FUNDS FOR DEVELOPMENT PROJECTS Croatia will be able to draw the greatest amount of funds from the European Union for the development of its transport infrastructure; Prime Minister Jadranka Kosor with ministers Popijac and Kalmeta"Accession to the European Union is for Croatia no longer a political issue, insomuch as it is the key prerequisite for economic survival. There is less and less doubt that it is the only way for Croatia to get out of the economic crisis soon. It is evident that the Croatian economy is currently in long-term stagnation, and the only way to launch a new cycle of economic growth is investment. Croatia clearly lacks the money for these investments, there are ever fewer foreign investors as a result of the crisis, so that the money from EU funds targeted to Croatia as a new member are practically the only funds your Government can count on in the coming years. At stake are 3.5 billion euro in the first two years of membership and Croatia needs to do all it can to try to make use of as much of this money as it can. If Croatia accedes to the EU in 2011 or in early 2012, the preparations for this process should start now, making it somewhat strange that it has practically not even been included in Government's economic recovery programme," Nacional was told by an eminent foreign diplomat in Zagreb.

This diplomat feels that membership in the Union is at this moment practically the only chance for development Croatia has. What is more, if the forecasts that Croatia could formally accede to EU membership by the end of next year are borne out, 3.568 billion euro will be available to privately owned and state owned companies, and to the national and local governments. The bulk of the money, a total of 2.392 billion, will be targeted to stimulating economic growth and employment, which is clearly why Nacional's source is saying that it could prompt a new round of economic growth. The global financial crisis has caused a massive drop in direct investment in Croatia. Unlike 2008, when they amounted to 4.2 billion euro, they dropped last year by over 50 percent to 1.87 billion euro.

This kind of massive drop in the influx of foreign capital to Croatia in so short a span of time has resulted in a sharp drop in economic activity, as domestic companies have also almost entirely stopped their investments in the face of the dearth of money. But that means that in 2012, with the help of money from the Union funds, the quantity of direct foreign investment into Croatia could jump back up to 2008 levels, and that is a key condition for overall economic activity to return to the level of that year. But, to take advantage of this opportunity Croatian Government will have to implement key reforms as soon as possible. Croatia will be awarded money from European funds on the basis of project proposals in the form of co-financing. That means that the EU will approve the disbursement of monies only after it has been presented a project, and that it will finance the project up to 80 percent, depending on the rules of the fund from which the money is drawn.

In short, to get to the money from the EU funds, Croatia will herself have to collect a significant amount of funding to cover its part of the project. And while these sums vary, it is felt in general that Croatia will have to invest between 0.2 and 0.3 euro for every euro received from EU funds. If it wants to use a billion euro in the first year of membership, Government will have to invest at least 200 million. At the present Croatia does not have this money, and given the growing budget deficit it is not realistic to expect that it will find the money in the near future. As a result many economists feel that Government should already start a reform of state expenditure so that it might, in the second half of 2010 and in 2011, set aside enough money in the national budget for the co-financing of European projects.

Economist Damir Novotny feels that as of next year Croatia needs to draft three-year budget plans. "Croatia will require at least 800 million euro in the first three years of membership to co-finance EU projects, and we need to start planning how to get to that money now. Only a fraction of this money will be spend by the national government independently, but given that local governments and a significant portion of the real sector cannot currently finance these projects on their own, the state will have to help out. It is to be expected that lines of credit will be set up through the Croatian Bank for Reconstruction and Development (HBOR), like those already in place for some pre-accession funds. Fiscal centralisation in Croatia, however, could turn out to be the greatest single obstacle to the successful use of money from EU funds. Croatia's largest county, Split-Dalmatia, with 600 thousand inhabitants, has an annual budget of up to 700 million kuna. When fixed costs for employee wages and the financing of necessary services such as school, hospitals and the like are covered, there is almost nothing left for projects. The majority of Union funds are linked to regional projects and Croatia will have to significantly increase the financial clout of local governments if it wants to use a significant part of these funds."

But, if that were to happen, it is estimated that every euro invested will have a many times greater effect on the growth of the domestic economy. A particularly positive circumstance for Croatia is the fact that the EU has of late been particularly generous in financing major infrastructure projects, especially those related to transport. The development of the Croatian economy over the past ten years has in fact been largely based on these kinds of projects, such as the construction of a network of motorways and other road infrastructure. During this period, and based on these projects, a number of large and quality construction companies have developed in Croatia, architectural bureaus, and companies involved in the manufacture of construction material and other equipment. When the national Government cancelled a number of planned projects and made radical cuts to expenditure in the sector in the wake of the economic crisis and a lack of funds, many of these companies found themselves in difficulties. Given that this sector employs about 11 percent of the labour force in Croatia and that it generates about 6 percent of the GDP, the crisis in the construction industry has caused massive problems for the domestic economy. EU funds could prove to be a big opportunity for recovery, and the specific traits of these kinds of projects in Croatia are that, because of the country's developed industrial sector, they can almost entirely be implemented with a Croatian work force and with materials manufactured in Croatian factories.

