According to the decision by the President of the Republic of Croatia, general elections for the 7th Croatian Parliament were held on 4 December 2011. With the overall national turnout of 61,95 percent, 151 Members of Parliament were elected in 10 national constituencies and in separate national minorities and diaspora constituencies.

The final and official election results were published by the State Election Commission on Tuesday, 13 December. According to the Constitution of the Republic of Croatia, the founding session of the Croatian Parliament must be held within 20 days after the announcement of the final election results. The President of the Republic of Croatia convened the first session of the 7th parliamentary term that took place on Thursday, 22 December 2011. The 7th parliamentary term was inaugurated by the election of the Speaker of Parliament, Mr. Boris Šprem.

After Croatia’s entrance into the European Union (EU) on 1 July 2013, the EU Nitrate Directive (91/676/EEZ) takes effect and regulates environmental protection measures in the area of agricultural production.  In order to protect ground and water, the Directive defines the maximum organic nitric oxide per hectare of used artificial fertilizer.  Croatia is third in Europe behind the Netherlands and Belgium in the use of artificial fertilizer per hectare.  According to the Nitrate Directive, during the first 4 years of adjustment, the use of organic nitric oxide is limited to 210 kg/ha and 170 kg/ha after the 4 year adjustment period.  The Ministry of Agriculture is lagging behind in its adjustment program, since they have not identified the areas vulnerable to the nitric oxide limit and have not approved their Action Program for the implementation of the Directive, which was a prerequisite for the closing of Chapter 11 (Agriculture and Rural Development) in the EU negotiation process.  The financial repercussions could be dramatic for Croatian farmers, since alignment with the Directive is prerequisite for the qualification of projects for EU funding.  This means that farmers need to invest in technology that will assist them in qualifying for EU funding.  Also, the reduction of nitric oxide will negatively affect the business of the national fertilizer producer, Petrokemija d.d. Kutina.  Petrokemija is the largest national producer and sold 370 tons of artificial fertilizer in Croatia in 2011.

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After media confirmation, Transportation Minister Sinisa Hajdas Doncic (SDP) confirmed that the European Investment Bank has agreed on financing the Zagreb airport expansion project for €120 million.  The financing is expected to complete the financing for the project for the French-led concessionaire – Zagreb Airport International Company Limited (ZAIC).

According to the 30-year concession signed between the government and ZAIC in April 2012, ZAIC was required to ensure project financing by 11 April 2013, in order for the government to transfer the airport management to ZAIC and for the beginning of the new terminal construction, which is expected in Q3/Q4 2013 with a 3-year completion deadline.

ZAIC is a French-Croatian construction and management consortium comprised of Aeroports de Paris Management, Bouygues Batiment International and the Croatian construction company Viadukt.  The 30-year concession is for the management of the Zagreb Airport and the financing, design and construction of a new passenger terminal, replacing the existing terminal.  TAV, the management company of the Istanbul airport, and Croatia Osiguranje, state-owned largest insurance group in Croatia, are investors into the ZAIC consortium in Q4 2012 Along with the construction of a new terminal, the concession contract includes the management of the current Zagreb Airport operations, including runways, current passenger terminal, cargo terminal, parking lots, and future property development.  The total value of the investment is approximately €324 million, with €236 million for the design and construction of the new terminal and €88 million for the operation of all airport infrastructure during the period of the concession.  The total value for the 30-year concession is €1.94 billion.

The estimates for the new terminal range from 3 to 5 million travellers, including significant increase in cargo traffic, making the future Zagreb Airport into a regional transportation hub.  The project is a strategic infrastructure and transportation project for the Zagreb, Croatia, Southeast Europe, and Europe, in general, as a regional hub and gateway to the region for both travellers and cargo.  The project further develops the European transportation corridors V and X.

Reports state that issues for the delay of the project include: financing difficulties by ZAIC, land ownership issues, project documentation and permitting issues, terminal design issues.  It is critical that these issues are addressed, so that they do not pose any further delays in the project, which means that the management transfer of the Zagreb airport to ZAIC in April/May is important to maintaining the construction plan for the project. (BJ/DV)

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At a press conference, Croatian PM Zoran Milanovic (SDP) presented the government’s new Tourism Minister Darko Lorencin (IDS) (see Person of the Week below), who is presently assistant to Economy Minister Ivan Vrdoljak (HNS) responsible for investments and competitiveness.

After the resignation of Veljko Ostojic (IDS) over a real estate transaction controversy by his spouse and accusations of conflict of interest over the transaction from 2004, the speculations that the Istrian Democratic Sabor would leave the ruling coalition were premature. Manager of the Brijuni Rivijera project, Ratomir Ivicic, has been named to be deputy Tourism Minister. (BJ)

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After approximately 10 years, the British air carrier British Airways (BA) will once again begin to fly between London and Zagreb.  BA commented that the decision to begin flights was influenced by Croatia’s EU accession in 2013, construction of the new Zagreb airport terminal, and the expectation of economic capacity to maintain profitability for the route…

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At the 60th Government Cabinet Session, held on 8 November 2012, the Croatian Government issued two decisions regarding local air transport services (PSO – Public Service Obligation).  The first decision awards the state-owned carrier Croatia Airlines (CA) the exclusive operating rights for the operation of state subsidised flights within Croatia through 31 March 2013.  CA is the dominant carrier in the country and substantially subsidised by the state, operating at a €5.3 million loss in 2011.  Also, CA operates under the Star Alliance air operator network, dominated by the German carrier Lufthansa.

