Vladimir Kavarić, Minister of Economy of Montenegro

Stable Fiscal and Financial System

Our estimates are that in the next three years Montenegro could mark economic growth of between 3.5 and 3.8 per cent. I think few economies in this kind of global atmosphere, especially small countries like Montenegro, can boast such large investor interest

As an emerging young country, Montenegro has built its economic system in periods of economic expansion, with an average growth rate of 8.7 per cent and the highest amount of foreign direct investment per capita in Europe of €1,600 or a total amount of 25 per cent of GDP. As in other European countries, building the institutional framework in Montenegro also went through a phase of crisis, falling GDP and rising budget deficits and debt.

The period of exiting the crisis was followed by painful fiscal adjustments, mainly focused on reducing public spending and structural reforms. We discussed the current economic and political situation, chances and opportunities ahead for the Montenegrin economy and the reform of the sector with Montenegrin Economy Minister Vladimir Kavarić.

FISCAL POLICY

Through the fiscal policy it is envisaged that the majority of revenues from oil (80 per cent) will be directed to the petroleum fund, like Norway does.

RULE OF LAW

Montenegro is committed to strengthening the rule of law in all its aspects, including when it comes to improving the business and investment environment.

ENERGY

Energy is recognised as a strategic sector of the Montenegrin economy and in this part we had significant activity in the last year.

– The aim of reforms is a stable fiscal and financial system. Today we are on the road to economic recovery with estimated real GDP growth in 2014 of 3.6 per cent, compared to 2.6 per cent in 2013.

Our estimates are that in the next three years Montenegro could record economic growth of between 3.5 and 3.8 per cent. However, we do not need to be satisfied with this and there is no need to stop. Rather, we will continue with activities on the continuous improvement of the business environment.

Considering the IMF‘s estimate that economic growth will be lower than originally planned (2.4 per cent instead of 2.9 per cent), what do you think the chances are of achieving this relatively high growth?

– The International Monetary Fund has done another revision of forecasts which improved the prediction of growth for the Montenegrin economy from 2.4 to 2.8 per cent for this year. According to the new forecasts, the Montenegrin economy will continue its growth trend by 2.9 per cent in 2015 and 3.1 per cent in 2016, which is encouraging.

However, when it comes to small and highly exposed economies like Montenegro‘s, forecasts of any kind are thankless, because just one major investment can drastically impacting on the GDP level. On the horizon is the start of the implementation of several large projects in the areas of transport and energy, so this year I expect some large investments to begin implementation and for Montenegro to complete the process of restructuring large systems. I think few economies in this kind of global atmosphere, especially small countries like Montenegro, can boast such large investor interest.

The energy sector is one of the priorities of the government for this year. What are the strategic steps that will lead to the realisation of this priority?

Energy is recognised as a strategic sector of the Montenegrin economy and in this part we had significant activity in the last year, both at the international and national levels.

I will remind you that Montenegro has been a member of the Energy Community for almost a decade, which is committed, among other things, to the harmonisation of its energy sector with the regulatory and legal framework from European flows. In line with the commitment of the European Union, Montenegro’s aims in the field of energy are to increase the security of the energy supply, increase the use of renewable energy, improve energy efficiency, attract investment and develop market competition in the energy sector. In accordance with that, this year the government plans to adopt the Energy Development Strategy of Montenegro to 2030.

Confirming the strategic projects of the government in this area is the great interest of investors for the construction of TPP Pljevlja and, furthermore, investor interest in projects in Montenegro and the region has also increased because of the project to interconnect Montenegro and Italy with a direct link. Another must-mention are small hydro projects, through the planned construction of which will continue to utilise the hydro potential of the country.

Other projects relevant to the energy sector of Montenegro are TPP Maoče, HPP Morača and HPP Komarnica and in this regard the government is open to cooperation with all investors who show interest in these projects.

There are also plans to build two wind farms in the locations of Krnovo and Možura, while there is growing interest in the construction of solar power plants.

So, our energy policy enables the energy sector to develop as an open system in accordance with the energy system of the EU and the Energy Community, open to private, domestic and foreign investment.

