Law in transition · Jenö Bobrovszky, Acting Director, Division for Co-operation with certain Countries in Europe and Asia, World Intellectual Property Organisation 10 Fighting corruption

South-eastern Europe Spring 2002

Law in transition

page

1 ForewordNoreen Doyle, First Vice President, Banking, EBRD

2 Ten years of progress for intellectual property rights in transition countriesJenö Bobrovszky, Acting Director, Division for Co-operation with certain Countries inEurope and Asia, World Intellectual Property Organisation

10 Fighting corruption through an independent judicial systemPeter Eigen, Chairman, Transparency International

16 European energy security and co-operation: the Energy Charter Treaty and itsProtocol on TransitKarl Petter Waern, Senior Expert, the Energy Charter Secretariat

23 The EU acquis communautaire and the position of employees in the event oftheir employer’s insolvency: a comparison of statutory regulationsMario Thurner, Managing Director, and Anton Kraft, Project Manager Research, Centre ofLegal Competence

30 Focus on south-eastern Europe

31 Private sector development and the role of the EBRD in south-eastern EuropeOlivier Descamps, Business Group Director, EBRD

39 Reforming the legal environment in post-conflict societies: legal and policyaspects of the EBRD’s activities in south-eastern EuropeKamen Zahariev, Senior Counsel, EBRD

44 Survey of judicial codes of conduct in south-eastern EuropeAngela K. Conway, Country Director, & Amanda Gilman, Program Associate, AmericanBar Association – Central and East European Law Initiative

51 Mobilising the private sector in municipal infrastructure projects in south-eastern EuropeKalo & Associates, Eurolex Bulgaria, Law Office Bogdanovic & Dolicki, Law OfficePolenak, Nestor Nestor Diculescu, Karanovic & Nikolic Advokati

62 Romania’s legal regime for security interests in personal propertyCristiana I. Stoica and Valeriu Stoica, Stoica & Associates

67 Bulgaria: from paper-based registries to electronic, central registriesStephan Z. Kyutchukov, Partner, Djingov, Kyutchukov & Velichkov

72 Legal transition developments

78 Legal transition events

General Counsel of the EBRDEmmanuel Maurice

Co-Editors-in-Chief Gerard Sanders, David Bernstein

Focus EditorKamen Zahariev

Production EditorsAnila Gramshi, Nadia Hadjova

SupportRichard Bate, Sandy Donaldson,Adrian Jonker, Anthony Martin,Olivia Oddi, Jon Page,Tabitha Sutcliffe

The Office of the General Counselgratefully acknowledges the generoussupport of the Government of theNetherlands for funding the production of this issue of Law in transition.

Law in transitionSpring 2002

The European Bank for Reconstruction and Development (EBRD) is an international institution

whose members comprise 60 countries, the European Community and the European Investment Bank.

The EBRD operates in the countries of central and eastern Europe and the Commonwealth

of Independent States committed to multiparty democracy, pluralism, and market economies.

The EBRD’s countries of operations are: Albania, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina,

Bulgaria, Croatia, Czech Republic, Estonia, FR Yugoslavia, FYR Macedonia, Georgia, Hungary, Kazakhstan,

Kyrgyzstan, Latvia, Lithuania, Moldova, Poland, Romania, Russian Federation, Slovak Republic, Slovenia,

Tajikistan, Turkmenistan, Ukraine and Uzbekistan.

The EBRD works through the Legal Transition Programme, which is administered by the Office

of the General Counsel, to improve the legal environment of the countries in which the EBRD operates.

The purpose of the Legal Transition Programme is to foster interest in, and help to define, legal reform

throughout the region. The EBRD supports this goal by providing or mobilising technical assistance for

specific legal assistance projects which are requested or supported by governments

of the region. Legal reform activities focus on the development of the legal rules, institutions and

culture on which a vibrant market-oriented economy depends.

Law in transition is a publication of the Office of the General Counsel of the EBRD. It is published twice a year and is available in English and Russian. The editors welcome ideas, contributions and letters, butassume no responsibility regarding them. Submissions should be sent to David Bernstein, Office of the General Counsel, EBRD, One Exchange Square, London EC2A 2JN, United Kingdom; or [email protected]

The contents of Law in transition are copyrighted and reflect the opinions of the individual authors and do notnecessarily reflect the views of the authors’ employers, law firms, the editors, the EBRD’s Office of the GeneralCounsel or the EBRD generally. Nothing in the articles should be taken as legal advice.

© European Bank for Reconstruction and Development, Spring 2002.

All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means,including photocopying and recording, without the written permission of the copyright holder. Such written permissionmust also be obtained before any part of this publication is stored in a retrieval system of any nature.

European Bank for Reconstruction and DevelopmentOne Exchange SquareLondon EC2A 2JNUnited KingdomTel: +44 20 7338 6000Fax: +44 20 7338 6100http://www.ebrd.com

Law in transition is printed on Hannoart matt which is an environmentally responsible paper. The pulp used in its manufacture is taken from sustainable forest sources and is 100% TCF (Totally Chlorine Free).

The report is printed by Hyway Printing Group, London, using the waterless offset litho process. Hyway hold the ISO 14001 international standard for effective management of environmental impact including wasteminimalisation and recycling.

Ref: 5188 Law in transition, Spring 2002.

Law in transition – Foreword 1

Noreen Doyle, First Vice President, Banking, European Bank for Reconstruction and Development

This issue of Law in transition, published inconjunction with the EBRD’s 2002 AnnualMeeting in Bucharest, provides the Bank with an opportunity to focus its attention on south-eastern Europe (SEE), a region that haspresented the EBRD and other investors with a unique set of transition risks and challenges.Recent developments in the region may nowprovide the opportunity for SEE countries tomake up for lost time and increase the pace of their transition to market economies andmultiparty democracies.

While all of the EBRD’s countries of operationshave had to struggle with the challenges ofsimultaneously transforming their political andeconomic systems, many of the SEE countrieshave had to undertake these transformations inthe shadow of war and civil conflict. This addedlevel of political instability and insecurity hasresulted in investors remaining on the sidelinesor putting their money into more reliable andsafe markets. Foreign direct investment percapita into SEE has only been one-quarter of thatachieved in central Europe and the Baltic statessince 1999. The EBRD, however, has beenactive in the region: at the end of 2001, theBank had committed €4,319 million in debt andequity to the seven SEE countries (Albania,Bosnia and Herzegovina, Bulgaria, Croatia, FRYugoslavia, FYR Macedonia and Romania).

With the recent political changes in the FederalRepublic of Yugoslavia and the negotiated end toethnic strife in the Former Yugoslav Republic ofMacedonia late last year, SEE countries are nowentering a period of greater political stability thatcan restore investor confidence. However, toattract the investment necessary to advanceeconomic transition, these countries mustdouble their efforts to build the effectiveinstitutions and undertake the structural reformsthat have proven critical to economic growth anddevelopment. SEE can now learn from andimprove on a decade of transition in central and eastern Europe.

The EBRD’s experience has shown that a keycomponent of successful transition is theestablishment of sound governance, both at themicro and macro levels. In the early stages oftransition, the EBRD was faced with the task ofidentifying commercially viable investments inSEE. Now, good private sector projects can beidentified but investors are put at risk by poorcorporate governance practices and a lack oftransparency from managers and controllingshareholders. While inadequate corporategovernance has been identified as animpediment to investment throughout thetransition countries, the problem is more acute in SEE.

Recently, SEE countries have begun to make up ground by building the legal foundation for sound economic development. In somecommercial legal areas, such as pledge andcompany laws, SEE countries are perceived as close to or on a par with EU accessioncountries. However, in other areas critical toimproving corporate governance, such asbankruptcy and capital market reform, SEEcountries lag behind their neighbours. In order to correct the micro-level governance problems in the region, SEE countries must continue to bring their laws and regulations up to bestinternational practice as well as focus additionalresources on building institutions that caneffectively implement these laws.

The corporate governance constraints toattracting foreign, direct investment arecompounded by public sector governance failingsin SEE. The EBRD and others have documentedthe negative effects that poor state institutionshave on economic transition. Corruption, ever-changing investment laws and regulations and aweak, ineffective judiciary are impediments toattracting investment in several of the SEEcountries. In surveys conducted by the EBRD,investors have indicated that their lack ofinterest in SEE is due to ineffective protection of property rights and contract enforcement by

SEE judiciaries as well as uncertainty andinstability in privatisation policy. Addressing and adequately funding judicial reform, decidingon a transparent, long-term privatisation policy and creating effective legal institutions, shouldbe high priorities for SEE countries if they are to overcome investor fears.

The governance problems that SEE countriesmust address to attract the investmentnecessary in order to advance economic andpolitical transition are not new – all transitionand developing countries are grappling with the same issues. What is new for many of the SEE countries is that after ten years of wars and conflict, there is sufficient political stabilityin the region to permit these countries to focustheir energy on building sound governanceprinciples and practices. Over the past decade of transition the EBRD has gained experience in helping private companies and governmentsidentify solutions to their governance problemsand the Bank is now putting this experience to good use in countries of SEE.

Making up for lost time in south-eastern Europe: unlockinginvestment by improvinggovernance

Ten years of progress forintellectual property rights in transition countriesIntellectual property refers to the legal rightsthat result from intellectual activity in alltypes of fields – scientific, technological,literary and artistic. There are two mainreasons that justify the existence of laws toprotect intellectual property. Firstly, they give statutory expression to the moral andeconomic rights of creators and the rights ofthe public accessing those creations. Secondly,as intentional acts of government policy, theypromote creativity, disseminate the applicationof its results and encourage fair trading – all of which contribute to positive economicand social development. This article exploresthe advances made in intellectual propertylaw in transition countries over the last tenyears and the work of the World IntellectualProperty Organisation (WIPO) to facilitatesuch progress.

Jenö Bobrovszky, Acting Director, Division for Cooperation with Certain Countries in Europeand Asia, World Intellectual Property Organisation (WIPO) *

2 Law in transition

WIPO is a specialised agency of the UnitedNations (UN)1 focusing on global cooperation in intellectual property. It aims to promotecreativity, innovation, technological exchange,economic growth and cultural development. It attempts to fulfil its global mandate concerningthe promotion and protection of intellectual prop-erty rights by harmonising certain norms of inter-national intellectual property law through thework of its Standing Committees and by admini-stering certain global treaties. In this way WIPOcan provide global intellectual property servicesand facilitate the acquisition and maintenance of industrial property rights.

It is widely recognised that over the last decade,economic, technical and legal developmentshave increased international attention on intel-lectual property. Economic factors have influ-enced the increasing importance of intellectualproperty protection. Globalisation and theliberalisation of world markets have intensifiedcompetition among companies. Increasingly,resources of an intellectual nature (as opposedto physical assets), are of crucial importance to businesses. The development of intellectualproperty rights is due to a large extent to therevolutionary technological advances that have been made in the fields of information technology and biotechnology over the lastdecade. Such technologies are difficult andexpensive to develop, but easy and cheap toimitate, therefore requiring more protection than traditional technologies. At a corporatelevel, it is widely recognised that intellectualproperty particularly inventions, designs andtrademarks, represents intangible assets andintellectual value components of certain market commodities which provide an importantcompetitive edge in technological innovation and marketing. Creating and developing suchassets involves substantial investment and risk-taking. On the other hand, their use intro-duces sophisticated and distinctive products into the market and is therefore linked to economic growth and cultural development. This often generates considerable income.

As a consequence of economic and techno-logical advances, the need for appropriateintellectual property protection has beenrecognised at national, regional and global levels of trade policy. The Agreement on Trade-Related Aspects of Intellectual PropertyRights (TRIPS Agreement) is the result of this global recognition.2

The legal protection of intellectual property is highly important for empowering the holders of these intangible assets. Intellectual propertyrights are legal vehicles for these values as theyprovide exclusive rights for their industrial andcommercial use, thus allowing the recuperationof the investment made and a fair return on thework of inventors or authors. Legal protectionprevents the imitation and misappropriation ofintellectual values, and establishes a legal basisfor technology transfer, sales and licensing.

An efficient intellectual property frameworkconstitutes a precondition for the confidence and willingness of foreign investors to enter into economic commitments in any country. The legal and organisational infrastructure for the protection of intellectual property has the same importance for the technological,economic and cultural development of a countryas roads and bridges do for the transport of goods and services.

WIPO and its member countries, includingtransition countries, closely follow intellectualproperty related global issues. These issuesconcern: electronic commerce, particularly theconflict of domain names and trademarks; thepatentability of business methods; the prior arteffect of internet publications; and jurisdictionand applicable law. There are also importantissues concerning biotechnology, particularly the patentability of biotechnological inventions;the protection of plants; the biological disclosure by deposit of biological material or by DNAsequence listing; traditional knowledge; and genetic resources and folklore.

Intellectual property systems intransition countries

One of the focus areas of WIPO’s work is assisting developing countries and transitioncountries to utilise intellectual property-orientedmarket developments as a platform for theireconomic transformation. During the period thattransition countries were governed undercommand economies, their intellectual propertylaws were distorted or hindered in functioning. In several countries the state practicallyexpropriated inventions by means of the so-called “socialist protection form” of aninventor’s certificate. During the first decade of transition of these countries to marketeconomies, there was a renaissance of theconcepts of intellectual property protection.

1 The Convention Establishing the WorldIntellectual Property Organisation wassigned in Stockholm in 1967 andentered into force in 1970. However,the origins of WIPO go back to 1883and 1886, with the adoption of theParis Convention and the BerneConvention respectively.

2 The TRIPS Agreement, which came intoeffect on 1 January 1995, is the mostcomprehensive multilateral agreementon intellectual property. It deals witheach of the main categories ofintellectual property, establishesstandards of protection and rules onenforcement, and provides for theapplication of the World TradeOrganisation (WTO) dispute settlementmechanism to resolve disputesbetween member states. One feature ofthe TRIPS Agreement is that theprotection of intellectual property hasbecome an integral part of themultilateral trading system as reflectedby the WTO. The failure of a country tomeet its TRIPS obligations canjeopardise its market access rights andother benefits under the WTO.

Law in transition 3

This meant not only the introduction orreintroduction of classical market-orientedintellectual property laws but also the beginningof significant efforts to bring these laws intocompliance with the TRIPS Agreement, the WIPOtreaties and European norms and to furtherdevelop the intellectual property sector.

The 27 countries in transition in Europe and Central Asia have differing levels of development, diverse languages, religions and cultural traditions, dissimilar socialproblems and vastly different needs and politicalorientation. For reasons of policy coordination,WIPO distinguishes between two groups of countries: the central European and Balticstates group3 and the Caucasian, Central Asianand eastern European countries group.4 Amongthe countries in these groups there are 20 newlyindependent countries (underlined in thefootnotes) that have established their nationalintellectual property legislation and administra-tions and joined WIPO during the last ten years.Most of them are still in the process of develo-ping their intellectual property sectors throughthe preparation of new legislation or theamendment of existing legislation, humanresources development, institution building andmodernisation, with the aim of joining the World Trade Organisation (WTO).

In seven of the transition countries5 theprotection of intellectual property throughtraditional laws, institutions and humanresources has been evolving over almost ahundred years. Central European countries are mostly “old” members of WIPO and the WTO,and aim to establish closer ties and cooperationwith the EU, the European Patent Organisation(EPO)6 and other European institutions. Some of the countries in the group of Caucasian,Central Asian and eastern European countrieshave set up regional organisations in closecooperation with WIPO, such as the InterstateCouncil on the Protection of Industrial Propertyand the Eurasian Patent Organisation.

WIPO has developed a cooperation programmefocusing on transition countries. The objectivesof this programme are to assist in reforming and strengthening intellectual property systemsand to encourage their effective use. Within the programme, WIPO continues to assist in strengthening national policies and legalframeworks of intellectual property, taking intoaccount relevant international standards and

trends. It also focuses on the modernisation of industrial property and copyrightadministrations, human resources developmentand the introduction of modern managementsystems. Special efforts are being made tosupport national administrations in expandingtheir access to technological, legal and otherrelevant information. WIPO assists therespective countries in increasing generalawareness of the fact that effective protectionand proper use of intellectual property areessential for access to markets, foreigninvestments and the transfer of technology.

WIPO assistance has resulted in the adoption of new intellectual property laws or the amend-ment of existing ones and has enabled thetransition countries to accede to the mostimportant treaties administered by WIPO and the regional organisations (see Tables 1 and 2).In addition, these countries have set up ormodernised intellectual property offices andother institutions. They have also upgradedpatent information services and human resour-ces, partly through WIPO’s assistance and withthe aid of regional organisations working withinthe framework of the EU’s RIPP and TACISprogrammes.7 As a result of these developmentsand through cooperation in the framework ofWIPO, 20 newly independent countries havebeen integrated into the global intellectualproperty community during the last decade.

Progress of patent laws

During the last ten years, patent laws have been enacted, renewed or amended in mosttransition countries, mainly in order to complywith the Paris Convention, the TRIPS Agreement,the Patent Cooperation Treaty (PCT) and, in thecase of the central Europe and Baltic states, with the European Patent Convention and itsRegulations and the European Directives andCouncil Regulations. The essential elements of patent law revision concern the availability,scope and use of patent rights in accordancewith the TRIPS Agreement.

A recently adopted Patent Law Treaty (PLT)streamlines formalities and procedures fornational and regional patent applications and patents.8 It provides for simple filing daterequirements, a standardised set of formalrequirements, simplified procedures, means for avoiding unintentional loss of rights and basic principles for electronic filing. Users

4 Law in transition

3 Members of this group include Albania,Bosnia and Herzegovina, Bulgaria,Croatia, the Czech Republic, Estonia,Hungary, Latvia, Lithuania, Poland,Romania, the Slovak Republic,Slovenia, FYR Macedonia and FRYugoslavia.

4 Members of this group include Armenia,Azerbaijan, Belarus, Georgia,Kazakhstan, Kyrgyzstan, Moldova,Russia, Tajikistan, Turkmenistan,Ukraine and Uzbekistan.

5 Bulgaria, the Czech Republic, Hungary,Poland, Romania, FR Yugoslavia andRussia.

6 The EPO allows anyone, irrespective ofnationality or domicile, to obtain aEuropean patent for an invention in thedesignated Contracting States by filinga single application with, and making asingle payment to, the European PatentOffice in Munich or its branch at TheHague. The granted European patent isa bundle of national patents: it confersin each Contracting State for which it isgranted the same rights as would beconferred by a national patent.

7 The RIPP programme was set up for thecentral European countries and theBaltic states, while the TACISprogramme was set up for theCommonwealth of Independent States(CIS) countries.

8 The Patent Law Treaty (PLT) is aninternational treaty on patentformalities and procedures that waselaborated in the framework of theStanding Committee on the Law ofPatents and adopted by a DiplomaticConference held in May and June2000. The Conference was convenedunder the auspices of WIPO.

The legal and organisational infrastructure for the protection of intellectual property has the same importance for the technological,economic and cultural development of a country as roads and bridges do for the transport of goods and services.

Law in transition 5

W ● ● ● ● ● ● ● ● ● ● ● ● ● ● ●

P ● ● ● ● ● ● ● ● ● ● ● ● ● ● ●

MM ● ● ● ● ● ● ● ● ● ● ● ● ● ●

MP ● ● ● ● ● ● ● ● ● ● ●

PCT ● ● ● ● ● ● ● ● ● ● ● ● ● ● ●

PLT ● ● ● ● ● ● ● ● ●

TLT ● ● ● ● ● ● ●

H ● ● ● ● ● ● ●

GH ● ● ● ● ● ● ● ●

BP ● ● ● ● ● ● ● ● ● ● ● ●

LI ● ● ● ● ●

IPC ● ● ● ● ● ● ● ●

N ● ● ● ● ● ● ● ● ● ● ● ● ● ●

VC ● ● ● ●

LO ● ● ● ● ● ● ● ● ● ● ● ●

MI ● ● ● ● ● ●

NOS ● ● ● ●

UV ● ● ● ● ● ● ● ● ●

B ● ● ● ● ● ● ● ● ● ● ● ● ● ● ●

RO ● ● ● ● ● ● ● ● ● ● ● ●

PH ● ● ● ● ● ● ● ● ● ● ●

S ● ● ● ●

WCT ● ● ● ● ● ● ● ●

WPPT ● ● ● ● ● ● ● ● ●

WTO ● ● ● ● ● ● ● ● ● ● ● ●

EPO ● ● ● ● ● ● ● ● ● ●

EA ● ● ● ● ● ● ●

Bul

garia

Cze

ch R

epub

lic

Esto

nia

Hun

gary

Latv

ia

Lith

uani

a

Pola

nd

Rom

ania

Slo

veni

a

Slo

vak

Rep

ublic

Alba

nia

Bos

nia

and

Her

zego

vina

Cro

atia

FYR

M

aced

onia

FR

Yugo

slav

ia

W WIPO ConventionP Paris ConventionMM Madrid Agreement (Marks)MP Protocol to the Madrid AgreementPCT Patent Cooperation TreatyPLT Patent Law Treaty (Signatories)TLT Trademark Law TreatyH Hague Agreement (Industrial Designs)GH Geneva Act of Hague (Signatories)BP Budapest TreatyLI Lisbon AgreementIPC Strasbourg AgreementN Nice AgreementVC Vienna Agreement

LO Locarno AgreementMI Madrid Agreement (Indications of Source)NOS Nairobi TreatyUV International Convention (New Varieties of Plants)B Berne ConventionRO Rome ConventionPH Phonograms ConventionS Satellite ConventionWCT WIPO Copyright Treaty (Ratifications)WPPT WIPO Performances and Phonograms Treaty (Ratifications)WTO World Trade OrganisationEPO Accession to EPO in 2002EA Extension Agreement on European Patents

Table 1: State parties to IP related treaties in the central European and Baltic states (as of 1 January 2002)

6 Law in transition

W ● ● ● ● ● ● ● ● ● ● ● ●

P ● ● ● ● ● ● ● ● ● ● ● ●

MM ● ● ● ● ● ● ● ● ● ●

MP ● ● ● ● ● ● ●

PCT ● ● ● ● ● ● ● ● ● ● ● ●

PLT ● ●

TLT ● ● ● ●

H ●

GH ● ●

BP ● ● ● ● ● ●

LI ●

IPC ● ● ● ● ● ●

N ● ● ● ● ● ● ●

VC ● ●

LO ● ● ● ● ●

MI ●

NOS ● ● ● ● ●

UV ● ● ● ●

B ● ● ● ● ● ● ● ● ● ●

RO ● ●

PH ● ● ● ● ●

S ● ●

WCT ● ● ● ● ●

WPPT ● ● ● ●

WTO ● ● ●

EAPO ● ● ● ● ● ● ● ● ●

Arm

enia

Azer

baija

n

Geo

rgia

Kaz

akhs

tan

Kyr

gyzs

tan

Tajik

ista

n

Turk

men

ista

n

Uzb

ekis

tan

Bel

arus

Mol

dova

Rus

sia

Ukr

aine

W WIPO ConventionP Paris ConventionMM Madrid Agreement (Marks)MP Protocol to the Madrid AgreementPCT Patent Cooperation TreatyPLT Patent Law Treaty (Signatories)TLT Trademark Law TreatyH Hague Agreement (Industrial Designs)GH Geneva Act of Hague (Signatories)BP Budapest TreatyLI Lisbon AgreementIPC Strasbourg AgreementN Nice Agreement

VC Vienna AgreementLO Locarno AgreementMI Madrid Agreement (Indications of Source)NOS Nairobi TreatyUV International Convention (New Varieties of Plants)B Berne ConventionRO Rome ConventionPH Phonograms ConventionS Satellite ConventionWCT WIPO Copyright Treaty (Ratifications)WPPT WIPO Performances and Phonograms Treaty (Ratifications)WTO World Trade OrganisationEAPO Eurasian Patent Orginisation (EAPO) membership

Table 2: State parties to IP related treaties in the Caucasus, Central Asia and eastern Europe (as of 1 January 2002)

WIPO has developed a cooperation programmefocusing on the transition countries. Theobjectives of this programme are to assist inreforming and strengthening intellectual propertysystems and to encourage their effective use.

of the patent system will be able to rely uponpredictable and simple procedures for filingnational and regional patent applications and for the maintenance of patents in all ContractingParties. The PLT will enter into force threemonths after ten countries have deposited theirinstruments of ratification or accession. WIPO is also promoting the accession of transitioncountries to the PLT.

The adoption of the PLT has opened the door for discussions on substantive harmonisation of patent law. This encouraging perspective will hopefully lead to results which will positivelyaffect the examination of applications andobtaining of patents throughout the world. Such work will have to be closely coordinatedwith the ongoing efforts on the reform of the PCT. It is hoped that the reciprocal influence of these related exercises with the participationof the transition countries will be an importantfactor in the development of an effectiveinternational patent system.

With respect to regional cooperation in thepatent field, the countries of central Europe and the Baltic states have entered into closecooperation with the EPO. Seven countries9

concluded agreements on the extension ofEuropean patents to their territory and tencountries10 have been invited to accede to theEuropean Patent Convention with effect from 1 July 2002. The accession will strengthen thenew members’ ties with the European EconomicArea, as well as facilitating their integration into the EU.

In addition, nine11 of the group of Caucasian,Central Asian and eastern European countrieshave concluded the Eurasian Patent Convention.This Convention allows anyone, irrespective ofnationality or domicile, to obtain a regionalEurasian Patent for an invention having unitaryeffect in all of the Contracting States by a singleapplication and on the basis of a centralisedpatent search and examination. Five years afterits establishment, the Eurasian Patent System is now widely recognised and holds a solidposition in the worldwide patent system.

Progress of the trademark andindustrial design laws and the laws ongeographical indications

The increased competitive value of trademarks,industrial designs and geographical indications12

require a higher level of protection at regional,national and international levels. Consequently,the most important developments ininternational intellectual property law during the last decade have aimed at strengthening the protection of these rights and simplifying the procedures for obtaining such protection.The requirements below serve as a basis for the renewal and amendment of the respectivelaws and procedures:

■ compliance with the standards of the TRIPS Agreement concerning the availability,scope and use of trademark rights and rights involving industrial designs andgeographical indications;

■ compliance with the standards of theTrademark Law Treaty harmonising and simpli-fying national trademark procedures;

■ improvement of the protection of well known marks in accordance with the WIPO Joint Recommendation adopted in September 1999;

■ harmonisation and simplification of the formalrequirements for the recording of trademarklicences in accordance with the WIPO JointRecommendation adopted in 2000;

■ protection of trademarks on the internet, in particular concerning abusive domain name registration and use of trademarks on the internet in accordance with the WIPO Joint Recommendation adopted in 2001;

■ the addressing of conflicts betweentrademarks and certain other signs, in particular International Non-proprietaryNames (INNs) of pharmaceuticals; and

■ enlargement of the geographical scope of the Madrid Agreement and Protocol to it on the international registration oftrademarks and the Hague Agreement and its Geneva Act concerning the internationaldeposit of industrial designs.

Through the EU integration process13 many of the central European countries and Baltic states are oriented towards compliance with the respective European Directives, CouncilRegulations and towards the accession to the

9 Albania, Latvia, Lithuania, Romania, Slovenia, FR Yugoslavia and FYR Macedonia.

10 Bulgaria, the Czech Republic, Estonia,Hungary, Latvia, Lithuania, Poland,Romania, the Slovak Republic andSlovenia.

11 Armenia, Azerbaijan, Belarus,Kazakhstan, Kyrgyzstan, Moldova,Russia, Tajikistan and Turkmenistan.

12 A trademark is a badge of identity andperforms functions which are related tothe distinguishing of marked goods orservices, their origin, their quality andtheir promotion in the market place.Industrial designs, such as ornamentalappearances of products, appeal to theeye and the aesthetic sense of thebuyers. Geographical indicationsidentify goods as originating in theterritory of a country or a region orlocality in that territory, where a given quality, reputation or othercharacteristic of the goods is essentially attributable to itsgeographic origin.

13 The approximation of laws to theCouncil Directives is aimed at avoidingdisparities which may distort compe-tition. The European CommunityTrademark System provides for a single registration covering allmember states of the EU.

Law in transition 7

European Community Trademark System and the Office for Harmonisation in the InternalMarket (Trademarks and Designs).

While the countries in the Caucasian, CentralAsian and eastern European group have notexpressed any intentions to set up a regionalorganisation on trademarks, they have con-cluded an intellectual property rights protectionagreement14 and an agreement for protection of trademarks and geographical indications.15

These agreements are aimed at strengtheningthe cooperation of the countries in enforcementof intellectual property rights.16 It is also worthnoting that Georgia recently prepared and sub-mitted a draft Agreement to the CIS EconomicCouncil on the creation of an interstate registerof geographical indications.

Layout designs of integrated circuitsand trade secrets

The protection of these special creations isrequired by the TRIPS Agreement. Protectingintellectual property in integrated circuits is very important because unauthorised copyingand the use of innovative semiconductor chipscauses substantial losses of revenue toinnovative semiconductor companies. Given the complexity of integrated circuits, almost all intellectual property rights come into playwhen protecting the rights of those who invest in the design and production of such circuits.Several transition countries have adoptedspecial laws on the protection of layout-designsof integrated circuits, and other countries are in the process of elaborating similar laws.

The transition countries have regulated the protection of trade secrets against unautho-rised use and disclosure by various methods and legal provisions. Some countries haveenacted special provisions for the protection of trade secrets, either under the specificlegislation on unfair competition or as part of another law. Other countries have enactedcriminal, administrative, commercial or civil law provisions prohibiting the unauthorised use or disclosure of business secrets. Finally, it is not unusual to have combinations of theabove means of protection available.

The progress of copyright laws

In the field of copyright, most transition countrieshave adopted or renewed their respective laws to make them compliant with the Berne Conven-tion, the Rome Convention, the PhonogramsConvention and the TRIPS Agreement.

In December 1996 two new international treaties were adopted at the DiplomaticConference on Certain Copyright andNeighbouring Rights Questions, namely the WIPO Copyright Treaty (WCT) and the WIPOPerformances and Phonograms Treaty (WPPT).These two WIPO “Internet treaties” provideinternational protection, attempting to meetchallenges presented by modern digitalcommunication technology, particularly theInternet. These treaties, the promotion of which has been a priority activity of WIPO, have already been ratified or implemented by several transition countries. Compliance with the European Copyright Directives repre-sents another challenge for the countries aiming to join the EU.

Participation of transition countries inintellectual property-related activities

Transition countries have been activeparticipants in a series of intellectual property-related activities of WIPO, such as:

■ institution building focusing on modernisingand strengthening the capacities of patentoffices, copyright agencies and organisationsfor collective management of copyright andrelated rights;

■ human resource development by awareness-building, distance learning and providing forums for decision makers, policy advisers and professionals;

■ development of information technology, in particular WIPOnet17 and informationtechnology services in the framework of the Standing Committee on Information Technologies;

■ upgrading the capacity of governmental,private and civil society to meet theintellectual property needs of small and medium-sized enterprises (SMEs);

■ development of infrastructure services andinnovation promotion, in particular cooperationwith associations of inventors, and innovationsupport centres by the organisation ofexhibitions and the granting of awards.

Strengthening of enforcement

WIPO views the strengthening of enforcementmechanisms of intellectual property rights as a crucial element to the advancement ofintellectual property protection. Theenhancement of intellectual propertyimplementation mechanisms has becomeincreasingly important due to the expansion of imitation technologies which facilitate theinfringement of protected creations of mind and commercial symbols. Violations ofintellectual property rights are rampant in severalcountries. Some of the consequences of trademark violations, counterfeits and patentinfringements are:

■ consumers are cheated and health and safety is jeopardised when consumers purchasecounterfeit pharmaceuticals, food, beverages,spare parts and other goods;

■ jobs are lost, the black market economyexpands, governments lose considerablerevenue in uncollected taxes;

■ the reputation of valued trademarks andpatents is damaged as low quality imitationsflood the market;

■ intellectual property rights without effectiveenforcement are regarded as “paper tigers”without meaningful value;

■ foreign and domestic investments arehindered as companies prefer investing in countries where intellectual property rights are protected;

■ the price of imported technology increases as the owner of technology translates his or her higher legal risk into a higher price;

■ admission of certain countries to keymultilateral organisations (for example, the WTO) is delayed.

Effective enforcement is possible throughvigilance and the coordinated efforts ofgovernments, enforcement agencies, rightholders and the public. The development ofappropriate enforcement mechanisms has been an area of concern to WIPO, the WTO andother organisations and to transition countries,as well as, in recent years, to the private sectorwhich has been cooperating with such organi-sations (in particular the Coalition for Intellectual Property Rights (CIPR) concerning the CIS countries).

8 Law in transition

WIPO views the strengthening of enforcementmechanisms of intellectual property rights as a crucial element to the advancement ofintellectual property protection.

The invigoration of intellectual property systems, the strengthening of the capabilities of the judiciary, police, customs and otherenforcement agencies by informing and training such bodies are methods through which enforcement of intellectual property rights can be strengthened. The aim is to ensure that right holders are able to act against infringers rapidly, effectively and in a cost-effective manner.

Conclusion

The last decade was a period of revival at anadvanced level of intellectual property protectionin the transition countries. WIPO is committed tocontinue promoting this positive process, as aprecondition of technological progress, economicgrowth and cultural development for the benefitof the transition countries and the intellectualproperty community worldwide.

14 Agreement Concerning the Cooperationin the field of Prevention of Any Act ofInfringement of Intellectual PropertyRights, concluded on 6 March 1998.

15 Agreement on Measures for thePrevention and Repression of the Useof False Trademarks and GeographicalIndications, concluded on 4 June 1999.

16 Countries party to the two Agreementsare: Armenia, Azerbaijan, Belarus,Georgia, Kazakhstan, Kyrgyzstan,Moldova, Russia, Tajikistan, Ukraineand Uzbekistan.

17 WIPOnet will promote internationalcooperation by facilitating the digitalexchange of intellectual propertyinformation between the intellectualproperty offices of its member states. Itwill also enable these states toundertake operations related tointellectual property rightsmanagement, in particular, thoserelated to the international treaties,such as the Patent Cooperation Treaty(PCT). In doing so, WIPOnet willpromote the progressive developmentand application of global standards andguidelines, and enhance the worldwideuse of strategic information for moreeffective protection and enforcement ofintellectual property rights.

* Jenö Bobrovszky, Acting Director,Division for Cooperation with Certain Countries in Europe and Asia, World Intellectual Property Organisation34, chemin des ColombettesP.O. Box 181211 Geneva 20SwitzerlandTel: + 41 22 338 9397Fax: +41 22 338 8110E-mail: [email protected]

The views expressed in this article are thepersonal views of the author and are notnecessarily shared by the World IntellectualProperty Organisation.

Law in transition 9

Fighting corruption through anindependent judicial system+

The independence of the judiciary is afundamental component of a fair andtransparent legal system. It is vital that theexecutive arm of government respects theindependence of the judiciary and otheroffice-holders who are given powers ofindependent action. Judicial independencecan be undermined by the executive, which isable to manipulate the assignment of casesthrough a compliant chief justice, or byappointing as many of its political supportersas possible to the bench. A dysfunctionaljudicial system is a primary indicator thatcorruption is spiralling out of control.Transparency International (TI) believes theRule of Law is of paramount importance inensuring independence and accountability.

Peter Eigen, Chairman, Transparency International*

10 Law in transition

An effective judiciary is an essential pillar inestablishing and protecting the Rule of Law. TI’s fight against corruption focuses closely on the judiciary for two reasons. Firstly, thejudicial system is an essential element of any integrity system that protects society against corruption; and secondly, the judiciary is also vulnerable to corruption and thereforeneeds protecting.

The importance of the judiciary

An independent, impartial and informed judiciaryis crucial to the realisation of just, honest, openand accountable government.

The constitutional role of the judiciary is toreview actions taken by the government and to determine whether they comply with theconstitution and the laws enacted by thelegislature. To perform this role effectively, the judiciary must be independent of theexecutive. In emerging democracies, the judiciaryhas the additional task of guaranteeing that new laws passed by an inexperienced executive or legislative branch do not violate theconstitution or other legal requirements.

