As Serbia doubles down on its EU accession efforts, the pivotal role of State aid in a crucial negotiation chapter creates serious challenges for the finalization of country’s prolonged privatizations and the continuation of its recently revamped subsidy scheme for foreign and local investors.
Companies contemplating investing in Serbia because of its incentive schemes and its favorable climate for foreign investors ought to be aware of both the general and country-specific risks associated with all forms of State aid. These risks persist irrespective of the nature of the investment; that is, regardless of whether investors opt for a greenfield (building of business operations from the ground up) or brownfield (purchase or lease of existing production facilities to launch a new production activity) investment. This assertion puts State aid rules and the legal requirements for Serbia’s accession to the EU on a collision course with a number of incentive schemes currently offered to investors – a “catch-22”, it might appear to the oblivious.
Although Serbian spectators are accustomed to a welcoming attitude towards state donations, State aid forms an integral part of Chapter 8 of the EU acquis, broadly described as the Competition Policy. With regard to Serbia, Chapter 8 of EU negotiations has yet to be opened while the harmonization with the EU law is approaching its peak activity. Hence, the EU monitoring mechanisms are already dealing with the matter of Competition on the Serbian market and, inevitably, its State aid schemes. As a result, the European Commission has emphasized the need for Serbia to adjust and align Serbian State aid rules, and – most importantly for the investor – to return any unlawful prior aid.
The reasoning behind the spotlight on State aid in Serbia, as was the case with other Eastern European countries on their path to the EU, lies primarily in the fact that Serbia followed the trend of supporting domestic companies through grants without a sound economic plan, while presumably using said companies as social welfare distribution channels. Today, with Serbia well on track to join the EU, such aid schemes become particularly important from the perspective of the planned privatizations of the Serbian “crown jewels”: the 11 large state-owned enterprises that hold particular strategic importance for the Government, as: (i) Serbia adopted its State aid rules in 2010, prior to finalizing its transition process, making any and all aid granted from 2010 onwards subject to inspection by competent authorities tasked with assessing and ensuring its compatibility with Serbian national law and applicable EU regulation; (ii) in cases where the aid is found to be illegal, it would need to be returned, imposing a severe financial burden on potential acquirers of the companies.
In addition, investors need to take into account that Serbia has, both internationally (via a number of investment treaties (e.g. by means of most-favored nation clauses, stabilization clauses etc.) and free-trade agreements) and domestically (through tax holidays (did someone say “Apple”?) and employment subsidies), created a wide net of incentives for local greenfield projects. Similarly, incentives to foreign investors can be easily torn apart before the State aid authorities if not handled with great care and expertise.
Serbia has, as it appears, reached a problematic position. On the one hand, it has a strong strategic, economic, and political interest in finalizing privatizations and attracting new investors, while, on the other hand, its rules on State aid create a strong disincentive for private investors. Consequently, although Serbia is clearly advancing in harmonization of its State aid rules with the EU law, these rules may prove to be the main deterrent for new investors, thus further prolonging the transition process and, paradoxically, hindering its progress towards the EU.
It almost goes without saying, the prevalence of either set of rules depends greatly on the acting forum (even arbitral awards ordering compensation to be paid to an investor do not hold as a sufficient guarantee), while vast know-how and rock-solid argumentation seem to be the key bargaining chip therein.
By Bogdan Gecic, Partner, and Tatjana Sofijanic, Associate, Gecic Law
This Article was originally published in Issue 4.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.