the industry can
                                                yield a high employment impact. However, this may be where Serbia is less competitive
                                                than its neighbors.

III. Combined Analysis

1. Ability to move sustainably into higher      Wood processing always was, and furniture increasingly is, a commodity business.
value markets, domestic and international       Without a very strong legacy (i.e. Italy), there is little to be done to increase the value of
                                                the products. This need not matter, but profitability can be low in the industry.

IV. Program Impact Analysis

1. Ability of Project to attributively impact                                                                                                    100%   0




2. Time frame for impact to be realized                                                                                                          100%   0




3. Regional, gender or youth impacts                                                                                                             100%




V. Possible Binary Excluders

1. Other donors very active in sector           Possibly SCOPES, Norwegian government has a "cluster" program, SDC                               100%   0




2. Potential to compete in a high profile                                                                                                        100%   0
manner with US products


3. Subjective assessment of sufficiency of                                                                                                       100%   0
clear ROI indicators


4. Inadequate number of firm/counterparts                                                                                                        100%
Key Supporting Data                                                                                                                            References

1. (a) The furniture industry is one of the largest manufacturing industries (82,2 billion Euro worth of turnover in 2001: +0.9% compared The EU Furniture Industry 2003
with 2000) in the EU. The EU furniture industry accounts for about half the world furniture production. It employs various raw materials
to manufacture its products. They range from wooden boards to metal through leather and glass.                                                                                  RH
1. (b) After slight recovery/growth of the furniture industry from 1998-2000, the industry suffered in 2001 with production stagnating    The EU Furniture Industry 2003
                                                                                                                                                                                RH
1. (c In 2001, exports from the EU to Russia rose by more than 11% (volume reduced by 3.1%); exports to Norway and Japan                       The EU Furniture Industry 2003
decreased to respectively 572 (-2%) and 415 (-1%) million Euros; the highest rates were recorded in Ukraine (+50% to 101 million
Euros) and in Croatia (+26% to 95 million Euros); the largest decrease occurred in Turkey (-36% to 91 million Euros); Italy was
responsible for 43% of total exports, Germany for 17% and France for 9%.                                                                                                        RH
1. (d) Imports from Poland to the EU accounted for 20% of total imports (rising by more than 16%); Imports from China exceeded 1               The EU Furniture Industry 2003
billion Euros (+11.2%); Imports from Czech Republic rose by almost 20% to reach 860 million Euros; In general, imports from Central
and Eastern European countries recorded double digits growth rates with Slovakia leading the way (+40%: 236 million Euros); Germany
imported 38% of total imports, UK 18% and France 10%                                                                                                                            RH
1. (e) The furniture industry consists of various sectors in which the manufacturers are specialized in the production of a specific type of   The EU Furniture Industry 2003
furniture. The upholstered furniture and the kitchen furniture sectors are the largest ones within the furniture industry respectively
representing 15% and 13%. Three other sectors have almost the same weight: the office furniture sector (11.7% of total production), the
dining room furniture one (11.5%) and the bedroom furniture one (10.3%).                                                                                                        RH
1. (f) In general, the average size of the firms has recently increased. All enterprises are investing in automation and computerization,      The EU Furniture Industry 2003
in order to standardize their production. The production is ever more automated, especially in the kitchen and office furniture industry.
This requires huge amounts of capital that may be more easily collected by large firms than by smaller ones.                                                                    RH
2. (a) Furniture manufacturers need to invest huge amounts of capital to compete as many companies are expanding their activities              The EU Furniture Industry 2003
either by extension of existing plants or creation of new plants or purchases of existing enterprises; In general, the average size of the
firms has recently increased. All enterprises are investing in automation and computerization, in order to standardize their production.
The production is ever more automated, especially in the kitchen and office furniture industry.
                                                                                                                                                                                RH
3 a) Barriers to enter EU market exist, furniture from new EU countries is sold more easily there although is more expensive and with          Interview Xinaris
the same quality.                                                                                                                                                             PZ
3 (b) large increases in market demand for solid hardwoods, could see 20 percent annual increases from Serbia. Main markets EU and             InterviewChamber_Woodindustry
Russia.                                                                                                                                        dep.doc                        PZ, AV
3. (c Trends in the Furniture industry for Central & Eastern European countries in 2001: In 2001, the Polish furniture production value        The EU Furniture Industry 2003
slightly decreased by 0.8% in 2001 to reach 2.9 billion Euros; In Czech Republic , the production value rose by 7% in 2001 (1.3 billion
Euros); In Romania , the production rose by 8.2% to reach 707 million Euros. The growth was more export-driven than driven by the
local market; In Slovakia, the furniture industry is booming and 2001 proved to be a very positive year: +32% to reach 341 million Euros.
This growth was led by exports to the EU that grew by 41% to 237 million Euros; The furniture production in Lithuania amounted to 170
million Euros in 2001 or an increase of 20%. Almost the totality (88%) is exported mainly to the EU                                                                             RH
3. (d) On average, 45% of total production value consists of purchase of specific raw materials or semi-finished products by the furniture The EU Furniture Industry 2003
industry from other manufacturing industries; The purchase of certain raw materials represents a substantial market share to some of
the suppliers to the furniture industry. In fact, there is an interdependence between the furniture industry and some of the
suppliers’ industries; This interdependence is the most important between the wood-transforming industry and the furniture
industry. On the EU level, the furniture industry annually buys 55% of the production of particleboards, 20% of the sawn woods and
about 90% of the production of MDF that is more and more used in the manufacturing of furniture.                                                                                RH
3. (e) it can be assumed that furniture production should rise annually by 4 to 6% in current terms or given the almost not-existent         The EU Furniture Industry 2003
inflation by the same rates in volume. One of the challenges of the furniture industry will be to maintain its competitive advantage on
external markets in order to increase its market shares and to maintain a positive trade balance when current markets in recession will
recover                                                                                                                                                                       RH