Of the three arms of government, the judiciary is perhaps the most vulnerable to corruption. If the executive and the legislature do notrespect the independence of the judiciary, then it can be severely undermined. For instance,when the corruption of Peruvian PresidentAlberto Fujimori was exposed, a series of videosemerged. One showed the head of the NationalIntelligence Agency, Vladimiro Montesinos,apparently offering a congressman a bribe.Another showed Montesinos bribing ministers,judges and police chiefs.

The capacity of the judiciary should not beoverstretched. By itself, it is not able to carry the whole burden of securing the Rule of Law.History has shown how easily the judicial systemcan be made subservient to dictatorship andabuse. Examples of this can be found in manyparts of the world. For instance, in Pakistan five successive elected governments have been dismissed on charges of corruption andmismanagement since 1998. Most recently, the Sharif government’s alleged manipulation of a trial judge in the Bhutto case, and Sharif’sexile to Saudi Arabia in the ‘national interest’,left little doubt as to the political motives ofofficial anti-corruption drives”1.

In Ukraine, it is said that 70 per cent of all courtdecisions are not enforced2. The old apparatchikstructures have been a key barrier to reform. In 1998, officials sabotaged Operation CleanHands”, an anti-corruption initiative developed by the Ministry of Justice. Powerful bureaucratsfought a fierce battle against the reforms. They successfully weakened key elements of the policy and blocked funds for the poorly paidand under-trained judiciary and police.3

TI has paid particular attention to the task ofstrengthening the judiciary and has participated in various efforts to address vulnerabilities at both local and international levels. A notableexample of this work is the drafting of a code ofjudicial conduct, which was prepared last Februaryby a judicial group in Bangalore (the BangaloreDraft). This code will be discussed later.

Maintaining an independent judiciary

Independence protects judicial institutions fromthe executive and the legislature. As such, it liesat the very heart of the separation of powers. The other arms of governance are accountable to the people but the judiciary alone is accoun-table to the higher value of justice, and shouldmeet the high standards of judicial rectitude.

The concepts of the independence andaccountability of a judiciary within a democracyreinforce each other. Judicial independencerelates to the institution – independence is not designed to benefit an individual judge, or even the judiciary as a body. It is designed to protect the people.

The appointment and promotion of judges

A judge must be independent and is not entitledto act in an arbitrary manner. The right to a fairtrial before an impartial court is universallyrecognised as a fundamental human right.

Individuals selected for judicial office must have integrity, ability, and appropriate trainingand qualifications in the field of law. Theselection process should not discriminateagainst a person on the grounds of race,ethnicity, gender, ideology, religion or class.

The ways in which judges are appointed andsubsequently promoted are crucial to theirindependence. They must not be seen aspolitical appointees, but rather as judges

1 A. Shah, “South Asia” in R. Hodess(ed.), Global Corruption Report 2001,p.44 (2001),http://www.globalcorruptionreport.org.A historic example can be found in myown country, Germany, under twooppressive systems. A close relative ofmy wife, a brilliant young judge, whodared in the early 1940s to resistFreisler’s policy of instrumentalising thecourts for Hitler’s policies, wasconscripted to fight in Russia, and wasdead within weeks. This kind ofpressure quickly undermined theindependence of a judiciary that wasbased on a proud professionaltradition.

2 Canadian Parliamentary Centre,Controlling Corruption: A ParliamentaryHandbook, p.44 (1998).

3 Canadian Parliamentary Centre,Controlling Corruption: A ParliamentaryHandbook, p.45 (1998).

Law in transition 11

selected for their competence and politicalneutrality. The public must be confident thatjudges are chosen on merit and for theirindividual integrity and ability, and not forpartisan reasons.

The election of judges poses a particular risk.While it has the attraction of being a democraticprocess, the populist candidate may be favouredover the professional candidate. This risk can be reduced if the list of candidates is vetted forprofessionalism and non-partisanship. Still, the prospect of having judges campaigning for re-election is particularly unattractive. Anindividual in court is entitled to a fair trial andthis is hardly assured if the judge has to panderto popular opinion in order to win re-election.

There are also potential dangers in the appoint-ment of the judiciary exclusively by the legis-lature, executive or judiciary itself. As a generalrule, in countries where either of the first twobodies is responsible for the formal appointmentprocess, and there is general satisfaction with the calibre and independence of judges,appointments do in fact involve some degree of cooperation and consultation between the judiciary and the authority actually makingthe appointment.

The promotion of judges should be based onobjective factors, particularly ability, integrity and experience. Promotion should be seen as a reward for outstanding professionalcompetence, and never as a kickback fordubious decisions favouring the executive. The selection of judges for promotion shouldinvolve the judges themselves, and any role that the executive might have should be minimal.

Secure tenure and the immunity of judges

It is widely accepted that a judge must enjoypersonal immunity from civil damages claims for improper acts or omissions in the exercise of judicial functions. This is not to say that the aggrieved person should have no redress,but reparation would be sought from the staterather than the judge.

If judges are not confident that theirremuneration or tenure of office is secure, their independence is clearly threatened. Theprinciple of the “permanency” of the judiciary,with no removal from office other than for justcause and by due process, and their security

of tenure at the age of retirement, is animportant safeguard of the Rule of Law. It isdesirable that judges retire when they reach the stipulated retiring age. This reduces the scopefor the executive to prolong the tenure of hand-picked judges whom they find sympathetic, while reducing the judge’s temptation to court the executive or other appointing authority,for approval for re-appointment as the date of retirement nears.

Judicial independence is best served by indivi-dual accountability being handled by judges, at least up to the point where impeachment by the legislature comes into play. The question of how impartiality and integrity can be maintained needs to be addressed.

Accountability of the judiciary

Judicial accountability is not exercised in a vacuum. Judges must operate within rules and in accordance with their oath of office, which limits them from thinking they can actunilaterally. How then can individual judges be held accountable without undermining the essential and central concept of judicial independence?

Individual judges are held accountable throughthe particular manner in which they exercisejudicial power and by the environment in whichthey operate. Judges should:

■ sit in courts open to the public;

■ be subject to appeal and judicial review;

■ be obliged by the law to give reasons for decisions and to publish them;

■ be subject to the law of bias and perceived bias;

■ be subject to questions in the legislature and open to media criticism;

■ be subject to removal by the legislature (or by a supreme judicial council);

■ be accountable to their peers.

Until very recently, it was almost unacceptable to raise the question of the accountability of the judiciary. Now, however, there is an increa-sing awareness that accountability, far fromeroding independence, actually strengthens it. The fact that individual judges can be held to account increases the integrity of the judicialprocess and helps to protect judicial power from those who would encroach on or misuse it.

An appropriate code of conduct is a powerful tool aimed at ensuring judicial accountability.This code should be developed by the judgesthemselves, and provide both for itsenforcement and for advice to be given toindividual judges when they are in doubt as to whether a particular provision in the codeapplies to a given situation.

Enforcing accepted rules of judicial conduct

It would not be desirable to give more power to the executive, whose decisions the courtsreview, nor to the legislature, as that would draw judges into the political sphere. There is also a need to be cautious about individualjudges being accountable to a chief justice. A judge in Hong Kong was once removed by achief justice whose decision was later reversedby Hong Kong’s highest court, which ruled thateven a chief justice has to comply with the law.Peer pressure is important, but independencefrom colleagues in a collegiate court can also be very important. In an appellate court, eachjudge has to be able to keep his or her mindindependent from the influence or biases of other colleagues.

Fair procedures and due process are needed for judges who are accused of impropriety. A system is required for separating seriousmisconduct (which may call for removal) fromminor matters (for example, lack of sensitivity,which may require a discreet word rather than an open reprimand). Judges should be subject to removal or suspension only for reasons of incapacity or behaviour that renders theindividual unfit to discharge his duties.

It is customary to make a clear distinctionbetween the arrangements for the lower courts where standard cases are heard, and the superior courts, where the judges are fewerin number, have been more carefully selectedand discharge the most important judicialfunctions under the constitution. Lower courtjudges are customarily appointed in a much less formal fashion and are more easily removedfor just cause. However, neither higher nor lowercourt judges are above the law. There must be sanctions for those who may be tempted to abuse their positions or who display grossprofessional incompetence.


Of the three arms of government, the judiciary isperhaps the most vulnerable to corruption. If theexecutive and the legislature do not respect theindependence of the judiciary, then it can beseverely undermined.

The removal of a judge is a serious matter. It cannot be permitted to occur simply at thewhim of the government of the day, but rather it should be carried out in accordance with clearlydefined and appropriate procedures in which theremaining judiciary plays a part. The involvementof the senior judiciary in policing its own membersin a public fashion is generally regarded as the best guarantee of independence.

The powers of removal would appear to havebeen used for good cause, albeit in gravecircumstances, when in March 2000 theAlbanian Ministry of Justice announced that “the Supreme Justice Council has fired 70judges for corruption and incompetence in thelast three years. The latest dismissals were on 4 March 2000, when three judges were sackedand stripped of their immunity for releasing a rapist without sentencing him.”4

The vulnerability of the judiciary

The concepts and tools discussed above are widely accepted and promoted to protect the independence and accountability of thejudiciary. However, in practice they are often not employed effectively, if at all.

Surveys suggest that in many countries thepublic regard their judiciaries as hopelesslycorrupt. The Global Corruption Report 2001states that “the key to effective implementationof anti-corruption laws is often the strength,independence and integrity of judiciaries. InMalaysia, the independence of legal institutionsis a cause for concern: a recent survey foundthat eight out of ten people are unhappy with the courts. In the Philippines, 57 per cent ofrespondents to a 1999 World Bank survey saidthat most judges could be bribed. Only 4 per centbothered to report incidents of bribery, sayingthat reporting them would be futile.”5 Few peopleare willing to pin their hopes for reform on institutions like the judiciary if they are deeply sullied or perceived as corrupt. Often the primary indicator that corruption is spirallingout of control is a dysfunctional judicial system.

This parlous state of affairs is exacerbated by the actions of others working in the legalsystem. Lawyers may demand bribes for thejudge, but keep the money themselves. Courtclerks may purposely lose files and requiremoney to find them, or they may withhold bailbonds until bribes have been paid. The judiciary

is therefore vulnerable because those around itmay be failing in their duties.

In Kazakhstan there is common agreement thatthe rights and freedoms of the media exist onlyin theory. The Global Corruption Report 2001finds that “the cards are stacked: attempts by journalists to appeal to the law, theconstitution or the Universal Declaration ofHuman Rights are, as a rule, unsuccessful, whilethe provisions of the Law on Media and otherlegislation used against journalists, editors,publishers and media owners are implementedwith fervour. The arbitrary nature of judicialdecisions is an obstacle, thwarting attempts by journalists to write about corruption.”6

Most frequently it is the executive that tries to unduly influence the judiciary. The methodsused to undermine the independence andintegrity of the judiciary are many and varied.Some are subtle, such as awarding honours or ranking judges in the hierarchy at stateoccasions. Others are more blatant, such as providing houses, cars, and privileges to judges or their families.

Perhaps the most obvious abuse by theexecutive is the practice of appointing as many of its supporters or sympathisers aspossible to the bench. The appointment processis therefore a critical one, even though somegovernments have found that their own support-ers develop a remarkable independence of mindonce appointed to high office. To undermine this independence, the executive can manipulatethe assignment of cases, perhaps through a compliant chief justice, and determine whichjudge hears a case of importance to thegovernment. It is therefore essential that thetask of assigning cases be given to the judgesthemselves, not to government servants, andthat the chief justice enjoys the full confidence of his or her peers.

When a particular judge falls from executivefavour, a variety of ploys may be used to try tobring the judge to heel. Such a campaign may be aimed at criticising certain judges or claimingthat a mistake was made when they wereselected for appointment. In such instances,judges are not in a position to fight back withouthopelessly compromising themselves and theirjudicial office. To minimise the scope for this,responsibility for court administration matters,including budget and postings, should be in the

4 Radio Free Europe/Radio Liberty, 8March 2000.

5 D. Djalal, “Southeast Asia” in R.Hodess (ed.), Global Corruption Report2001, p.28 (2001),http://www.globalcorruptionreport.org.

6 Transparency International Kazakhstan,“Freedom of the press in Kazakhstan:deceptive appearances” in R. Hodess(ed.), Global Corruption Report 2001,p. 118 (2001),http://www.globalcorruptionrerport.org.


Judicial accountability is not exercised in avacuum. Judges must operate within rules and inaccordance with their oath of office, which limitsthem from thinking they can act unilaterally.

hands of the judges themselves, and not left tothe executive or its civil servants.

When it comes to public attacks, judges mustnot be, nor consider themselves to be, abovepublic criticism. Judges cannot claim to beguarantors of rights to freedom of speech whileat the same time attempt to silence their critics.Nor should they attempt to muzzle public debateabout problems within the judiciary itself, as hasbeen the case in some countries when the issueof corruption in the judicial process has arisen.

Criticism can be damaging, especially to thosejudges who do their best in difficult and at timeshazardous situations. Criticism should be fairand temperate. More specifically, politiciansshould avoid making statements on cases thatare before the courts and should not takeadvantage of their immunity as legislators toattack individual judges or comment on theirhandling of individual cases.

The government’s chief law officer shouldconsider it his or her duty to defend members ofthe judiciary against intemperate and destructivecriticism by fellow judges or by the government.The head of the judiciary also has an importantrole to play in speaking on behalf of all judges in the rare cases where a collective stand mustbe taken.

At the lower level of the court structure, a varietyof corrupt means may be used to pervert thejustice system. These include influencing theinvestigation and the decision to prosecutebefore the case even reaches the court. This isdone by inducing court officials to “lose” files;delaying cases or assigning them to corruptjunior judges; corrupting judges themselves (whoare often badly paid or who may be susceptibleto promises of likely promotion); and bribingopposing lawyers to act against the interests of their clients.

The vulnerability of the judiciary is heightened if those responsible for the investigation andprosecution of corruption cases do not imposehigh standards on their subordinates. Courtofficials should be accountable to the judges for their conduct and subject to sanction by thejudges where, for example, files are lost. Thejudiciary itself must insist on high ethicalstandards within its own ranks, carefully dealingwith complaints and, where necessary, sendinginspection teams to visit the lower courts toensure that they are functioning properly.

Law societies and bar associations do not takesufficiently stern action against members whobehave corruptly. The fact that a legal systemmay itself be corrupt does not mean that lawyershave to become part of the system. Although, in some situations, it may be an unavoidablenecessity for a client to pay a “backhander” to a lawyer acting as gate-keeper, it is highlyquestionable whether the lawyer need everprofessionally be in such a position.

Another area of vulnerability for a judge is the issue of income after retirement. Judicialpensions tend to be less than generous, and thepractice in some countries of rewarding selectedjudges with diplomatic posts on their retirementfrom office is clearly open to abuse if nothandled through a fair and transparent process.

Building and protecting an effectivejudiciary

It is hoped that TI and other internationalorganisations will be able to help to buildindependent and honest judiciaries in small and incremental steps. Simply providing judgeswith travel scholarships (often paid throughgovernment ministries, who then use them to reward the judges whose decisions thegovernment approves of), or depositing booksand computers with staff, is unlikely to changethe way people behave. Much of the effort madeto date by the international community haslooked promising on paper, but has been of littlepractical impact in real terms.

TI has placed great importance on helping buildand protect effective judicial systems, mainly by supporting its 85 national chapters in theirquest to pursue this goal. It is the people in each society and in each country, who need todiagnose the weaknesses of their own judiciary,and who need to develop strategies and tools to strengthen it. To empower civil society to playthis role, TI helps develop specific instruments,based on experiences in a variety of countries.These are then considered and adapted forparticular situations, if found useful.

The judicial group on strengtheningjudicial integrity

The Draft Code of Conduct for the Judiciary is a notable example of TI’s work. The Code wasdeveloped in Bangalore in February 2001 by a group of eight chief justices from differentcountries7. The values upheld by the Code are:

propriety, independence, integrity, impartiality, equality, competence, diligence and accountability.

Rules under each heading provide guidance to judges. Through a process of consultation,and with the support of Mary Robinson, theUnited Nations High Commissioner for HumanRights, TI hopes the draft Code of Conduct willdevelop into a global code and be adapted andadopted in countries around the world.

Codes alone will not suffice, however. Specificproblems and weaknesses need to be properlyidentified and addressed in each country.Loopholes in the judicial system explored bycorrupt court staff, lawyers and judges need tobe closed. For example, in one country it wasfound that court clerks were refusing litigantsaccess to their files unless they paid a smallbribe. On discovering this, the chief justiceordered that the court list be posted on theInternet. Not all people have access to theInternet of course, but this action stripped the court clerks of their monopoly and thepractice of demanding bribes stopped abruptly.

The judiciary and comprehensive integrity systems

An independent and accountable judiciarycommitted to the Rule of Law cannot alone and unaided, ensure that the Rule of Law isupheld, or that just and honest governmentfunctions effectively. In this larger role, thejudiciary is one of a number of the institutions,which make up what TI calls the NationalIntegrity System.8 The National Integrity Systemcomprises a number of institutions – theexecutive, the legislature, watchdog agencies, a free press, an active civil society, the privatesector and the judiciary. Collectively, they provideassurance to citizens that the government willfunction in accordance with the law.

These institutions must be mutually reinforcing.Independence, transparency, accountability,sound rules governing conflict of interest,guarantees of access to information and of a free press and free speech, are essentialattributes of the National Integrity System.However able and independent the judiciary, it must still be supported by a populace willing to speak out; by independent and ableinvestigators; by independent lawyers ofintegrity; and by honest court clerks. If any of the elements of the Integrity System are not in


Much of the effort made to date by theinternational community to build effectivejudiciaries has looked promising on paper, buthas been of little practical impact in real terms.

place, the risk that the government and legalsystems will become corrupt increases.

As the eminent American jurist, Felix Frankfurter,once remarked, “The Court’s authority –possessed of neither the purse nor the sword –ultimately rests on substantial public confidencein its moral sanctions.” In other words, it rests on the confidence that civil society has in theway it discharges its essential functions. It is in this area that TI and others are working.

TI believes that the most effective judicial reformprogrammes will be developed and implementedby uniting all the stakeholders in the judicialprocess in the vanguard of reform. Civil societywill be both the main beneficiary and a keycomponent of the reform effort. In this way, a better future will be built on the basis of a truly independent and accountable judiciary.

7 Transparency International and JudicialGroup on Strengthening JudicialIntegrity, Code of Judicial Conduct: The Bangalore Draft (2001),http://www.transparency.org/coris/edocs/2001.txt.

8 J. Pope (ed.), “Confronting Corruption:The Elements of a National IntegritySystem”, Transparency InternationalSource Book 2000, (2000),http://www.transparency.org/sourcebook.

* Dr. Peter EigenChairmanTransparency International Otto-Suhr-Allee 97–9910585 BerlinGermanyTel: +49 30 3438 2010Fax: +49 30 3470 3912Email: [email protected]: http://www.transparency.org

Transparency International, with nationalchapters now operating in 85 countries, isthe world’s leading non-governmentalorganisation engaged in the fight againstcorruption.

+This article is based on a speechdelivered at a World Bank Conferenceco-hosted by the Government of Russia,“Empowerment, Security andOpportunity through Law and Justice”,Tavrichesky Palace, Saint Petersburg,Russia, 8–12 July 2001.


European energy security and cooperation: the EnergyCharter Treaty and its Protocolon Transit+

This article outlines the transit provisions ofthe Energy Charter Treaty and examines theeffects of the Energy Charter Protocol onTransit on third party access to energytransport facilities. The Protocol is currentlybeing negotiated between the 51 signatoriesto the Treaty. Given the expected increasedenergy import dependency in the EuropeanUnion, stable long-term energy solutions canbe found in greater multi-dimensionalinternational cooperation. An internationalminimum standard of third-party access toenergy transport facilities used for transit isbeneficial for the 51 Treaty signatories. Thisanalysis is based on the political,geographical and energy market realities ofthe European Union, central and easternEurope (CEE) and the Commonwealth ofIndependent States (CIS).

Karl Petter Waern, Senior Expert, the Energy Charter Secretariat*


Energy Charter Treaty

In December 1991, 54 states (including theUnited States, Japan, Russia and the memberstates of the EU) signed a political commitmentreferred to as the European Energy Charter (theCharter). The Charter envisaged the creation ofan Energy Charter Treaty (the Treaty)1, which wasconcluded in 1994. The map below shows thesignatories and observers to the Charter, theTreaty and related instruments.

The objective of the Charter is to develop therelationship in energy matters between the CIS,CEE and the West. Article 2 of the Treaty statesas its purpose the establishment of a legalframework to promote long-term cooperation inthe energy field, based on complementaritiesand mutual benefits between the contractingparties of the Treaty. This energy relationshipbetween the signatories of the Charter is well

documented.2 On the assumption that allinternational energy trade takes place betweenthe 54 signatories to the Charter, the easternconstituency of the Charter together with Norwayand the UK may cover up to 50 per cent of thenet energy imports of the western part of theconstituency. The mutual dependency is clear.

The objectives and principles of the Charter are not legally binding under public internationallaw. However, the signatories pursued theseobjectives, and broadened their cooperation by negotiating the Treaty from 1991 to 1994. To date, 51 countries in Europe and Central Asia have signed the Treaty, which is binding and effective under public international law.Forty-five countries have ratified the Treaty and the remaining six countries are in variousstages of preparation for ratification. Twosignatories, Russia and Belarus, apply the

1 For the full text, see Energy CharterSecretariat, The Energy Charter Treatyand Related Documents, October 1996.

2 The relevant net energy export numbersfor 1997 may be found in InternationalEnergy Agency, Key World EnergyStatistics from the IEA, 1999.


Signatories of the Energy Charter Treaty (1994) and the European Energy Charter (1991)Signatories of the European Energy Charter (1991)Observers

Source: Energy Charter Secretariat, January 2002

Signatories of Energy Charter Treaty and European Energy Charter

Treaty provisionally. The Treaty is the firsteconomic agreement uniting the CIS, including Azerbaijan, Kazakhstan, Russia and Turkmenistan, CEE and the majority of the members of the Organisation for EconomicCooperation and Development (OECD).

The main areas of economic activity addressedin the Treaty are: energy transit, energyinvestment, energy trade and energy efficiencyand related environmental aspects. The Treatyalso provides for the possibility of internationalarbitration in case of a dispute on theinterpretation of Treaty provisions between thesignatory states and between signatory hostgovernments and investors when the disputerelates to investment.3

The Energy Charter Conference is the governingbody of the Treaty. The Energy Charter Secretariatis the international organisation supporting thework of the Conference. The Secretariat works inclose cooperation with other intergovernmentalorganisations, such as the World Trade Organi-zation (WTO), the International Energy Agency(IEA), the OECD, the World Bank and the Euro-pean Commission (EC). Detailed work is carriedout by delegations from the signatory states insubsidiary bodies or working groups establishedand mandated in accordance with the provisionsof the Treaty.

To illustrate the practical implications of theprovisions of the Treaty, it is useful to look at the case of Russia and its neighbouring states.However, it must be emphasised that the Treaty’s provisions apply individually, and in any combination of states, for the 51 signatoriesof the Treaty. All members of the CIS have ratifiedthe Treaty, with the exception of Russia and Bela-rus, who apply the Treaty provisionally. However,the ratification process is currently progressing inthe Russian State Duma and consequently, allthe major transit states from a Russian perspec-tive are either contracting parties to the Treaty or apply the Treaty provisionally.4

Energy Charter Treaty’s transit provisions

Article 7 of the Treaty deals specifically with theissue of energy transit, which is defined as themovement of energy materials and products, suchas crude oil, oil products, natural gas or electricity,from one contracting party of the Treaty throughthe territory of another contracting party, destinedfor the territory of a third contracting party. Energy

transport facilities are defined as pipelines orgrids used to transport crude oil, oil products,natural gas or electricity respectively. For example,natural gas produced in Russia and destined forGermany would be in transit through the territoriesof Belarus and Poland.

The major transit obligation of Russia and itsneighbouring states under the Treaty is toimplement the principles of freedom of transitwithout distinction as to the origin, destination or ownership of the energy and of non-discrimi-natory pricing. Russia and its neighbouringtransit states, such as Ukraine, Belarus or theBaltic states agree to encourage cooperation inthe modernising, interconnection, developmentand operation of energy transport facilities,including mitigation of the effects of interruptionin the supply of energy. Russia and itsneighbouring transit states shall establish ormaintain their domestic laws or regulationsrelating to the transport of energy in such a waythat energy in transit shall be treated no lessfavourably than energy produced domesticallyand exported or energy imported. The contractingparties of the Treaty shall not place obstacles inthe way of new energy transport facilities beingconstructed. However, if the security or theefficiency of the existing energy transportfacilities is endangered, including the security ofsupply, permission for the construction ormodification of new or additional transit can berefused, but the established flows of energy intransit shall be secured.

Article 7(6) of the Treaty obliges signatories notto interrupt or reduce the existing flow of energyin transit in the event of a dispute over suchtransit prior to the conclusion of a set of concili-ation procedures laid down in Article 7(7) of theTreaty. These procedures call for the use of aconciliator with powers to set interim tariffs andother terms and conditions for a period of 12months or until resolution of the dispute,whichever is earlier. Settlement of disputesbetween the contracting parties concerning theapplication or interpretation of the transit-relatedprovisions of the Treaty should be settledthrough diplomatic channels. If diplomaticchannels cannot reach a solution, the disputemay, in accordance with Article 27 of the Treaty,be submitted to a tribunal with three arbitratorsusing the arbitration rules of the United NationsCommission on International Trade Law(UNCITRAL). An arbitration award is final andbinding on the parties to the dispute. The

conciliation procedure of Article 7 is aspecialised transit dispute resolutionmechanism, whereas the internationalarbitration mechanism is applicable to disputes on the application or interpretation of any provision of the Treaty.

Unless otherwise explicitly stated, all obligationsof the Treaty are between the states signing andratifying the Treaty. However, as a member of theTreaty, Russia shall not encourage any stateenterprise or any entity, established or main-tained under Russian law, which is grantedexclusive or special privileges, to conduct itsactivities in a manner inconsistent with Russia’sobligations under the Treaty. If Russia establish-es or maintains an entity and entrusts the entitywith regulatory, administrative or other govern-mental authority, the entity must conduct itsauthority in a manner consistent with Russia’sobligations under the Treaty. In addition, Russia is responsible for the observance of the provisions of the Treaty by regional or local governments.

The Treaty contains a general set of exceptionsto the obligations laid down in Article 7, includingan exception to avoid actions that may endangerhuman, animal or plant life or health. Conditionsof short supply exempt Treaty members from obligations under Article 7, as do theprotection of the essential security interests or the maintenance of public order of acontracting party.

An important part of the Treaty’s transitprovisions is found in Article 29, which requiresthe application of WTO trade and transit rules forthose signatories that are not yet WTOmembers.5 The applicability of WTO rules underthe Treaty is of particular relevance to Russia,which is not yet a WTO member. As a result ofArticle 29, all transit-related provisions of theWTO apply fully under the Treaty. The generalexceptions of the WTO also apply. However, aspecial, simpler dispute resolution procedurehas been established under the Treaty replacingsimilar provisions under the WTO. This impliesthat Russia, or any neighbouring states, such asUkraine or Georgia, may invoke the Treaty’senergy trade dispute resolution procedure tosolve any energy dispute.


The Energy Charter Treaty is the first economicagreement uniting the CIS, CEE and the majorityof the members of the OECD.

The case for international rules onenergy transit

Russia and the other 50 signatories to the Treatyhave established the foundation for an energyexportation, importation and transit regime thatis potentially beneficial to all states. However,the practical implementation of the aboveprinciples is in its infancy in Russia and most of the CIS. Currently, the signatories to theTreaty are negotiating an Energy Charter Protocolon Transit, in which the transit principlesoutlined above will be further supplemented,extended or amplified.

The regulation of third-party access to energytransport facilities used for transit is a missingpart of a fully-fledged regulatory system forenergy transit between the 51 signatories to theTreaty. To analyse third-party access issuesunder the Treaty and draft Protocol, the followingsub-sections use the natural gas sector as anexample. While the provisions of the Treaty anddraft Protocol cover natural gas, crude oil, oilproducts and electricity, it is possible to treatdifferent energy carriers similarly for the purposeof this analysis. This is important from theperspective of legal harmonisation.

Energy transport facilities as naturalmonopolies

A necessary condition for establishing perfectcompetition is the presence of multipleindependent consumers who take the marketprice as given when deciding the quantity topurchase. Perfect competition also requires thepresence of multiple independent supplierstaking the market price as given when decidingthe quantity to supply. Both consumers andsuppliers must have access to the samecomplete information about the marketconditions. Only when these conditions arefulfilled will competition yield a cost-efficientsupply of a commodity and promote the optimalallocation of resources in the economy.

The establishment of sufficient competition inthe supply of energy transport facilities requirespublic regulation, due to the cost characteristicsand large economies of scale present whenconstructing and operating these facilities. Forexample, when increasing the transportationcapacity of a natural gas pipeline by 50 per cent,the marginal unit cost is significantly lower thanthe average unit cost prior to expansion ofcapacity. Consequently, the average unit cost

decreases after the expansion of capacity.Potential new entrants wanting to construct aparallel pipeline face the possibility of significantshort-term cost-cutting competition fromincumbent pipeline providers. The incumbentmaximises the long-term profits by supplyingcapacity short-term at a price covering variablecost only, pre-empting the establishment of new,independent capacity. In the long run, after theattempt to establish new capacity has beensuccessfully pre-empted, the incumbent canincrease the price of capacity to a level yieldingmonopoly returns. As a result, public regulationof energy transit facilities is needed.

Geography and European energy import dependency

The EC started a debate on the security ofenergy supply in 2001. Increased energy importdependency is expected based on widelyaccepted assumptions on energy demandgrowth, energy carrier mix and the expecteddevelopment in the indigenous production ofprimary energy in the EU. Currently, the EUimports 40 per cent of its natural gasconsumption. Natural gas import dependency isexpected to increase to 70 per cent over the next25 years, according to an EC Green Paper.6 Toaddress the issue of increasing energy importdependency, the EU should seek solutionsthrough increased international cooperationacross as many dimensions of mutual interestas possible.7

It is important to acknowledge the geographicalfeatures of the European natural gas market.Before 1991 the issue of natural gas transit waslargely solved inside the Soviet Union’s sphereof influence. Today, both the EU and Russiamust address the issue of natural gas transitacross CEE. This scenario may become cleareras the energy industry privatisation in CEE andthe CIS progresses.

The challenges facing the EU in the fields oftransit and supply source competition becomeclear if it is assumed that both demand andsupply need to be liberalised in order to reap thebenefits of a competitive market and that thesupply of competitively priced energy transportcapacity is only possible if a public regulator isable to regulate the price and other terms andconditions of access to energy transportfacilities. The Green Paper on European securityof energy supply does not go far enough in

3 For a survey and discussion of theTreaty’s features, see T.W. Waelde, TheEnergy Charter Treaty – An East-WestGateway for Investment and Trade(1996).

4 For an overview of the State Dumadebate, see “Gazprom forces delay ofenergy treaty decision”, FinancialTimes, 29 January 2001.

5 For a compilation of the applicable WTORules under the Treaty, see EnergyCharter Secretariat, TransparencyDocument – Applicable Trade Provisionsof the Energy Charter Treaty, December1998 and Energy Charter Secretariat,Trade in energy – WTO Rules applyingunder the Energy Charter Treaty,December 2001.

6 Commission of the EuropeanCommunities, Green Paper – Towards aEuropean Strategy for the security ofenergy supply, COM (2000) 769 final,November 2000.

7 Support for this line of reasoning isfound in R. Kemper, “EU looks tosecure Russian supply future”,Petroleum Economist, December 2000.


applying a multilateral perspective in this regard.The need for an international approach by the EUin this field arises due to the location of energyresources outside the region that are required tomeet growing demand and import dependencywithin the EU.

The 51 signatories of the Treaty are anappropriate unit of analysis in order to addressall the conditions necessary to obtain sufficientcompetition in the natural gas market on theEuropean continent. With this broader focus, the issue of third-party access to energytransport facilities used for transit has different implications. The major natural gascompanies of the EU will increasingly becomenet buyers of natural gas transportation capacityoutside the territory of the EU. Consequently, it may be beneficial to introduce third-partyaccess provisions under public international law in order to create a larger, pan-Europeanplaying field that is level.

It is interesting to observe that the net energyexports of Russia are of a magnitude to align the interests of the EU and Russia in the field of energy transit. With an optimistic developmentof primary energy production in the Caspian area,the demand for transit capacity on the territory of Russia increases. Russia, however, remains a net purchaser of energy transit in neighbouringstates, such as Belarus, the Czech Republic,Poland, the Slovak Republic and Ukraine,compared with the expected supply of transitcapacity on Russian territory. Based on datafrom the IEA, Russia exported approximately 350 million tonnes oil equivalent (mtoe) in 1998, whereas the Caspian states exportedabout 35 mtoe or approximately 10 per cent of the Russian net exports. Consequently,Russia is in a position to favour a level playingfield in the area of energy transit. Thecompetition for west European market sharebetween Russian and Central Asian natural gasis not likely to change Russia’s positionconcerning a level international energy transitplaying field. This is due to the existence ofspare natural gas transportation capacity inRussia offsetting any detrimental impact of lost natural gas market share.8

The countries of central and eastern Europe willbenefit from increased transit business in thefuture, based on the above analysis. Appropriateinternational rules may prevent the constructionof unnecessary energy transport facilities andfacilitate construction and pipeline routingdecisions based on economic criteria only. It isin the interest of the incumbent owner of energytransport facilities to avoid pipeline-to-pipelinecompetition. Due to the cost characteristics ofnatural monopolies described above, pipeline-to-pipeline competition may lead to short termaggressive price underbidding, which ultimatelyleads to inadequate rates of return on employed

capital. Consequently, establishing a set ofinternational rules on the public regulation ofthird party access to energy transport facilitiesmay stabilise the realised rate of return for theincumbent pipeline owners. The security ofenergy supply in CEE may be enhanced throughdiversification of sources of supply, away fromsuppliers operating in Russia and towardssuppliers operating in the Caspian area orwestern Europe. However, this diversificationdoes not necessarily equate with a decrease innatural gas exports from Russia, as increasingeconomic growth and a successful transition to amarket economy are likely to increase primaryenergy consumption in CEE.

Central Asia has proven reserves ofhydrocarbons and needs market access and energy transit capacity to commercialisethese reserves. Therefore, it is in the interest of these states to establish an internationallyrecognised set of rules to address third-partyaccess to energy transport facilities. Such rulesshould include provisions limiting the market-distorting consequences of abuses by dominanttransport suppliers. The establishment of clearbinding rules under public international law willincrease the probability that foreign directinvestment will be channelled to the appropriateupstream exploration and production projects.The corresponding pipeline investments will thenonly be made as the existing energy transportfacilities are filled to capacity utilising third partyaccess provisions. In addition, the full potentialof energy location swaps should be exploited to ensure the optimal timing of new pipelineinfrastructure capital expenditure. Rules andregulations legally binding under publicinternational law can substantially reduce the geopolitics involved in the design anddecision-making related to upstream explorationand production, not to mention the reduction of geopolitics involved in the choice of pipelinerouting or use of existing capacity in the Caspian area.9

European Union third-party accesslegislation

The process if not the speed of thedevelopments of regulated or negotiated third-party access in the EU may set an example ofhow to proceed in developing the same issues in the Energy Charter process. Of particularrelevance for the negotiation of the Protocol are the EU’s Natural Gas Transit Directive10

and the Natural Gas Directive.11

In the Natural Gas Transit Directive, definedentities12 such as Ruhrgas AG, Distrigaz SA or Gaz de France are obligated to opennegotiations on the conditions of natural gastransit when requested. They must also informthe EC of these requests. Failure to concludesuch negotiations must also be reported to the

Commission. The Directive establishes aconciliation body under the auspices of the EC in case of dispute. This access proceduremay be seen as the first step in establishing an internal market in natural gas in the EU. The Directive is widely accepted as only codifying existing business practice at the time of its implementation.