The IMF has done another revision of forecasts which improved the prediction of growth for the Montenegrin economy from 2.4 to 2.8 per cent for this year

How far have you progressed in the implementation of the project to construct the second block at the Thermal Power Plant Pljevlja and what does that project mean for Montenegro?

– Confirming the Montenegrin government’s strategic projects in the energy field is the great interest of investors in constructing the second block of TPP Pljevlja, with applications coming from nine companies/ consortiums from around the world. Three companies are still in the race to build the second block, one Czech and two Chinese, and submission of their final bids and proposals for the implementation of the contract is expected, after which the selection of the best bid will follow. In accordancewith this, the beginning of the project‘s implementation is expected this year.

The development plan envisages Block Two of TPP Pljevlja as having a power range of 220-300MW and for location of the existing units of TPP Pljevlja to have electrical efficiency of not less than 38 per cent. The project also envisages a heating system for the town, in cooperation with the Municipality of Pljevlja, while the new block will be constructed with the use of the latest technology and in compliance with the latest environmental protection requirements.

Constructing Block Two of TPP Pljevlja would realise a strategic objective in the energy sector – ensuring

 the electrical energy independence of the state, eliminating the current electricity deficit, improving the security of the supply to consumers, as well as improving the stability and sustainability of the power system of Montenegro. The implementation of TEP-II, with joint production from both units, would result in a significant surplus of electricity, which represents a very good starting position for the time after installing an undersea cable between Italy and Montenegro.

The undersea cable between Italy and Montenegro is a project in its infancy. What does this project mean for Montenegro and its economy, and what will be its significance for the region?

– The undersea cable, the installing of which is expected no later than 2017, will be a bridge connecting the power supply system of the European Union and the Balkans, a technologically state of the art undersea connection, which will position Montenegro as an important energy hub in the region.

The accreditation of Montenegro as a reliable partner in accepting and developing major international investments al

so means creating a favourable environment to entice new investment in energy production, through possible partnerships with local and foreign investors, aimed at utilising the significant energy resources of the country and the region, primarily in significant renewable hydro potential.

From an international perspective, the undersea interconnection with Italy will make Montenegro the only Balkan country that is directly linked with Europe, contributing tangibly to the process of political and energy integration in the EU and providing further recognition of the state as a reliable partner that can host major initiatives of international cooperation and development.

From an international perspective, the undersea interconnection with Italy will make Montenegro the only Balkan country that is directly linked with Europe, contributing tangibly to the process of political and energy integration in the EU

In May the deadline expired for companies interested in submitting bids for the awarding of concessions for the exploration and production of oil and gas on the Montenegrin coast. Which companies applied, how much money can Montenegro expect annually from this area and when will exploitation begin?

– With great satisfaction I can say that the public call for proposals for the awarding of the contract on concessions for the production of hydrocarbons in offshore Montenegro, which was open until 15th May, attracted applications from six companies that submitted three bids. These are companies from the U.S., Austria, Italy, Russia, Greece and the UK, which had combined revenues in 2013 of over $70 billion, profit of over $10 billion and together they have operations in over 80 countries worldwide.

Considering the global nature of this business, as well as global references of these companies, we can say that the first phase was completed successfully and that the Montenegrin institutional system in the oil and gas sector passed its exam. The expectations are that the government will choose a partner, or several, for the awarding of the concession by the end of the year. Theoretically, they could all be awarded the concession.

The state’s interest is the efficient use of resources which we all hope exist. I will remind you that the tender specified 13 blocks of a total area of 3,191 square kilometres and with this project Montenegro has positioned itself as the first country in the Balkans to launch such an endeavour.

It is also important to note that the Government of Montenegro, with the adoption of a set of laws and regulations, completed most of the regulations in this area. When it comes to the income Montenegro will have from this endeavour, it is tough to talk about money, but we can talk about percentages. We have defined the scope of state intervention and all told the state should get 60 to 70 per cent of the total profits of the concessionaire. Through the fiscal policy it is envisaged that these are not budget funds, but rather the majority of revenues from oil (80 per cent) will be directed to the petroleum fund, like Norway does.