3. (f) There is a concentration process in the furniture industry. Furniture manufacturers are investing huge amounts of capital for         The EU Furniture Industry 2003
expanding their activities either by extension of existing plants or creation of new plants or purchases of existing enterprises.                                             RH
3. (g) Innovation of the industry can be subdivided: 1). Reduction of Costs - includes automation, the use of Computer Aided Design or       The EU Furniture Industry 2003
Manufacturing and the introduction of new materials that are more resistant or cheaper than previous ones. Use of Internet and
development of electronic commerce are also important AND 2) Market led innovation - innovation guided by the market and the
consumers. Design and the change of forms are the most important. Use of new materials may be asked by the consumers (fabrics for
upholstered furniture, recyclable materials, etc.) or environmental concerns of the consumers (safety, health, etc.) may lead to changes
in the production processes                                                                                                                                                   RH
4. (a) Furniture is both an investment article (for the enterprises and the households) and a casual consumer article sensitive to fashion   The EU Furniture Industry 2003
effects: the substitution goods or services are cars, consumer electronics, holidays, insurance, etc. Furniture is a durable good
characterized by a high unit price and an enduring life span (some furniture is passed on to the next generation). Consumers have to
own or to borrow a certain amount of capital for the purchase of furniture. Purchases of furniture can be easily postponed, as has been
the case during the recent years of recession. In the industrialized countries, households are well equipped and the market for new
furniture is saturated. Generally, 70% of the purchases of furniture are replacement purchases: tastes may have changed, incomes
increased, etc.                                                                                                                                                               RH
4. (b) Production & distribution are separate businesses. On the EU level, material cost and of services account in general for more than    The EU Furniture Industry 2003
60% of the production value (respectively 45% for materials for manufacturing and 15% for services for manufacturing, development of
products, distribution. The value added represents in average 40% of the production value. Labor costs account for about 78% of the
value added of the sector. The global productivity has increased by 20% during the nineties. Investments yearly vary but they represent
in average 4% of the production value or 10% of the value added.                                                                                                              RH
5 a) Huge bargaining power of big EU distributors such as IKEA brings prices down tremendously and our companies are in situation to         Interview Xinaris
sell with very low profit margin. Cost advantages disappear under these circumstances.                                                                                        PZ
5 c) Low price of energy makes our products more competitive, at least in short term. Energy is less then ten percent of costs, but it       Interview Xinaris
makes a difference at the margin.                                                                                                                                             PZ
5 d) It seems that transport costs are not influencing price very much because relatively high unit value and good geographical position
                                                                                                                                                                              PZ
5 e) As other sectors that use locally provided raw materials, sawn wood and furniture producers have a problem with unrealistically         Interview Xinaris
strong local currency which makes them less competitive                                                                                                                       PZ
5 (f) Cost is important since in many segments of the market, it is not clear how to move up to higher value products and they compete       SEDP Experience
on cost.                                                                                                                                                                      AV
5 (g) Cost 50 percent lower than Italy, and they can reduce even more if that is what it takes to get into new markets.                      Interview_Dallas.doc
                                                                                                                                                                            DP, AV
5 (h) costs of labor and raw material are fine. Outdated equipment can be costly to run, not very energy efficient.                          InterviewChamber_Woodindustry
                                                                                                                                             dep.doc                        PZ, AV
6 a) The necessary skill set for wood processing industry is being constantly built on: twenty two high schools specialized in wood          Siepa/Forest Based Industry in
processing and the Faculty of Forestry at Belgrade University. Exceptional human capital available at very competitive prices with high      Serbia
quality raw materials provides opportunities on the domestic as well as foreign markets. (SIEPA promotional materials, represents GOS
view)                                                                                                                                                                  PZ
6 (b) Over 1,200 graduates in wood processing came from the technical schools in 2005.                                                  EducationDataSectorRelevanceFi
                                                                                                                                                    nal.xls
6 (c) once firm said hard to find people close to their company in South Serbia who have the needed skills. Costs are low, but so are        Interview_Dallas.doc
skills.                                                                                                                                                                    DP, AV
6 (d) labor force is capable in this sector, says the Chamber of Commerce                                                                    InterviewChamber_Woodindustry
                                                                                                                                             dep.doc                       PZ, AV
6 (e) Serbian products ( i.e. wood toys) are safe and with good quality, but design is still not yet on desired level due to the lack of     Interview Alira
creative designers.                                                                                                                                                        PZ
6 (f) Educational programs are not designed well; it is too much of theoretical staff. Practical education, to learn about processes on real Interview Canimpex
equipment must be improved. Apart from changing curriculums, equipping of school labs is needed.                                                                           PZ
7 (a) very hard to meet the requirements that banks want for financing.                                                                      Interview_Dallas.doc
                                                                                                                                                                           DP, AV
7 (b) big issue given that much of the equipment is outdated and major investments are needed, hard to finance this industry. Much of InterviewChamber_Woodindustry
the finance is coming from FDI, rather than local banks.                                                                                     dep.doc                       PZ, AV
8 a) broadleaved and conifer tree species can be found throughout the country. The forest area is spread across the territory of Serbia Siepa/Forest Based Industry in
and differs by region. According to official statistics, the forests of Central Serbia and Vojvodina cover 25.17% of the country or          Serbia
1,949,871 ha. In Central Serbia, 32.21% (1,802,656 ha) of area is covered with forest; mainly broadleaf species, while in
Vojvodina forests cover about 6.85% or 147 215ha.                                                                                                                          PZ