The fourth preamble clause of the Natural Gas Directive contains a direct reference to the Natural Gas Transit Directive showing the historic line in the development of a liber-alised competitive market. The overall criteria of objectivity, transparency and non-discrimi-nation are laid down for the implementation ofthe Natural Gas Directive, which containsprovisions covering negotiated third-party accessand regulated third-party access. Negotiatedthird-party access gives eligible consumers aright to negotiate access to energy transportfacilities based on commercial conditionspublished by the owner or operator of thefacilities. Regulated third-party access giveseligible consumers a right to access energytransport facilities on the basis of publishedtariffs and other terms and conditions for the use of the facilities. Refusal of access to energytransport facilities must be based only onsubstantiated reasons. The EU member statesmay choose between regulated or negotiatedthird-party access in meeting the Directive’soverall objective of creating competitive naturalgas markets and establishing an internal marketin natural gas. Access is granted to eligibleconsumers, defined on the basis of the annualconsumption of natural gas. The definition isbased on a minimum expected potential marketopening of 20 per cent as of August 2000, whichthen increases in steps to 33 per cent by 2008.Finally, the Directive contains a disputeresolution mechanism, in order to enforce its provisions.

The actual implementation of the Natural GasDirective is encouraging.13 The average potentialmarket opening in the EU is 79 per cent, sincemost member states have defined eligibleconsumers with lower annual natural gasconsumption than foreseen in the Directive.Eight member states, including Belgium and theUK, have implemented regulated third-partyaccess through the creation of a public regulator,three member states have hybrid systems andAustria and Germany have implementednegotiated third-party access. Greece andPortugal have not decided on a third-party accesssystem. Based on the Directive, Greece andPortugal are entitled to derogations due to theirstatus as emerging natural gas markets. Somemember states have implemented legalunbundling, which requires that the operation ofthe energy transport facilities be performed by asubsidiary to ensure objective, transparent andnon-discriminatory access.


The EC proposed new legislation in 2001 tospeed up the market opening process, with fullmarket access for all consumers planned for2004–05.14 In addition, mandatory legalunbundling and the establishment of a publicregulator are required by the proposedlegislation. To ensure transparency, thepublication of transportation tariffs and expectedavailable capacities will be mandatory in the newproposals. It is expected that these changes willlead to the development of a single Europeannatural gas market.

Energy Transit Rules in the EnergyCharter Treaty and draft EnergyCharter Protocol

There is no provision explicitly addressingaccess to energy transport facilities in theTreaty. Mandatory third-party access to energytransport facilities is excluded in an Under-standing adopted by the states at the signing ofthe Treaty in December 1994. Instead, Article7(1) of the Treaty states that “each ContractingParty shall take necessary measures to facilitatethe transit of energy materials andproducts…without imposing any unreasonabledelays, restrictions or charges”.15

Under some circumstances, access to energytransport facilities can be one of the compo-nents of transit facilitation. If a refusal tonegotiate access to facilities is construed asimposing an unreasonable restriction, Article7(1) of the Treaty may serve as implicitly obligingthe contracting parties to undertake negotiationon access. However, the under-utilisation ofexisting pipeline infrastructure and thediscussion of expensive bypasses in the Baltic Sea area, Poland or the Caspian Sea area indicate that more explicit provisions onaccess to energy transport facilities may benefitthe economies of the Treaty members.

The draft Charter Protocol negotiation presentsan opportunity to establish provisions on third-party access to energy transport facilities usedfor transit. The article on third-party access ofthe draft Protocol states that:

“Each Contracting Party shall ensure thatowners or operators of Energy TransportFacilities under its jurisdiction will negotiate in good faith with any other ContractingParties or Entities of Contracting Partiesrequesting access to and use of AvailableCapacity for Transit. Such negotiations shallbe based on transparent procedures, and oncommercial terms and be non-discriminatoryas to the origin, destination or ownership ofthe Energy Materials and Products.”

It is important to note that the provision providesnegotiation rights to private parties. Entities caninclude a natural person having the nationality or

citizenship of a contracting party or who ispermanently residing in a contracting party orcompanies or other organisations established in accordance with the domestic laws of acontracting party. The main obligation is found in the wording “will negotiate in goodfaith…access to and use of Available Capacityfor Transit”. This obligation imposed on theowner or operator of energy transport facilities is similar to the negotiation obligation imposedon similar players in the energy sector of the EU under the Natural Gas Transit Directive. Thewording “access to and use of Available Capacityfor Transit” limits the scope of the obligations to only those facilities that may handle transit in the territories of the contracting parties. In the Treaty as well as in the Protocol, transit is defined as the movement of crude oil, oilproducts, natural gas or electricity crossingtwo state borders. Energy transport facilities are high-pressure natural gas transmissionpipelines, high-voltage electricity transmissiongrids and lines, crude oil transmission pipelines,coal slurry pipelines and oil products pipelines. It is expected that only large corporations orconsortia undertake energy transit, involving at least three states utilising such facilities. In practice, this parallels the limitations found in the Natural Gas Transit Directive through thelist of high-pressure natural gas grid owners in the Annex of the Directive.16

Another article of the Protocol addresses thepublic regulatory aspects of third-party access to the transportation capacity of energy transportfacilities in the absence of competition. Becauseof the natural monopoly characteristics of energytransit facilities and the high barriers to entry for new transport operators, there is a need for public regulation to circumscribe possibleabuses by dominant operators and to alleviatemarket distortions. The draft article states that:

“Each Contracting Party shall take allnecessary measures to ensure that TransitTariffs and other conditions are objective,reasonable, transparent and do notdiscriminate on the basis of origin,destination or ownership of Energy Materialsand Products in Transit. Each ContractingParty shall ensure that Transit Tariffs andother conditions are not affected by marketdistortions, in particular those resulting fromabuse of a dominant position by any owner oroperator of Energy Transport Facilities usedfor Transit.”

The first provision in the draft article wouldrequire that certain minimum standards ofobjectivity and transparency be observed, forexample the publication of indicative tariffs and other terms and conditions. A moreexpansive reading of the provision would implythe additional publication of expected availablecapacity of energy transport facilities used for

8 While additional Russian gas fromwestern Siberia will be likely to be moreexpensive to extract and therefore lesscompetitive than gas from Central Asia,this can be offset by increased naturalgas transit income earned on CentralAsian gas that must transit throughRussia. For an analysis of the Russiannatural gas industry and the need fornew Siberian natural gas fielddevelopment, see International EnergyAgency, Energy Policies of the RussianFederation – 2000 Survey, 2002.

9 For a discussion of the relative meritsof various pipeline alternatives in theCaspian area, see T.R. Stauffer,“Caspian Fantasy: The Economics ofPolitical Pipelines”, 7 Brown Journal ofWorld Affairs, pp. 63–78, Issue 2,Summer/Fall 2000.

10 Council Directive 91/296/EEC, 31 May1991 on the transit of natural gasthrough grids.

11 Council Directive 98/30/EC, 12February 1998, on the Commissionrules for the internal market in naturalgas.

12 The entities that may apply theprovisions of the Natural Gas TransitDirective are limited to the 44 naturalgas transmission companies listed inthe Annex of the Directive.

13 For a detailed description of theimplementation, see EuropeanCommission working paper,“Completing the internal energymarket”, SEC (2001) 438, March2001.

14 European Commission, “Proposal for aDirective of the European Parliamentand the Council amending Directives96/92/EC and 98/30/EC concerningcommon rules for the internal market inelectricity and natural gas”, COM(2001) 125 final, March 2001.

15 Contracting parties are those statesthat have ratified the Treaty.

16 Signatories may decide to add positiveobligations in the Protocol to undertakemultilateral negotiations necessary toestablish third party access in the spiritof the EU’s Natural Gas Directive.


17 The states participating in the EnergyCharter process are expected to finalisethe negotiation of the Protocol, ifpossible, by Spring 2002.

* Karl Petter WaernSenior ExpertEnergy Charter SecretariatBoulevard de la Woluwe, 56B–1200 BrusselsBelgiumTel: +32 2 775 98 58 Fax: +32 2 775 98 42Email: [email protected]://www.encharter.org/index.jsp

+The comments and opinions expressedin this paper are the author’s own anddo not necessarily reflect those of theEnergy Charter Secretariat.

transit. The standard of non-discrimination is a minimum requirement for allowing theestablishment of new suppliers of energy. The second provision addresses the concernsraised by the existence of natural monopolies in the supply of available capacity of energytransport facilities used for transit by limiting the possibilities for abuse of a dominantposition. An interpretative understanding agreed by the negotiators notes that transittariffs should incorporate a reasonable rate ofreturn on investment. This understanding impliesthat the calculation of a reasonable rate of returnwill be used to assess the absence of abuse of adominant position. As a consequence, all transittariffs should be, in the long run, cost-reflective.

Conclusion

Detailed and explicit third-party accessprovisions under public international law aim to:promote more efficient use of available capacityin existing transit infrastructure; promote moreefficient flows of energy in transit; and avoid theduplication of energy transport facilities includingthe construction of expensive bypasses. Inshort, third-party access provisions should leadto an improvement of economic efficiency underthe clear rule of law.

The Energy Charter Protocol is currently being developed in recognition of the growingimportance of the economic area of energytransit, in particular in CEE and the CIS. The EU-Russia Energy Partnership, the EC initiativeon security of energy supply in the EU, and the Energy Charter process are clear evidencethat energy cooperation is a viable basis forinternational dialogue. In addition, it is of vitalimportance to include the appropriate set ofstates when designing a multilateral initiative. In this respect the Energy Charter process, with its 51 signatory states, has a comparativeadvantage when the agenda is European energy policy.

An international minimum standard of third-partyaccess to energy transport facilities used fortransit will benefit the EU, CEE, Russia and theCaspian states. Over the next 25 years, Europewill require additional energy imports. Centraland eastern Europe will benefit from a furtherdevelopment of their energy transit industry andincreased economic integration with the EU. The question of security of energy supply will be addressed for CEE through the integration

of several sources of energy supply. Chief amongthe new sources of energy supply will be theCaspian area. Russia and the Caspian states will need financial resources and technology for the development of their energy exportindustry and will benefit from increasedeconomic integration in Europe.

In preparing clear, transparent rules forinterstate cooperation in energy transit, theEnergy Charter process (through the draftProtocol17) is pursuing not only an economicobjective but also the political objective thatenergy transit will play a significant role inpromoting regional stability and security. The Energy Charter process illustrates how governments can cooperate in an economic sector-specific context to further the broader political objective of strengtheninginternational economic security and stabilitybased on the fundamental principle of respectfor the rule of law.


To address the issue of increasing energy import dependency, the EU should seek solutions through increased internationalcooperation across as many dimensions of mutual interest as possible.


The EU acquis communautaireand the position of employeesin the event of their employer’sinsolvency – a comparison ofstatutory regulationsThis article compares the EU acquiscommunautaire in the field of employeeprotection in the event of employer insolvencywith the corresponding current legal situationin the transition countries of Bulgaria, theCzech Republic, Hungary, Poland and theSlovak Republic. The article also discusses the significance of the connection between the integration of the rights to recourse, whichhave been transferred to guarantee institutions(especially funds), in most cases by way of an assignment by operation of law, and anypossible preferential claims of other securedcreditors (usually secured by encumbrances) –the so-called preferential creditors.

Mario Thurner, Managing Director, and Anton Kraft, Project Manager Research,Centre of Legal Competence (CLC)*

When dealing with the insolvency law of thetransition countries of central and easternEurope, a common problem arises. As a generalrule, secured creditors lose a part of theirsecured legal position, either because theirclaims are satisfied only in part – as is alreadyrequired by the applicable law – from theproceeds of realising the collateral (which is thecase in the Czech and Slovak Republics and inHungary), or simply because of their lowerranking in the distribution of liquidation proceeds(which is the case in Poland). This isunsatisfactory for crediting banks and thebanking industry is demanding that theframework and dynamics of the accessionprocess are used to introduce the acquiscommunautaire – the existing legislation of theEU – as quickly as possible in the immediatecandidate countries for EU accession. This wouldcreate the adequate framework conditions andreduce investment risks. However, this task ismore difficult when the investment-obstructingarrangements are included in the acquiscommunautaire and need to be transformed bythe national legislator of the candidate countriesfor EU accession. Regarding the rights ofemployees the implementation of CouncilDirective 80/987/EEC of 20 October 1980 onthe approximation of the laws of the MemberStates relating to the protection of employees inthe event of the insolvency of their employer(Insolvency Directive) by the aforementionedtransition countries is essential.

This is a legal area which at first sight concernslabour and social law. It appears to have little in common with the legal position of securedcreditors in cases of insolvency. However, thisarticle illustrates the detrimental effect which the provisions of this Directive may have onsecured creditors in case of insolvency.

Applicable Community law

Relevant legal standard

On the level of EU Community law, CouncilDirective 80/987/EEC on the approximation of the laws of the Member States relating to the protection of employees in the event of theinsolvency of their employer (20 October 1980)1

and Council Directive 2001/23/EC of 12 March2001 on the approximation of the laws of theMember States relating to the safeguarding ofemployees’ rights in the event of transfers ofundertakings, businesses or parts of

undertakings or businesses (TransfersDirective)2 are of key importance for theprotection of employees’ claims in the event ofthe insolvency of their employer. In addition, theCouncil Regulation of 29 May 2000 oninsolvency proceedings (Insolvency Regulation)3

will enter into force on 31 May 2002. However,the latter is only of minor importance for themain questions of interest here. For thepurposes of further developing insolvency law,taking account of the development of the internalmarket, harmonising the Insolvency Directivewith other labour law directives of theCommunity, adopted at a later stage, and takingaccount of the recent jurisdiction of theEuropean Court of Justice, the Commissionrecently submitted a proposal for a Directive ofthe European Parliament and of the Councilamending the Insolvency Directive (hereinafterreferred to as the “Proposed Amendments”).4

Insolvency Directive

The Insolvency Directive consists of fourSections and one Annex: Section I (Articles 1and 2 of the cited law) determines the scope andcontains definitions; Section II (Articles 3 to 5 ofthe cited law) contains provisions on guaranteeinstitutions; Section III (Articles 6 to 8 of thecited law) relates to provisions concerning socialsecurity; and Section IV (Articles 9 to 13 of thecited law) contains general and final provisions.The Annex lists the categories of employees thatwere admissibly excluded from the scope of theInsolvency Directive by the Member States.

Scope and definitionsThe Insolvency Directive applies to claims ofemployees from contracts of employment oremployment relationships against employers whoare in a state of insolvency. The Member Statesmay exclude the claims of certain categories ofemployees from the scope of application of theInsolvency Directive by virtue of the specialnature of the employee’s contract of employmentor employment relationship, or because of theexistence of other forms of guarantee offeringemployee protection equivalent to that resultingfrom the Insolvency Directive (Article 1 (1) and (2)of the Insolvency Directive).5 The InsolvencyDirective does not prejudice the law of theindividual Member States regarding thedefinitions of the terms “employee”, “employer”,“pay”, “right conferring immediate entitlement”and “right conferring prospective entitlement”(Article 2 (2) of the Insolvency Directive).

An employer is considered to be insolvent if (1) a request has been made for the opening ofproceedings involving the employer’s assets, as provided for under the law, regulations andadministrative provisions of the Member Stateconcerned, to satisfy collectively the claims of creditors and which make it possible to takeinto consideration the claims of employees, and (2) where the authority which is competentpursuant to the said laws, regulations andadministrative provisions has either decided to open the proceedings or established that the employer’s undertaking or business hasbeen definitely closed down and that theavailable assets are insufficient to warrant the opening of proceedings (Article 2 (1) of the Insolvency Directive).

The Proposed Amendments for Section I of the Insolvency Directive recommend a stricterdelineation of its scope, as well as dispensingwith the Annex. They also propose to use a wider definition of “insolvency” and to bring thedefinition more into line with the Directives that have been adopted since the creation of the Insolvency Directive. There is a risk,according to the Proposed Amendments, that the scope of protection of the InsolvencyDirective is restricted, on account of theprovision that the term “employee” in particular,is left to national law and that Member Statesmay exclude certain categories of employeesfrom the application of the Directive wheneverthe aforementioned requirements prevail. TheProposed Amendments therefore propose thatthe Member State may no longer excludeemployees by virtue of the special nature of anemployee’s contract of employment oremployment relationship, with the exception oftwo cases6 that are of minor significance ineconomic exchanges.

Individual Member States are expresslyforbidden to exclude part-time workers, as defined in Council Directive 97/81/EC,7

employees with fixed-term work, as defined in Council Directive 99/70 EC,8 and loanedemployees, as defined in Council Directive91/383/EEC.9 From the perspective of theMember States, this restrictive approach of the Commission concerning exclusion issomewhat mitigated by Article 10 of theInsolvency Directive, which makes it possible for Member States to take the measuresnecessary to avoid abuses, as well as to refuse or reduce the obligation for payments


In order to ensure a certain (minimum protection)under Community law, the Insolvency Directiverequires Member States to create a guaranteeinstitution that provides for the satisfaction ofoutstanding claims relating to the remunerationfor work of employees of employers who havebecome insolvent, for a certain (minimum) period.

or guarantees. The categories of employees thatare currently listed explicitly in the Annex asbeing excluded from the scope of the Directive,on account of the existence of other forms ofguarantee (under national law) offering theemployee protection equivalent to that resultingfrom the Directive, may continue to be excluded.By dispensing with the Annex, however, the needto mention them explicitly is to be eliminated.

As regards the concept of insolvency, theProposed Amendments suggest that thedefinition of the Regulation on insolvencyproceedings be used, as it covers bankruptcy(liquidation) proceedings as well as othercollective insolvency proceedings.10 With thisbroader definition of the term, the objectives ofthe Transfers Directive are also brought in linewith those of the Insolvency Directive – as isstated in the Proposed Amendments.

Provisions on guarantee institutionsIn order to ensure a certain (minimum protection)under Community law11, the Insolvency Directiverequires Member States to create a guaranteeinstitution that provides for the satisfaction ofoutstanding claims relating to the remunerationfor work of employees of employers who havebecome insolvent, for a certain (minimum)period. The Insolvency Directive grants MemberStates the right to limit the liability of theguarantee institutions and therefore gives themthe possibility in Article 3 (the so-called liabilityobligation) and Article 4 of the InsolvencyDirective to choose from among severalreference dates and associated referenceperiods, in order to be able to limit the timeframe of the guarantee obligation. In thisconnection, any limit must not be shorter thanthe (minimum) period under Community law(Article 4 of the Insolvency Directive). It is fully inline with the social objective of the InsolvencyDirective that the Member States may set aceiling to the liability for employees’ outstandingclaims (Article 4 (3) of the Insolvency Directive).

According to Article 3 (2), in connection withArticle 4 (2) of the Insolvency Directive, MemberStates have the option to choose among threepossible reference dates as well as referenceperiods:

■ The onset of the employer’s insolvency, inwhich case the payment of outstanding claimsmust be ensured that relate to pay for the lastthree months of the contract of employment or

the employment relationship occurring within aperiod of six months preceding the date of theonset of the employer’s insolvency.

■ The date of the notice of dismissal issued to the employee concerned on account of the employer’s insolvency, in which case the payment of outstanding claims must be ensured that relate to pay for the threemonths of the contract of employment or the employment relationship preceding the date of the notice of dismissal issued to the employee on account of the employer’s insolvency.

■ The date of the onset of the employer’sinsolvency or that on which the contract of employment or the employment relationshipwith the employee concerned was discon-tinued on account of the employer’sinsolvency, in which case the payment ofoutstanding claims must be ensured thatrelate to pay for the last 18 months of thecontract of employment or the employmentrelationship preceding the date of the onset of the employer’s insolvency or the date onwhich the contract of employment or theemployment relationship with the employeewas discontinued on account of theemployer’s insolvency. In this case, MemberStates may limit the liability to make paymentto pay corresponding to a period of eightweeks or to several shorter periods totallingeight weeks.

The Proposed Amendments suggest a simpli-fication of the – admittedly unnecessarilycomplicated – arrangements, to the effect thatonly one minimum period should be laid downunder Community law, leaving it to the MemberStates to fix a date and a reference period. TheProposed Amendments argue that whenadopting this approach, one could also react to a practice commonly followed by MemberStates, i.e., that the statutory guarantee shouldalso cover claims arising after a specific refer-ence date. However, the currently validInsolvency Directive only relates to claims arisingbefore a reference date. The ProposedAmendments therefore provide that Article 3should include among the claims that guaranteeinstitutions take over such outstanding payclaims relating to a period prior to and/or, asapplicable, after a given date determined by theMember States.

The option to limit the liability of the guaranteeinstitutions is to be retained. If the period is

1 OJ 1980 L 283 of 28 October 1980,p.23; as amended by Council Directive87/164/EEC of 2 March 1987, due tothe accession of Spain, OJ 1987 L 66of 11 March 1987, p.11, and (mostrecently) amended by the Acts on theAccession of Austria, Finland andSweden, OJ 1994 C 241 of 29 August1994, p.115. The Insolvency Directivedoes not apply to Greenland, onaccount of the specific features of thelabour market (Article 1 (3) of theInsolvency Directive). Pursuant to theProposed Amendments of theInsolvency Directive, this exemption isto be waived now (see also below).

2 OJ 2001L 82 of 22 March 2001, p.16.In connection with the TransfersDirective see, for example, the briefsummary by M. Thurner and A. Kraft,“Die Sicherung vonArbeitnehmeransprüchen auf der Ebenedes Gemeinschaftsrechts sowie nachösterreichischem Recht”, ZInsO20/2001, pp.921, which is followed bythe subsequent presentation of theCommunity law in connection with theInsolvency Directive.

3 OJ 2000 L 160 of 30 June 2001, p.1.4 OJ 2001 C154 of 29 May 2001, p.109.5 Austria, Greece, Ireland, the

Netherlands, Spain, Sweden and theUnited Kingdom have availedthemselves of this possibility (fordetails on the exemptions see theAnnex to the Insolvency Directive).

6 The admissible exclusions relate todomestic servants employed by naturalpersons and fishermen who areremunerated by way of a share in theproceeds.

7 OJ 1998 L 14 of 20 January 1998, p.9.8 OJ 1999 L 175 of 10 July 1999, p.43.9 OJ 1991 L 206 of 29 July 1991, p.19.10 This broad concept is at the basis of

most provisions for transposition intonational law regarding the InsolvencyDirective. The Commission’s concernwas – in reaction to the literalinterpretation of the concept, given bythe European Court of Justice in itsjudgment of 9 November 1995(C479/93 Francovich) – to stipulate adefinition that is in line with the socialobjective of the Insolvency Directive andthe development of insolvency law.

11 Pursuant to Article 9 of the InsolvencyDirective the Member States have theoption of applying or introducing laws,regulations or administrative provisionsthat are more favourable to employees.


limited, for which the guarantee institutions mustpay outstanding claims, this period must not beshorter than a period covering the last threemonths for which pay is still outstanding. In thisregard, Member States may stipulate in theirnational law that this (minimum) period must beplaced within a reference period of at least sixmonths (Article 4 of the Proposed Amendments).By the same token the possibility, available toMember States, to set a ceiling on payments tobe made by the guarantee institution toemployees is to remain unchanged.

The details of the organisation, the financing andthe operation of the guarantee institution are leftto the discretion of Member States which mustcomply with three principles: (1) the assets ofthe institutions shall be independent of theemployers’ operating capital and be inaccessibleto proceedings for insolvency (of the employer)(Article 5 (a) of the Insolvency Directive); (2)employers shall contribute to the financing,unless it is fully covered by the public authorities(Article 5 (b) of the Insolvency Directive); and (3)the institution’s liability shall not depend onwhether or not obligations to contribute to thefinancing have been fulfilled (Article 5 (c) of theInsolvency Directive). It is therefore also up tothe Member States to decide whether and inwhat form (for example, in what pay-off rankingetc.) to allow the guarantee institutions toparticipate in proceedings concerning the assetsof an employer for collectively paying off his orher creditors.

Provisions concerning social securityThe Insolvency Directive requires in itsprovisions on social security (Section III, Articles6 to 8 of the cited law) that the Member Statestake measures (under national law): (1) toensure that non-payment of compulsorycontributions due from the employer, before theonset of his or her insolvency, to their insuranceinstitutions under national statutory socialsecurity schemes does not adversely affectemployees’ benefit entitlements in respect ofthese insurance institutions in as much as theemployees’ contributions were deducted atsource from the remuneration paid (Article 7 ofthe Insolvency Directive; the so-called guaranteeobligation); and (2) to protect the interests ofemployees and persons having already left theemployers undertaking or business at the date ofthe onset of the employer’s insolvency in respectof rights conferring on them immediateprospective entitlements to old-age benefits,

including survivors’ benefits, undersupplementary company or inter-companypension schemes outside the national statutorysocial security schemes (Article 8 of theInsolvency Directive). Pursuant to Article 6 of theInsolvency Directive, the Member States maystipulate that the provisions on guaranteeinstitutions (Section II, Articles 3 to 5 of the citedlaw) do not apply to contributions by employeesdue under national statutory social securityschemes or under supplementary company orinter-company pension schemes outside thenational statutory social security systems.

Provisions concerning transnational institutionsIn response to the growing internationalinterdependency of companies, the ProposedAmendments provide that a new section, IIIa(Articles 8a and 8b of the ProposedAmendments), should contain provisions oncross-border cases.12 When an undertaking withestablishments in the territories of at least twoMember States is in a state of insolvency withinthe meaning of Article 2 (1) of the cited law, andthe opening of insolvency proceedings has beenrequested in a Member State other than that inwhich the worker habitually works, thecompetent guarantee institution shall be that inthe latter Member State (Article 8a (1) of theProposed Amendments). The extent ofemployees’ rights is to be determined by the lawgoverning the competent guarantee institution(Article 8a (2) of the Proposed Amendments).

General and final provisionsThe Insolvency Directive grants Member States the right to take the measures necessary to avoid abuses and to refuse orreduce the liability obligation referred to in Article 3 or the guarantee obligation referred to in Article 7 of the Insolvency Directive if itappears that the fulfilment of the obligation is unjustifiable because of the existence ofspecial links between the employee and theemployer and of common interests resulting in collusion between them.

Legal situation in the accession states

Bulgaria

In Bulgaria, claims secured by a pledge,mortgage or a retained lien are satisfied from theproceeds obtained for the collateral as first andsecond priorities (Article 722 (1) 1 and 2 of theCommercial Code.13 While the Code does provide

for the distinction of two ranks of creditors, this only appears to be a form of pay-off ranking,as all secured creditors must be paid off anywayfrom the assets serving as collateral or theretained assets, which are not part of theinsolvent assets and therefore only used tosatisfy secured creditors.14 All possible claims of preferential creditors are covered from the other pay-off ranks - if there are enoughassets available.

Claims of employees that arose up to one yearbefore the opening of insolvency proceedings,are paid off as a fourth priority (Article 722 (1) 4 of the Code). At present, there is no institution(guarantee fund) in Bulgaria, as is required bythe Community’s acquis communautaire.However, plans in such an institution may beexpected in the near future, in the course of theenvisaged comprehensive reforms of theBulgarian insolvency law. It would be desirable if a solution were found that would raiseemployees’ claims to the first rank, which would pass to a fund by way of an assignmentthrough the operation of law, which in turn would be able to obtain recourse in a rankbehind the secured creditors.

Czech Republic

There is no separate guarantee institution in the Czech Republic. However, the law on theprotection of employees in the event of theiremployer’s insolvency (the Law), which enteredinto force on 1 July 200015 does provide forsome adaptation of the legal situation to theCommunity’s acquis communautaire, as specificemployees’ claims (see section 5 of the Lawregarding protected or secured claims) aresatisfied by the Ministry of Labour and SocialAffairs, after they are first claimed at the locallyresponsible labour office, in the event of anemployer’s insolvency. In this case, the claimsfor wages and salaries of employees pass to theresponsible labour office in the actually paidamount (section 8 of the Law), which may resortto recourse in the course of the proceedingsagainst the employer (assignment by operationof law pursuant to section 11 (3), sentence 1, of the Law). Since neither the Law nor the law on bankruptcy and debt recomposition (KAG)16

provide a special ranking for rights to recourse,the labour office assumes the privileged legalposition of the employee (section 31 (3) of theKAG), as is in line with assignment provisions,and its rights to recourse are satisfied from the


A particularly significant issue is the level ofsatisfaction afforded to the claims of employeesor the funds set up for their protection on the one hand, and the claims of secured creditors on the other.

insolvent assets on an ongoing basis, togetherwith the claims against the insolvent assets(section 31 (2) of the KAG) in the course of thebankruptcy proceedings.

As under Slovak law, collateral also constitutesspecial insolvent assets in the Czech Republic,the proceeds of which may be used to pay offsecured creditors on an ongoing basis in thecourse of the bankruptcy proceedings (section28 in connection with section 31 (1) of the KAG).There is, however, the restriction that in anyevent17 secured creditors only get a maximum of70 per cent of the proceeds from the specialinsolvent assets securing his or her claim. Theremaining 30 per cent goes to the generalinsolvent assets and (also) serves to satisfy therights to recourse of the labour offices.

As a result, the Czech Republic has also adoptedthe requirements of the Insolvency Directivewithout, however, paying sufficient attention tothe possibilities of providing some relief for theinsolvent assets, which the establishment of aguarantee institution allows. Such a relief couldalso be achieved, in the case of the CzechRepublic, by, for example, eliminating theprivileged position of the rights to recourse of thelabour offices and by treating their claims on thesame basis as all other claims.

Hungary

The Hungarian legal situation is not significantlydifferent from that in Poland. Although Hungarydistinguishes between general insolvent assetsand special insolvent assets which are used topay off secured creditors, section 49/D of thelaw on bankruptcy and liquidation proceedingsand final settlement (KonkG)18 provides,however, that the receiver may give to thesecured creditors only 50 per cent of theproceeds obtained for the special insolventassets. The remaining 50 per cent becomes partof the general insolvent assets and is distributedaccording to the pay-off ranking pursuant tosection 57 (1) of the KonkG. The latter providesthat secured creditors are paid off for theirpreferential claims in the second place, with thefirst 50 per cent being deducted, which theyreceived before. The first priority is for claimsagainst the insolvent assets, which includeemployees’ claims. As in Poland, if assets are oflittle value secured creditors will occasionallysuffer considerable losses.

A guarantee institution for the protection ofemployees’ claims in the event of an employer’sinsolvency – which is not in conformity withCommunity law in many respects – wasestablished in Hungary as early as 1994 (lawcreating a Salary Guarantee Fund, the “SGFLaw”).19 The Salary Guarantee Fund is part of theLabour Market Fund and is set up with theMinistry of Labour (section 1 (3) of the SGF Law).In contrast to Poland, the Slovak Republic andthe Czech Republic, employees’ claims do notpass to the Salary Guarantee Fund, but thedebtor is granted an interest-free loan (fromsection 5 of the SGF Law), for which he or shemay apply to the receiver. This must be returnedfrom the insolvent assets as a first priority(section 57 (1) a to i, in connection with (2) b ofthe KonkG). There are no plans to change thisprivileged pay-off ranking with bill No. T/4644concerning an amendment of the SGF Law.20 Thebill serves exclusively to adjust Hungarian legalnorms to the Insolvency Directive.

An article by Tiborné on the creation andoperation of the Salary Guarantee Fund shedssome light on the Hungarian understanding ofthe issue.21 While the author is familiar with billNo. T/4644 and recognises that the SGF Lawneeds to be adapted to the requirements underCommunity law (especially regarding its scope ofapplication), he points out that the legislativechanges must not lead to any increases incontributions, as the Salary Guarantee Fund issufficiently funded and actually has accumulateda surplus, since it is used only inadequately(receivers and administrators are not obliged toapply to the Fund). This is hardly surprising,bearing in mind that payments from the SalaryGuarantee Fund are limited to five times thestatutory monthly minimum wages per eligibleapplicant22 (section 7 (1) of the SGF Law). Thesuggestion of the author, which bill No. T/4644does not –address, also aims to highlight themonthly average gross income.

As a result, the planned changes of the SGF Lawwill transpose the requirements of the InsolvencyDirective. However, as in Poland, and the Czechand Slovak Republics, the possibilities forproviding relief for the insolvent assets, offeredby the creation of a guarantee institution, werenot given sufficient attention. In Hungary, such a relief may, for example, be an extension of the scope of the SGF Law (bill No. T/4644already takes account of this suggestion), anincrease of the ceiling for paying the unsatisfied

12 See also the judgments of theEuropean Court of Justice of 17September 1997 (C–117/96 Mosbaek)and of 16 December 1999 (C–198/98Everson, Barrass, Secretary of State forTrade and Industry, Bell Lines Ltd.);“Arbeitsort als Zuständigkeitskriteriumfür die Garantieeinrichtung”, ZIK 2000,p.32; R. Weber: “Arbeitgeberstaat mußInsolvenz-Ausfallgeld für im Auslandbeschäftigte Arbeitnehmer zahlen”,Comments on the ECJ judgment of 17September 1997, C–117/96, RdW1997, p.678.

13 The Bulgarian insolvency law applying tobusinesspeople is contained in PartFour of the Commercial Law Code (HG).

14 W. Daskalov and M. Thurner ,Bulgarisches Insolvenzrecht (1996),p.60 FN 187.

15 Law No. 118/2001 Sb. See also:Regular Report 2000 of theCommission on the progress achievedby the Czech Republic on the way toaccession, p.71.

16 Law No. 328/1991, collection, in thecurrently valid version.

17 This general restriction is the result ofthe amendment of the KAG whichentered into force on 1 May 2000 (LawNo. 105/2000 Sb.). Prior to that date,it was possible to limit the pay-off rateonly under circumstances that stillprevail today in the Slovak Republic.Parallel to weakening the legal positionof secured creditors, Law No.105/2000 Sb. strengthened theposition of employees’ claims. Underthe old legal regime only claims fromemployment relationships had to besatisfied on an ongoing basis from theinsolvent assets, which had existed atthe time or one month before theopening of bankruptcy proceedings(section 31 (3) of the KAG in its oldversion), claims from employmentrelationships that occurred in thecourse of the last three years prior tothe opening of bankruptcy proceedingsnow also enjoy this privilege (section31 (3) of the KAG in its new version).

18 Law No. IL/199 in the currently validversion.

19 Law No. LXVI/1994, in the currentlyvalid version.

20 Bill no. T/4644 relating to anamendment of Law No. IV/1991 on thepromotion of employment and supportto unemployed persons, of Law No.LXVI/1994 on the Salary GuaranteeFund, of Law No. IL/1991 onbankruptcy and liquidation proceedingsand on final settlements, as well as ofLaw No. XCII/1993 on the protection ofemployees of May 2001.


claims of employees, and an elimination of theprivileged position of claims under a loan.

Poland

As early as 1994, a law on the protection ofemployees’ claims in the event of an employer’sinsolvency (ArbnFSchG)23 was enacted, whichprovides for a guarantee institution (the so-calledFund on Guaranteed Employees’ Claims) that islargely in conformity with Community law. Anyemployees’ claims (for protected or securedclaims see Article 6 of the cited law) that theFund satisfies become ex lege its claims(assignment by operation of law pursuant to Article 10 section 1 of the cited law). Pursuant to Article 10 section 2 of the cited law, the rights of recourse of the Fund “enjoy the same legal protection as it is provided inseparate provisions for liabilities arising fromwork”. The separate provision in the presentcase is Article 204 section 1 of the Polishinsolvency law24 which governs the ranking forpay-offs. It stipulates that claims from workperformed must be paid off as a first priority (the so-called Class 1 according to Article 204section 1 (1) of the cited law), while claimssecured by pledge, mortgage, entry in the ships’register or by retaining liens need only be paid off as fourth priority (the so-called Class 2baccording to Article 204 section 1 (2) b of thecited law). When bearing in mind that the rankingfor pay-offs is based on the general insolventassets, which also include the collateral, andthat no special insolvent assets are formed, then it may well be – in the case of a low volumeof assets, which is not so rare – that the insol-vent assets are not sufficient to (fully) pay off the secured claims, ranked fourth, whichmeans that creditors will occasionally sufferconsiderable losses.

