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Monday, November 21, 2022

Country Profile: Bosnia and Herzegovina Slowly Opens Up to Investors

 One of the things that is striking during a visit to Bosnia and Herzegovina (BiH) is the relative lack of international franchise companies doing business in the country. This is especially notable in the hospitality sector, where the vast majority of hotels are independent and locally-owned. Currently, Accor and Marriott are the only major international hotel companies operating in the country. But the picture may be different in five years’ time, thanks to a number of initiatives being put in place by international organizations.

Latin Bridge in Sarajevo, Bosnia and Herzegovina. (Leonid Andronov/Getty Images)

On October 12, the EU recommended Bosnia for candidate status, on the condition that a number of steps be taken dealing with several issues, including rule of law, judicial reform and corruption.This could seem like good news for international investors, according to Charlotte Ruhe, managing director for Central and South Eastern Europe at the European Bank for Reconstruction and Development (EBRD).

“When countries ascend into the EU, it’s like a Good Housekeeping seal of approval in terms of their rules of governance, which gives investors confidence,” she said.

However, Ruhe adds that given Bosnia’s current constitutional issues and complicated political structure, both relics of the  Dayton Peace Agreement, it might be quite some time before the country is able to make the qualifications for EU accession. And there are plenty of other matters as well.

Simply put: it’s complicated. The political structure divides the country’s governing bodies into two main entities: the Federation of Bosnia and Herzegovina, made up of a collection of somewhat autonomous cantons, and the Republika Srpska, where power is centralized at the top. There is a third administrative area, Brcko District which is a tiny section straddling a border between the other two. The three areas share a tripartite national presidency. As a result, says Almir Pestek, PhD, a professor teaching at the University of Sarajevo School of Economics and Business, “We are trapped into the post-Dayton structure, which is a big burden, since there are different economic and political systems and legislation is not harmonized.”

That means, he says, that “the overall business climate is pretty-bad compared to other countries in the region. You can see it from recent World Bank reports, the complex environment when it comes to government structure and legislation, plus high levels of corruption and slow administration, are main constraints. Based on that information, you can see why companies avoid us in terms of investments.”

The Slow Winds of Change

Yet, despite the aforementioned challenges, Pestek says he would still suggest investment here, particularly in the tourism sector. “In terms of tourism the positive things outweigh the negative. “Bosnia is far from its full potential,” he notes. Prior to the pandemic, Bosnia was growing at the third highest tourism rate in the world. While the pandemic put a huge dent in that progress, investment during that period by international organizations like USAID and the EBRD didn’t slow down.

EBRD is investing in the highway systems, improving connectivity between the country’s main cities and between BiH and neighbouring countries. Meanwhile, USAID’s Developing Sustainable Tourism in Bosnia and Herzegovina (Turizam) project is in the middle of a five-year (2020-2025), $20 million project aimed at improving the economic regulatory environment, enhancing the quality and diversity of products, professionalizing human and institutional capacity, and promoting Bosnia and Herzegovina to high-yield visitors.

Plus, there’s that EU invitation. Pestek believes working toward EU membership will give a boost to improvement efforts.

“So many international organizations tell us what should be done, but just a narrative and the situation hasn’t changed over the years,” says Pestek. “But maybe the idea of EU accession may finally be the incentive to help us resolve the issues on our to-do list. So, I think the invitation will help make the business climate better, but it will still take a while for us to make the changes.”

Opportunities for Private Investment

Despite the lack of a national tourism office and its limited transportation infrastructure, the country’s competitive advantages are many. BiH is cheap compared to most other European countries; the diversity of product and culture in a relatively small area is appealing, and its proximity to the rest of Europe are bonuses. Plus, the country is making substantial headway in Gulf markets.

About ten years ago, Ajdin Sehic, sales manager for the Tarcin Forest Resort and Spa, part of Accor’s  MGallery Hotel Collection, says BiH became increasingly popular among Saudis and other Middle Easterners looking to escape the scorching summers at home. Aside from its natural advantages, such as mountains and waterways, Sehic said Bosnia was particularly attractive because “it is a cheap destination in terms of accommodation and food (particularly attractive to Middle Easterners looking to stay for several weeks or months) and it is a ‘brotherhood’ country.” Muslims comprise the single largest religious community in the country, with the majority of those concentrated in the Federation of Bosnia and Herzegovina.

Where GCC travelers went, investment followed. Saudi investors in particular made note of the increasing demand and invested in several hotel properties, including the Tarcin Forest Resort and three other properties which were brought under Accor flags (the Novotel, Ibis Style and Swissotel, all located in Sarajevo). All of these properties opened between 2017 and 2019.

Frank Reul, Accor’s vice president of development for Northern Europe, Eastern Europe and the Balkans, says that after a pandemic pause, the company is once again exploring partnership possibilities in the country. Targets include the cities of Mostar, Banja Luka and Tuzla, plus resort locations in the mountainous regions. Given that the market “cannot carry many five-star hotels,” says Reul, “we are looking at growing the midscale Mercure brand and the premium Movenpick brand in the country.” He thinks the time for international investment in tourism is right. “It’s a tremendous opportunity, as the country is underdeveloping in terms of exploiting its tourism potential.”

Courtney Chubb, mission director of USAID/Bosnia and Herzegovina, concurs, saying: “The tourism sector offers tremendous investment potential. We are already seeing examples of successful foreign investments in the hotel and entertainment sector. For example, Hotel Malak Regency, a five-star hotel on the outskirts of Sarajevo, Tarcin Forest, Swissotel and several other resorts are examples of Middle East investments that have done well.”

Moving forward, Chubb adds: “Opportunities exist in the conferencing and exhibition space for new facilities, mixed use facilities (hotels with serviced or non-serviced residences), and in transport. In the hotel sector specifically, there are opportunities to increase international brand presence, as this is an area that offers ample room for brands to either invest or come in with management contracts to brand and operate local hotels.”

This article first appeared in Hospitality Insights.

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