Serbia woos British firms with zero corporation tax offer

With the threat of bankruptcy hanging over its head, Serbia is offering tempting financial incentives to encourage foreign businesses to invest. But is it enough?

by Elizabeth Anderson
Last Updated: 20 Jul 2016

After spending much of the last few decades on the front line of politics, Serbia is now grappling with a new set of problems. The country’s budget deficit is swelling, a quarter of its people are unemployed and, according to deputy prime minister Aleksandar Vucic, Serbia is ‘virtually on the verge of bankruptcy.’

The country’s public debt ballooned from around 35% of GDP in 2009 to almost 60% last year and its budget deficit is around 7.5%.

To stave off an impending crisis, the cash-strapped country is hoping British businesses can help relieve the financial strain. In an attempt to woo foreign investors, companies which set up shop in Serbia will get a 10-year corporate tax break, providing they invest €9m (£7.8m) in the country and create at least 100 jobs.

Belgrade is still struggling to overcome its troubled past


In the heart of Belgrade, a factory is pumping out 1,900 cans a minute for the likes of Heineken, Coca-Cola and Pepsi. Ball Packaging is one of Serbia’s most successful foreign direct investment projects, investing €100m into its operations since coming to Serbia in 2004.

‘We came here because we need to be close to our customers, and being in the centre of everything saves on transport costs,’ says David Banjai, Ball Packaging’s plant manager. ‘The labour costs are also cheaper. A skilled person costs a lot less here than in Germany, for instance.’

Ball Packaging Europe, which is headquartered in Zurich and operates in 12 locations across Europe, produces around 1 billion cans a year. The business has been fairly recession-proof, having benefited from people opting to buy cheap cans from their local supermarket rather than go to the pub. Last year the firm’s exports from Serbia rose by around 40% on 2011.

Ball Packaging Europe, one of Serbia's biggest foreign investors, makes 1 billion cans a year.

‘When we first came here in 2004, I thought companies sexier than us would soon follow,’ Banjai says. ‘Why didn’t they come? Beats me. The only thing I can think of is that people haven’t made the effort to get to know the sorts of opportunities that are here. They think Serbia is a godforsaken black hole somewhere in the middle of the Balkans.’

Certainly Serbia has struggled to shake off memories of its troubled past. The seat of at least one world war and more recently in the 1990's, venue for some of the bloodiest and most divisive civil conflicts of the 20th century, the Balkans is historically the least politically stable area in the western world.

In a recent European Attractiveness Survey commissioned by EY, just 1% of investors picked Serbia as an attractive place to do business, although in reality the situation is more positive – Serbia scooped up 11% of all Central and Eastern Europe foreign investment projects in 2012. ‘This glaring mismatch suggests the country faces perception problems among foreign investors,’ the report concluded.

Despite Serbia’s troubled past, businesses are coming. Since 2000, the country has attracted nearly €25bn of inward foreign direct investment from companies including Microsoft, Telenor and Siemens. Its central location in south-east Europe means there is easy access to both the EU and Russia, and Serbia benefits from free trade agreements with both.

Entry into the EU is the Serbian government’s next priority; partly in the hope it will lure more firms to the country and partly to get access to all those centrally funded EU grants for areas of economic hardship. Accession negotiations between the European Council and Serbia will open in January next year, although the country isn’t expected to become a fully-fledged EU member before 2020.

‘Joining the EU means that your country holds up to certain standards. It gives a sense of security to people investing their capital here,’ says Vladimir Tomic, assistant director for FDI at SIEPA, Serbia’s investment promotion agency. ‘Serbia has struggled for years with perception problems, due to the civil wars in the 1990s and later the Kosovo problem. The EU gives you a stamp – certified country, safe to invest.’ Of course, EU membership will also give Serbia access to centrally-funded grants for economically deprived areas.

The country’s biggest ever industrial investment has come from Fiat. Since signing a joint venture with Serbia in 2008, the Italian carmaker has spent €1.2bn building a new plant in Kragujevac, a city on the outskirts of Belgrade, employing more than 3,000 people. Exports from the Fiat plant are a key driver of economic growth in the Balkan country, which emerged from recession in the first quarter of this year.

Aleksandra Rankovic, Fiat Serbia’s communications manager, praised the government’s support and tax and training incentives, but says he is concerned about the level of Serbia’s bureaucracy and the country’s infrastructure: ‘The roads and the railways need modernising to help us deliver products and make it easier for us to do business.’

Fiat has invested €1.2bn building a plant in Kragujevac

 

But there are more pressing concerns for the government. Like other Balkan states, Serbia has suffered something of a ‘brain drain.’ With an unemployment rate of 24%, it has struggled to keep hold of graduates seeking better wages and opportunities abroad.

There are signs that things are picking up though. On the outskirts of the city centre, a group of 20-somethings are huddled round a chess board, taking time out between conference calls to the US. Microsoft’s development centre in Belgrade employs 150 developers working on services such as Bing and Office. When it was established in 2005, it was one of just four such centres in the world.

‘Ten years ago if you wanted a really good product to work on, you’d need to move abroad. Now we’re seeing more and more cool places to work in Serbia,’ says Djordje Nijemcevic, 31, a senior development engineer in the Bing team. 

Djordje Nijemcevic came back to Serbia after living in GermanyThere are now 1,600 IT companies in Serbia, employing more than 14,000 people. For the first time ever, software exports will exceed frozen raspberries this year, despite Serbia being the world's largest raspberry exporter.

‘I worked in Germany for a year before coming back here to work for Microsoft,’ Nijemcevic adds. ‘In more developed countries, you’re just like one cog in a big machine. Here you have a chance to have some impact and to influence young folks and raise the bar of what Serbia can offer.’

So let's hope they can stave off that impending bankruptcy and keep the show on the road.

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