If the position of the secured creditors is to be improved – without basically changing theexisting ranking for pay-offs, i.e., by granting thesecured creditors a “genuine” preferential right –then it is necessary to provide some relief for thehigher ranks. This could be achieved, forexample, by giving up the privileged position ofthe Fund’s rights to recourse in connection withguaranteed employees’ claims25 by treating itsclaims just like all other claims.26 Such anapproach is fully in line with Community law,since the details on organisation, financing andoperation of the guarantee institution is left tothe Member States, as are the arrangements asto whether, and if so in what form (for example inwhat ranking for pay-off, etc.), the guaranteeinstitutions are to share in the assets of anemployer for collectively paying off of hiscreditors (from Article 5 (a) Insolvency Directive).

The equal treatment of the Fund’s rights torecourse for guaranteed employees’ claimspresupposes, however, that the government

would have to reconsider the financing of the Fund and would possibly have to boost the funding.

Slovak Republic

The guarantee institution required by theInsolvency Directive was set up in the SlovakRepublic on 1 May 2000.27 The relevantregulations can be found in subsections 64a to 64f of the Labour Law Code (ArbGB)28 and in different places in the law on employment(BeschG).29 Employees’ claims (regardingsecured claims see section 64b (2) a to i of theArbGB, or section 22 (2) a to i of the ArbGB, asof 1 April 2002), which the guarantee institution(Fund) has satisfied, become ex lege claims ofthe institution (assignment by operation of lawaccording to section 128 b (8) of the BeschG).30

The Fund’s rights to recourse are claims againstthe insolvent assets (section 31 (3) of the law onbankruptcy and debt recomposition – KAG),31

which are satisfied in the course of theproceedings. The preferential treatment of theFund’s rights to recourse does not affect thelegal position of the secured creditors, as theirclaims are satisfied at any time during theproceedings and outside of the decision on thedistribution of the remaining assets from theproceeds obtained for the collateral, up to theamount of the secured claim (section 28 (2) ofthe KAG). Limiting the pay-off percentage forsecured creditors to 70 per cent, which ispossible pursuant to section 28 (5) of the KAG,only applies to those cases where the insolventassets are not even sufficient to pay the remune-ration and the expenses of the administrator, inconnection with the preservation and admini-stration of the insolvent assets. According torecent statistics on insolvencies, this is hardlyever of any significance, as of the 7,435bankruptcy proceedings that were pending oropened during the first semester, only 386 of the applications for bankruptcy had to bedismissed for lack of sufficient insolvent assets.

Although the legal situation of secured creditorsis more favourable than that in Poland, it mustalso be said that that while the requirements ofthe Insolvency Directive were transposed in theSlovak Republic, insufficient attention was paidto the possibilities for providing some relief tothe insolvent assets, arising from theestablishment of a guarantee institution. Thiscould also be achieved in the case of the SlovakRepublic, for example, by giving up the privilegedposition of the Fund’s rights to recourse and bytreating its claims on the same basis as all otherclaims.32 At any rate, this would allow anincrease in the achievable pay-off rate forunsecured creditors (section 32 of the KAG).


21 Tiborné, Der Lohngarantie-Fonds isterwacht – Mehr Beiträge alsForderungen,http://www.cegnet.hu/munkadoo/008/m160_60.htm, August 2000. Theauthor is a member of the HungarianNational Association of Employers andIndustrialists.

22 At present, the monthly minimumwages amount to HUF 50,000(approximately €197).

23 Dz. U. 1994, No. 1, Pos. 1, in theversion of Dz. U. 2000, No.48, Pos.550.

24 “Insolvency law” (in Polish: Prawoupadlosciowe) refers to the Ordinanceof the President of the Republic of 24October 1934 – Insolveny Act (Dz. U.1991, No. 188, Pos. 512, in thecurrently valid version.)

25 The question whether the preferentialposition of the rights to recourse mightnot meet with constitutional concerns(principle of equal treatment) cannot bediscussed here. After all, theconsideration is that the Fund with itsrights to recourse certainly does nothave any title to more protection, whichis in contrast to the position ofemployees and their claims, beforethese claims pass to the Fund. Thisline of argument presupposes,however, that the legislator did notgrant the Fund a special position, inefforts to create a legal structure (seealso the Polish construction as agovernmental special-purpose fundaccording to Article 12 section 2 of theArbnFSchG.)

26 If, for example, the claim of anemployee is secured, the Fund’s rightto recourse could be satisfied whenranked fourth. If an employee’s claim isnot secured, the Fund’s right torecourse could be satisfied whenranked seventh (the so-called Class 6according to Article 204 section 1 (6) ofthe cited law).

27 See also Regular Report 2000 of theCommission on the progress achievedby the Slovak Republic on the way toaccession, p.62.

28 Law No. 65/1965, collection, in thecurrently valid version. Theaforementioned provisions are basicallyalso contained, with more or less thesame wording, in section 21 to 26 ofthe Labour Law Code that will enter intoforce on 1 April 2002 (Law No.311/2001, collection).

29 These are essentially section 4 andfollowing, 9, 16, 20, 65, 73 andfollowing, 77a, 128a to d, and 131 ofthe BeschG (Law No. 387/1996,collection, in the currently validversion).

Conclusion

There are varying degrees of tension surroundinginsolvencies and related laws in the transitioncountries reviewed above. A particularlysignificant issue is the level of satisfactionafforded to the claims of employees or the fundsset up for their protection on the one hand, andthe claims of secured creditors on the other.With the exception of the Slovak Republic, theprivileged position of employees’ and guaranteeinstitutions’ claims goes hand in hand with aweaker position of the secured creditors –especially in the case of insolvencies with onlyfew assets. The table below summarises thesituation. The present study shows that theadoption the principles of Council Directive80/987/EEC of 20 October 1980 on theapproximation of the laws of the Member Statesrelating to the protection of employees in theevent of the insolvency of their employer(Insolvency Directive), which has basically beeneffected in the aforementioned accessionstates, does not result in a better position ofsecured creditors. One might counter this

statement by saying that this is not the objectiveof the Insolvency Directive. Other approacheswould therefore have to be followed in order toimprove the legal situation of secured creditorsin the accession states. If that were to be done,however, it would mean to forego the problem-solving potential provided by the InsolvencyDirective. Outsourcing the claims of employees,which deserve protection and must therefore besatisfied with priority, to a guarantee institutionoffers the possibility of distributing a higher pay-off rate among the secured creditors, whilemaintaining the social balance. However, thedifficulty in implementing this approach lies inthe need to reconcile the interests of all partiesinvolved: employers, banks, trade unions andthe public sector. Such an approach would yieldbetter results in the area of the protection ofinvestments, which is an indispensable factor forpromoting prosperity in the ongoing transitionprocess, than would an approach which favoursintervention to the detriment of one class ofcreditors, i.e., the secured creditors.

30 Section 128 (8) of the BeschG: “Afterthe payment of the financialremuneration has been effected fromthe Guarantee Fund, the employerbecomes a debtor of the NationalLabour Authority, and the NationalLabour Authority becomes a creditor ofthe debtor”. The term “financialremuneration” refers to claims ofemployees from their employmentrelationship that are satisfied from theGuarantee Fund (section 64b 82) of theArbGB or section 22 (2) of the ArbGBafter 1 April 2002). The GuaranteeFund is set up with the National LabourAuthority (from section 74 BeschG.)

31 Law No. 328/1991, for example, in thecurrently valid version.

32 See the earlier reference in III.A forconformity with Community law.

* Mario Thurner, Managing Director, andAnton Kraft, Project Manager ResearchCentre of Legal Competence (CLC),Vienna, Austria

Wohllebengasse 6,6th Floor, 1040 ViennaAustria

Tel: +43 1 5037335/120 (M. Thurner),Tel: +43 1 5037335/160 (A. Kraft)Fax: 0043 1 5037336Email:[email protected], [email protected]

Article translated from German by Dipl.Dolm. Liese Katschinka, Vienna, Austria.


Pay-off ranking Pay-off rate

Claims of Claims of From the From the generalemployees or secured creditors proceeds insolvent assetsthe guarantee obtained for the

institution special insolvent(if available) assets

Bulgaria Fourth priority special insolvent 100 per cent depending onassets availability

Czech Republic First priority special insolvent 70 per cent depending onassets (maximum) availability

Hungary First priority second priority 50 per cent depending onavailability

Poland First priority fourth priority 0 per cent depending onavailability

Slovak Republic First priority special insolvent 100 per cent or depending onassets 70 per cent availability

(maximum)

As a rule, only the proceeds are distributed (as a percentage) after deducting the costs for the administration and disposalof the collateral or the special insolvent assets, as well as the expenses incurred in connection with the special insolventassets and the share of the remuneration due to the receiver that is attributed to the special insolvent assets.

30 Law in transition – Focus on south-eastern Europe

Focus on south-eastern EuropeThe countries of south-eastern Europe (SEE) (Albania,Bosnia and Herzegovina, Bulgaria, Croatia, FR Yugoslavia,FYR Macedonia and Romania) have faced particularlytough obstacles on the path to achieving democratisationand the transformation into market-oriented economies.Political instability, low inflows of foreign direct investmentand the effects of civil wars in the region have hindered thetransition process. As a result, the pace of progress inthese countries has been slower than that of the centralEuropean and Baltic countries, for example. Although allseven countries of the SEE region aspire to full-fledgedmembership of the European Union, only Bulgaria andRomania have effectively started accession negotiations.Bosnia and Herzegovina and FR Yugoslavia are at the otherend of the transition spectrum. The state still dominateseconomic activity and large-scale privatisation is yet totake place.

Olivier Descamps’ article outlines the economic factorscontributing to the ongoing difficulties of SEE countries’ inattracting foreign direct investment. The article discusses:the major challenges facing the region that are currentlyonly in the early stages of being tackled; the improvementof the investment climate by addressing barriers to entry;high and arbitrary taxation and corruption; the enhance-ment of access to finance, particularly for small andmedium-sized enterprises (SMEs) and new start-ups; andthe lowering of barriers to intra-regional trade in order toattract foreign investors. The article concludes byemphasising the encouraging progress that SEE countrieshave made and the important role that internationalfinancial institutions, including the EBRD, will continue toplay in assisting the region to develop its private sector.

The second article, by Kamen Zahariev, explores the legaland policy aspects of the institution building activities ofthe EBRD in SEE countries. The article examines the stateof legal infrastructure in the region and provides specificexamples of the EBRD’s role in promoting law reform andinstitution building.

The following article by Angela Conway and Amanda Gilmanfocuses on the efforts of SEE countries to develop codesof judicial conduct aimed at strengthening their respectivejudicial systems. It examines the status and nature ofthose efforts in each of the countries and the regulation of judicial conduct more generally. It notes that while these codes commonly provide for sound principles ofjudicial behaviour, their practical bearing is often seriouslyhindered by various factors, such as a lack of adequateimplementing legislation, poor enforcement capacity, and

the lack of resources and independence of the bodies in charge of judicial discipline.

The fourth article investigates the practice of channellingprivate investments into municipal infrastructure projects.It provides an analysis of legal frameworks for raisingmunicipal finance and examines the possibilities formobilising the private sector in municipal infrastructureprojects. The article explores cooperation between localgovernments and private investors, and the commonalityand diversity of experiences in the region. The main issuesand challenges that each country faces in developing itslegal regime on municipal financing are summarised, andareas where law reform or better law implementation areneeded are outlined.

The last two articles provide local practitioners’ insightsinto current legislative developments in Bulgaria andRomania, and propose methods for the improvement ofexisting laws. Cristiana I. Stoica and Valeriu Stoica discussthe Romanian legal regime for creating security interest onpersonal property, analyse the main provisions of the lawand provide a critical assessment of its implementation.The authors emphasise the importance of the introductionof a unified and transparent statutory regime for thecreation and enforcement of security interests andsuggest this would promote certainty in commercial andfinancial secured transactions. The new coherent andpredictable security enforcement regime provides betterprotection for creditors and improves the Romanianinvestment climate. Stephan Kyutchukov’s articleexamines the functions of company and property registriesin Bulgaria and their role as fundamental components of legal infrastructure supporting commercial activity. Itdescribes the structure of paper-based registries andoutlines the main problems associated with them.Recognising the need to create an electronic, centralisedcompany, property and security registry, the article detailsthe efforts of the Ministry of Justice in Bulgaria to promotethe establishment of this kind of registry. The establish-ment of the electronic Central Registry of non-possessorypledges, the enactment of the Law on the ElectronicDocument and the Electronic Signature and the WorldBank and EU Phare project for the creation of electroniccadastral maps of Bulgaria are discussed. These provide a sound basis for the further evolution of the registry.

Focus on south-eastern Europe – Law in transition 31

Private sector developmentand the role of the EBRD insouth-eastern Europe+

The Stability Pact for south-eastern Europe(SEE) launched in 1999 deems the creationof vibrant market economies in the countriesof this region its primary objective. Since1999 significant efforts have been made toestablish investor-friendly regimes andencourage private sector development. This article reviews the work carried outwithin the last years and the progress made by the countries to comply with the objectives of the Stability Pact.

Olivier Descamps, Business Group Director, EBRD*

Romania

BulgariaFR

Yugoslavia

FYRMacedonia

Albania

Bosnia andHerzegovina

Croatia

At the launch of the Stability Pact for south-eastern Europe (SEE) in Cologne on 10 June1999, one of the objectives was the creation of“vibrant market economies based on soundmacro policies, markets open to greatlyexpanded foreign trade and private sectorinvestment, effective and transparent customsand commercial/regulatory regimes, developingstrong capital markets and diversifiedownership, including privatisation, leading to awidening circle of prosperity for all our citizens”.More than two years later, it is time to evaluatethe role of the private sector in achieving thisobjective. Have governments in SEE madesubstantial progress in creating an enablingenvironment for private sector development?How have local enterprises and entrepreneursresponded to the changing and sometimesvolatile investment climate? How successfulhave countries in the region been in attractinggreater levels of foreign direct investment (FDI)?In short, to what extent is private sectordevelopment in SEE “catching up” with the more advanced countries of central Europe and the Baltic states (CEB)? Can the interna-tional donor community start to withdraw, leaving future development in the hands of the private sector?

This article argues that the private sector in SEEhas made encouraging progress in the past twoyears and is indeed catching up with the moreadvanced transition economies. Private sectoractivity has grown in size, both in absolute termsand as a percentage of GDP, and enterprisesface an improved investment climate relative to two years ago. However, the foreign directinvestment and other capital flows remain wellbelow those in CEB as foreign investors remaincautious about the region’s prospects.Therefore, it is argued, Western governmentsand IFIs should continue to assist the countriesof SEE in creating fully functioning marketeconomies and developing the private sector.

Progress in private sector development

The size of the private sector

Estimating the size of the private sector intransition economies has long proved to be adifficult task. The main problem is that datacoverage is usually far from complete becausemany firms operate in the informal economy inorder to evade taxes, registration requirementsand other costs of doing legitimate business. In

some SEE countries, the informal economy mayaccount for nearly half of economic activity. Withthis caveat in mind, it is possible to give roughestimates at least of the percentage of GDPaccounted for by the private sector.1 Chart 1shows how this percentage has evolved in SEEover the past four years. The chart shows amodest upward trend, from 56 per cent in 1998to more than 60 per cent in mid-2001 but theregion remains below the central European andBaltic states, where private sector activityaccounts for about 75 per cent of GDP onaverage. The state retains a dominant share ineconomic activity in two countries of SEE, Bosniaand Herzegovina and FR Yugoslavia. Takentogether, these facts suggest that, once thesecountries embark fully on long-delayed large-

scale privatisation, the gap between the tworegions will be narrowed over the medium term.

Privatisation

The rise in private sector activity noted abovehas come largely from the increased pace ofprivatisation over the past two years. In mostcountries, small-scale privatisation is largelycomplete, the exceptions in the region beingBosnia and Herzegovina and FR Yugoslavia.However, large-scale privatisation and the sale ofstrategic enterprises and public utilities are farmore difficult tasks. Chart 2 evaluates theprogress in large-scale privatisation asmeasured by the EBRD index, where 1 indicateslittle or no progress, and 4+ indicates a standard


Central Europeand Baltics

South-easternEurope

Source: EBRDNote: Figures for 2001

are estimates

Chart 1: Private sector share in GDP, 1998 – 2001

78

74

70

66

62

58

54

50

1998 1999 2000 2001

Per

cent

The private sector in SEE has made encouraging progress in the past two years and is indeed catching up with the moreadvanced transition countries.

Central Europeand Baltics

South-easternEurope

Commonwealth ofIndependent States

Source: EBRD

Chart 2: Progress in large scale privitisation, 1994 – 2001

3.5

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similar to advanced market economies (seeTransition Report, various issues, for moredetails). The chart tells an interesting story.Between 1994 and 1999, large-scaleprivatisation in SEE was lagging behind even thecountries of the Commonwealth of IndependentStates (CIS). Since then, however, there hasbeen a significant acceleration and preliminaryestimates suggest that the SEE region has nowovertaken the CIS.2 The region has seen anumber of significant “flagship” privatisationssince mid-1999.

Capital flows

Foreign investors are playing a significant role inthe sustainable development of the SEE region.Investors have shown considerable caution inrecent years. Total private flows to SEE, close toUS$ 6 billion in 1997, had fallen to US$ 2.4billion in 1999, reflecting the general instability inthe region. However, the two years since thenhave seen a significant upturn in private flows,with the total for 2001 forecasted to be aroundUS$ 4.5 billion (see Chart 3).

Since 1998 FDI has accounted for well over half of the capital flows (see chart 4). However,compared with CEB, the countries of SEE havebeen less successful in attracting FDI, reflecting a slower pace of reform, the late start of privati-sation and less market confidence about EUaccession prospects. FDI inflows per capita intoSEE since 1999 have been relatively stable butare only about one-quarter of those achieved inCEB. In countries that have received substantial

flows of FDI, privatisation programmes have beenthe main source of inflows, and FDI and privati-sation revenues are closely correlated. Bulgariaincreased per capita FDI inflows to US$ 123 in2000, on a par with Hungary or Lithuania.Privatisation of large public enterprises and of themajor banks were the key sources of inflows, andwith the expected completion of the privatisationof public utilities over the next two years, Bulgariawill increasingly face the same challenge as CEBcountries in trying to maintain FDI. In Romania theprivatisation of large-scale state-ownedenterprises and public utilities is still in the earlystages and FDI inflows have so far failed to regaintheir peak level of over US$ 2 billion in 1998. Ifstrong structural reforms and adherence tomacroeconomic austerity can be maintained, FDIinflows into Romania could double over themedium term. FDI in Croatia dipped significantly in2000 relative to 1999.

Other SEE countries have lagged a long waybehind in terms of FDI, mainly because of the highlevel of political instability that has prevailed in theregion and the slower pace of reforms, especiallyin large-scale privatisation. As a result, they havebeen far more dependent on official financialflows, which have typically covered around one-third of their current account deficits, and onoccasional large deals, as the sale of MacedonianTelecoms earlier this year illustrates. Replacingofficial flows with private financing will be a keychallenge to prevent costly external adjustmentonce donor resources diminish. The case of FRYugoslavia will be particularly instructive in this

1 See EBRD Transition Report, variousissues.

2 Indicators for 2001 are preliminary.Updated estimates for each country areprovided in the EBRD Transition Report2001, published in November 2001.


Total private flows, net

Total official flows, net

Total capital flows, net

Source: World EconomicOutlook Database and EBRD Database

Note: Figures for 2001 are forecasts

Chart 3: Total net private and official flows to south-eastern Europe

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3000

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1996 1997 1999 2000

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$ m

illio

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regard, given the country’s size and previousbusiness links with enterprises in Slovenia and Croatia. The appetite of internationalinvestors for future investments in the SEE region will depend crucially on further progressbeing made in deep structural reforms.

Major challenges

It is clear that, notwithstanding the considerable progress over the past two years, much more investment from bothdomestic and foreign sources is required if the region is to achieve a path of sustainablehigh growth. In 1999 total investment as apercentage of GDP was around 25 per cent inCEB, but less than 15 per cent in SEE, and these figures have changed little in theintervening period. How can the gap between the two regions in terms of investment levels be closed? The experience of the past few yearssuggests that there are three major challengesthat are only in the early stages of being tackled.The first is improving the investment climate by tackling barriers to entry, high and arbitrarytaxation, and corruption. The second isenhancing access to finance, particularly for small and medium-sized enterprises (SMEs) and new start-ups. The third is loweringbarriers to intra-regional trade, so that foreigninvestors in particular might be attracted by the prospect of a larger market for the fruits of their investment. These challenges arediscussed in turn.

Investment climate

During 1999 and early 2000, the EBRD andWorld Bank carried out a joint survey of morethan 3,000 enterprises across almost alltransition countries.3 The surveys were designedto elicit from enterprises themselves what theysaw as the main obstacles to doing business intheir country.

Although there were significant differencesbetween, for example, advanced countries inCEB and early stage transition economies inCentral Asia, common themes emerged acrossall countries. Local businesses repeatedly saidthat the most significant impediments to theirinvestment and growth are haphazard andarbitrary taxation, excessive business regulationand weak judicial protection of property rights.There are notable similarities across thecountries of SEE: policy instability is generallyconsidered an important obstacle to investmentand expansion, while taxes and regulation (andin particular business licensing) and lack ofaccess to finance also figure prominently asmajor constraints. However, there are also somestriking differences. Albanian enterprises, forexample, are deeply concerned about law andorder issues, although this is an area wheresignificant advances have been made in the lastcouple of years, whereas enterprises in Romaniaare more worried about macroeconomicinstability as a constraint.

One very significant step towards tackling the problems identified is the South East EuropeCompact for Reform, Investment, Integrity and Growth (the “Investment Compact”). This is a key component of the broad structure of the Stability Pact and facilitates commitments by countries in the region to take concreteactions across a range of investment climateissues, with specific targets and timetables for each action. Under the sponsorship of theOECD, each country has prepared a set of“monitoring instruments”, so that progress, or lack of progress, on specific areas is imme-diately apparent. The increased transparencybrought about by the introduction of monitoringinstruments strengthens considerably the hand of reformers in each country.

In addition, several countries have benefitedfrom a detailed assessment of barriers to foreign investment by the Foreign InvestmentAdvisory Service (FIAS), a joint service of the IFC and World Bank.

The role of SMEs

In the SEE region, SMEs are, and will continue to be, at the heart of sustainable economic growth. However, SMEs face a number ofdifficulties that larger enterprises find easier toovercome, and any strategy to promote SMEsmust simultaneously tackle the three “pillars” of (i) finance, (ii) improvements in the businessenvironment and (iii) the strengthening of SME support networks.

Access to finance is one of the main obstaclescited by SMEs in the region. The EBRD-World Bank survey in 1999–2000 shows that the finance constraint affects small enterprisesrelatively more than larger businesses, with theexception of Bosnia and Herzegovina. The financeconstraint is relatively less binding in Albania than in the other economies, perhaps becausemicro and small enterprises in Albania benefit from substantial remittances flows, estimated to be equal to 20 – 40 per cent of GDP; the private enterprise sector has largely relied on these inflows to meet its financial needs.

A comprehensive overview of the banking sector shows that, even where privatisation and restructuring have advanced, theintermediation of the banking system in theregion is poor.4 Bank credit to the enterprisesector has grown modestly but banks rarely


According to local businesses, the mostsignificant impediments to their investment andgrowth are haphazard and arbitrary taxation,excessive business regulation and weak judicialprotection of property rights.

Total private flows, net

Total official flows, net

Other investment

Total capital flows, net

Source: World EconomicOutlook Database and EBRD Database

Note: Figures for 2001 are forecasts

Chart 4: Total net capital flows to south-eastern Europe (by type)

6000

5000

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3000

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-1000

1996 1997 1999 2000

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meet enterprise needs in terms of maturity and collateral requirements. Shortage of funds,lack of credit skills, unavailability of good lendingopportunities, and poor and/or deteriorating loan portfolios are among the many factorsresponsible for a low level of bank credit to the private sector. Sometimes a relatively highlevel of bank credit to enterprises with respect to GDP hides a high level of insider or relatedparty lending. Moreover, micro and small enter-prises are rarely recipients of bank credit outside very specialised programmes funded by IFIs and donors.

One response of the international donorcommunity to this lack of credit has been to create banks that specialise in micro-enterprise lending. The performance of thesebanks to date is discussed in the box below.Looking ahead however, the challenge ofassisting SMEs and improving their access to finance is a major one. To date, the onlycountry in which the banking system is playingsome role is Croatia. With capital markets being underdeveloped or non-existent, theburden of intermediation falls on the bankingsystem. Policy-makers in the region mustaddress the often inadequate legal and regulatory environment, poor supervision

capabilities and inadequate accountingstandards. The enhanced presence of Western banks can also play an important role, as recent experience in most countries of the region indicates.

Intra-regional trade

Trade integration is key to promote higher growth in the countries of southern Europe and longer-term integration into the EU. Given the small size of the domestic markets,integration can offer clear benefits for investors.To illustrate how small these countries are in economic terms, GDP in Romania is less than a quarter of the level in Greece, and theGDP of Albania, Bosnia and Herzegovina and FYR Macedonia combined is only one-third of Romania’s.

This long-term objective contrasts sharply with the current situation, with trade playingdiverse roles in the countries of the SEE region.A typical indicator of trade openness is the trade-to-GDP ratio, defined as the sum of total exports and imports over GDP. At the end of 2000 these ratios varied from a low of 32 per cent of Albania, to 56 per cent of Romania,up to the 90 per cent of Bulgaria and FYR

3 Results from 20 countries arediscussed in detail in the EBRDTransition Report 1999.

4 See F. Pissarides, “Financial Structuresto Promote Private Sector Developmentin South-Eastern Europe.” EBRDWorking Paper, No. 64.


Micro-enterprise banks

The primary purpose of micro-finance is toprovide access to finance for very smallprivate sector entrepreneurs who otherwisehave little opportunity of securing debtfinancing on acceptable terms. Commercialbanks often view micro lending as labour-intensive, risky and therefore unprofitable.Being small, new and unknown, micro-enterprises are frequently forced to operate inthe black economy, and are therefore unableto provide tax returns or prepare businessplans. Therefore, they cannot communicate tolenders information about theircreditworthiness, if the lenders use traditionalcredit techniques.

One approach that has gained popularity inrecent years is the establishment of newinstitutions, “micro-banks,” which focus solelyon micro lending. The EBRD participates inthe capital in the new institutions and investstogether with other IFIs, bilateral agencies,

micro specialist institutions and in somecases local commercial banks. These micro-finance institutions are recipients ofsubstantial grant and subsidised donorfunding which supports start-up costs andconstitutes the initial funding base for lendingactivities while the institution becomes locallyknown and starts building up its own depositbase. Governance and financial fragilityproblems are obviously overcome through thisapproach.

Four banks have been set up so far. MEBKosovo, MEB Bosnia and FEFAD Bank Albaniaare all operating on a highly successful basis.MFB Yugoslavia opened for business on 10April 2001 and ProCredit Bank Bulgaria on 8October 2001. Plans for a similar bank arewell advanced in Romania, where a financecompany has already been established. Plansfor Croatia and FYR Macedonia are beingexplored. The existing banks have all madeexcellent progress in 2001 and are fastapproaching sustainability.

Macedonia. These values are low compared to other transition countries of CEB, where it exceeds 100 per cent. Based on theseconsiderations, trade volumes can be expectedto increase, especially after the re-opening of the Yugoslav border and the restoration of themain trading routes towards central Europe.

Extra-regional trade shows a strong andincreasing orientation towards the EU. Four countries in the region – Albania, Bulgaria, Croatia and Romania – send more than half of their exports to the EU. In the case of Albania, trade with the EU accounts for almost90 per cent of the country total exports, while it stands for 51, 55 and 64 per cent ofBulgarian, Croatian and Romanian exportsrespectively. By contrast, intra-regional trade is relatively small. Trade turnover betweenneighbours Bulgaria and Romania representsaround 1–2 per cent of their total trade, and their trade with other countries of the region isnot much more substantial. Albania has virtuallyno trade with the rest of the region. There are far stronger trade links among some of thesuccessor states of the former Yugoslavia:between Croatia and Bosnia and Herzegovina(11.2 per cent of Croatia’s exports go to Bosniaand Herzegovina), and between FR Yugoslavia,Republika Srpska and FYR Macedonia. The existence of these links points both to the significant potential for greater integration, and it suggests that other barriers to trade related to recent conflicts may be as important as policy barriers.

Regional private sector initiatives

The EBRD was given a mandate to coordinatethe international community’s efforts to promoteeconomic development and regional integrationin south-eastern Europe through Private SectorDevelopment. To this end, a paper was pre-sented to the Stability Pact at the March 2000Funding Conference entitled “InternationalFinancial Institutions; Regional Private SectorInitiatives in South-Eastern Europe”. The paper describes ten specific Regional Initiatives,selected through a process of consultationamong the IFIs as having the most immediateimpact. In order to improve the pace ofimplementation, most of the initiatives arebased on existing operations or proven models, which can be extended from one country to another. The paper indicated a need for bilateral donor grant co-finance

and technical assistance for “Quick Start”extension or implementation of these initiativesof €104 million.

Private Sector Development under Working Table II attracted total pledges of €356 million.Out of this amount, €253 million was pledged by the IFIs themselves including the World BankGroup, the EBRD, the European Commission and the Council of Europe Development Bank(CEDB). Bilateral donor grant co-finance andtechnical assistance pledges totalled €102million effectively meeting the identified target for the “Quick Start” programme.

It is encouraging to note that the more advancedand well-defined initiatives are already having animpact on the ground, especially the EBRD’sTrade Facilitation Programme and the IFC’sSouth Eastern Europe Development (SEED). The Stability Pact has had a very definite impactby generating incremental resources to theoperations and programmes managed by the IFIs and a higher concessional element.

Future initiatives of the EBRD and other IFIs

Looking ahead, what role can the EBRD and other members of the international donorcommunity, including the IFIs, play in promotingprivate sector development and investment flowsin SEE over the medium term? The highestpriority for the IFIs is to speed up the imple-mentation of existing projects and confirm theirrisk appetite and support for the region. Thissection evaluates the possible contribution of anumber of concrete, project-related products andconcepts under active consideration by the EBRDthat have been applied successfully elsewhereand could be implemented in the region, or thatalready exist but could be expanded further withadditional donor support.

Public-private partnerships and risk-sharing in infrastructure

Infrastructure in south-eastern Europe ischaracterised as being outdated, inadequate to support economic growth, expensive tomaintain and having regional imbalances. In light of restricted public sector budgets,governments in the region have recently startedto consider whether public private partnerships(PPPs) can be an effective complement tofinancing infrastructure projects. This interest

is primarily motivated by a desire to financeinfrastructure projects off budget. Nonetheless,in order for PPPs to be effective, there needs to be a strong commitment to establish theappropriate enabling environment to attractprivate sector investment5.

Trade facilitation programmes

EBRD guarantees cover commercial and politicalrisk of non-payment by the issuing bank. They do not assume any risk of the exporter or theimporter. For each EBRD guarantee issued, the EBRD will charge a guarantee fee or – in thecase of pre-export advances – interest, which will depend on the agreed market rate and tenor of the EBRD exposure. There are nocommitment fees. The introduction during 2000 of umbrella guarantees with maturities of up to one year has proved popular in theregion. The guarantee permits exporters to ship with the support of a first class bankguarantee, and the importer to have flexiblepayment terms. The combination of enhancedpayment security for the exporter and flexibilityfor the importer with minimum documentation is proving to be an attractive combination.

The EBRD is looking to provide longer terms in support of the import of capitalequipment needed in the region to improve the industrial base. Some transactions havebeen completed already.

In addition to providing trade finance guarantees,the EBRD has recently been extending short-termrevolving loans to banks in its countries ofoperations. These loans are structured to fundtrade related advances to local companies. To date however, no such line has been finalised with any bank in the SEE region, due to the weaknesses in the banking system noted earlier in the paper. However, this situation is expected to change in 2002.

A need for working capital amongst exporters in FR Yugoslavia has been identified by the EBRD and a Framework Facility has beenapproved. In the immediate future, the EBRD expects to be offering pre-export financefacilities to exporters, with the sources of repayment linked to the proceeds of export sales.


In light of restricted public sector budgets,governments in the region have recently startedto consider whether public private partnerships(PPPs) can be an effective complement tofinancing infrastructure projects.

SME/micro-finance support

Given the problems noted earlier with thefinancial sector in the region, what else can be done to enhance the SME sector? In FRYugoslavia, the complete restructuring of the banking sector is a pre-condition for SME finance. The EBRD is working with thegovernment on several projects with the aim of allowing a few banks to commence properbanking operation. One proposal is thatTechnical Cooperation (TC) funds be used in parallel with the financing of the EBRD with a focus on supporting lending to SMEs. Thisshould take the form of introducing moderncredit technologies, risk management policies,portfolio management skills and training of loan officers.

The remaining countries will also require ongoingsupport in improving corporate governance andlending techniques to SMEs and micro enter-prises. The National Savings Bank of Albania,which is in the process of being privatised, issuch an example.

Municipal environmental infrastructure

The needs of municipal authorities in the regionto upgrade the provision of basic services arewell documented. The EBRD has gainedextensive experience in working withmunicipalities and local service utilities by thefinancing of water and waste water investments,district heating, and urban transport.

The key requirements for implementing theseprojects are adequate technical assistance(aimed at project preparation and institutionbuilding for improved service delivery andoperational management), combined withappropriate financing structures including grantand concessionary funding. Parallelarrangements which support project preparationactivities and strengthen implementationcapabilities at the municipal level may alsoprovide opportunities for the EBRD and bilateraldonors to accelerate the development andimplementation of joint projects.

In FR Yugoslavia, projects in excess of €140 million are being developed by the EBRD. Municipal programmes are planned with institution-building requirements in other countries of the region.

Institution building

Institution-building categories which can beidentified on a region-wide basis and which are linked to this priority objective in the SEEregion include:

■ TurnAround Management – the EBRD TAMProgramme is a vehicle for deliveringmanagerial, operational and marketing adviceto transform SMEs into competitive busi-nesses. TAM and bilateral donors havediscussed the management needs of localbusinesses in the region, and there is a broadunderstanding of the role that TAM couldcontinue to play in addressing and overcomingwidespread management weaknesses.

■ Strengthen commercial banks and otherfinancial institutions – in addition to theinstitutional strengthening of SMEs and micro-finance referred to above, weaknessesof commercial banks, leasing companies,pension funds, insurance companies andother financial intermediaries serving privatebusinesses are a binding constraint to privatesector development in the Bank’s countries of operations. Drawing upon the lessons ofthe Russian banking crisis of 1998, the EBRDis committed to overcoming these weak-nesses in order to meet the financing needs of local private businesses and to promotemobilisation of savings. Assistance to finan-cial intermediaries includes improvement ofcredit policies and procedures, treasurymanagement, accounting standards, internalaudits and staff training. With some banks,the EBRD is sponsoring twinning programmesto transfer best practice. Because weak-nesses in financial intermediaries arewidespread, the institution building task is immense.

■ Legal transition – the EBRD has anestablished Legal Transition Programme,through which advice and technical assistanceis provided. Focusing on key commercial andfinancial sectors, legal transition assistance isoften a precursor to additional EBRDinvestment activity.

■ Corporate governance – the EBRD is workingwith its clients to improve corporategovernance. Priority areas have beenenvironmental compliance, accountingstandards and health and safety.

5 For an analysis of the elements ofeffective concession regimes, see W.Labadi and A. Ramasastry, “AFavourable Concessions Regime: aLender’s Perspective”, Law intransition, Spring 2001, p. 20.


Conclusion

In the last two to three years the countries of SEEhave made encouraging progress in catching upwith more advanced transition economies andimproving the investment climate. Governmentsthroughout the region are making serious effortsto tackle the difficult tasks of privatisation of large-scale enterprises, improving standards of corporate governance and competition, and lowering impediments to investment andeconomic activity. However, the pace of progresshas been slower than some had expected, andmuch more remains to be done in coming years.Western governments and IFIs must thereforecontinue to play a key role in assisting privatesector development and enabling greater flows of foreign investment through enhanced risk-sharing, and an active policy dialogue with governments.


In the last two to three years the countries of SEE have made encouraging progressin catching up with more advanced transition economies and improving the investment climate.