8 b) State owned forests make a little over 47% and are mostly managed by Srbijašume (85%). Smaller portions are managed by                  Siepa/Forest Based Industry in
Vojvodinašume (7.5%), national parks (6.5%) and educational and research institutions (1%).                                                  Serbia
                                                                                                                                                                              PZ
8 c) Besides natural growth, Serbia attends to reforestation. Plantations are spread throughout Serbia and are usually monospecific          Siepa/Forest Based Industry in
stands where species depend on the characteristics of landscape and eco–system.                                                              Serbia                           PZ
8 d) Bigger holdings with more substantial potential for development are very rare, but produce good quality hard wood timber used in        Siepa/Forest Based Industry in
solid wood furniture manufacturing.                                                                                                          Serbia                           PZ
8 (e) Serbian firms do not yet have the capacity to do very large (>1000) production runs, like some firms in Romania and Bulgaria, but      Interview_Dallas.doc
will get there.                                                                                                                                                               DP, AV
8 (f) proximity to Italian materials is good                                                                                                 Interview_Dallas.doc
                                                                                                                                                                              DP, AV
8 (g) roads are poor, making it hard to bring in inputs and send out exports. (this company had a plant in south Serbia)                     Interview_Dallas.doc             DP, AV
8 (h) Chamber says that forests, transport, and other infrastructure are all adequate.
8 (i) Producers think that row material (wood) is purchase on unrealistically high prices domestically, Serbia Sume (Public Company that Interview Canimpex
manages 50% of forests) has monopoly and use it on the expense of producers.
                                                                                                                                                                              PZ
9 (a) There is a lack of clear strategy for this sector, government should decide is it important sector or not, what varieties of forests   Interview Canimpex
should be grown and cut, what sub sectors to be supported and so on. Therefore, there is no favorable environment for this sector to
grow.                                                                                                                                                                         PZ
10 a) The annual volume of timber felled for commercial purposes in Serbia is approximately 3 million cubic meters, out of which             Siepa/Forest Based Industry in
approximately 2 million are produced in state owned forests by state enterprises and 827,000 m3 is felled in privately owned forests.        Serbia
Almost two thirds (70%) of all felled wood is used as fire –wood while the remaining 30% are mainly saw and veneer logs.                                                      PZ
10 b) Forest based industry has a relatively high share in GDP (1.24%) and industrial production (3.63%). Note the relatively low ratio of    Siepa/Forest Based Industry in
value add to production. This sector has been in a positive foreign trade balance since World War II. Today, there are 2,365 companies        Serbia
engaged in wood processing. The majority of them produce sawn wood (1,491) and furniture (402). Most companies are privately
owned (about 96%). There has been little foreign investment in this sector (only about 2% of all companies have foreign capital. The
industry is dominated by small enterprises (98%) which predominately deal with sawn wood production, joinery manufacturing, and
production of packaging and veneer.                                                                                                                                            PZ
10 c) Sawmills make up 63% of total number of wood processing companies. At the same time, sawn wood accounts for 37.2% of                    Siepa/Forest Based Industry in
exports in this sector, so this is unprocessed wood. Most sawmills are small, located in rural areas and operate only during the warm         Serbia
season. Large sawmills, with annual capacities of 3,000 – 5,000 m3, hold 55% of installed capacity for sawn wood production. Annual
production of sawn hardwood in Serbia exceeds 300,000 m3.                                                                                                                      PZ
 10 e) Particle boards Particle board is the wood product with the highest demand in Serbia. It is generated by the market–driven             Siepa/Forest Based Industry in
growth in low value and usually quality, mass produced furniture production. Serbian furniture producers make more than 100,000 m3 of         Serbia
particle board annually.                                                                                                                                                       PZ
10 f) Plywood and Veneer plywood boards which are mainly utilized in furniture and packaging production. Produced in 3 companies              Siepa/Forest Based Industry in
the total plywood production capacity is 10,000 m3 annually with main export markets being Italy Germany , Macedonia and Hungary.             Serbia
                                                                                                                                                                               PZ
10 g) Domestic growth has been good for private Serbian companies who have recovered and taken market share after collapse of                 Interview_Dallas.doc
public firms. They have been able to maintain and increase their markets.
                                                                                                                                                                               DP, AV
10 (h) It is not cost effective to do small series/quantities due to the high fixed cost per unit and because of that we should either join   Interview Canimpex
together or increase our bargaining power, both towards suppliers and buyers or develop bigger sawmills.
11 a) This demand is further increased by the Serbian construction companies building abroad, which purchase joinery for these                Siepa/Forest Based Industry in
projects from Serbian joinery producers. This indirect export of Serbian produced joinery is one of the main reasons for the recent           Serbia
increase in joinery production.                                                                                                                                                PZ
11 b) Serbia and Montenegro is the only country outside the CIS that enjoys a free trade agreement with the Russian Federation,               Siepa/Forest Based Industry in
offering tariff free access to an increasingly attractive market of 150 million people.                                                       Serbia                           PZ
11. c) strong presence in regional markets, exporting to Croatia, Slovenia, Macedonia, Belarus, Ukraine. Russia up and coming.                Interview_Dallas.doc
Winning some good commercial tenders in the region, combining Serbian labor with Italian fabrics. Sector getting more competitive with
time, few years ago was not.                                                                                                                                                DP, AV
11. (d) Has been improving. Serbia still imports a lot, but the trade balance in this area is improving, reflecting better health in the      InterviewChamber_Woodindustry
sector.                                                                                                                                       dep.doc                       PZ, AV
11. (e) Some wood products are exempt from free trade regime with Russia. They are tariff lines : wood office furniture (9403.30), wood       Serbia-Russia Free Trade
kitchen furniture ((9403.40), wood bedroom furniture (9403.50) and other wood furniture (9403.60)                                             Agreement
                                                                                                                                                                            ZS
11. (f) See chart below for trends