What is the significance of the IAP project for Montenegro and what does the Montenegrin Government expect from its implementation?

– It is known that, unlike the rest of Europe, in our country there is no gas infrastructure and the gas market is very limited. The intention of the EU is to carry out gasification of the whole region, because natural gas, due to its characteristics, is slowly but surely becoming the number one energy source, primarily because of the low price, but also the fact that this energy does not adversely affect the environment.

Montenegro, with 600,000 inhabitants and very little demand for gas, cannot itself be a target for the gasification of a large gas company. Instead our only chance is to find ourselves on the route of an international gas pipeline. In this sense, the decision of the Shah Deniz Group, operator of the largest gas deposits in the Caspian Sea, for this energy resource to be transported via TAP and IAP, as one of its branches in Europe, is a great chance for Montenegro, because there is a realistic prospect that natural gas will come to us and thereby reduce our dependence on other energy sources.

The final version of the IAP Feasibility Study is over and it is also important to point out that Montenegro, under the auspices of the 10th round of the WBIF (Western Balkan Investment Framework) received a grant in the amount of €550,000 for the creation of the Master Plan for the Gasification of Montenegro, which will be done by the end of this year.

Montenegro is a full member of the WTO, a signatory of the CEFTA and EFTA free trade agreements and being applied are also free trade agreements with the EU, Russia, Turkey and Ukraine

Has the structure of investors changed in Montenegro? Which countries have the highest interest and which of your economic sectors are the most attractive?

– Experience to date shows that investors have recognised energy, tourism, transport and agriculture as the key economic sectors in which Montenegro has comparative geographical and other advantages. We can be proud of the fact that we collaborate just as successfully with investors from the EU as those from beyond the Union.

Considering the geographical positioning of Montenegro and its connection with the entire region, the structure of investors has not significantly changed, and in this sense the most investors who are still present are from EU countries. However, proof that Montenegro is on the right track when it comes to investment policy is the interest of investors from countries such as China, Turkey, Azerbaijan, the United Arab Emirates (UAE) and Russia, with which we have already started major development projects or will do so in the near future.

I will remind you that Montenegro is a full member of the WTO, a signatory of the CEFTA and EFTA free trade agreements and being applied are also free trade agreements with the EU, Russia, Turkey and Ukraine. Membership in the WTO, together with signing of free trade agreements, indicates that Montenegro is not just a destination with clearly defined trading rules, but also that investors have cheaper access to other markets of around 800 million people.

The government is expected to strengthen the capacity of the judicial system, in the area relating to contract enforcement. How much will this impact on the improvement of the business climate?

– Montenegro is committed to strengthening the rule of law in all its aspects, including when it comes to improving the business and investment environment. Therefore, in parallel with systemic activities in the area of justice, the Montenegrin administration is working on projects which the attractiveness of the business environment is directly dependent on. During this year the Council for Improving the Business Environment will be especially committed to improving the situation in the execution of contracts and will do so by simplifying the process by increasing efficiency, reducing costs and the duration of the procedure, or the beginning of public enforcement. All of this will contribute to improving the climate for doing business in Montenegro.

What is envisaged by the Action Plan for the implementation of the Strategy for the Development of the Manufacturing Industry of Montenegro 2014-2018, and how do you evaluate it?

– The manufacturing industry is a very important branch for the overall economic development of every modern country that‘s not only because of its participation in the GDP of the country, but also because of its importance in the field of employment and the creation of conditions for balanced regional development.

Accordingly, the Strategy for the Development of the Manufacturing Industry of Montenegro 2014-2018, which was prepared by the Economy Ministry, states the objectives that it is essential to achieve in the future, such as increasing employment and competitiveness, strengthening export opportunities and the growth of GDP.

The Action Plan defines the general priorities to achieve these goals, such as improving the business and investment environment, completing the privatisation process and enterprise restructuring, then strengthening the offer and availability of financial resources, strengthening of human resources and adapting to the demands of the labour market, as well as improving the entrepreneurial infrastructure. Thus, the Strategy and associated Action Plan are the fundamental planning documents for the future industrial policy to be adopted in accordance with the negotiation process with the EU.