* Olivier DescampsBusiness Group Director for south-eastern Europe and the CaucasusEBRDOne Exchange SquareLondonTel: +44 20 7 338 7164Fax: +44 20 7 338 7218Email: [email protected]: www.ebrd.com

+This article is an edited extract from apaper presented by the author at theSecond Regional Conference for south-east Europe in Budapest on 25–26October 2001. That paper wasprepared jointly by economists andbankers at the EBRD under thedirection of Olivier Descamps (BusinessGroup Director for south-eastern Europeand the Caucasus), Jean-MarcPeterschmitt (south-eastern Europe Co-ordinator) and Peter Sanfey (SeniorEconomist and Lead Economist forsouth-eastern Europe).


Reforming the legalenvironment in post-conflictsocieties: legal and policyaspects of the EBRD’sactivities in south-easternEuropeThis article explores the legal and policyaspects of the institution building activities of the EBRD in SEE countries. It examines the state of legal infrastructure in the region and describes examples of the EBRD’s role in promoting law reform and institution building.

Kamen Zahariev, Senior Counsel, EBRD*

Since the demise of communist regimes adecade ago, the countries of central and easternEurope (CEE) and the Commonwealth ofIndependent States (CIS) have undergone radicaland sometimes traumatic social, political andeconomic change. The countries of south-eastern Europe (SEE) – Albania, Bulgaria, Bosniaand Herzegovina, Croatia, FYR Macedonia,Romania and FR Yugoslavia – have had to carry aparticularly heavy burden. Their transitionprocess to democratic, market-oriented societieshas often been hindered by political instability,civil wars and ethnic violence. The energy pooreconomies of the region suffered from thecollapse of their traditional markets for valueadded exports (the Soviet Union, the internalmarket of the former Yugoslavia and the MiddleEast), which was exacerbated by the loss ofaccess to preferential energy imports fromRussia. As a result, the countries of the regionincurred excessive foreign debt, low per capitaprivate investment flows, hyperinflation andeconomic recession on unprecedented levels.The armed conflicts in former Yugoslavia,economic sanctions and the weakening ofgovernment structures, led to the rise oforganised crime, delays in urgently neededreforms and the pernicious effects of delayed oropaque privatisation deals. As a result, almostall of the poorest countries in Europe are nowconcentrated in the south-east.1

Legal infrastructure

The difficulties experienced by the countries ofsouth-eastern Europe have also delayed theprocess of establishing the legal and regulatoryenvironment necessary for the development ofprivate sector activities and foreign investment.Despite the uniformly bleak economic andpolitical environment in which the emergingmarkets of that region developed in the lastdecade, the present state of their legal andregulatory environment is far from uniform.South-eastern Europe is probably the mostheterogeneous region in Europe in terms of itshistory and ethnic and religious diversity.2 This isalso true for the legal traditions and systems of

the region. This is so despite the great dividebetween the countries which were historicallyunder the influence of either the Ottoman Empireor the Austro-Hungarian Empire. There were alsodifferent patterns of integration of westEuropean constitutional and commercial law intothe legal systems of the region. Romaniafollowed the French Civil Code, Bulgaria adoptedthe German system of civil law and Yugoslaviafollowed the Austro-Hungarian model in manyrespects. The post-war experiences of thecountries also influenced the diversity anddevelopment of the legal systems in the region.During this period, Romania and Bulgaria werefirmly within the Soviet sphere of influence,Yugoslavia was experimenting with “socialownership”, neutrality and openness to the rest

of the world and Albania represented theopposite approach with the crudest forms ofcommunist experiments in isolationism (which attimes included the abolition of the teaching oflaw as it was deemed an “unnecessarybourgeois concept”). A third factor contributingto the differences in the current status ofprivatisation and legislative reforms is the effectof the civil wars and ethnic conflicts whichfollowed the disintegration of former Yugoslavia.3

The annual EBRD Legal Indicator Survey4 reflectssome of these differences. The map aboveshows the composite commercial law indicatorsof the region as being “barely adequate” fornormal private sector commercial activities,while at the same time indicating that Bosnia


Russian FederationEstonia

Lithuania

Latvia

Belarus

Poland

Czech Republic UkraineSlovak Republic

SloveniaHungary

FRYugoslavia

Croatia

Albania FYRMacedonia

Bosnia &Herzegovina

MoldovaRomania

Georgia

Armenia Azerbaijan

Kazakhstan

Uzbekistan

Turkmenistan

Kyrgyzstan

Tajikistan

Bulgaria

Local lawyers’ perceptions of thequality of commercial law

Adequate

Barely adequate

Inadequate

Detrimental

Extensiveness

Effectiveness

Source: EBRD Legal IndicatorSurvey, (2000/2001)

Note: The Y axis reflectsboth the extent towhich company lawsapproximate interna-tional standards andtheir effectiveness.

Source: EBRD legal indicator survey, (2000/2001)Note: No country’s laws were perceived as

“comprehensive”. No data available for Kyrgyzstan.

Local lawyers’ perceptions of Company Laws

100

80

60

40

20

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Albania Bulgaria Croatia

Perc

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FRYugoslavia

FYRMacedonia RomaniaBosnia and

Herzogovina

Extensiveness

Effectiveness


Note: The Y axis reflects boththe extent to whichcapital markets regula-tions approximateinternational standardsand their effectiveness.

Local lawyers’ perceptions of capital markets regulations

100

80

60

40

20

0

Albania Bulgaria Croatia

Perc

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FRYugoslavia

FYRMacedonia RomaniaBosnia and

Herzogovina

and Herzegovina and Albania are lagging furtherbehind. In the case of the former, this is mainlydue to the weakness of the institutions inherentin the forced federation of former enemy entities5

and, in the case of Albania, because of theparticularly extreme and isolationist form ofcommunist rule experienced by that country.

A similar picture is revealed by looking atcompany law and the regulation of capitalmarkets in the region, which show the slowerprogress of Albania and FR Yugoslavia. In thecase of the latter this reflects the significantdelays in privatisation and in kick-starting thereform of commercial law.

A comparison of the legal transition indicators ofthe countries of the region with other transitioncountries suggests that in the last two to threeyears the pace of legal reform has picked up.Commercial legislation in south-eastern Europeis catching up with more advanced transitioneconomies6 and in some areas, such as theregulation of secured transactions andbankruptcy law, it has already reached or evenexceeded their level.

The role of the EBRD in fosteringreform

Initiatives to improve laws and legal institutionsin the region are focusing significantly on redu-cing excessive government control, strengthen-ing the judiciary, improving corporate governanceand tackling official corruption at all levels. Theactivities of the EBRD in assisting the countriesof south-eastern Europe in meeting thesechallenges are focussed on three main areas.They are:

■ promoting infrastructure development, foreigninvestment and privatisation throughinvestments which have a high demonstrationeffect for the development of the privatesector;

■ promoting legal reform in key areas of commercial law; and

■ providing assistance in post-conflictcommunities.

In the first area, the EBRD’s investmentactivities in the region have concentrated onaccelerating large-scale industrial and bankprivatisation (see Box 1). There is also a focuson introducing financing structures and productswhich are particularly suited to countries withunderdeveloped infrastructure and low capacityfor sovereign debt financing due to high levels offoreign indebtedness. These include municipalinfrastructure financing based on public-privatepartnerships (PPP), concessions and financial

1 Of the seven countries in the region,only Bulgaria and Romania have EU pre-accession status and they are laggingbehind the core group of centralEuropean EU accession candidates.

2 See M. Glenny, The Balkans1804–1999: Nationalism, War and theGreat Powers, (2000).

3 See C. Cviic, “Building on the past:history and transition in the ‘other’Europe”, Law in transition, Autumn2001, pp.10-15.

4 The EBRD’s Legal Indicator Survey hasbeen conducted annually since 1995and measures the perceptions oflawyers and legal experts in itscountries of operations on thecommercial laws and financialregulations of their countries. Theresults of the survey are published inthe EBRD’s Transition Report and inLaw in transition.

5 Francis Delaey, “Bosnia andHerzegovina’s continuing struggle: Legaland institutional challenges in the post-Dayton era”, Law in transition, p.11,Spring 2001, p.11.

6 A similar trend is observed in theprivate sector development in theregion. See the analysis provided byOlivier Descamps, “Private sectordevelopment and the role of the EBRDin south-eastern Europe”, in this issueof Law in transition.


2000 Extensiveness

2000 Effectiveness

2001 Extensiveness

2001 Effectiveness


Note: The Y axis reflects boththe extent to whichpledge laws approx-imate internationalstandards and theireffectiveness.

Local lawyers’ perceptions of Pledge Laws

100

80

60

40

20

0

SEE CE & Baltics

Perc

eptio

ns In

dex

CIS(excluding Russia)Russia

2000 Extensiveness

2000 Effectiveness

2001 Extensiveness

2001 Effectiveness


Note: The Y axis reflects boththe extent to whichbankruptcy regulationsapproximate interna-tional standards andtheir effectiveness.

Local lawyers’ perceptions of bankruptcy regulations

100

80

60

40

20

0

SEE CE & Baltics

Perc

eptio

ns In

dex

CIS(excluding Russia)Russia

support for micro and small enterprises, andtrade facilitation.

In addition to providing much needed financingfor enterprises and municipalities in the region,EBRD investments aim to have a significantdemonstration effect for local and foreigninvestors and governments. Legal andinstitution-building aspects of the demonstrationeffect of EBRD investments include:

■ the introduction of more sophisticated dealstructures and legal documentation;

■ an insistence on transparent procurementprocedures;

■ and the promotion of corporate governance ininvestee companies.

In implementing what are sometimes pioneeringdeals in the region, the EBRD seeks to test theeffectiveness of commercial legislation andhighlights gaps and bottlenecks which requirefurther attention by legislators. The Sofia WaterConcession project in Bulgaria is one example ofthe legal and institution-building aspects of theEBRD’s investments in the SEE region (see Box2). The EBRD’s role in this project was not

limited to providing financing. Prior to providing a loan of €35 million, the EBRD was invited tomonitor the privatisation process and to ensurethe openness and transparency of the selectionof the concessionaire. The EBRD also helped tomobilise donor funding for legal, regulatory andtechnical advisers for the city. Documentnegotiations revealed some gaps in legislationwhich were subsequently addressed by thegovernment in Bulgaria. More specifically, one ofthe stumbling blocks had been the inability of theforeign controlled but locally registeredconcessionaire company to choose internationalarbitration as the method for settling disputeswith the municipality and other local parties. TheBulgarian law on arbitration was subsequentlyamended to address this issue.

Another area of the EBRD’s activities in south-eastern Europe is the provision of assistancewith analysing and reforming countries’commercial laws. Included in this group ofactivities is the EBRD’s legal sector assessmentwork, along with the annual EBRD Legal IndicatorSurvey of lawyer perceptions in the region. Legalsector assessments benchmark the develop-ment of key commercial law sectors in eachcountry against international standards,

providing an analysis of the existing legislativeframework. Among the specific legal reformprojects implemented by the EBRD in the regionare: the development of modern pledge laws inBulgaria and Romania which are based on theEBRD Model Law on Secured Transactions7; theAlbanian telecommunications law reform project;and the assistance provided to FR Yugoslavia to prepare a new privatisation law for theRepublic of Serbia. Another aspect of theEBRD’s role in the SEE region is its assistanceto post-conflict states and communities. TheEBRD seeks to help post-conflict countries build better societies by drawing on the advan-tages offered by its status as an internationalfinancial institution; key features of which are its treaty making status and its related ability to absorb political risk.8


Box 1: Examples of privatisations, 1999–2001

Albania: Albanian Mobile Communications

The most significant privatisation in Albania to date was concluded in July 2000, when an 85 per cent stake of the state-owned mobile phone company, Albanian Mobile Communications (AMC), was sold for US$ 85.6 million to a consortium comprising Telenor of Norway and Cosmote of Greece. As a consequence of this privatisation, mobilephone users have already benefited from a fall in tariffs, an improvedservice and increased investment in the sector.

Croatia: Croatia Telecoms

In 1999 the government privatised a 35 per cent strategic stake of thefixed-line telecommunications monopoly, Croatia Telecoms (HT), toDeutsche Telekom for approximately US$ 850 million. Ahead of the sale,

a new law providing for the establishment of a new regulatory frameworkand an independent regulator was adopted. In July 2001 the governmentagreed to privatise a 16 per cent stake to Deutsche Telekom (DT) for€500 million.

Romania: Sidex

In July 2001 the Romanian Authority for the Privatisation andAdministration of the State Shareholdings and the LNM Group signed acontract for the privatisation of Sidex, the largest steel mill in the country.Its privatisation has been widely regarded as critical to economic reformin Romania. In exchange for approximately 90 per cent of the company’sshare capital, LNM pledged to invest over US$ 350 million in the steelcompany in the next decade to bring Sidex production in line withinternational environmental standards.

Box 2: Sofijska Voda: Sofia water concession project

The EBRD provided €35 million in a long term loan to Sofijska Voda, ajoint stock company which will operate the city of Sofia’s water and wastewater system. The loan concluded several years of work on the part of theEBRD and the city of Sofia to successfully bring much needed newinvestment into the city’s water and waste water system. In addition tofinancing these improvements outside of the city’s budget, the projectwill also result in efficiency gains and improved services.

The deal is the first of its kind in the region and will have an importantdemonstration effect in bringing in private investment into the watersector. The investors are a consortium which includes International WaterLimited (UK), Bechtel Enterprises Holding, United Utilities plc and the city.

EBRD involvement began in early 1996 when the Bank was invited by thecity to monitor the privatisation proces and ensure that the selection of

the concessionaire would be fair and transparent. This process wasconcluded with the provision of a long term loan by the EBRD. Workingclosely with city officials over a period of several months, a concept paperwas developed which established an effective blueprint for movingforward, including an outline of the preferred form of PPP for the project,which was a concession. Moreover, the concept paper provided allparties with a clear understanding of what the issues would be and whatkind of commitment was needed by the city in order to progress.

With the support of the city, which contributed 20 per cent of the fundingfor technical cooperation, the EBRD then helped to mobilise EU fundingto engage a multi-disciplinary advisory team for the city. Among theirother tasks, the advisers played a key role in guiding the city through theprocurement process to ensure that appropriate procedures were inplace and that the selection criteria was consistent with goodinternational practice.


Box 3: Albanian telecommunications

This project, funded by the United Kingdom in cooperation with France, permitted theadoption of a new telecommunications sectorpolicy in 1999 in anticipation of the privati-sation of Albtelecom. It also provided trainingon tariff rebalancing and interconnectioncharges to the Telecommunications RegulatoryEntity. The EBRD assisted in the drafting of a new telecommunications law, which wasadopted in June 2000. The new law estab-lished the foundation for a modern regulatoryframework favouring competition and privateinvestment. This legal reform project has had a direct impact on the EBRD’s investments in Albania.

The Bank has provided a loan to Albtelecom,the state-owned incumbent fixed-line operatorand is prepared to consider further financing tosupport the privatisation of the Company,previously announced by the government. TheEBRD is also seeking to provide finance to the

private sector, which is beginning to developas a result of the Albanian Government’s newsector policy and the overall improvement inthe regulatory environment, as evidenced bythe privatisation of the Albanian MobileCompany and the awarding of a second GSMmobile licence to Panafon, the Greek mobileoperator, which is supported by Vodafone asthe major shareholder.

Following the success of the firsttelecommunications reform project, thegovernment asked the EBRD to assist it inpreparing all tender documents for the awardof the second GSM licence through an openand transparent bidding process. With theEBRD’s assistance, the tender documentswere prepared and the tender was launched in Autumn 2000. The EBRD’s involvementhelped reassure the participating bidders of the fairness and transparency of the bidding process.

Box 4: FR Yugoslavia: SerbianPrivatisation Law

In June 2001 the Republic of Serbia enacted anew Privatisation Law along with severalrelated laws and regulations. The newPrivatisation Law was prepared with theassistance of the EBRD in close consultationwith the World Bank. It was funded by theUnited Kingdom’s Department for InternationalDevelopment (DFID). The new Privatisation Lawis the third attempt to privatise social andstate owned capital in the Republic of Serbia.Previous attempts, which were largelyunsuccessful, were based on an insiderprivatisation model where up to 60 per cent ofa company was transferred to workers andpensioners and the decision on whether toprivatise the company was left to the solediscretion of the company. The newPrivatisation Law represents a radical breakwith previous attempts. Under the new law atleast 70 per cent of the social and state owned

capital of a company subject to privatisationmust be offered for sale. The remainder up to amaximum of 30 per cent of the social and stateowned capital of the company can betransferred to the company’s employees andother citizens. The new law also puts foreignand domestic natural and legal persons on anequal footing to participate in the privatisationprocess. In this respect it is noteworthy thatexisting shareholders of a company do nothave a right of first refusal with respect to thecapital to be privatised. Additional features ofthe new Privatisation Law include mandatoryprivatisation within a four year time frame, arelatively straightforward privatisation processand cash compensation for propertynationalised after the Second World War. Thelaunch of an international tender in October2001 to sell up to 70 per cent stakes in theBeocin, Novi Popovac and Kosjeric cementplants, the first privatisation under the newlaw, attracted eight multinational parties.

7 See Law in transition, Autumn 2000.See also the EBRD’s Regional Surveyon Secured Transactions, athttp://www.ebrd.com/english/region/legtran/st_main.htm.

8 See G. Sanders, “Natural advantage,values and community: EBRD and theformer Yugoslavia”, Proceedings of the95th Annual Meeting of the AmericanSociety of International Law, 4–7 April2001, pp. 245–250.

* Kamen ZaharievSenior CounselEBRDOne Exchange SquareLondonTel: +44 20 73386907Fax: +44 20 73386150Email: [email protected]: http://www.ebrd.com

Charts and map prepared by Olivia Oddi.

Survey of judicial codes of conduct in south-eastern Europe1

Over the past few years, countries and otherlegal jurisdictions throughout south-easternEurope have worked to develop discrete codesgoverning judicial conduct. This articleexamines the status and nature of those effortsand the regulation of judicial conduct moregenerally throughout the region. It notes thatwhile these codes commonly provide for soundprinciples of judicial behaviour and constituteremarkable attempts to strengthen the judicialsystems of these countries, their practicalbearing is often seriously hindered by factorssuch as the discretionary nature of the codesthemselves, lack of adequate implementinglegislation, poor enforcement capacity andlack of resources and independence of thebodies in charge of judicial discipline.

Angela K. Conway, Country Director, & Amanda Gilman, Program Associate, American BarAssociation-Central and East European Law Initiative*


Discrete codes of judicial conduct now exist inalmost all countries and legal jurisdictions of theregion. This fact is in large part due to the effortsof professional associations of judges, who haveled efforts to put such codes in place. Most ofthese codes remain voluntary and apply only toassociation members. However, some codes arereferenced in separate legislation governingjudicial discipline and are thus enforceable.Although legislation governing judicial disciplinegenerally establishes guidelines for judicialconduct, these provisions are rather limited andvague. In contrast, many of the discrete codes ofconduct describe obligatory and prohibitedconduct in some detail.

Even where legislation provides for theenforcement of codes of conduct and/ordisciplinary rules, the mechanisms forperforming this task are universally weak. Inmost instances, the institutions responsible forenforcement lack sufficient staff and resourcesto execute their work. As a result, despite theexistence of a relatively significant body ofregulations pertaining to judicial conduct, mostcountries in the region adjudicate only a handfulof misconduct cases each year.

The treatment of judicial conduct in the countriesand regions of south-eastern Europe is reviewedbelow. The accompanying chart reflects researchconducted by the American Bar Association’sCentral and East European Law Initiative (“ABA-CEELI”) during autumn 2001 and comparesapproaches to substantive and proceduralaspects of this area across the region.

Albania

The Albanian National Judicial Conference2

developed a code of ethics for judges at the endof 2000. Through its 29 articles, the Albaniancode establishes standards for conduct in coreareas such as independence, impartiality anddiligence. The code is comparatively in depth anddetailed, addressing issues such as ex partecommunications, which are not treated by manyother codes in force in the region. Although thecode states that the Conference is responsiblefor its enforcement, it does not delineatespecific enforcement procedures and is notbeing actively enforced at the present time.

Despite the existence of a code of conduct anddiscrete disciplinary rules, the overall frameworkgoverning the regulation of judicial conduct in

Albania continues to be viewed as ineffective. A variety of factors seem to contribute to thisperception. These factors include an apparentoverlap in the jurisdiction of the High JudicialCouncil3 (HJC) and the Ministry of Justice (MOJ)in the enforcement area, and some uncertaintysurrounding the legal status of the HJC. Withregard to this last point, the law governing theHJC is currently being revised. The proposedchanges would alter the process for handlinginvestigations and complaints regarding conduct.If adopted, the changes would direct thatcomplaints regarding judicial conduct be made to the HJC and then sent to the MOJ forinvestigation. The HCJ would continue toadjudicate conduct proceedings. Although the HJC has almost no resources to supportenforcement efforts, giving full responsibility for this area to the MOJ does not necessarilyaddress the problem as it also has significantresource limitations. Moreover, there is somecontroversy over the appropriate role of each of these two actors in the disciplinary process.Citing the HJC’s composition, some critics havestated that it is overly protective of judges indisciplinary matters. From the other side, theMOJ has been criticised for misusing disciplinaryactions to intimidate judges and exert influenceover them.

The perception that the current system isunworkable is reinforced further by the lack of information and transparency regardingstandards of conduct, procedures for complai-ning about conduct and for processingmisconduct cases. In this transitional period,neither the MOJ nor the HJC are vigorouslypursuing cases of misconduct. Even mattersinvolving conduct that is potentially criminal have escaped review. As a result, members of the public are left with the impression thatjudicial corruption is widespread and that littleaction is being taken to address it.

Bosnia and Herzegovina

Federation of Bosnia and Herzegovina(FBiH)

The FBiH Judges’ Association adopted a code of judicial conduct in 1999. The code wasenacted pursuant to the enabling statute of the judges’ association and promulgated in the State Gazette of the FBiH. The Federationcode is based on European and internationalstandards of conduct. It consists of five brief

1 This article is based on informationobtained from the American BarAssociation Central and East EuropeanLaw Initiative staff in Washington, D.C.and liaisons and local staff in CEELI’soffices throughout south-easternEurope. Significant contributions weremade by the following CEELI staff: ScottCarlson; Greg Gisvold; Wendy Betts;and Terry Rogers. Legislation and codesof conduct referenced in this article areavailable online athttp://www.abanet.org/ceeli.

2 The National Judicial Conference (NJC)is a government entity whosemembership includes all sitting andretired judges in Albania. The NJCundertakes many activities in areas ofinterest to the judiciary.

3 The High Council of Justice (HJC) is thestate authority responsible for theappointment, transfer, discharge,education, evaluation, and oversight ofthe activity of judges of the courts ofthe first level and the courts of appeal.


articles, focusing only on major issues such asindependence, impartiality, conflict of interest,professionalism and participation in outsideactivities. The text of the articles is fairly broad,stating general principles as opposed toproviding detailed guidelines in each of the areasaddressed. The code is accompanied byseparate rules detailing procedures for handlingcode violations through the FBiH Judges’Association’s Court of Honour.

It is enforceable through the Association’s ownCourt of Honour and via the Law on Judicial andProsecutorial Service, which includes violationsof the code among the grounds for disciplinaryactions. The existence of such mechanisms forenforcing the code makes the FBiH fairly distinctamong the jurisdictions in the region. Howeverdespite this, the number of judicial disciplinecases remains low and no cases based on aviolation of the code have been brought to date.As is the case elsewhere in the region, the lackof sufficient institutional resources formonitoring conduct and pursuing violations has served as a significant obstacle to activity in this area.

Pursuant to the new Law on Judicial andProsecutorial Service, the International JudicialCommission4, along with the Federal andCantonal Commissions, has recently begunauditing judges in the FBiH. As part of thisreview, the Commissions will considercomplaints received about judicial performanceand alleged code violations. In connection withthis process, the Office of the HighRepresentative has led an extensive publicawareness campaign on the procedures formaking complaints against judges.5 It is thuspossible that there will be increased activity inthis area in the near future.

The adoption of the code is viewed by many as an important step towards advancing theindependence and professionalism of thejudiciary. Notably, the presidents of the FBiH and Republika Srpska (RS) judges’ andprosecutor’s associations have agreed to accept and honour the standards enumerated in the Federation code (the RS code of conduct is nearly identical to the Federation code) as those which are minimally acceptable for member judges in both jurisdictions.

Republika Srpska (RS)

As noted above, the RS Association of Judgesand Prosecutors has also adopted a code ofconduct. The text of the RS code is essentiallythe same as the Federation’s code, with thesignificant distinction that it applies to bothjudges and prosecutors. Similar to theFederation’s code, the RS code violations areconsidered grounds for disciplinary action underthe Law on Courts and Judicial Service.6 In thearea of enforcement, the RS faces many of thesame obstacles stemming from lack ofresources that exist elsewhere in the region. The High Judicial Council (HJC) has primaryresponsibility for enforcing disciplinary rules but does not have its own staff or office space.Consequently, it must rely on the resources of the Supreme Court and Office of the PublicProsecutor. This reliance leaves the HJC in theundesirable position of being dependent on thevery entities that it must regulate.7 To date, nojudge has been charged with violating the codeof conduct.

As it is the case in the Federation, the RS’s Law on Courts and Judicial Service calls for a comprehensive review of all sitting judges. The International Judicial Commission ispresently leading this review in cooperation with the Federal and Cantonal Commissions. The scope of this review, however, does includesome areas of conduct.

Bulgaria

Under the leadership of the Bulgarian Judges’Association, a committee of judges has recentlycompleted an initial draft of a code of conduct.The drafting committee has now turned itsattention to developing a framework for enforcingthe code. In addition, the Bulgarian Ministry ofJustice recently announced its intention todevelop a code of judicial conduct. At this point,it is unclear whether these two efforts will mergeor proceed independently. It should also benoted that the by-laws of the Judges’ Associationcontain ethical rules, which serve as voluntaryguidelines for members.

One obstacle to the adoption of a code ofconduct in Bulgaria is the lack of support frommembers of the judiciary. A significantpercentage of judges believe that rulescontained in the Judicial Systems Act providesufficient regulation in this area. Some believe aseparate code of conduct will serve as a

“criminal code” for judges. The Judges’Association recognises the need to educatejudges about the nature and role of a discretecode of conduct and develop their support forsuch a step. In this respect, it has plans toundertake an initiative to raise awareness andsupport in the near future.

The draft code is relatively extensive and covers most of the major recognised principlesof conduct. It is also among a handful of codesin the region that go beyond merely recitinggeneral principles and offers guidance on themeaning of the principles in specific contexts(e.g. judges may not disclose confidentialinformation pertaining to matters before them,but they may discuss legal problems with otherjudges).8 In addition, some of the provisions ofthe code qualify their application. Theseexceptions may leave too much room for thesubjective/discretionary application of the code. Other unique aspects of the code include a provision stating that it is permissible forjudges to receive compensation for extra-judicialactivities such as training and lecturing.9

It is also the only code in the region to obligatejudges to make financial disclosures.10

If the draft code is adopted, it is envisaged that its implementation will be challenging. This will largely due to the fact that the SupremeJudicial Council, despite being currently the only entity responsible for regulating judicialdiscipline, is perceived as lacking theadministrative capacity necessary to undertake additional work in this area.

Croatia

The Association of Croatian Judges firstpromulgated a code of judicial conduct in 1991.This code consisted only of general principles.The Association undertook an extensive revisionand expansion of the code in 1999. The codenow includes a narrative on the rationale for acode of conduct, an implementing thesis, aglossary of terms, explanatory commentary oneach article and instructions for implementation.The extensive explanatory text included in thecode and its accompanying documents make itthe most detailed and understandable documentof its type in the region.

Substantively, the code focuses on behaviouralstandards inside and outside the courthouse. Itaddresses the issues of independence,


Discrete codes of judicial conduct now exist inalmost all countries and legal jurisdictions of theregion. This fact is in large part due to the effortsof professional associations of judges, who haveled efforts to put such codes in place.

impartiality and fairness, respect for theinstitution of the court, diligence andprofessional development. Although the text ofthe code does not discuss its enforcement, theAssociation has developed accompanyingimplementing instructions that cross referencestatutes that make certain code provisionslegally binding. This consolidation of legalstandards and ethical principals establishes theclearest relationship between a judicialassociation’s ethics code and statutes governingjudicial conduct among the Balkan states.

Croatia is in the midst of implementing newlegislation that will significantly impact theregulation of judicial ethics and discipline. Therecently codified Law on the State JudicialCouncil (SJC) will introduce a body responsiblefor both monitoring and enforcing standards ofjudicial conduct independently from theexecutive. The majority of SJC representativeswill be appointed from the judiciary and theremaining from the broader legal community. The reconstituted SJC will appoint, monitor and conduct disciplinary hearings for judges.Each judge will undergo a performance reviewevery three to five years that will include anexamination of conduct. This new system hasonly recently been implemented and it is tooearly to predict its potential for success.However, anecdotal evidence indicates that it is already having a positive effect. Prior to the enactment of this new legislation, no judicial disciplinary proceedings had ever been systematically processed. In the short time since the new law took effect in the Spring of 2001, however, a few cases havealready been initiated.

FYR Macedonia

The Macedonian Judicial Ethics Code was amongthe first in the region, approved by theMacedonian Judges’ Association (MJA) in 1994.Substantively, the code covers a broad range ofjudicial rights and obligations, includingindependence, immunity, impartiality, diligence,and even salary and pensions. The codespecifically circumscribes its enforceability,stating that judges are “morally” responsible touphold the code, but are not legally liable incases of its violation. Legislation governingjudicial discipline does not reference the MJAcode, and therefore judges cannot be heldaccountable for code violations under theselaws. However, the Republic Judicial Council

(RJC), the state entity responsible for monitoringjudicial performance, has promulgatedguidelines for determining judicial competence,which include failure to adhere to the code ofethics as an element of this determination.

The RJC is the primary body responsible forhearing and deciding cases of judicialmisconduct. Of its seven members, all of whomare appointed by parliament and none of themare political representatives, more than half arerepresentatives of the judiciary and theremaining members are representatives of thewider legal community. The RJC maintains itsown office space and administrative staff. It hasadjudicated a relatively low number of conductcases, despite having been in existence forseveral years.

Although the law limits the powers of theexecutive to influence judicial disciplinaryprocedures, anecdotal evidence indicates that inpractice the executive and political parties mayand do influence the process in some cases.

Romania

Over the past few years the SupremeMagistrates’ Council (SCM) has developed acode of conduct for magistrates.11 According tothe drafters, the recently completed code isintended to serve as a guide for institutions withresponsibility for overseeing judicial conduct.Accordingly, the code indicates that it is notintended to serve as a basis for disciplinaryliability except in cases of serious violations.Consistent with such indication, it notes thatestablishing additional institutions to apply thecode is beyond the scope of the code itself.12

The drafters have indicated that the mainprinciples of the code are drawn from obligationsof the magistracy outlined in other legislationincluding the constitution and international law.The code addresses the key issues ofmaintaining the dignity of the profession,neutrality, professional development,transparency of assets and participation inpolitical activities. One notable shortcoming ofthe code, however, is the absence of anyprovision pertaining to communications betweenthe judge and parties outside of the courthouse.With judicial corruption being a continuing andsignificant concern, the lack of guidance orlimitations on such interactions is problematic.

4 The Independent Judicial Commission(IJC) was formally established by theHigh Representative as a CivilianCommission under Annex 10 of theGeneral Framework Agreement forpeace in Bosnia and Herzegovina. It isthe lead international agency for judicialreform in the country and was givenauthority and responsibility to guide andcoordinate judicial reform activities.

5 Nicolas Mansfield, CEELI JudicialReform Index, Bosnia and Herzegovina,October 2001.

6 Republika Srpska Law on Courts andJudicial Service, art. 56, May 2000.

7 ABA-CEELI-Republika Srpska, Overviewof Mechanisms for Enforcing JudicialEthics Codes, November 2001.

8 Bulgarian Judges Association, DraftBulgarian Code of Judicial Ethics,art. 9, 2001.

9 See Draft Bulgarian Code, art. 15,2001.

10 Draft Bulgarian Code, art. 18, 2001.Specifically, the code indicates thatjudges must comply with otherlegislation governing disclosure.

11 In Romania, magistrates include judgesand prosecutors.

12 See Romanian Ethics Code.


Judicial discipline is enforced through the SCM,which executes this responsibility under thedirection of the Ministry of Justice (MOJ). As partof this framework, the MOJ’s judicial inspectors13

initiate and investigate disciplinary and conduct-based actions. This framework has raisedconcerns that it creates the potential forinfringement on the independence of judges.Some judges have indicated that they feel theinspectors are accustomed to maintaining anatmosphere that pressures judges to yield topolitical influences in their decision-making.

The SCM considers only a handful of disciplinary cases per year. With no staff of its own and the limited staff at the MOJ (there are approximately twenty inspectors, who are responsible for monitoring issuesrelating to overall court function), its capacity is extremely limited. Given this, it does not seem likely that the SCM will be capable of any meaningful enforcement of the code ofconduct in the near future. Moreover, the current disciplinary process is widely viewed as lacking sufficient transparency and beingopen to misuse. Contributing to this problem is the SCM’s heavy reliance on the MOJ toexecute its responsibilities.

Federal Republic of Yugoslavia

Serbia

In 1998 the Serbian Judges’ Associationdeveloped an ethics code outlining ten tenets of judicial responsibility. The code discussesjudicial independence, fairness, anti-corruption,professionalism and courage among theprinciples of judicial integrity. Although the codeis not legally binding on judges, at the time of itsdevelopment it represented an important effortto exercise judicial independence from politicalinfluence. The then Ministry of Justice stronglyopposed the creation of a judicial ethics code,viewing it as a competing focus of judicial loyalty.

Under the previous government, the statecontrolled the integral functions and member-ship of the Serbian judiciary, including judicialdiscipline, through the Ministry of Justice. Suchactivities were conducted without transparentstandards or legally proscribed procedures. Even today, the Serbian justice system remainsvulnerable to political interference. Thisvulnerability was recently demonstrated inNovember 2001 when the new SerbianGovernment initiated proceedings to dismiss188 magistrates from service. The allegationson which these proceedings were initiated rangefrom electoral fraud to incompetence. Thelegality of these proceedings has beenquestioned because the information on whichthey were based was collected under a law whichis no longer in effect. The Serbian Parliamentrecently passed a series of reforms which

establish institutional parameters between thegovernment and the judiciary. This is a positivestep that promises to improve the politicalneutrality of the disciplinary process.

Currently in Serbia, judges can be legallydisciplined for minor infringements either atindividual court level by the respective courtpresident, or at Supreme Court level foregregious acts of judicial misconduct warrantingdismissal. The Supreme Court hears very fewcases on judicial misconduct, because once ajudicial misconduct case is initiated before theSupreme Court, dismal is the only sanction thatcan be applied under the Law of the Courts.Therefore, many complaints are left unanswered,because the offence is deemed at the outset asnot serious enough to merit dismissal. Theabsence of clear procedures for a range ofjudicial conduct violations in this area has alsoallowed the Ministry of Justice to initiate andpursue cases independently, presenting casesdirectly to the Parliament, rather than goingthrough the Supreme Court as the law stipulates.

Kosovo

A discrete code of judicial conduct does not presently exist in Kosovo. The newly formed Kosovo Judges’ Association is working to draft an internal code of ethics to serve as a guideline for conduct and disciplinary action against members of the association. The United Nations Mission in Kosovo (UNMIK)Judicial and Prosecutorial Council has recentlycompleted a detailed draft code, whichcomprehensively sets forth standards for both prohibited and obligatory behaviour in a broad range of categories. In this regard, some of the provisions seem to exceed thetypical boundaries of ethics and address judicial procedure more generally. For instance,one of the provisions states that “a judge shall encourage parties to reach a friendlysettlement”.14 This approach is unique among the codes in the region. The UNMIK code faces opposition by members of the judiciary who had extremely limitedparticipation in its development.

UNMIK is also responsible for judicial disciplinemore generally. The UNMIK regulation governingthis area provides for disciplinary proceedingsbased on conduct and expands to indicate thatviolations of the ethics code may also triggerdisciplinary action.15 Although the UNMIKCouncil’s work in this area is relatively nascent,it has been criticised by some local institutionsfor its reliance mainly upon international judgesand prosecutors and failure to consult with orinvolve local entities in its processes.