11. (g) The information taken from SEDP study on Wood processing industry                                                                     SEDP Study
                                                                                                                                                                               DP
11. (h) Sector has potential to export more technology-intensive products, right now companies are satisfied with export of timber.           Interview Canimpex
                                                                                                                                                                               PZ
11 (i) There is opportunity to develop a new products - a palette and a briquette. These can be successfully marketed if there was    Interview Canimpex
cooperation among sawmills. Profitable investment would require consolidation of wood residues from at least 6-7 sawmills which would
supply production facility with capacity of 50,000m3.
                                                                                                                                                                               PZ
12. (a) See chart below for trends


                                                      EXPORTS (000 EUR)

  400000



  350000
                                                                                            Tourism

  300000                                                                                    AutoParts
                                                                                            ICT/Eng (Exc Telco)
                                                                                            Education
  250000
                                                                                            Energy, especially renewable
                                                                                            Construction
  200000                                                                                    Textile and apparel
                                                                                            Logistics, warehousing and transport
                                                                                            Film and production
  150000
                                                                                            Medical supplies and devices
                                                                                            Building materials
  100000
                                                                                            Bldg Matls w/o CLP
                                                                                            Wood processing and furniture
   50000



       0
                2002             2003   2004            2005         2006   2007 (1-VIII)
                                               Year

				
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