The second decision is regarding the upcoming PSO tender for services after 31 March 2013.  Given the short timetable, it is expected that the Transport Ministry will issue a public services tender for the PSO valid from 31 March 2013 – 26 March 2016 for the following routes: Zagreb-Dubrovnik, Zagreb-Split, Zagreb-Zadar-Pula, Zagreb-Brac, Osijek-Dubrovnik, Osijek-Split, Osijek-Zagreb, Rijeka-Split-Dubrovnik.  The maximum number of subsidised flights is 6,857 per year and the operators will receive state subsidies totalling between €13 million and €17 million per year, dependent upon the number of yearly flights.

One of the conditions for qualifying for the PSO is that the bidder be registered in Croatia.  Presently, 4 registered operators own appropriate aircraft and a total of 12 companies are registered for appropriate aviation services in Croatia and are potential applicants. The deadlines for tender preparation, public tender process, awarding of tender and final date of services in operation (1 April 2013) are very short.  As of expected EU membership (1 July 2013), EU carriers and businesses will be allowed to operate in Croatia, but without state subsidies.

The above decisions allow CA to dominate the Croatian airspace through 2016, with state subsidies totalling an average of €45 million.  With Croatia’s entrance into the EU and the total liberalisation of the air traffic market in Croatia, this market dominance is only prolonged for a short period of time and delays the inevitable strategic business decision of the privatisation of CA.

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Minister of Maritime Affairs, Transport and Infrastructure Sinisa Hajdas Doncic (SDP) announced that the government intends restructure Croatia Airlines (CA) and is seriously considering privatising the state-owned carrier. While restructuring the struggling carrier, the minister stated that they will seek a potential strategic partner. Due to EU regulations, the government can privatise up to 49% to non-EU investors and up to 100% for investors from EU member states.

In 2012, CA ended with losses of € 62 million; in comparison, CA ran losses of €10 million in 2011. One of the primary reasons for CA’s financial difficulties is the failure to carry out the necessary restructuring of the company, which was outlined in November 2012. At the end of 2012, as an alternative to the restructuring of the company, the government initiated the recapitalization of CA. The recapitalization eventually amounted to €114 million, which is more than the initial €86 million than the government was planning to invest. In particular, the government turned its financial claims towards CA into capital/ownership share; €86 million was related to capital on paid state guarantees and it was used for the purchase of aircraft that CA could not repay.

Earlier this year, BDO Consulting, which produced a restructuring evaluation of Croatia Airlines, assessed that restructuring will need to include the layoff of 20% of personnel. Consequently, the assessment caused strong opposition from CA’s workers unions. Also, due to issues of interpretation of state aid towards the state-owned carrier, private low-budget carriers have begun international litigation procedures against the government’s policies of supporting CA…

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In 2012, Croatia Airlines (CA) registered losses of €63 million, six times more than the €10 million in losses in 2011.  The carrier’s operational and financial difficulties are forcing state subsidies and further financial restructuring.  In December 2012, the government approved €114 million in subsidies.  The carrier’s original 2012 restructuring plan needs to be revised.  CA’s restructuring consultant BDO presented their restructuring plan to the workers’ union, which included a downsizing of personnel by 20% or the possibility of privatising up to 35% of the carrier to a strategic partner…

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Europe’s largest low cost airline, Ryanair, has opened its first base in the former Yugoslavia, in Zadar Croatia.  The base will operate on a seasonal summer flights. Ultimately, the decision will be based on the performance of its summer services. Zadar Airport expects to handle over 500.000 passengers this year. Last year the airport welcomed 371.256 travellers through its doors.

Ryanair has now based a Boeing 737-800 at the airport, with a total workforce of 40, employing pilots, cabin crews and mechanics.  Ryanair will be opening 16 routes, including routes to Gothenburg, Liverpool, Paris, and Dublin.  Depending on the business results of the summer schedule, year-round flights are an option and the plan is to develop the business operations to employ up to 300 persons.

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Last week, Russia’s Sberbank, opened its first subsidiary in Zagreb. The bank has been operating in Croatia under its original name ”Sberbank” since 18 January 2013, when the former Volksbank (which Sberbank acquired in February 2012) was renamed. The acquisition allowed Sberbank to enter the Croatian market, largely dominated by Italian and Austrian banks.

Before the arrival of the Russian bank, Turkish Kentbank also recently entered the Croatian market in 2012, representing the continued Turkish economic presence in Croatia. Sberbank is currently the ninth bank per share in the total assets on the Croatian banking market and operates through 31 offices in 22 cities…

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