Montenegro

The Montenegrin Judges Association hasdeveloped and adopted a code of judicial ethics.The code is very brief and provides general“moral” guidance to members of the Associationon the issues of independence, impartiality,conflict of interest, and participation in politicalactivities. The code does not discuss theconsequences of violating its principles. Aseparate Law of Courts provides correspondinglegislation on judicial conduct and discipline.Although this law establishes procedures fordismissing judges, these procedures areextremely vague. In addition, the law is silent onthe right of accused judges to counsel or toreview information and evidence relating to thecharges brought against them. To date, fewcases of judicial misconduct have been broughtforward. The parliament is currently consideringa revised Law on the Courts, which may clarifystandards and procedures for monitoring andreviewing judicial conduct.

Conclusion

Given the widespread perception of significantcorruption among the judiciaries of southeastern Europe, judges, governments andcitizens alike can benefit from initiatives thatpromote adherence to clear standards of judicialconduct. Policy-makers should build on theadvances made in this area to date bydeveloping mechanisms for enforcing suchstandards. These efforts should includesafeguards against allowing rules of conduct toserve as a basis for politically motivatedsanctions and dismissals.



Regulation of judicial conduct – codes and statutes

AlbaniaCode exists YesBinding enforcement mechanisms No enforcement procedures yet.Implementing entity National Judicial ConferenceLaws govern judicial discipline YesEntity responsible for monitoring or enforcing Ministry of Justice and High Council of JusticeEntity responsible for adjudicating complaints High Judicial CouncilRight to appeal Yes, to High Court or Constitutional CourtTypes of sanctions Civil

Bosnia and Herzegovina – Federation of BiHCode exists Yes16

Binding enforcement mechanisms No17

Implementing entity FBiH Judges’ Association Court of HonorLaws govern judicial discipline Yes*

Entity responsible for monitoring or enforcing Court presidents and Federal Commission for theAppointment and Dismissal of Judges and relevantcantonal commissions.

Entity responsible for adjudicating complaints President of the relevant court; Federal Commission forthe Election and Appointment of Judges.

Right to appeal YesTypes of sanctions Civil

Bosnia and Herzegovina – Republika SrpskaCode exists Yes18

Binding enforcement mechanisms No19

Implementing entity Association of Judges and Prosecutors is responsiblefor implementation of the code.

Laws govern judicial discipline YesEntity responsible for monitoring or enforcing High judicial CouncilEntity responsible for adjudicating complaints High Judicial Council20

Right to appeal Yes, but appeal remains within the High JudicialCouncil.

Types of sanctions Civil

BulgariaCode exists Under developmentBinding enforcement mechanisms No, but under development.Implementing entity To be determined.Laws govern judicial discipline YesEntity responsible for monitoring or enforcing Ministry of Justice and Supreme Judicial CouncilEntity responsible for adjudicating complaints Supreme Judicial CouncilRight to appeal Yes, but appeal remains with a Supreme Judicial

Council panel.Types of sanctions Civil21

CroatiaCode exists YesBinding enforcement mechanisms NoImplementing entity None at present.Laws govern judicial discipline Yes22

Entity responsible for monitoring or enforcing Court presidents and State Judicial CouncilEntity responsible for adjudicating complaints State Judicial CouncilRight to appeal YesTypes of sanctions Civil

FYR MacedoniaCode exists YesBinding enforcement mechanisms NoImplementing entity Macedonian Judges’ AssociationLaws govern judicial discipline YesEntity responsible for monitoring or enforcing Ministry of Justice, Court presidents and Republic

Judicial Council.Entity responsible for adjudicating complaints Republic Judicial CouncilRight to appeal Yes, but appeal remains with the Republic Judicial CourtTypes of sanctions No specific sanctions

13 Each Court of Appeal also has judicialinspectors who can review that court orlower level courts within its jurisdiction.

14 UNMIK, Code of Ethics andProfessional Conduct for Judges, 2001.

15 UNMIK /REG/2001/8, On theEstablishment of the Kosovo Judicialand Prosecutorial Council. sec. 7.11, 6April 2001.

16 This code was adopted by the FBiHAssociation of Judges and is codifiedthrough the Law on Judicial andProsecutorial Service, which states thata judicial code of ethics must berespected at all times. See art. 2.

17 See FBiH Law on Judicial andProsecutorial Service, art. 24.

18 Codified through the Republika SrpskaLaw on Courts and Judicial Service,which states that a judicial code ofethics must be respected at all times.See art. 5.

19 As with the Federation, the Code ofEthics adopted by the Republika SrpskaAssociation of Judges and Prosecutorsis enforceable through the RS Law onCourts and Judicial Service. See id atart. 56, para. 3. 0

20 In cases involving potential dismissal,the High Judicial Council recommendsdismissal to the National Assembly.The Assembly is responsible for makinga determination on termination.

21 Judicial Systems Act, art. 169(3). 22 See Judiciary Act, arts. 58–62. Law on

the State Judicial Council, art. 20.

23 It is anticipated that the ethics codewill be codified in the near future. ABA-CEELI Survey on Mechanisms forEnforcing Judicial Ethics Codes, at 12.

24 Disciplinary procedures currently existunder other laws, but are vague.Clarification anticipated under the newlaw on the courts, now underdevelopment.

* American Bar AssociationCentral and East EuropeanLaw Initiative740 15th Street NWWashington, DC 20005–1022(202) 662–1597http://www.abanet.org/ceeli

The statements and analysis containedherein are the work of the American BarAssociation’s Central and East EuropeanLaw Initiative (ABA/CEELI), which is solelyresponsible for its content. The Board ofGovernors of the American Bar Associationhas neither reviewed nor sanctioned itscontents. Accordingly, the views expressedherein should not be construed asrepresenting the policy of the ABA.Furthermore, nothing contained in thisreport is to be considered rendering legaladvice for specific cases, and readers areresponsible for obtaining such advice fromtheir own legal counsel.


RomaniaCode exists YesBinding enforcement mechanisms None; serves as a guide.Implementing entity NoneLaws govern judicial discipline YesEntity responsible for monitoring or enforcing Ministry of Justice and Supreme Judicial Council

of Magistrates.Entity responsible for adjudicating complaints Supreme Council of Magistrates’ conducts hearings

with the president of the Supreme Court presiding.Right to appeal YesTypes of sanctions Civil

FR Yugoslavia – SerbiaCode exists YesBinding enforcement mechanisms NoImplementing entity Serbian Judges’ AssociationLaws govern judicial discipline YesEntity responsible for monitoring or enforcing Court presidents and Ministry of JusticeEntity responsible for adjudicating complaints High Personnel Council or Supreme CourtRight to appeal YesTypes of sanctions Civil

FR Yugoslavia – KosovoCode exists Under developmentBinding enforcement mechanisms NoImplementing entity N/ALaws govern judicial discipline YesEntity responsible for monitoring or enforcing UNMIK/Kosovo Judicial and Prosecutorial Council

Judicial Inspection Unit.Entity responsible for adjudicating complaints Kosovo Judicial and Prosecutorial CouncilRight to appeal NoTypes of sanctions Civil and criminal

FR Yugoslavia – MontenegroCode exists Yes23

Binding enforcement mechanisms NoImplementing entity Montenegrin Judges’ AssociationLaws govern judicial discipline Yes24

Entity responsible for monitoring or enforcing Court presidents and Judicial CouncilEntity responsible for adjudicating complaints The Judicial Council reviews complaints and submits

them to Parlaiment.Right to appeal NoTypes of sanctions Civil

Law in transition – Focus on south-eastern Europe 51

Mobilising the private sector in municipalinfrastructure projects in south-eastern EuropeThis article examines the legal framework oflocal government financing in south-easternEurope and investigates the practice ofchannelling private investments intomunicipal infrastructure projects. The articlefeatures sections on Albania, Bulgaria,Croatia, FYR Macedonia, Romania and FR Yugoslavia. It contains examples ofsuccessful cooperation between localgovernments and private investors. A numberof suggestions for legislative improvements are considered, and both the commonality and diversity of experiences in the region are explored.

Kalo & Associates, Eurolex Bulgaria, Law Office Bogdanovic & Dolicki, Law Office Polenak,Nestor Nestor Diculescu, Karanovic & Nikolic Advokati.Edited by Nadia Hadjova, Associate, Office of the General Counsel, EBRD

Kalo & Associates*

The legal framework

Until recently all public property was under theownership of the Government of Albania,represented by the Ministry of Public Economyand Privatisation. The Albanian Parliament hasrecently introduced a new law on localgovernment based on the principles of localautonomy and decentralisation (Law no. 8652,dated 31 July 2000). For the first time in thehistory of Albanian legislation, the Lawprovides that local government units areowners of public immovable property, andrules the transfer of ownership or possessionfrom the central government to the localgovernments. Within municipalities asterritorial administrative units, the council ofmunicipality exercises the ownership rights.

Income generation

Under the new Law on Local Government,municipalities are entitled to create and collect

revenues, establish new fees and tariffs, carry out commercial activity and rent theirimmovable property. Proceeds originating from alienation, rent or other uses of theirproperty go to the municipality’s budget. These represent the main sources of income for municipalities.

The most important and permanent source of income for municipalities are local feesprovided for by Law no. 8435, dated 28December 1998 entitled “On Fees in theRepublic of Albania”. The law in question alsoprovides that the council of the municipality,within the margins of the local fee, is entitledto change the fee by up to 20 per cent. Thecouncil of a municipality may impose otherinterim fees at its own discretion. Local feesare collected by public or private entities thattransfer the collected proceeds to themunicipality, reserving the right on a definedpercentage on such proceeds. Law no. 7973,dated 26 July 1995 and entitled “On conces-sions and mobilising the private sector inpublic services and infrastructure” authoriseslocal governments to grant concessions for

water supply infrastructure and wastewatercollection systems, the management ofrecycling of solid and harmful refuse, theindustrial areas, parks and free zones. Priorityis given to concessions for water supplyinfrastructure and wastewater collectionsystems. Since the enactment of the law, aconsiderable number of municipalities haveentered into concession agreements with localor foreign investors.

Since municipalities do not have the necessaryinfrastructure to carry out public works such aspublic lighting, recycling, and restoration andpainting of buildings, they often outsourcethese activities to private entities. Munici-palities focus on borrowing funds and try to engage the private sector in public worksthrough tenders. Municipalities procure fundsand select the private entities to deal withspecific public works.

Sponsorship, donations, economic aid and fines are also sources of income. The law onadministrative contraventions (no. 7697, dated 7 April 1993) provides that the council

Albania


Government devolution and decentralisation in the transitioneconomies of south-eastern Europe have given rise to newresponsibilities for local governments, particularly in theprovision and financing of services to local constituencies.However, the national policy dimensions of suchdecentralisation and the strong dependence of localgovernments on the state budget have adversely affectedtheir ability to mobilise financial resources and makeindependent spending decisions. Moreover, the expandedlocal government role in providing services is constrained byweak institutional capacity, inadequate legal frameworksand limited financial resources. Therefore, the financialconstraints and the new decentralised environment hasprompted many local governments to become more self-reliant and cost-efficient by transferring, where possible, theoperation of some of their activities to the private sector, andby raising revenue from their own sources.

This article examines local experiences and practises inmunicipal asset management in south-eastern Europe. Itprovides an analysis of the legal framework for raising

municipal finance and examines the possibilities formobilising the private sector in municipal infrastructureprojects. The article covers Albania, Bulgaria, Croatia, FYRMacedonia, Romania and FR Yugoslavia and reflectscontributions from local practitioners with experience inmunicipal financing.

Each country section covers the legal framework ofmunicipal finances and the power of municipalities to borrowfunds for investment projects; the municipal concessionsregime; the possibility of providing municipal assets assecurity for municipal borrowing; and the power ofmunicipalities to independently collect municipal taxes.Examples of each country’s experience in the use of theprivate sector in managing and financing municipalinfrastructure projects are also pointed. Each sectionconcludes with a brief description of the main issues andchallenges in developing the legal regime of municipalfinancing, specifying the areas for law reform or the meansof better implementation of existing legislation.

Romania

Bulgaria

FRYugoslavia

FYRMacedonia

Albania

Bosnia andHerzegovina

Croatia

of a municipality may, to a certain extent, define what actions constitute administrativecontraventions and impose fines within its territory.

A significant aspect of decentralisation is the local government’s right to independentlycollect income and organise its own budget.Local governments can also decide on itsinvolvement in and implementation of projectsof economic development. To date the practicehas been that funds from the state budgetwere the main source of fulfilment of publicfunctions and infrastructure services. The newLaw on Local Government specifically providesthat infrastructure projects should be financedby income generated by local governments’own sources as well as by the state budget.

Privatisation is another form of both municipalincome generation and involvement of theprivate sector in the financing of municipalinfrastructure projects. The most widely usedforms of privatisation include the acquisition of shares of state owned enterprises, and the formation of new joint stock companies or companies with venture capital. This leadsto better management and profitability of the companies.

The Law provides that as of January 2002,local government units are entitled to apply for loans. This deadline corresponds with the intended completion date of the process of transfer of ownership of immovableproperties from central government to the local governments. The transfer of ownershipis based on two legal instruments, the Law on State Owned Immovable Properties and the Law on Transfer of Titles from CentralGovernment to Local Government. Therefore,municipalities will have autonomy in managingtheir revenues and will be able to apply formedium and long term loans and secure such loans with their properties in order to finance and implement infrastructuredevelopment projects.

Regarding immovable property, municipalitiesare in the process of evidencing and register-ing such property with the public registry of realestate. They are entitled to use their proper-ties and to collect revenues generated fromleasing or disposal of such property.

Current examples of municipalinfrastructure projects: Tiranamunicipality

Currently, Albanian municipalities, particularlyTirana municipality, are concentrating theirefforts on the rehabilitation and developmentof public markets and trade networks andrelated infrastructure. Since there are privateentities capable of financing such municipalprojects in the capital, Tirana municipality is inthe process of preparing projects for severalpublic markets and shopping centres to beimplemented with the involvement of theprivate sector.

The work of Tirana municipality in associationwith the Albanian Development Fund is anotherexample of a municipal infrastructure project.These projects aim at securing ten per cent oftheir overall value by contributions from the localcommunity. One such project is the rehabilitationof a number of main commercial streets inTirana. The rehabilitation process is beingcarried out with the financial support of entre-preneurs and other businesses whose premisesare located in these streets. Tirana municipalityis also implementing an ambitious project withthe World Bank and the Ministry of Transportwhich aims to improve the Tirana ring road.

Future issues and challenges:

Tirana municipality is developing some furtherinfrastructure projects in association with theInternational Organisation for Migration. Theseare primarily focused on: the rehabilitation ofsport areas within the premises of elementaryand high schools; the illumination of severalpublic streets; and the rehabilitation andregeneration of the Lana River embankment.Other Tirana municipality projects include thecreation of several pedestrian areas in themain squares, parking areas and theimprovement of shopping centres. All theseprojects are being implemented withsignificant private sector participation.

EUROLEX Bulgaria*

The legal framework

The legal status of municipalities is regulatedby the Constitution of the Republic of Bulgaria,the Local Self-Governance and Local

Administration Act (the Act), the MunicipalProperty Act and the Municipal Budgets Act.According to the legislation, municipalities areresponsible for a number of activities andpublic utilities such as: the urbanisation anddevelopment of the territory, education, health,culture, water and waste water, electricity andcentral heating, streets, garages and publictransport, local environment, parks and wastedisposal, social welfare and assistance, andlocal historical, cultural and architectural inhe-ritance. The investment needs of the munici-palities in these areas are substantial, makingit vital for municipalities to identify and exploitall financial sources provided for under law.

Income generation

The budget sources available to Bulgarianmunicipalities for investment purposescomprise a state subsidy for each fiscal yearand a portion of up to 5 per cent of themunicipal revenues, as defined in Article 11(1) of the 2001 State Budget Act. In order totighten financial discipline, the Ministry ofFinance has introduced a regulation that only90 per cent of the allocated state subsidy shallbe transferred to the municipality, while the 10per cent outstanding would be provided only ifthe budget deficit for the fiscal year is withinthe prescribed limits.1 Extra budgetary funds,mainly revenues from municipal privatisation,can also be applied to finance infrastructureprojects. Article 6 (2) of the Municipal BudgetsAct defines municipal revenues as the localtaxes and fees,2 other taxes defined by law3

and non-tax receipts.4 The Constitutionstipulates that all taxes and their rates shouldbe defined by law, giving local authorities noautonomy to establish their tax revenues.Furthermore, the municipalities develop theirbudgets on the basis of the projections of thecentral tax administration within the Ministry ofFinance. Tax revenues are collected by the taxadministration, which prevents the municipa-lities from influencing the revenue collection.

Another source of income generation ismunicipal borrowing in the form of bank loansor credits from other financial agencies, or inthe form of municipal bond issues, as providedby Article 40 of the Municipal Budgets Act.However, the access of the municipalities tothe credit market is restricted by Article 10 ofthe Act, which stipulates that the municipal

Bulgaria


Government devolution and decentralisation in the transition economies of south-easternEurope have resulted in new responsibilities for local governments, particularly in respect tothe provision and financing of services to theirlocal constituencies.

budget deficit in each fiscal year should notexceed 10 per cent of anticipated revenues.This provision sets a limit to the overall munici-pal debt which the municipality can incur ineach fiscal year. Article 40 (2) of the MunicipalBudgets Act states that municipalities mayprovide security for their indebtedness bygranting mortgages and pledges over munici-pal property. However, under the Law onRegistered Pledges municipalities are notentitled to grant registered pledges as onlycommercial entities can do this. Sovereignguarantees are seldom granted as security formunicipal loans, as it is the government’spolicy to provide financial support only formunicipal debt that would finance projectsgiven a high priority by the central government.This policy is due to the tight restrictionsimposed by both the International MonetaryFund (IMF) and the European Union (EU)accession criteria, which set certainthresholds for aggregate public indebtedness.

As a consequence, the municipal authorities inneed of infrastructure finance have directedtheir attention to public-private partnerships(PPP) as an alternative solution. The Local self-governance and local administration act setsforth the legal basis for the use of privatesector resources by local authorities5

according to the type of municipal property -public or private – as defined in the Municipalproperty act.

If the assets are private municipal property,the legal forms for PPP can take the form ofprivatisation, leases, management contractsand other contractual arrangements governedby commercial law.

Privatisation

Municipal privatisation is regulated by theState and Municipal EnterprisesTransformation and Privatisation Act. Theprocedure, regulated in great detail by the law,is regarded by local practitioners as timeconsuming and clumsy. The privatisation of anasset or an enterprise is often conditionalupon achieving specified infrastructureimprovements. The municipality may retain anequity share in the privatised company andmaintains control over decision making. Fundsaccumulated in the Municipal PrivatisationFund are at the municipality’s disposal andcould be reinvested in infrastructure projects.

Enterprises capital increase

Attracting a private partner through a capitalincrease in existing municipal companies is anefficient way to create a PPP while avoiding theproblems with employee options which oftenarise in the privatisation process. Anotheradvantage of a PPP created through a capital

increase and share subscription is the fact thatthe name and the practice of an existingmunicipal structure will back the private partner.

Joint ventures

The establishment of new legal entities usuallyaims at obtaining fresh resources from theprivate investor for the development of newbusinesses. The municipality’s equity contri-bution is usually in the form of fixed assets(including land plots) and in administrativesupport (e.g. construction permits).

Management contracts

A private partner may be invited to manage andmore efficiently operate an existing municipalenterprise and thereby provide a higher qualityof service. Although no new cash is invested inthe company, the municipality benefits fromthe improved management of the company andthe decrease in operating expenses.

Others

There are various other types of businessdeals, such as lease contracts and serviceagreements. The municipalities are obliged to follow the public procurement rules underthe Public Procurement Act when awardingcontracts for construction works, supplies and services above determined thresholds.6

As already mentioned, the legal type of PPPhinges on the type of municipal propertycommitted to the joint venture. If the assetsare public municipal property, the only possibleforms of partnerships with the private sectorare concessions and three year fixed termlease contracts. A concession is defined as a special right for exploitation, operation andmanagement of existing or future assets thatare public municipal property. A concessionmay also be defined as a permit for renderingactivities that the municipal authorities areempowered by law to reassign to a privatepartner.7 Concessions are compulsory formineral water springs, water and wastewaternetworks and equipment, inert materials,water basins and adjacent beaches, localroads and municipal forests. In practice,concessions are granted in the form of theBuild, Operate, Transfer (BOT) schemes underwhich the concessionaire undertakes to buildnew infrastructure assets. The maximum termfor concession contracts is 35 years and maybe extended for another 15 years by themutual consent of the parties and an approvalby the municipal council. The concessionairecommits to repair and maintain the existingfacilities, and to develop the infrastructure byundertaking new construction works, whilemanaging the activities, optimising theexpenditures and increasing the revenues. Thepublic interests are protected via a concession

contract and a transparent procedure for the selection of the private partner.

Current examples of municipalinfrastructure projects

The Sofia Municipality WaterConcession

With EBRD support, on 23 December 1999 the Municipality of Sofia signed a 25 yearsconcession agreement with International Water Ltd., which came into force on 6 October 2000. International Water Ltd. was selected as the first ranked bidder for the concession for offering:

■ The lowest tariff (average amount for theperiod – 43.5 stotinki of a cubicle meterwithout VAT) for the provided services.

■ Minimum investments of US$ 150 million,from which US$ 65.5 million will beinvested during the first three concessionyears, meaning that the highest activity for the renovation of the network should be in the 2002-2003 period.

Under the investment scheme InternationalWater has entered into a joint venturecompany named Sofiyska Voda with theexisting municipal water and wastewaterenterprise ViK-Sofia. International Water Ltd.holds 75 per cent of Sofiyska Voda and ViK-Sofia the remaining 25 per cent (representingassets assessed by the concessionaire asnecessary for the concession). The ViK staffhas been transferred to the new company andsubsequent staff reductions are to be effectedfollowing the scheme offered in InternationalWater’s bid. After the concession expires theconcessionaire’s shares should be transferredto ViK-Sofia with the perspective of mergingthe two companies.

The Sofia Municipality eurobond issue

In December 1998 Sofia obtained a creditrating from Standard & Poor’s of B+. In May1999 the Municipality issued an equivalent of€50 million in 3–year bonds bearing interest at 9.75 per cent, payable annually in arrears.The French PARIBAS acted as an agent of theissue. The eurobonds were listed on theLuxembourg Stock Exchange and the issuewas priced at 99.5 per cent. With issueexpenses of €662,000, plus the discount, the net proceeds were €49.088 million,equivalent to 96 million leva. Thus theeffective interest rate is about 9.93 per cent.The eurobonds issue was the first appearanceof Bulgarian debt bonds since the Brady bondsissue in 1994.

In 1999 Sofia Municipality utilised some 37.5million leva of the bond proceeds while theremainder of the issue was temporarily


invested in Bulgarian State securities. Asplanned the issue was fully utilised in 2000 for road rehabilitation.

The present intentions of the SofiaMunicipality are to redeem the eurobondspartly from the privatisation fund (25 millionleva) and the remainder (72.8 million leva) and the final interest payment of 9.5 millionleva, from the municipal budget.

Sofia Municipality Zentralni HaliRenovation Project

In July 1998 the Sofia Municipality and theIsraeli “ASHTROM Properties” Ltd. establisheda joint venture company “Zentralni Hali” JSC.The Sofia Municipality provided the buildingand the plot of the Zentralni Hali to the newcompany while “ASHTROM Properties” Ltd.provided the investments needed for thereconstruction and the operation of the historiccentral city market. About 20 Bulgarianconstruction companies took part in theoverhaul as sub-contractors. The market place,which has three levels with shops, boutiques,restaurants, food stores and a parking area,was officially opened in May 2000.

Future issues and challenges

The general financial weakness ofmunicipalities and the legal restrictionsimposed on the fiscal and budgetary system by the currency board directly affect the invest-ment capacity of Bulgarian municipalities.These restrictions raise serious doubts as to their conformity with the Bulgarian Consti-tution which grants broad autonomy to localgovernments. To date, two disputes relating to municipal property and finances have had to be referred to the Constitutional Court.8

Currently the Bulgarian municipalities seek PPP as a last resort for meeting theirinvestment needs. The future legislation willneed to establish a better balance betweenthe mobilisation of their own municipalfinances and private sector participation forthe development of municipal infrastructureprojects. This could be achieved through thedevelopment of a municipal credit market, asrecently proposed by the Association of theBulgarian Municipalities in a Draft MunicipalDebt Act. Another option is to loosen therestrictions on investment spending imposedon the municipal budgets through the grantingof greater powers to the local authorities indeveloping and implementing their budgets.

Law Office, Bogdanovic & Dolicki*

The legal framework

Croatia is a signatory to the European Charterof Local Self-Government of 1985, which took

effect in Croatia in 1997 (the EuropeanCharter) and has adopted many of theprinciples of the European Charter in its legislation.

The Croatian law on local self-governmentestablishes city, county and municipality as entities of local government. The country is divided into counties and each county has a number of municipalities within its borders.Zagreb is the only city in Croatia, which has thestatus of city for local government purposes.

The Law on Financing of Local Self-Governmentand Government Entities regulates the finan-cing of local governments and obliges them tomatch their expenses and income. Each entityof local government provides information in itsannual budget with respect to the funding of itsactivities. There are special rules which governthe matching process. Each entity derivesincome from its own activities, common taxesand money allocated by the state.

Income generation

Sources of income for counties are:

■ income from its own property;

■ county taxes, taxes on inheritance and gifts,vehicle taxes, boat taxes and taxes onentertainment and sporting events;

■ penalties for offences prescribed bycounties;

■ other incomes prescribed by special law.

Sources of income for municipalities and cities are:

■ income from its own property;

■ municipal or city taxes, tax on expenditure,holiday-houses, advertising, registeringcompany names and taxes on usage ofpublic spaces;

■ penalties for offences prescribed by themunicipality or city;

■ administrative fees levied pursuant to aspecial law;

■ travel taxes levied pursuant to a special law;

■ utility fees, contributions and other feeslevied pursuant to a special law;

■ fees for usage of public, municipal or city spaces;

■ other incomes prescribed by special law.

Taxes collected by counties, municipalities and cities are:

■ income tax;

■ capital gains tax;

■ tax on gambling;

■ tax on sale of real estate.

Croatia

1 2001 State Budget Act, Article 9 (2).2 Local taxes include real estates tax,

inheritance tax, donations tax, vehicletax, real estates acquisition tax etc.Local fees include fees for solid waste,market places, fairs and street stalls,kindergartens and nurseries, summercamps, social welfare establishments,resorts, quarries, technical andadministrative services, dogs, graveyardlots, etc.

3 e.g.: 1. The municipal tax – the portionfrom the Corporate Income Tax of 10per cent that goes into the budget ofthe municipalities, 2.The tax on profitsof the commercial entities with morethan 50 per cent shares of themunicipalities – under Article 52 of theCorporate Income Tax Act the fullamount of this tax goes into thebudgets of the municipalities, unlikethe tax on the profit of enterprises inwhich the municipalities do notpossess or possess less than 50 percent of the shares and which goes inthe state budget.

4 Remunerations from concessioncontracts, fines, interest payments,income from leases of municipalproperty, etc.

5 Article 51(3) empowers the municipalityto perform commercial activities and toinvest assets and funds but not thetargeted subsidy

6 For construction works: 600 thousandleva; for supplies: 50 thousand leva;for services: 30 thousand leva.

7 According to Article 70 of the MunicipalProperty Act concession in the form ofa permit is granted for the activitiesrelated to water and wastewaterservices, use of networks and facilitiesof the transport infrastructure andactivities related to the transportationservices, commercial activity for whichpublic municipal property is utilised.

8 Constitutional Court Decisions no.2/18.01.2001 and no 16/12.06.2001.


Income tax and capital gains tax aredistributed between the state, municipalities,cities and counties. Taxes on gambling and onthe sale of real estate are distributed betweenall these levels of government except counties.

Incomes of the districts with special self-government status are as follows:

■ incomes from its own assets;

■ special municipal and district taxes andfees, pursuant to the special law;

■ subventions and donations from Croatia asprescribed by the state budget, i.e., byspecial law;

■ other incomes stipulated by the special law.

There are strict rules governing how muchmoney local entities can borrow. This ismonitored by the State Audit Bureau to ensurethat local government entities do notjeopardise their solvency. Local governmententities may raise money from the public byissuing bonds upon approval of the Ministry ofFinance. The general rule is that localgovernment entities cannot borrow money tofinance their regular activities, except on ashort-term basis. Special projects may befunded with borrowings. The city or countygovernments are competent to pass decisionson short term (up to six months) borrowings.The loan agreements are signed by thepresident of the city or county government, orby a person authorised for performance ofbudget and finance based on the authorisationof the city or county governments. Localgovernment entities may give guarantees tothe users of the budget and take loans of up to20 per cent of the value of their own assets,provided that an opinion of the State AuditBureau and an approval of the Ministry ofFinance have been obtained in advance.

Concessions are means by which a publicauthority (state, entity of local or self-government and other bodies carrying publicauthorities) permits a certain entity to useparticular resources or to perform certainworks or activities as regulated by theprovision of the Law on Concessions. This lawhas a character of a general law, however,there are a number of special laws whichregulate the possibility of grantingconcessions. Such special laws regulateconcessions on: maritime property, theperformance of harbour activities, exploringand exploiting minerals, water and waterresources, exploiting farmlands owned by thestate, hunting rights, public roads,performance of municipal services andtelecommunications. Some acts of concessionare of a mixed nature – displaying elements ofboth public and private (civil) law.9


Although budget funds collected from localgovernment and self-government entities oftenseem to be insufficient for financing localpublic needs, private sector involvement infinancing municipal infrastructure projects hasonly recently been developed.

Such private financing may take the form of a bond issuance. The Croatian market onmunicipal bonds was established by theissuance of bonds of the Istrian county. The bonds were of a face value of DM 1,000(€510) and had a coupon interest rate of 11per cent and a maturity of three years. The owner of the bond acquired DM 199.27(€102) semi-annually. After the three yearperiod expires, the owners of the bondsacquire six instalments amounting to DM 199.27 (€102), meaning that the investor acquired DM 1,195.62 (€610) in total during the three years of holding bonds.10

In practice, concession agreements are moreoften used to finance municipalities than arethe issuance of municipal bonds. For instance,an international tender for granting concessionon the cleansing of liquid waste in the city ofZagreb was completed at the end of 2000.This was the first signed concessionagreement for building of communalinfrastructure under BOT (Build, Operate,Transfer) model in the Republic of Croatia.Signatories of this agreement were the City of Zagreb as an entity granting the concession,Zagrebacke otpadne vode d.o.o. as conces-sionaire and three (only) shareholders of thecompany Zagrebacke otpadne vode d.o.o., acompany organised in the Republic of Croatia.While the international tender was still open(after the bids were opened and evaluated),and first ranking bidder was known, a discus-sion was initiated on legal ground for certainelements of the tender documents. Thediscussion also related to some legal aspectson granting and agreement on concessionaccording to BOT model in Croatia. Theopinions were and still are divided. Althoughthe project of cleansing of liquid waste is ofcommunal and urban importance for Croatiancapital, its echo is much bigger. No doubt theBOT models will gradually take primary positionin public projects in Republic of Croatian andon other levels of state organisation and forother types of infrastructure (airports,harbours, motor roads etc.). Keeping up withhighly developed countries requiresinvestments in infrastructure, which the publicsector is unable to provide. While the risks ofdevelopment are big and only partiallypredictable, the project gives essential proofsto private investors on advantageousinvestment climate.11

Borrowing is the most usual model ofmunicipal financing. The Croatian Bank forReconstruction and Development establishedprogram of granting loans for financialrestructuring to municipalities as support forthe development of communal infrastructure.The beneficiaries of these loans arecommercial banks (indirect financing), whileactual beneficiaries of loans are entities oflocal government and self-government (directfinancing). Indirect financing is secured byblank promissory notes and debentureinstruments of commercial banks andadditionally promissory notes and debentureinstruments of entities of local governmentand self-government. Direct financing issecured by accepted promissory notes anddebenture instruments of entities of localgovernment and self-government, without anyadditional security instruments.12


Numerous principles of European Charter areaccepted in legislation of the Republic ofCroatia on the field of financing of entities oflocal government and self-government.However, there is still a necessity for moredetailed regulation of some issues likeconcessions and issuance of municipal bonds.

Previously public needs, including essentialinvestments, were financed almost totally byincomes from taxes and state transfers.However, currently there is a lack of funds forfinancing local public needs. The private sectormay have an important role in the performanceof local and regional investment programs due to this lack of budget funds. The contribution of private investment can take the form ofproject financing, privatisation and municipalbonds, for example.

Financing local government and self-government entities is regulated by speciallaws which provide an opportunity to obtainfinance from non-fiscal incomes. Financialinstruments such as project financing and theissuance of municipal bonds are not yet welldeveloped. This is due to a lack of detailedregulation and the unwillingness of the localgovernment and self-government entities touse it. A Law on Obligatory Pension Funds wasenacted recently in Croatia, and theinvestment policy on pension funds, as well asthe Law itself predict investment of up to 30per cent of the pension funds in municipalbonds. There will now be significant fundsmade available for investment by issuingmunicipal bonds to cities and counties. Thesefunds may finance capital projects and thefunds from this resource could becomecheaper than banking loans over time.


Law Office Polenak*

The legal framework

The basic legal framework for financingmunicipalities is set forth in the Constitution ofFYR Macedonia of 1991 and the Law on LocalGovernment (the Law) published in the OfficialGazette of the Republic of Macedonia,(no.52/95 and 60/95 respectively). Article 8.1(9) of the Constitution describes the localgovernment as a “foundation value of theconstitutional order of the Republic ofMacedonia”. According to the Law on LocalGovernment, municipalities represent units oflocal government, have the capacity of a legalentity and are independent to perform thecompetencies granted by the Constitution andthe laws. In addition, the Law onAdministration (published in the OfficialGazette of the Republic of Macedonia, no.58/00) provides for the establishment of aMinistry for local government to proposepolicy, guidelines and strategies for thebalanced development of the region, and tomonitor developments in this area. Within thisframework, the Ministry of local governmenthas created an office for commerciallyunderdeveloped regions.

Pursuant to the Law, the units of localgovernment are the municipalities and the cityof Skopje, which, as a separate unit of localgovernment, is regulated by a special Law onthe city of Skopje. The Law regulates the rightsand competencies of the municipalities, theparticipation of the citizens in the decisionmaking process, the organisation andoperation of the municipal offices, themethods of financing the government and thesupervision and protection of the localgovernment and other rights.

Income generation

Section VIII of the Law on Local Governmentdefines what constitutes municipal propertyand the means for municipal financing. Theproperty of the municipality consists of land,facilities and assets in the amount that wasand is financed by the citizens with self-contributions or their participation in anotherway in the construction of the infrastructureand other movable and immovable assets,finances and rights. Each municipalitydisposes of its property and operates in thepublic interest of its citizens as a soundbusiness unit. The income generated fromsuch a disposition or operation with theproperty could be re-invested in order toincrease the value of the municipal property orto improve it.

The right of the municipalities to financethemselves independently from the state is

contained in Article 62 of the Law on LocalGovernment, which also describes the sourcesof income of the municipalities. The Law liststhe following sources of income:

■ taxes that encompass: part of the tax oncirculation of goods and services, propertytax, inheritance and gift tax, tax oncirculation of realty and rights;

■ land tax, communal tax, and serviceincomes;

■ own property income;

■ income from taxes received from FYRMacedonia and abroad (in goods andmoney);

■ profits from public companies and publicservices founded by the municipality;

■ part of the profit that is realised by thepublic companies that have branches in thelocal government, as determined by law;

■ other income given to the budgets of themunicipalities on a different basis inaccordance with law.

Collecting additional revenue from finesimposed for violations of municipal regulationsused to be an additional means of finance forthe municipality, but was considered unconsti-tutional and abolished by a decision of theConstitutional court of FYR Macedonia (U. no.133/2000/06.12.2000). The rationale wasthat the municipality may not enact regulationsfor income collection that may only be deter-mined by law and therefore, only pursuant toan act of the FYR Macedonian parliament.