Analyst Damir Novotny estimates that Croatia will need 800 million euro for investment in the first three years of membershipAs a result, the economic effects of these kinds of projects and of money from EU funds is significantly greater than their nominal value. The lion's share of these projects could pertain to the development of railroad infrastructure. Over the coming three years Croatia should get about 200 kilometres of new or completely modernised railway lines, and projects worth about half a billion euro should be launched by 2013 in the upgrading, reconstruction and construction of railroad infrastructure. The Croatian railway company HZ will get most of this money, up to 85 percent, from European funds for transport infrastructure development. What is more, this period should see the start of construction of the key HZ infrastructure project - the high-speed rail line from Zagreb to Rijeka. The line should in the future be one of the most important transport corridors in South Eastern Europe, the quickest and most effective way to deliver large quantities of goods from the Mediterranean coast to Central Europe and vice versa. The construction of this railroad would set the stage for strong economic growth in all of the areas through which the railroad would pass, and HZ could, with the help of money from EU funds, over a very short period of time transform itself from a technologically outdated and neglected company, producing massive losses every year, to a modern and profitable company that will benefit from all of the advantages of Croatia's geo-strategic position.

Another important segment in which Croatia could significantly benefit from money in European funds is agriculture. In the first two years of membership, probably 2012 and 2013, the European Union plans to provide Croatia with 750 million euro a year for direct payments to farmers and as funds for rural development and fisheries. Of course, the amount of money used will again depend on Croatia, but Union rules on agriculture subsidies could finally force Croatia to launch a reform of its system of agricultural subsidies. In short, Croatia will no longer be able, as it has to date, to subsidise farms regardless of their size, and money from EU funds, with a very small share of co-financing by the users, will be conditional on farmland consolidation. That should make Croatian agriculture significantly more competitive, and considering the possibility of export to the market of the entire Union, and the cost of labour, which is somewhat lower in Croatia than in developed member states, Croatia's very negative agricultural import to export ratio should be improved. This effect was achieved in other countries after their accession to the European Union. In Poland, the export of agricultural products grew from 4 to 11.3 billion euro, and imports from 3.6 to 9.8 billion, in the first few years following EU accession.

Trade with EU member states increased, exports by 248 percent, and imports by 212 percent, and the incomes of farms were also significantly improved, and now Polish farmers earn on the average double what they did prior to accession to the Union. But, so that the effects can be used in their entirety, the state must not leave the complete drafting of projects to the end users of the money, but should rather set up expert bodies capable of quickly drafting and conceiving as many adequate projects as possible on the basis of which financing would be approved for Croatia. Vesna Pusic, the president of the national committee monitoring the negotiations with the EU, recently indicated as much when she proposed that a special group of 100 highly-educated experts with an excellent knowledge of English be set up - to be educated in the coming year on the preparation of projects linked to EU funds. Her idea is that these one hundred experts would see to the operational aspects of leading a hundred projects, but the idea is currently far from being seen through. The problem is that as a result of the limitations recently imposed by Government, state owned companies and institutions cannot take on new employees, including people key to the implementation of these kinds of projects. On the other hand it is an open question just how many quality experts could be drawn into these companies with the current cuts to wages in the state sector.

It is clear then that Croatian Government will have to significantly increase its efforts as soon as possible in making use of money from EU funds. Jean-Luc Demarty, the EU director-general for agriculture and rural development, recently directed Government's attention to this in written form, expressing his concern with Government's inefficiency, noting that it had already missed opportunities for significant amounts of money from various European funds that would not be available again. Demarty warned that Croatia had organised only 37 projects by the end of February to be financed from the SAPARD fund, and added that there was an obvious need for greater effort in implementing projects paid for by the EU. In 2009 Croatia used on 93 million kuna from the programme, just barley over 50 percent of the funds that had been earmarked, while 90 million simply were simply missed. A similar situation continues this year.

EUROPEAN UNION PRESIDENT Herman Van Rompuy visited Zagreb Monday — how much Croatia will profit from the Union does not depend on meetings between top-ranking officials, but rather on concrete plansHad the Croatian Government succeeded in preparing the state administration for cooperation with the European Union, about 150 million euro would have come in just from SAPARD this year, but poor organisation means that only half that amount is expected. Indicative of just how disorganised the national administration is, is the fact that Government recently appointed a person who does not know English to the post of director of one of the agencies that deals with cooperation with European funds, an individual subsequently send to a fast-track course in the language that serves as the chief means of communication in the Union. And then there is the city of Karlovac which, on the basis of a recommendation from the Croatian Democratic Union-led Government seven years ago was awarded funds for the reconstruction of the municipal sewage system, with nothing having been done to date. During that same period the sewage systems in ten Latvian cities have been reconstructed thanks to the same EU funds. And that is why experts fear that, unless Croatian Government speeds up the drafting of projects financed by EU funds, there is a danger that Croatia will be at a financial loss over the coming years as a result of accession to the EU, and would get some 500 million euro from the Union, but also, as a member state, pay some 600 million to the Union budget.