The Law also provides that the municipalitiesare funded by the state budget when theyperform “transferred competencies”, i.e.competencies that belong to the state buthave been transferred to the competence ofthe municipalities. An example of suchtransferred competence is the constructionand maintenance of medical and educationalfacilities transferred from the state to themunicipality pursuant to the General PlanningAct and the Detailed Planning Act.

Municipalities may also obtain loans from thebudget of FYR Macedonia. The application ofsuch loans, however, is limited to covering thebudget deficit of the municipality and may notbe used for infrastructure projects.Government may also finance municipalitiesfor particular entrusted matters. Furthermore,municipalities can borrow money for certainprojects and issue bonds in accordance withprocedures determined by law. Themunicipality may offer its movable andimmovable property as security for the loans.

In addition, legal entities and natural personsare legally permitted to finance municipalitiesprovided that such financing is applied only to

FYR Macedonia9 M. Zuvela, “Concession Right”,

Croatian Legal Journal, Vol.1, p.102,2001.

10 www.pbz.hr.11 V. Simic, “Legal Aspects of Concession

of Cleaning of Liquid Waste in Zagreb”,Engineer, Vol. 4, p. 261 (2001)

12 www.hbor.hr.


particular projects. Municipalities may alsoaccept donations from foreign or local personsand legal entities.

According to the Law, each municipality shouldcreate a supervising board, which is entitled tosupervise the municipal finances. Thesupervising board regularly informs themunicipality and the Ministry of finance about its work.

The Law on concessions (Official Gazette of the Republic of Macedonia, no.42/92 and 40/99) stipulates that only FYRMacedonia can grant concessions and that the municipalities cannot grantconcessions. This limitation of sources of income includes all objects and land owned by the municipality, which areconsidered to be goods of public interest.


There is no experience in FYR Macedoniaconcerning large projects involving municipalfinancing, nor have there been any projectsfinanced by individuals contributing to theimprovement of local communities.


The existing legislation regulates the matter ofmunicipality financing with some deficiencies.Such deficiencies are particularly evident onthe part of the Law on Local Government whichdoes not provide for a possibility for the localgovernment to grant concessions. Also, thestate government restricts the use ofadditional finances gained by performingtransferred functions, because the law deniesthe possibility to use such means for otherneeds of municipalities. This is particularlyserious when the numerous financing needs ofmunicipalities are taken into consideration,such as the construction of roads, theillumination and maintenance of streets, parksand other public facilities and theestablishment of schools.

The local government as structured in the Lawon Local Government is still to be developed.According to government officials, regulatorychanges of the regime of municipal financingcan be expected, but the current politicalsituation in FYR Macedonia may delay theenactment of such changes. Unfortunately, theoverall situation in the country has not alloweda more rapid development of the municipalitiesas part of the daily lives of FYR Macedoniancitizens. The recent political developments inthe country require a redefinition of somearticles of the Law on Local Government, thusmaking a significant role for local governmentpossible and enabling the municipalities toreach their potential.

Nestor Nestor Diculescu Kingston Peterson*

The legal framework

The term municipality used herein refers to the local public administrative units ofRomania, which consist of counties, towns and communes. Romanian municipalities are currently organised on two main principles,the principle of local autonomy and theprinciple of public services decentralisation.The legal framework within which theRomanian municipalities are organised and function is shaped so as to observe these two main principles.

Income generation

The rights granted to Romanian municipalitiesto establish and collect local taxes, to enterinto associations with private entities, and toraise debt finance are the most relevant tomunicipal financing.

Direct or indirect local taxes can beestablished by municipalities within the limitsprovided by the Law on Local Taxes. As such,the municipalities have the power to establishand collect taxes and charges in relation toproperty, vehicles (for road and watertransportation), and the issuance ofconstruction authorisations, certificates andpermits, outdoor advertising, accommodationin tourist resorts, villages and towns. Othertaxes which municipalities have the right toestablish relate to the temporary use of publicassets such as museums, and historical andarchaeological monuments.

The municipalities can, upon decision of thelocal councils, enter into an association withprivate entities and undertake certain projectsor services of local interest. The terms andconditions of such associations are decided by each local council, within the larger frame-work of the applicable laws. Municipalities can also take equity participation or establisha commercial company whose activities fallwithin their responsibilities.

In order to undertake investment programmesof local interest or to refinance municipal debt,the Romanian municipalities, through theirlocal councils, have the power to incurdomestic and/or foreign debt either as loansor as municipal bonds. Both debt instrumentscan be guaranteed directly by the borrowingmunicipality. Domestic debt/guarantee mustbe notified, prior to being raised/granted, bythe borrowing municipality to the RomanianMinistry of Finance, while the foreigndebt/guarantee must be authorised prior tobeing raised/granted by a special commissionappointed by the government.

Municipalities can borrow and/or guaranteedebt up to a maximum annual13 threshold of20 per cent of the borrowing municipality’scurrent own revenues, including the allocationof a specific quota of the global income tax ofindividuals from the state budget.

The law provides that a municipality canguarantee debt with its own revenue, thusappearing to prevent the municipalities fromsecuring debt through assets in their property.Therefore, it seems that the implicit intentionof the legislator was to create a derogationfrom the rule according to which the privateproperty of municipalities generally follows thelegal regime of any other private property,including the creation of guarantees, exceptwhen otherwise expressly provided by law.Foreign municipal debt can be also securedthrough a state guarantee as per the publicdebt law.

Main municipal financing sources

Municipalities have the following main sourcesof financing available:

■ Own sources, consisting mainly of fiscalrevenue (various local direct and indirecttaxes and other fiscal charges), non-fiscalrevenue (including revenue from concessionand lease), and divestiture related revenue(including proceeds from the privatisation ofmunicipality-owned commercial companies);

■ Allocations and subsidies from the statebudget, consisting mainly of quota from thetax on global income of individuals; and

■ Raised funds, consisting mainly of debtfinance (domestic or foreign).

The breakdown of the aggregate municipalbudgets financing resources over the period1997–2001 is presented in the figure on page 59 .

Concessions are contractual means to ensurethe long term use of property in the local privateor public domain by private operators, as wellas the long term rendering of local publicservices14. It is also a method of ensuringprivate investments in local public services,which the concessionaire commits toundertake when awarded the concession.

Local public services are defined as including,but are not limited to, water supply, sewerageand draining waters and wastes, sanitation,heat supply, natural gas supply, electricitysupply, local transportation and administrationof the public domain. These services can berendered either by specialised municipaldepartments or by independent operators,authorised for that purpose by the respectivemunicipal regulatory bodies after beingawarded a concession.

Romania


Privatisation of municipal property is anothermeans of obtaining finances by municipalities,as the privatisation proceeds are revenues ofthe respective municipality. Municipalcompanies solely owned by the municipalityare privatised according to the existingprivatisation legislation. Municipalities areobliged to take all necessary measures withrespect to the privatisation of thosecompanies. Therefore, the municipalities areempowered to: (i) determine the appropriateprivatisation method; (ii) prepare theprivatisation-related documentation; (iii) effectthe sale of their shareholdings at market price;and (iv) initiate or approve the sale of assets ofcompanies each municipality is shareholder of.

In addition to their own budget and financingsources, the Romanian municipalities can alsobenefit directly or indirectly through localorganisations and entities from non-reimbursable financing from the EuropeanCommunity devoted to implementing varioustypes of projects, including infrastructureprojects. The Instrument for Structural Policiesfor Pre-Accession (ISPA) Programme forinstance, is a programme for infrastructureand project developments in the field oftransport and environment, whichmunicipalities can benefit from, subject tosubmitting sustained and eligible projects andhaving such projects approved. In addition,finance is sometimes available formunicipalities from governments of developedcountries for undertaking different projects ona bilateral basis.


Private sector involvement in managing andfinancing municipal infrastructure projects isprimarily based upon concessions,privatisation, partnerships and associations.However, two municipalities have recentlytargeted the fixed income market by success-fully issuing municipal bonds. The municipa-

lities of Predeal and Mangalia are the pioneersof this type of municipal financing in Romania.

Pre-deal municipal bonds

This was the first issue of municipal bondsafter 1989 and amounted to ROL 5 billion, withquarterly payable interest (floating annualinterest rate of 3 per cent over the Romanianaverage interbank rate for placing deposits andtaking loans). The issue has a maturity of sixmonths for half redemption, and of 18 monthsfor the remaining half redemption. The financeraised is to be utilised for arranging a new skislope in Predeal, a town famous for its skifacilities. The issue is guaranteed by thetown’s tax revenue. The public offer wassuccessfully closed, and the bonds are to belisted on the Bucharest Stock Exchange.

Mangalia municipal bonds

This was the second issue of municipal bondsafter 1989 and amounted to ROL 10 billion, withquarterly payable interest (floating annualinterest rate of 2 per cent over the Romanianaverage interbank rate for placing deposits andtaking loans). The issue has a maturity of 12months for half redemption, and of 24 monthsfor the remaining redemption. The finance raisedis to be utilised for infrastructure works inMangalia and for construction works in thetown’s education infrastructure. Mangalia is atown on the banks of the Black Sea, and asummer seaside resort. The issue is guaranteedby the town’s tax revenue. The public offer wassuccessfully closed, and the bonds are to belisted on the Bucharest Stock Exchange.

Both municipal bond issues are likely to beconsidered small for a mature market. Theymay be small, but they are the first incontemporary Romania and their merits lie indemonstrating that the Romanian capitalmarket responds to such offers, and thatfinance can be raised in this manner, ratherthan in their amount.

13 The amount of debt and/or guaranteeswhich are taken into consideration forthe calculation of the annual debtincludes principal payments due in therespective year for loanstaken/guarantees granted, payableinterest and related commissions andfees.

14 The maximum period for granting aconcession is 49 years.


Fiscal revenue

Non-fiscal revenue

Capital related revenue

Allocations from state budget

Subsidies

Others

Source: National Bank ofRomania’s Monthlybulletin, August, 2001

Note: Data for 2001estimated based upon August 2001annualised figures

Romania – Aggregate municipal budgets financing resources

100%

80%

60%

40%

20%

0

1997 1998 2000 20011999


The reform which the Romanian governmenthas embarked upon since 1990 has led tosignificant change for municipalities. Theenactment in 1991 of the law regarding thelocal administration saw the centralisedsystem replaced with local autonomy. For thefirst time since the Second World War,municipalities were awarded title and right overproperty of public local interest, and were giventhe power to establish, organise andadministrate public services and activities,including lucrative businesses.

Furthermore, since the principles without themeans to achieve them would remain only wellintentioned words in law, the principles werecomplemented by regulations with respect tothe municipalities’ finances. Mechanisms andprocedures were established with respect tothe formation, raising and allocation offinancial resources by municipalities, separate-ly from the state budget. In addition, themunicipalities were granted the power toestablish taxes and charges for specific fields,as well as to collect these taxes and chargesas their own revenue.

The basic legal infrastructure was thusestablished, granting the municipalities themain powers and means to achieve the rolewhich these organisations play in a freemarket economy. They could now becomepartners of the private sector with respect toprojects and programmes of local interest. It isnow time for municipalities themselves todevise mechanisms and practices that best fitthis legal infrastructure to their needs. Theinfrastructure itself is not beyond criticism andis certainly not perfect, it still needs to bedeveloped, fine tuned, clarified and completedin certain areas where inconsistencies andgaps could be identified. However, lookingback at Romania’s starting point, one couldsay it is on the right track. Looking ahead,Romania still has a long way to go, and thetime has come for municipalities to learn tomake the best use of the benefits, which thepublic-private partnerships have to offer tolocal communities.

Karanovic & Nikolic Advokati*

The legal framework

The role of the private sector in financingmunicipal infrastructure and in providingcommunal services has been negligible in FRYugoslavia over the last 50 years. All municipalservices and projects were financed by the stateand therefore the possibility for private investorsto participate in this sector was nominal.

Serbian legislation defines local self-government units as municipalities, cities andthe city of Belgrade (collectively referred to asthe municipalities). The legal status of themunicipalities is regulated by the Constitutionof the Republic of Serbia (published in theOfficial Journal of the Republic of Serbia, no.1/90), the Local Self-Government Law(published in the Official Journal of theRepublic of Serbia, no. 49/99 and 27/01) andthe Statutes enacted by the municipalities.

Income generation

Pursuant to the Local Self-Government Law, the municipalities are financed from the state budget.

Serbia is authorised to determine and collecttaxes. Part of the collected tax is transferred to the municipalities. The municipalities areentitled to receive the proceeds from thefollowing taxes:

■ income tax;

■ inheritance tax;

■ property transfer tax;

■ turnover tax.

In addition, the law provides for amunicipality’s local revenues, collected by the municipalities themselves. The localrevenues include local administrative taxes,local communal taxes, and fees imposed and collected by the municipalities’administrative authorities.

The Local Self-Government Law lists theactivities that may be performed by themunicipalities. Generally, the municipalities are entitled to regulate the organisation andoperation of communal activities and toestablish public communal companies in orderto provide various communal services (water,wastewater, heating, public transport, etc.). This law does not explicitly provide that themunicipalities are entitled to raise funds forinvestment projects. The Statutes of theMunicipalities regulate this issue. Eachmunicipality may therefore provide in its statutesthat it shall be entitled to borrow funds forvarious investment projects within the scope

of its activities (e.g. the Statutes of the city ofBelgrade contains specific provision that the cityof Belgrade is entitled to borrow funds in order tofinance various municipal projects. Recently, thecity of Belgrade entered into a loan agreementwith the EBRD to finance water supply, heatingsupply and public transport services).

The Law on Credit Transactions with ForeignEntities regulates credit transactions betweenlocal persons and legal entities and foreignentities. The law requires Yugoslav entities toregister their credit transaction with theNational Bank of Yugoslavia and therefore themunicipalities are obliged to register any credittransaction they enter into, including when toborrow funds from foreign entities.

Concessions are regulated both at federal andrepublic level. As the assets used by themunicipalities are owned by Serbia, the Law onConcessions (published in the Official Journalof the Republic of Serbia, no. 20/97, k22/97,and k25/97) enacted by the Parliament of ofSerbia is applicable.

The Law on Concessions provides that only theGovernment of Serbia can grant concessions.A municipality cannot grant a concession,because Serbia owns all assets used by themunicipalities. Some municipal activities suchas water supply services and maintenance ofcommunal water systems are subject to con-cessions and therefore a concession for thoseactivities could be granted to a private entity.When a concession is granted, the conces-sionaire is obliged to establish a concessioncompany in order to commence its activities.

The Law on Communal Activities (published inthe Official Journal of the Republic of Serbia,no. 16/97 and 42/98) restricts the provisionof some communal services (such as waterand heating supply services), which canexclusively be provided by public communalcompanies where a foreign entity’s sharecannot exceed 49 per cent.

However, the Government of Serbia has not yetgranted concession licenses in accordancewith current legislation and there are noimplementation precedents so far. It istherefore not clear whether a private entity canobtain a concession to provide communalservices. Under a more conservative reading ofthe law it appears that only companies with astate shareholding of not less than 51 per centcould provide communal services.

Municipalities do not have ownership rightsover property. Serbia’s Law on Propertyprovides that all assets (immovables,movables, rights, securities and cash) used bythe municipalities and by the public communalcompanies are owned by Serbia.

FR Yugoslavia


This Law provides that the municipalities areentitled to provide their assets as security forobligations undertaken with the prior approvalfrom Serbia’s Property Agency and pursuant toa resolution of the municipalities’ authorisedbody. Without approval from the Agency, apledge or mortgage over the assets cannot bevalidly created or enforced.


A number of attempts have been made in thelast ten years to include the private sector inthe financing of municipal infrastructure butnone of the projects was successful.

Although the current legislation enables private investors to invest in municipalinfrastructure and to finance the developmentand management of communal activities, inthe last ten years there has been no privateparticipation in the municipal sector.

There have been attempts to invest in the Belgrade water supply system. A projectinvolving the city of Belgrade and a Frenchinvestor has not been completed due to the economic and political situation in FR Yugoslavia.

The Belgrade public transport project isanother example of an unsuccessful attemptto involve the private sector in municipalinfrastructure projects. In the 1990s Belgradepublic transport faced huge difficulties due tothe economic problems experienced by theBelgrade Public Transport Company. In order to provide public transport to its citizens, thecity of Belgrade invited local private companiesand entrepreneurs to participate in providingpublic transport services. Since then, the roleof the private sector in the public transportsector has increased and currently almost half of the bus public transport services arestill provided by private companies. However,the state-owned Belgrade Public TransportCompany provides the trolleybus and tramwaytransport services exclusively, as the lawprohibits private participation in that sector.


The laws and regulations governing communalactivities and concessions do not provide asolid legal framework for private participationin providing these services. In order to makecommunal services more effective andfavorable to private investors, the currentrestrictions imposed by Yugoslav and Serbianlegislation should be lifted.

The first restriction relates to the possibility forprivate investors to invest in and to managepublic communal companies by providing allforms of public communal services. Legislation

in this sector should only provide a generallegal framework and strict regulations only withrespect to the liabilities of the communalservice providers.

The tariffs for providing communal services areset by the public communal companies withthe approval of the Government of Serbia andwere not established in accordance withmarket practice. The government used itsauthority in order to provide social stability inthe country when the economy was depressed,which resulted in public communal companies’inefficiency and losses that prevented anypotential development and investment intothese companies. It is necessary to removethese restrictions and to allow publiccommunal companies to set tariffs freelywithout interference from the state.

In order to enable municipalities to use theirassets freely and to invite foreign and localinvestors to participate in municipalinfrastructure financing, it is important toamend the current legislation providing thatSerbia owns all assets. Amendments to theLaw on Assets Owned by Serbia should bemade soon and should provide for the transferof the assets to the municipalities.

Currently only the Government of Serbia grants concessions and the municipalitieshave no authority in this sector. It may be more effective for the municipalities to beauthorised to grant concessions upon theirsole discretion for activities organised andmanaged by the municipalities (for example,the municipalities water supply system,heating supply system, etc).

The new Privatisation Law enacted in 2001provides that all state-owned companies willbe privatised within four years. Companies canbe privatised by either public tender or publicauction. Currently, there is no indication as towhether and when the privatisation of thepublic municipal companies will commence.

This Law provides that only up to 70 per centof the shares of the companies can be sold toprivate purchasers. This imposes a furtherrestriction with respect to private participationin the public sector. It is essential that alllegislation in respect to the public sector beharmonised, particularly with the newlyenacted Privatisation Law.

Albania* Kalo & AssociatesBrigada VIII Street,

Canadian Embassy BuildingSuite 3–4, Tirana AlbaniaMailing Address: P.O. BOX 235Tel: +355 4 233532Fax: +355 4 224727E-mail: [email protected]<mailto:[email protected]>Web: http://www.kalo-attorneys.com

Bulgaria* Eurolex Bulgaria

St 11th of August, #11000 Sofia, BulgariaTel: + 359 2 988 42 12Fax: + 359 2 989 60 02E-mail: [email protected]: http://www.eurolexbg.com

Croatia* Law Office, Bogdanovic & Dolicki

Alexandera von Humboldta 4b10000 ZagrebCroatiaTel: +385 1 615 95 95Fax: +385 1 615 77 33E-mail: [email protected]

FYR Macedonia* Law Office Polenak

blvd. Koco Racin 30/21000 Skopje, MacedoniaTel: + 389 2 114 737Fax: + 389 2 120 420E-mail: [email protected]: http://www.polenak.com.mk

Romania* Nestor Nestor Diculescu Kingston

PetersenNeocity Tower, Floors 9–12237B Calea Dorobantilor, Sector 171281 Bucharest, RomaniaTel: + 401 201 12 00Fax: + 401 201 12 10E-mail: [email protected]: www.nnkp.com

FR Yugoslavia* Karanovic & Nikolic Advokati

Dzordza Vasingtona 42BelgradeFR Yugoslaviatel: +381 11 3221532; 3223287;3222486fax: +381 11 3344054e-mail: [email protected]: http://www.karanovic-nikolic.co.yu


Romania’s legal regime for security interests inpersonal propertyThis article provides an overview of theRomanian legal regime for creating securityinterests in personal property. It analyses themain provisions of the law that was adoptedin 1999, and provides a critical assessment ofits implementation. The introduction and roleof the new electronic registration system isalso examined.

Dr Cristiana I. Stoica and Prof Valeriu Stoica, Stoica & Associates.*


The regulation of security interestswithin the Romanian legal system

Romania has a civil law based continental legalsystem. Historically, it was based on the Frenchlegal system. The Romanian Civil Code is a copyof the Napoleon Civil Code and was adopted in1866. Since 1990 the entire legal system hasundergone significant change. A number of lawsrequired to facilitate the transition process wereadopted during this period, including legislationregulating the creation of security interests. Priorto the enactment of the new law on securityinterests in personal property (the Law)1, theregulation of security interests was based on thegeneral legal principles governing the creation ofsecurity interests contained in commercial andcivil codes (mainly the possessory pledge andthe hypothek). Since the Law came into force inAugust 1999 Romania has become one of thetransition countries with a modern law governingsecured transactions.2 The introduction of theLaw was the result of a World Bank initiative,and involved extensive preparatory work andconsensus building efforts by the EBRD.3 As a result of the involvement of foreign experts, the Law is in part based on the principles of common law, and consequently, itsimplementation needed to be adapted toRomania’s civil law based legal system.

The main features of the Law

The scope of the Law is extensive. Article 1provides that the Law regulates the legal regime of security interests in personalproperty4. An individual or party is entitled to secure the performance of a civil or acommercial obligation5, arising from any contract concluded between natural persons or legal entities. The Law sets out a specialsystem of recording and publishing civil or commercial contract obligations which are applicable to all security interests inpersonal property (Chapters III and IV).

Article 2 applies to any kind of civil or commercial obligations, including:

■ all assignments of debt and conditional sales;

■ any kind of legal acts, irrespective of their form or name, which secure the fulfilment of an obligation with moveable goods;

■ leases of goods for a term longer than a year;

■ consignment contracts for goods with a valueover €1,000;

■ warrants and deposit receipts.

Article 4 of the Law contains specific definitionsof such notions as debtor, creditor, depositaccount and rental, including leasing.

The only obligations that may be secured withpersonal property are contractual obligations,which can arise from civil or commercialcontracts (Article 1). Article 10 (1) expresslystipulates that the obligations which may besecured with personal property are: present andfuture obligations, conditional or unconditionalobligations, divisible or non-divisible obligations,determined or determinable obligations.Obligations can be secured with domestic orforeign currency.

The scope of personal property that may be subject to security is very broad. Article 6 (1)stipulates that all movable, tangible or intangibleassets are subject to the Law. Article 6 (5)provides a list of movable assets which may form the object of a security interest. This list includes:

■ stocks of tangible or non-tangible assets;

■ credit balances in deposit accounts or savingsaccounts, or time deposits in banks or otherfinancial institutions;

■ depositary receipts, bills of cargo and othersimilar documents;

■ shares of joint stock or limited liabilitycompanies;

■ the rights to exploit natural resources and tooperate public services under the conditionsprescribed by the law;

■ the rights arising from patents, trademarksand other intellectual property rights;

■ insurance policies and accounts receivable;

■ negotiable instruments, including thosesecured by mortgage (hypothec);

■ all movable assets belonging to a debtor,which may include the inventory of present or future assets;

■ forests, agricultural crops, minerals andhydrocarbons that have been or are to beextracted;

1 The Law was enacted as a part of aseries of laws contained in Title VI,Legal regime of the security interests inpersonal property, of the “Law referringto the acceleration of the economicalreform” no.99, 26 May 1999,published in the Official Gazette,no.236, 27 May 1999.

2 See D. Fairgrieve and M. Andenas,“Securing progress in collateral lawreform: the EBRD’ s regional survey ofsecured transaction laws”, Law intransition, Autumn 2000, p.32.

3 See J. Simpson and J. Menze, “Tenyears of secured transactions reform”,Law in transition, Autumn 2000, pp.24–25.

4 Under the Romanian law “personalproperty” means movable assets(tangible or intangible assets, otherthan real estate).

5 Under the Romanian law there is adistinction between “civil law” and“commercial law”, as in othercontinental legal systems (e.g., France).Under such circumstances, there isalso a distinction between “civil” and“commercial” obligations.


■ rights arising from the lease of real property;

■ equipment or agricultural machinery;

■ corporate rights;

■ any right, whether exclusive or not, to deal with movable assets or to provide serviceswhich may be assigned. The assignment issubject to restrictions or requires the consentof the assignor or the authorisation fromanother person;

■ rights arising from the lease of personalproperty for more than one year.

The products resulting from the assetsmentioned above can also form the object of a security interest (Article 7). Article 12 defines a produce as follows:

■ an asset, received by the debtor, replacing thesecured asset, following a sale, or anexchange;

■ the fruits, products and proceeds from thesecured goods;

■ if the secured goods have been insured, theproceeds resulting from the insurance policy.

Article 8 of the Law expressly provides forexceptions such as assets or rights which maynot be the subject of a security interest. Theyinclude inheritance rights or intellectual propertyrights and other rights arising from varioussituations which are defined and regulated by theCivil Code.

The effects of creating a security interest

The Law identifies the basic principlesintroduced as to the effect of creating a securityinterest:

■ the security interest in personal propertyrepresents a right in rem the purpose of whichto secure an obligation of any type (Article 1);

■ the obligation secured with personal propertygives the creditor the right to be satisfied priorto any other unsecured creditor, or prior to anyobligation ranking behind another creditor;

■ the security interest can be created with orwithout the transfer of possession of thesecured asset to the secured creditor.

In addition to the principal obligations andunless the parties agree otherwise in thesecurity agreement, the security interest coversall interest, expenses of enforcement and sale,

insurance costs and payment of taxes relating to the possession and preservation of theassets (Article 10 (2)).

The creditor’s rights with respect to securedproperty are specified in Article 11 and include:

■ taking possession of or retaining the asset(s);

■ selling the asset to obtain the payment of thesecured obligation;

■ inspecting the asset securing the obligation;

■ accelerating the debt and commencingenforcement proceedings where the creditorhas reasonable commercial grounds to believethat the secured property is in jeopardy or thepossibility of payment is impaired.

The legal conditions for creating a validsecurity interest

The security agreement must be concluded inwritten form (notarised or not notarised) or bydeed under private signature and signed by thedebtor. A definition of the written private form ofsuch a contract is given in Articles 13 and 14 ofthe Law.

There is no obligation to fix the maximumamount of the secured obligation in the securitycontract. The asset over which a security interestis being created must be identified in thecontract, however the inclusion of the words “all personal property” is considered a sufficientdescription for the purposes of the Law. When sums of money deposited in a bank arepledged, a bank account number is required(Article 16 (1)).

The security interest extends to the products or the proceeds from the secured asset only ifthis is expressly set out in the contract. In thiscase, the contract should also contain anacknowledgement that the secured obligation is reduced to the extent of such products or proceeds pass to the secured creditor.

The creation of a valid security interest overfuture assets is subject to certain publicationrequirements applicable to the assets (Article 18 (1)). When the secured assets consist ofsecurities or documents of title, which aretransferred by endorsement or possession,particular formalities must be observed (Articles 13 and 25)6.

The security interest in personal property can beassigned to another party and the proof of suchan assignment is accepted by private written act(signed by the parties, without requirement of anotarised form) (Article 43)7.

The registration of security interests

The Law outlined the requirements for thecreation of a national, computerised registrationsystem. Priority is established by the time anddate of registration, subject to identifiedexceptions where publicity is to be accomplishedthrough possession or other means. Notice ofsecurity interests is registered through the filingof a security interest notice, and searches arebased on the debtor’s name or serial number inthe case of motor vehicles. A supervisoryauthority of the Government of Romaniaoversees the registration system.

The registration of the security interest notice is valid for five years and the renewal of theregistration is mandatory if required by theprincipal obligation secured. Otherwise theeffects of the initial registration are no longereffective. Liens in favour of the state must alsobe registered in order to achieve priority.

Methods of enforcing security interests

The Law gives creditors the option to pursueenforcement through the procedure set out inthe Romanian Civil Procedure Code or to use theenforcement procedure specified in the Article62 (1) of the Law. Unless specifically stipulated,the enforcement procedure specified in the Lawwill apply. The Law gives creditors the right to“peacefully” take possession of the debtor’sassets, provided such a process does notdisturb public order or threaten the debtor(Article 63). If a voluntary transfer of possessionis not possible, the creditor has the right to takepossession of the secured asset by way of anenforcement procedure, with the help of courtofficers, bank officers or of any enforcementauthority. The Law outlines the enforcementprocedure in detail. It also sets out the remediesavailable to the debtor and other creditors tochallenge in court the right of the creditor to sellthe secured assets or to distribute the proceedsfrom the sale (Article 67 and following). Theenforcement procedure commenced pursuant to the Law is not suspended by subsequentbankruptcy proceedings (Article 86(1))8. The Law also prescribes various sanctions against


The law is in part based on the principles ofcommon law, and consequently, itsimplementation needed to be adapted toRomania’s civil law based legal system.

creditors who breach the requirements for the realisation of the security interests.

Regulation of international operationsrelated to security interests

Regulation of international operations related to security interests in personal property areexpressly provided for in the Law. The basicprinciples of international private law ascontained in Law no.105/19929 are taken into consideration by the Law, with respect to the validity of a legal act, when this is ansecondary act10.

The Law provides the effects in Romania of the ranking of priority of a security interest inpersonal property, as to its opposability, in caseof an initial registration in another state. The Lawregulates in particular the following situations:

■ the security interest in personal property is created over an asset located in anothercountry than Romania. The validity of thissecurity interest is submitted to the conditions prescribed by the law of that state where the asset is located when security interest was created.

■ after the security interest’s creation in anotherstate than Romania, the asset is transferredin that later country (Romania). In this case, the Law provides that the security interest such created and registeredin a foreign state preserves its ranking, if the security interest is registered in theelectronic archive11, in Romania. Thisregistration in Romania has to be operatedwithin 60 days since the asset entered inRomania or within 15 days since the creditorlearned about this entering into Romania. In any of the circumstances, this registrationshould be operated before the priority rankingobtained by the registration in the foreignstate ceases to produce effects.12

The practical implementation of thelaw: issues and experience

The Law entered into force on 27 August 1999,90 days after the date of its official publicationon 27 May 1999. Security interests in assetsreferred to by the Law, which were created priorto the Law entering into force, were consideredvalidly created in conformity with the relevant law applicable at the date of their creation.

The courts were ordered to transfer the registersand documents related to the above securityinterests within 120 days from the date on whichthe Electronic Archive for Security Interests inPersonal Property (the Archive) created pursuantto the Law began its activities. However therewas no specific deadline by which the Archivehad to start functioning. Within the 90 day termmentioned above, the Government of Romaniawas required to adopt the Rules for theElectronic Archive for Security Interests inPersonal Property (the Rules). The Rules enteredinto force in October 1999.13

The Archive was conceived as a nationalregistration system for all types of securityinterests in personal property, as defined by the Law. The Archive is structured as a databasesystem which is updated through one or moreinterconnected servers. The Ministry of Justiceacts as the Supervisory Authority and authorisedspecial operators enter the data into thesystem.14 Access to the information contained in the Archive is available to the public andaccessible on the internet.

The Law initially provided for the possibility ofgranting public concessions for the operation of the Archive. However, it became clear that the procedure for public concession was timeconsuming and highly bureaucratic. Particularconditions of selection by public concessioncould also result in a limited number ofoperators. The need for a more flexible,transparent and rapid operator selection system led to the enactment of a new regulationregarding the authorisation procedure of Archiveoperators and the registering of operations.15

The implementation of this ordinance required a number of instructions to be issued by theMinistry of Justice to regulate issues such as the fee system for registration and the procedurefor authorising operators.

The selection of operators was given effect byorder of the Ministry of Justice in October 2000.The selection criteria was aimed at ensuring theauthorisation of operators with appropriatefinancial resources and geographical coverage,modern equipment and a large range of services.

Another important issue was the choice ofinfrastructure for the Archive. Initially a closednetwork where operators are interconnected was recommended. This kind of system couldnot be accessed externally. However, it was

6 In this case, the registration in theArchive does not represent a valid wayof publicity. This might be performedonly by possession over the documentitself, or through endorsement appliedon that document.

7 The Law does not provide anything withrespect to the debtor’s consent or thenotification to be addressed to him inthe circumstance of an assignment ofsecurity interest. According to ouropinion, this is the difference betweenthe assignment of the security interestin personal property and theassignment regulated by the Civil Code,where these are provided.

8 In our opinion, this is a facilityrecognized by the Law to the creditors,in order to avoid the competition withother creditors in a subsequentbankruptcy proceedings.

9 The Law regarding the regulation of theinternational private law relationship.This law was adopted on 22 September1992 and entered into on 1 October1992. See Official Journal of Romania,Part I, no.245, 1 October 1992).

10 An act which existence depends of theexistence of another legal act.

11 The Electronic Archive for SecurityInterests in Personal Property.

12 There are also other circumstancesregulated by the Law (articles 92–96).

13 The Rules were adopted by GovernmentDecision no.802 on 30 September1999 and were published in the OfficialJournal, no.499, October 1999.

14 In accordance with the Law, theoperators could appoint “agents” tooperate the registration in the Archive.Their appointment is made by acontract with the operators and theirselection is submitted to conditionsprovided by the Law.

15 Government Ordinance no.89 of 29August 2000, which was published inthe Official Journal, no. 423, 1September 2000. This regulation hasabrogated a number of provisionscontained in the Law and the Ruleswith regard to the functioning of theArchive.


16 For a more comprehensive presentationof the Law including proposals for legalmodifications, see C. Stoica and R.Rizoiu, “Theoretical and practicalaspects of the current legal regime ofsecurity interests in personal propertyapplying in the commercial field”,Revista de Drept Comercial nr.1,pp.47–68 and Revista de DreptComercial no.2, p. 67–82, 2001.

* Stoica & AssociatesSplaiul Independentei nr. 17ap.30 – Bucharest 70501RomaniaTel: +40 1 336 70 10/+40 335 54 64Fax: +40 1 336 71 30Email: [email protected];Web: http://www.stoica-asociatii.ro

decided that the advantages of this securenetwork were not significant enough to justify thehigh costs involved. The Romanian Governmentthen selected a system based on the intercon-nection of the operators through an open net-work via the internet. The costs were significantlylower, as the administration of the databaserequired only the acquisition of a server. All oper-ators were connected to this server. In order to enhance the security of the entire system, the access to it by the operators was protectedby a password.

An essential element for the functioning of theelectronic system is the software which ensuresthe correct administration of the database. Theexisting software enables searches of Archiveregistrations on the basis of various criteria,such as the name of the creditor, the name ofthe debtor or the asset given as security. It wasdecided, during the developmental stages of thesystem, that the software did not meet therequirements of the Ministry of Justice and itsfuture major operators – the Trade RegisterOffice, the National Union of Public Notaries and the Institute for Informational Research.Further modifications of the software wererequired before the current version was put into operation.

At the end of 2001 there were several operators working throughout Romania under the supervision of the Ministry of Justice. The Supervisory Authority clarifies the rules and regulations issued in respect of the Archive by giving an appropriate interpretationwhen necessary.

The Authority also exercises financial andaccounting control over the operators’ activitiesregarding the correct payment of fees. It alsoauthorises the operators’ registration of eachsecurity, the payment of fees to the state and the professional liability insurance.

The Archive technical staff monitor thefunctioning of the equipment to ensure theuninterrupted registration of the data by theoperators and the access of the public to theinformation available in the Archive.

So far, the Archive has proved to be a simple and efficient registration system of securityinterests in personal property. It allowsindividuals to have immediate access toessential information about creditors, debtors

or assets securing a commercial or civiltransaction concluded anywhere in Romania.Access to this information is open to peopleanywhere in the world via the internet.Information about the existence of a securityinterest in personal property previously involvedprohibitive amounts of time and money. Now thatsame information is significantly easier andcheaper to obtain.

Conclusion

The new Law is a very important step by theRomanian Government and Parliament inpromoting commercial and financial transactionssecured by personal property. The introduction ofa unified and transparent statutory regime for thecreation, priority and enforcement of securityinterests is a significant development. There is of course room for improvement of this Law andof the regulations issued for its implementation.16

However, despite some organisationaldifficulties, the benefits of this new legal systemare already apparent to the government, thepublic and investors. There is now a moreconsistent and predictable enforcement regimein case a debtor cannot satisfy its obligationstowards the creditor. The civil and commercialcirculation of the assets that could form theobject of a security is not affected. There is now better protection of creditors and animproved climate for local and foreign investment in Romania.


The Law sets out a special system of recordingand publishing civil or commercial contractobligations which are applicable to all securityinterests in personal property.


*Stephan Z. Kyutchukov, Partner, Djingov, Gouginski, Kyutchukov & Velichkov

Bulgaria: from paper-basedregistries to electronic,central registriesRegistries are a fundamental component of the legal infrastructure supportingcommercial activity. Those willing to registermaterial facts or circumstances must be ableto access the registry in a practicable waywith the certainty that the information inputwill correspond to the information outputprovided to those searching the registry.

No matter how well-organised and user-friendly aregistry is, it is only through a search subsequentto filing that certainty that the registry hasperformed its functions may be achieved.Therefore, when registering a security interestand before disbursing, a prudent lender shouldnot be satisfied with a confirmation that itssecurity interest has been duly registered.Before disbursing, the lender should perform asubsequent follow-up search of the registry andbe satisfied that the generated registry reportshows both the registration of the lender’ssecurity interest and the absence of conflictingsecurity interests with priority over the lender’ssecurity interest. A similar logic applies inrespect of executing transactions with corporateentities. A party signing an agreement havingreceived evidence as to who the entity’sregistered representative with signatory powerswas, would not wish to act on the agreementbefore ensuring that the signatory was stillauthorised to act on behalf of the relevantregistry as of the moment of signing. If a registryis to perform its function of bringing certainty tocommercial transactions, particularly in the fieldof lending and sizeable transactions, it mustoffer a practicable way for subsequent searchesto be undertaken.

If registries fail to function properly and do notensure timely registrations and registrysearches, they become detrimental to ratherthan beneficial for commerce. To the extent thatthere is no practicable way for a registry to besearched, the parties concerned tend to rely onknowledge about certain facts or circumstancesfrom sources other than the registry. However, ina number of cases only the constructiveknowledge of such facts or circumstances isrelevant and the only source of such knowledgeis the registry. Therefore, those who have donetheir best to learn of the facts or circumstancesconcerned, but have not searched the registrydue to the lack of a practicable way to do so, arepenalised instead of supported by the registrysystem. This also applies to those who have notfiled relevant information in the registry due tothe lack of a practicable way to do so and havethus enabled third parties to rely on outdatedknowledge which is obtained from a registry.

Criteria for assessing the practicabilityof register searches

The criteria as to what constitutes a practicableway to update or search a registry should be

formulated through an examination of theexisting status of Bulgarian registries whichhandle registrations of corporate entities,registration of title and other rights in-rem in realestate, and registration of security interests.

Time for accessing the registry

The time it takes for a traditional Bulgarianregistry to complete a registration would ideally be one week (i.e, registration of therelevant information and the issuance of aregistration certificate). It is extremely rare that a quicker registry response is obtained and often the period might be longer. A one-weekdelay poses a serious timing problem for modern business transactions.

Similarly, if an individual applied for an extract or certificate from a traditional Bulgarian registry(e.g, a certificate of good standing in respect of a company, or a certificate for encumbrances inrespect of a person’s owned real estate, etc.), it would be not issued in under a week.

Location of the registry

Corporate entities in Bulgaria are registered in 28 decentralised paper-based registries withthe existing District Courts. Real estate trans-actions are registered in 107 decentralisedpaper-based registries with the existing RegionalCourts. Therefore, if an individual did not want to correspond with these registries via mail orlocal agents, distances of up to 500 kilometresmight have to be covered if a filing or a requestfor information is to be made. Since the registrystatement concerning the filed registration or requested information would not be issued on the spot, the magnitude of the problem is doubled. While covering distances is a burden itself, the decentralisation of registries exacerbates the problems of registries’ inaccessibility.

Precision of timing

Traditional Bulgarian registries work in timeincrements equal to a day. Therefore, if thechange of a registered manager and atransaction take place within the same day, theregistry would not be able to provide the requiredbacking in respect of determining whether thetransaction was signed by the registeredauthorised signatory or not.

Paper carrier

Traditional Bulgarian registries are paper-based,which makes them incapable of being accessedvia electronic media, such as the Internet. Thisdirectly effects the time it takes to accessinformation. More importantly, the paper carriermakes such registries unreliable or even incapableof performing their basic functions. For example,real estate registry books in Bulgaria are over acentury old. Due to heavy use over the years,significant parts of them have been worn away toan extent that they are not legible. Corporate andreal estate registry books are often tampered withillegally: pages or even entire books disappear orare stolen by interested parties. By its very nature,paper is much more difficult to protect from wearand tear and tampering, without slowing down thesearch process.

Uniformity of registry and registry reports

Traditional Bulgarian registries are incapable ofenabling automated processing of incoming andoutgoing information. The delays in processinginformation and its inaccessibility via electronicmedia are just two aspects of the problemcaused by lack of computerised processing.Another important aspect is the inconsistency of statements. One and the same certificate –(for example, a certificate of encumbrances onone party’s real estate) – might come in a broadvariety of forms, depending on the specificindividual who drafts or issues it. Often there are discrepancies in the contents of the actual registry and the registry certifications.Some certificates might omit important data,others might be certifying information which is irrelevant.

Appeals against decisions of registrars

In the case of a disagreement between theapplicant and the registry judge concerning aregistration, the process might stall for weeks ormonths. Applicants hardly ever appealunjustified denials of registration to the superiorcourt, as such an appeal would delay registrationfor up to years. Therefore, following dramaticdisputes, the registration usually takes placeafter each and every whim of the registry judgehas being addressed.


If registries fail to function properly and do notensure timely registrations and registrysearches, they become detrimental to, ratherthan beneficial for, commerce.

The impact of traditional Bulgarianregistries on commerce

The first registries to be set up in Bulgaria about one century ago handled filings in respect of title and other rights in-rem in realestate. Although these registries have gonethrough numerous organisational changes, they have never been discontinued as a statefunction and their principles of operation havenot been materially altered. Therefore, searchesof the registries dating back to their origins do not present problems.

By contrast registries handling corporate filingshave been practically discontinued, insofar astheir functions for handling commercial corporateregistrations are concerned since the abolition ofthe 1898 Law on Commerce in 1951. With theenactment of the Law on Commerce of 1991,these registries were reinstated with a structurethat was not principally different from the originalone that existed prior to 1951.

Commerce in Bulgaria relies on real estateregistries and corporate registries, with theexception of some modern developments ofsecured transaction law dating from 1996.Therefore, commerce has to rely on and complywith the capacity of infrastructure toolsconceived in nineteenth-century Europe anddesigned to accommodate the level of technicalaccomplishments of that era. As a result,businesses willing to function through use of theInternet, are restricted with regard to interchangewith registries. Due to the bureaucraticprocedure of obtaining registry statements, allbusinesses transact on the basis of informationconcerning the corporate good standing of theirpartners which dates back days, weeks or evenmonths from the moment of transaction. Thus,businesses have to rely on representationsmade by the individuals signing the respectiveagreements, to the effect that those sameindividuals are the registered signatories of therespective company as of the moment of signing.While this secures the contracting party at leasta claim for damages in case of misrepresen-tations, the risk of the signed agreements being null and void in respect of the non-represented entities is still present.1

For the same reason, payments pursuant to realestate transactions normally happen before thepayor has full certainty that he or she hasacquired clear title. Fraudulent transactions arenot unknown in Bulgaria. Sellers do not agree to

wait for their money for over a week, until acertificate is issued demonstrating theregistration of the title transfer and the absenceof recorded third-party rights recorded prior topurchaser rights or encumbrances in respect ofthe sold real estate. Normally, sellers insist onreceiving their money when the purchase andsale deed is recorded with the real estateregistry. Consequently, after the purchaser haspaid, he or she could discover that they hadtaken title subject to someone else’s rights inthe “purchased” real estate.

Lenders in Bulgaria take advantage of theirstronger bargaining position prior todisbursement and do not disburse until thepromised mortgage has been properly recordedand until evidence has been shown to the effectthat the mortgaged property was notencumbered prior to registering lender’smortgage. It is the borrower in this instance whosuffers from the inefficient registry system, forhe or she does not see his or her money until theslowly operating real estate registry issues therequisite certificate. It is not unusual that thecertificate would not give the proper certificationof all circumstances desired by a lender, in whichcase a new certificate would have to be issued.

Central Pledges Registry with theMinistry of Justice

In October 1996 the Bulgarian Parliamentenacted the Law on Registered Pledges. The Lawtook effect on 1 April 1997 and for the first timeintroduced a comprehensive, institutionalisedsystem for the creation and perfection of non-possessory security interests in movables andcertain categories of intangibles. The Law notonly introduced a versatile and convenient typeof security interest, but it also led to theintroduction of the first centralised andexclusively computer-based registry: the CentralPledges Registry.

The system of registered pledges is structuredaround the Central Pledges Registry andprovides a national system of filings. A group ofprofessional lawyers with backgrounds inacademia, commercial banks, private practiceand the court system inspired its establishment.Initially it received the support of the Central andEast European Law Initiative of the American BarAssociation and Bulgarian pro-reform non-governmental organisations. Later, the supportof the Institutional Reform and the Informal

1 There are a variety of “practical” rulesestablished by various administrationsand private notaries in respect to howlong after issuing a certificate of goodstanding of a corporate entity should betrusted. Sometimes a one-month-oldcertificate is acceptable, at other timesa six-months-old certificates would stillbe trusted. The law does not specify aperiod of time after which a certificateof good standing should not be trusted.In practice, the only case where acertificate of good standing should betrusted is if it is issued after therelevant event and if this relevant eventtook place during the historic periodcovered by the certificate.


Sector (IRIS) Programme of the University ofMaryland was procured which unlocked fundingand access to the world’s leading experts in thefield. The EBRD Model Law on SecuredTransactions was used as a model, along withArticle 9 of the Uniform Commercial Code of theUnited States. The Bulgarian Ministry of Justicefully backed the project and this led to theintroduction of a bill in parliament and itssuccessful enactment into law.

Institutional framework of the CentralPledges Registry

The Central Pledges Registry with the Ministry ofJustice (the Registry) has the status of anindependent public agency under the Minster ofJustice. One Director manages the affairs of theRegistry and it has its own independent budgetwithin the Budget of the Ministry of Justice. TheMinister of Justice is authorised to open localoutlets (branches) of the Registry on a needs-basis. Local outlets receive filings, do initialprocessing and forward the filings for registrationby the central Registry office. Local outlets alsocollect requests for certificates to be issued bythe Registry, forward them to the central Registryoffice and then issue the certificates to theapplicant based on a draft generated by thedatabase in the central Registry office. Specificregistrations are handled by registration clerksand public servants employed in the Registry,who process incoming and outgoing informationand effectuate registrations and issuecertificates in the name of the Registry Director.The Registry Director’s denials to register aresubject to appeal before the Minister of Justice.In turn, the Minister’s denials to register aresubject to appeal before the SupremeAdministrative Court. An appeal against denial toregister has as its immediate effect the promptregistration of the relevant security interest,subject to public notice in the Registry that theregistration might be annulled in case of anunsuccessful appeal by the applicant. Under law,the Registry’s operation may be sub-contractedto a private operator. The Registry has not yettested in practice this provision of the law.

Registrations and certifications

Applications to register must be in writing and inspecial forms pre-approved by the Minister ofJustice, consisting of a few groups of boxes tobe filled in. Detailed instructions as tostandardising the information written in each box

have been supplied by way of a regulationadopted by the Minister of Justice. Theinformation required is in respect of: identifyingthe secured creditor and the pledgor; to theextent different from the latter, the obligor underthe secured debt; the secured debt; and thecollateral pledged as security. Upon filing, theRegistry clerk makes sure that there is no emptybox on the form or, if there is no information tobe supplied, the respective box is filled in withN/A (not applicable). If the Registry clerk issatisfied with the form and if the applicable feehas been paid, he or she authorises theregistration in the name of the Registry Director.

Registration is effectuated pursuant to a methodology built into the system. First, the clerk has the system generate a uniqueregistration number for each accepted filingform. A bar code sticker is pasted onto a special box on the form. The form beingprocessed is scanned and an image file of the form is created in the system and isautomatically associated with the generatedfiling number. Then a special menu opens which enables the operator to key in the dataconcerning the identity of the creditor, pledgorand main obligor. This information goes into the database and allows computer searches by pledgor details. The Registry retains no paper registrations.

The Registry issues two types of reports. Thefirst enables the requesting party to obtain thefull record of each person in the Registry, in thatperson’s capacity as pledgor. This type of report,however, omits the image files themselves andprovides details concerning the number ofassociated pages of scanned image. The reportprovides details concerning each filing on therecord, which are sufficient to enable a follow upsearch concerning any one of such filings. Thereport provides information on the sequentialnumber of each filing and the exact date andtime the system completed the filing. In this waythe sequential order of completed filings isidentifiable. The system can also generatereports with the full details of one or morespecific filings. Such reports may be issued uponrequest, to the extent the applicant is aware ofthe sequential number of the specific filing. Ifnot, the applicant must first do a personalsearch, obtain the first type of report, and thenenter into each concerned filing’s details.

Assessing the effectiveness of accessto the Central Pledges Registry

Using the criteria outlined earlier, it is possibleto assess the extent to which the partiesconcerned can effect registrations of securityinterests or run various types of searches in theCentral Pledges Registry.

Time for accessing the Registry

In practical terms, if a person was standing in front of the registry door with a signedregistration application, it would take fiveminutes to complete the process (i.e.,registration of the relevant information and the issuance of a registration certificate), unless there would be a queue in front of thedoor. Filing applications may be sent via mail as well but that takes extra time. If the applicant waited for that five-minute period, he or she would walk out with a confirmation of filing, which represents a replica of theinformation that was actually placed on theRegistry and that would be issued to any partysearching the Registry. This also applies to aparty searching the Registry, to the extent thatsuch party has defined its search criteria.

Location of the Registry

For the time being, the Registry has the sameproblems of distance that exist with traditionalregistries. However, due to the fact that aregistration certificate is issued within minutes,an applicant should never have to take morethan one trip.

Precision of timing

Each certificate issued by the Registry lists theexact moment a filing was made, the filing’sabsolute sequential number and the time andnumber of the issued certificate. This makes thesystem reliable in respect of preventing disputesas to the exact time of registration.

Electronic carrier

The Registry is entirely based on digitally storedinformation. Therefore, computerised processingof data is possible and makes searches andreporting extremely fast. Since there is no paperarchive, back-up of Registry information is easy,economical and secure. The risk of tampering orwear and tear is negligible. The Registry iscapable of being accessible to outside users viathe Internet.


Traditional Bulgarian registries are paper-based,which makes them incapable of being accessedvia electronic media, such as the Internet.

Uniformity of Registry and Registryreports

The Registry operates based on standardisedfiling forms. The actual information contained in the Registry is an exact copy of what wassubmitted by the applicant. The Registrycertificates are generated on the basis of a standard template and are automatically filled in with the actual data from the Registry.

Appeals against refusals of registration

Appeals against the denial of registration do not have a timing impact on accomplishing an appealing applicant’s goal, which is a promptcompletion of the desired registration,regardless of how long an appeals process might take.

Impact of the Registry on commerce

This analysis demonstrates that the partieswilling to rely on the Registry have a practicableway to ensure that the proper information isregistered and obtained in a timely fashion from the Registry. Such information is reliable in terms of being precise and comprehensive.Therefore, the Registry might be viewed as an institution that can improve commerce in Bulgaria.

Potential for reform

Bulgaria has enacted a Law on the ElectronicDocument and the Electronic Signature, whichtook effect in October 2001. This law, which is compatible with EU standards and Directives,provides a sound basis for electronic commerce.The Law provides for state agencies to exchangeelectronic documentation by way of bothreceiving applications and issuing statements in electronic form. It also provides that individualadministrative agencies under centralgovernment shall start receiving and issuingelectronic statements by way of a decree of the Council of Ministers.

It would be easy to enhance the Registry so that it could receive filings and issuecertificates electronically and sign themelectronically, via the Internet. The distancefactor would then be removed and thepracticability of accessing the Registry for filing and certification purposes would besignificantly improved.

Furthermore, a universal Central Registry couldbe created to record all structural components of transaction activity. A Central Registry shouldbe computer-based and centralised for the entirejurisdiction of Bulgaria. It should also provide on-line access for filings and certifications,thereby enabling users to have immediateaccess to up to date information. Registration of all legal entities, excluding state agencies,political parties and trade unions, could bemaintained in the Central Registry. Such aRegistry could also maintain the registration of security interests in assets other than real estate.

A Central Registry could contain the fulldescription of objects of real estate (forexample, plots of land, buildings or parts of buildings) as well as transactional informationconcerning real estate. This information could include transfers, encumbrances andmortgaging, and would allow users to determinethe ownership status of property at any givenmoment. An electronic registry concerning realestate would allow searches and filings based on both personal data and property data for the first time.

The transition to a Central Registry could be based on a number of existing structuralaccomplishments, which can be furtherdeveloped and streamlined. The Law on the Electronic Document and the ElectronicSignature provides a sound basis for thecommunication infrastructure of the CentralRegistry. The Central Pledges Registry with the Ministry of Justice will provide the platformon which an enhanced registry structure mightgrow, and whose procedures and experience to date will be utilised by the new CentralRegistry. The World Bank and EU Phare financedproject for the creation of electronic cadastralmaps of Bulgaria, which is currently under way,will provide the property data that will serve asthe basis for the property registration.

* Djingov, Gouginski, Kyutchukov & Velichkov10 Tsar Osvoboditel Boulevard1000 SofiaBulgariaTel: 359 2 932 1100Fax: 359 2 980 3586E-mail: [email protected]


Legal reform project

The EBRD completed its telecommunicationsregulatory reform project in Armenia during the third quarter of 2001. Working with theMinistry of Transport and Communications and the Ministry of Justice, the EBRD and its consultants delivered to the ArmenianGovernment a substantial regulatory reformpackage, including a draft law and measuresnecessary to establish, empower and equip an effective and well managed independenttelecommunications regulatory authority. This package, when implemented, will afford powerful instruments enabling furtherdevelopment of the telecommunications sector in Armenia.

Legal developments

Civil Code – Pledges

On 1 September 2001, the new Civil Codeentered into force. The Civil Code includes newprovisions applicable to the taking of securityover property. The Pledge Law of 19 August1998 also remains applicable but only to theextent that it does not contradict the new CivilCode. A reform process was initiated for thecreation of a unified, centralised, pledgeregister operated by the Ministry of Justice, but the register has not yet been developed.


In November 2001, at the request of the StateCommittee for Securities, the EBRD undertooka project to assist Azerbaijan in preparing anew Law on Joint Stock Companies and a newLaw on Securities. Funded by the UnitedKingdom, this project is expected to help bringthese two pieces of primary legislation

governing the securities market into line with international standards and the soundpractices of more developed markets.

Legal developments

Proprietary law

On 13 November 2001, pursuant to Edict No. 667, the President repealed a 1999decree that provided that the President couldtransfer to state ownership the property of anyindividual or any legal entity that caused“damage to the state”. The 1999 decreeprovided that property could be returned to its previous owner if the damage caused to the state was compensated in full, or if a court of law held that the relevant person was not responsible for causing the damage.The repeal of the 1999 decree is a welcomedevelopment, as “damage to the state” wasnot precisely defined and seemed to indicatethat legal entities could be held responsible for misdeeds of their shareholders/investors.This possibility contradicted the basic principlelaid down in Belarus’s Civil Code that legalentities are not responsible for the obligationsof their shareholders/equity owners.

Legal developments

Election law

In September 2001, the Election Law of Bosniaand Herzegovina entered into effect. The lawregulates, among other things: the conduct of elections; rules of conduct for politicalparties; the election of members of thePresidency of Bosnia and Herzegovina; theelection of delegates to the House of Peoplesand the House of Representatives of theParliamentary Assembly of Bosnia andHerzegovina; the composition of the Parliament

of the Federation of Bosnia and Herzegovina,the National Assembly of The RepublikaSrpska; and the mandates for cantonassemblies, municipal councils/assembliesand city councils/assemblies.

Legal developments

Deposit insurance law

On 9 December 2001, the Parliament approvedthe amended Deposit Insurance Law. Accordingto its provisions, deposits of up to BGN10,000 (€5,106) will be fully insured and there will be no insurance for sums above this amount. The threshold is calculated afteradding together all accounts of a depositor in a bankrupt bank. The Law provides thatfunds found to be related to money launderingwill not be guaranteed. Under the law, eachbank must deposit a yearly premium of 0.5 percent of all deposits for the previous year in thenational insurance fund.

Legal developments

Competition law

On 1 July 2001, a new Law On Protection of Economic Competition came into effect,bringing substantial changes to competition law. The new Law, which fully replaced theprevious legislation, is designed to achieve fullharmonisation with EU competition regulations.The Law protects economic competition againstelimination, restriction or other interferencecaused by (i) agreements of competitors, (ii)abuse of dominant position; and (iii)concentration of competitors. It also providesdefinitions for some of the terms that wereregularly used by the Office for the Protectionof Economic Competition, but which were notdefined under previous legislation. Like its

Czech Republic

Bulgaria

Bosnia and Herzogovina

Belarus

Azerbaijan

Armenia

Legal transitiondevelopments


predecessor, the new Law prohibitsagreements that distort competition, butprovides a new system of individual andgeneral (block) exemptions, including a deminimis rule exempting agreements with lowmarket impact from the statutory ban andconsiderably changing the procedure forgranting individual exemptions. TheCompetition Office has enacted eight blockexemptions which, under certain conditions,can apply to some of the most important typesof research and development agreements.

Civil Code

On 1 January 2002 amendments and newprovisions to the Civil Code relating to securityrights entered into force. The provisionsintroduce a new regime for the creation andregistration of pledges over certain assets.These assets include movable and realproperty not registered in the CadastreRegistry, collective assets and sets of assets.The pledge agreement for these assets shallhave the form of a notarial deed and thepledge shall be created by registration in apledge registry maintained by the CzechChamber of Notaries. With the exception ofpossessory pledges over movable property,which may be created by means of a writtenpledge agreement and the handing over of the assets to the pledgee, there are no othermethods for creating a pledge. It is no longerpermissible to create a pledge by labelling theproperty. The Chamber of Notaries is currentlydrafting internal rules and guidelines for theoperation of the registry, which is expected tobecome fully operational during 2002.

Legal developments

Contracts law

On 25 September 2001, Parliament passedthe long-awaited Contracts and Non-ContractualObligations Law. All contractual obligations willcontinue to be regulated by the old civil codeuntil this Law comes into force. The Law willnot alter basic contracts law, but will providegreater detail and relevance for a post-Sovietstate and will enhance consumer protections.In order for the Contracts Law to becomeeffective, parliament must pass new civil codegeneral provisions, the international private lawact and an enactment law. While the twoformer draft laws have been completed, thelatter has not yet been referred to parliament.Consequently, the new Contracts Law is likelyto come in force sometime late in 2002.

Securities market law

On 17 October 2001 parliament passed a newSecurities Market Law that aims to harmonisenational regulations with relevant EU require-ments. The new Law regulates matters related

to the provision of investment services andsecurities settlement. The new Law, togetherwith the enactment in June 2001 of the Lawestablishing the Financial Services Authority asa single regulator for financial services (seeLaw in transition, Autumn 2001), is expected tohelp improve the creditability and transparencyof the country’s capital market.

Legal reform projects

Telecommunications

At the request of the Yugoslav authorities, the EBRD will initiate a project to assist withthe establishment of a clear and predictabletelecommunications regulatory framework likely to attract private investment and enablethe overall development of the telecommuni-cations sector. The objectives of the project are the elaboration of a sector policy fortelecommunications, together with: policies for licensing, interconnection and tariffs; theadoption of a modern telecommunications law;the establishment of an independent regulatoryauthority; and the improvement of generalawareness on telecommunications law andpolicy. It is expected that this reform projectwill begin during the first half of 2002.

Secured transactions

The EBRD has initiated a new project for the reform and implementation of a securedtransactions law in FR Yugoslavia. The projectincludes the drafting of new provisionsgoverning the taking of security over movableassets, the registration of the security into a centralised registry and enforcement of secured creditor rights. The EBRD is workingclosely with USAID and their consultants onthis reform project. In addition to drafting new legislative provisions, the EBRD will assistwith the implementation of the new provisionsby helping to create a pledge registry,developing ancillary regulations and ensuringthat the reform fits in with the existing legalframework. The United Kingdom has funded the first phase of this project.

Legal developments

Money laundering

From 1 March 2002 a new Law against MoneyLaundering is to take effect. The Law providesa broad definition of what constitutes moneylaundering. It imposes a direct obligation onindividuals and legal entities that could beinvolved in money laundering activities (evenunknowingly), including banks and law firms, to report suspect activities to a specialdirectorate to be created as part of the Ministry of Finance.

Legal developments

Secured transactions

On 1 September 2001 a number ofamendments to the Law on Charges set forthin Act IV of the Civil Code became effective.These amendments aim to clarify the existing rules enacted in 1997. Oneimportant clarification concerns the priority of a floating charge, which now clearly relatesto the date of its formation rather than itsconversion into a pledge. Under the amendedrules it is also now possible for the parties to agree in advance to the sale of collateraloutside of the judicial foreclosure process.

Money laundering

In October 2001 the government approved anumber of amendments to laws regulating cashmanagement and money transfers to combatmoney laundering. Among these measures arethe elimination of anonymous savingsaccounts. Parliamentary approval of theseamendments was given at the end of 2001.

Legal developments

Currency regulations

On 18 July 2001, the National Bank of the Republic of Kazakhstan’s new Rules for Conducting Currency Operations in theRepublic of Kazakhstan entered into force. The new Rules raise the thresholds for certain currency transfers.

Civil Procedure Code

On 11 July 2001, significant amendments to the Civil Procedure Code were approved,including the elimination of the mandatory pre-filing procedure for “property-related”disputes (i.e., those involving claims that can be expressed in monetary terms); theabolition of the appellate procedure known as the cassational complaint; the adoption of new procedures for appealing court rulingswhich have already gone into effect; and theintroduction of new provisions governing the“reverse enforcement” of a court decision, by which the effects of a prior decision that is subsequently reversed are eliminated. Thesechanges represent a significant simplificationin the judicial process.

Kazakhstan

Hungary

FYR Macedonia

FR Yugoslavia

Estonia



Telecommunications regulatoryreform

At the request of the Kazakh authorities, the EBRD continued its legal assistance with the launch of a further phase of thecurrent telecommunications regulatory reformassistance programme. This third phase builds upon the work done in phases one and two and provides assistance with tariffrebalancing and the development andimplementation of a universal service policy. It also provides advice on telecommunicationslaw and aims to improve general awareness on telecommunications law and policy. Whencompleted, this assistance will provide thebasis for the Kazakh authorities’ finalisation of a Concept Paper on Telecommunications and the presentation to Parliament of proposedlaws on telecommunications and a UniversalService Fund in Kazakhstan.

Legal developments

Investors protection law

In January 2002, the Latvian Law on Commerce entered into force. Thiscomprehensive law set in place a cohesive,revamped body of jurisprudence applicable tothe rights and relations of persons engaged inall aspects of commerce and trade in Latvia. itis the most significant piece of legislationrelating to Latvian business passed in recentmemory. The Cabinet of Ministers hasintroduced before parliament a draft InvestorsProtection Law that is likely to take effect from1 January 2002. Once enacted, the newlegislation is expected to establish a scheme toprotect the financial and securities investmentsof small investors by compensating them forlosses from irrevocably lost investments andundelivered investment services.

Telecommunications law

On 30 November 2001, the new Law OnTelecommunications came into effect, replacingthe Department of Communications and theMinistry of Transport with a Telecommuni-cations Regulatory Commission. This newregulator will be responsible for all functionspertaining to public telecommunicationsnetworks and services, including the settlementof disputes arising from interconnection, tariffsand frequency allocation. The Law also reducesthe fixed-line monopoly of Lattelekom by tenyears to 1 January 2003 and brings forwardnumber portability from 2005 to 1 January2003. The Law also provides for theestablishment of a universal telecommuni-cations fund for financing development in ruralareas. This Law brings Latvia into line with thesecond wave of EU liberalisation.

Accounting law

The Law on Certified Auditors enters into force on 1 January 2002, allowing atransitional period for a number ofrequirements. Most importantly, the newCertified Auditors Law allows audit firms to sign off accounts of Latvian companies in addition to licensed individuals; sets newliability insurance requirements; and appliesspecial rules to audits of financial institutionsand listed companies.


In December 2001, the EBRD began assistingthe Lithuanian Ministry of Economy inamending its Concessions Law and developingimplementing regulations. Proposedamendments to the existing Concessions Laware expected in early 2002 and the project isexpected to be completed by summer 2002.

Legal developments

Pledge law

On 30 July 2001, parliament approved the new Law on Pledge, which came into effect inNovember 2001, except for one chapter whichcame into effect in January 2002. The new Law contains detailed provisions regulating the pledge over an enterprise, although it isunclear how the description of the collateralshould be made in order for the pledge to bevalid. On enforcement, the Law gives thepledgee the right to sell the pledged propertyindependently, under the control of a judicialbody or to take possession for the purposes of administration, especially in the case of anenterprise. Many provisions of the new law are based on the creation of an effectiveregistration system, which does not yet exist in Moldova. It is unclear whether the Ministryof Justice has taken measures to establishsuch system. The new provisions constitutemajor improvements in the securedtransactions regime in Moldova but theireffectiveness will depend on theimplementation of the Law.

Bankruptcy law

In November 2001, the new Law on Insolvencyentered into force. The new law combines theconcepts of re-structuring and bankruptcy in asingle mechanism of legal securing of insolvententerprises, thus combining two laws in oneAccording to the new law the realisation of there-structuring process of the insolvententerprises and the insolvency proceedings(bankruptcy) are viewed as two stages of pre-judicial and judicial proceedings. However thecriteria of insolvency, which lead to therealisation of one or another procedure over

the debtor, are marked rather vaguely. The newlaw also introduces judicial insolvencyproceedings applicable to banks. However, it isstill prohibited for the debtor bank toindependently commence insolvencyproceedings and the right to file an insolvencyclaim remains exclusively with the NationalBank of Moldova. The new law emphasises therole of the administrator in the process ofbankruptcy of an enterprise. It sets theprinciples for the foundation and operation ofthe creditors’ representative bodies, namelythe creditors’ meeting and the creditors’committee. The new law also introduces adefinition for “disqualification”, which is aimedto raise the responsibility of persons engagedin the administration of debtor enterprises.

Legal developments

Consumer credit legislation

On 21 July 2001, parliament adopted a Lawgoverning consumer credit. The Law regulatesthe principles and procedures for concludingconsumer credit agreements, principles ofconsumer protection and obligations imposedon entities that undertake consumer credit.The new Law will come into force during thecourse of 2002.

Environmental law

On 1 October 2001, the EnvironmentalProtection Law became effective. The Lawintroduces the concept of a contaminated landregime, defining liability for soil andgroundwater contamination and setting legallybinding soil and groundwater clean-upstandards. The Law adopts the principle that the polluter must pay and allows until2004 for a determination of liability for existing pollution. If no party can be found to be responsible for the past pollution, the local government authority is responsible for the clean up. The Law also introduces a publicly available contaminated land register.The Law is part of a number of legislativechanges being implemented as part of the EU accession process.

Intellectual property law

On 22 August 2001, the new Law On IndustrialProperty became effective. The Law concernsregulations relating to invention, utility models,industrial designs, trademarks, geographicalindications and topographies of semicon-ductors. It also introduces changes to theregulations governing Poland’s Patent Office,modifying the procedure for granting trademarkprotection. The new Law also introduces a new definition of geographical indications.

Poland

Moldova

Lithuania

Latvia



CIS Model Securities Law

On 24 November 2001, the Commonwealth of Independent States (CIS) Inter-ParliamentaryAssembly approved the CIS Model SecuritiesLaw that was drafted with the support andtechnical assistance of the EBRD and theGerman Agency for Technical Co-operation(GTZ). The Model Law regulates circulation of securities, their clearance and settlement,the role and functions of professional marketparticipants and licensing. It also governs the activities of a national Securities MarketRegulator. The Model Law is based onInternational Organisation of SecuritiesCommissions (IOSCO) internationallyrecognised principles.

CIS model laws are of an advisory nature for member states. Therefore, it is expectedthat the Model Securities Law will serve as the basis for new national laws or amendmentsto existing laws in CIS countries. On 20–21December 2001 the heads of nationalsecurities regulators and the heads of financecommittees of national parliaments met todiscuss ideas for implementing the ModelLaw’s provisions into national laws.

CIS model investor protection andbank bankruptcy laws

The General Secretary of the CIS Inter-Parliamentary Assembly Council has requestedthat the EBRD assist the Council with thedevelopment of model legislation to improveinvestor protection and bank bankruptcy andliquidation. Model investor protectionlegislation will be designed to provide a morestable investment environment by empoweringnational securities commissions to imposemeaningful incentives and penalties onprofessional market participants and issuers.Model bank bankruptcy and liquidationlegislation will assist with the efficient and fairliquidation of distressed banks. These legalassistance projects will be presented to EBRDmanagement for approval and funding duringthe first half of 2002.

Corporate governance assessment

In November 2001, the EBRD initiated aCorporate Governance Assessment Project,which is expected to provide the Bank with an evaluation of corporate governance in the27 transition countries of central and easternEurope (CEE) and the CIS. Corporategovernance rules will be benchmarked againstthe Organisation for Economic Co-operation and Development (OECD) Principles ofCorporate Governance and best internationalpractice. The assessment conducted under the project will provide the Bank with a detailed

analysis of the laws, regulations, and decreesin the corporate governance sector and willenable the EBRD to identify gaps, conflicts or other deficiencies in the corporategovernance legal framework of the transition countries.

Legal developments

Land Code

On 26 October 2001, the president signed intolaw the new Land Code of Russia, which cameinto effect on 30 October 2001. The new Code,which replaces the 1991 Soviet-era Land Code,codifies the legal relations on land andrepresents a significant development in Russianlegislation. According to the new Code, land andall buildings and structures on it constitute awhole entity and may not be sold or privatisedseparately, except in certain cases. The newCode gives foreigners, under certain conditions,the right to purchase land in Russia and grantsforeigners owning buildings or enterprises inRussia the pre-emptive right to acquire ownershipto the land under such buildings or enterprises.However, the Code prohibits the right to obtainstate-owned land in so-called “perpetual use”following the Code’s entry into force. The Codealso restricts the sale of certain types of valuableland, including farmland and forest land.

Money laundering legislation

On 7 August 2001, the president signed into lawnew measures against money laundering, whichentered into effect on 1 February 2002. The laworders financial organisations to reportsuspicious deals to financial monitoringagencies. At the same time, it makes it anoffence to divulge, for competition purposes,information received by such an agency.Operations by Russian individuals andcorporations outside Russia are subject to jointmonitoring by a specialist Russian agency andsimilar bodies in other countries.

Company law

On 1 January 2002, the Federal Law On theIntroduction of Amendments to the Federal Lawon Joint Stock Companies of 7 August 2001came into force. The Law was amended toensure compliance with the Federal Law on theSecurities Market, to reflect court decisions,improve shareholder protection and creditorrights and to clarify some of the provisions of theearlier version of the Joint Stock Companies Law.

Banking law

On 1 October 2001, the Central Bank DirectiveNo. 1030–U on the Order of Conducting CurrencyOperations Connected with Receipt and Return of Credits and Loans in Foreign CurrencyProvided by Non-residents to Russian Residentsfor a Period of More than 180 days entered

into force. Under this Directive foreign currencyloans provided to Russian residents by non-residents of Russia are exempted from Central Bank licensing.

Civil Code

On 1 March 2002, Part III of the Russian CivilCode entered into effect. This law contains,inter alia, a section on international private lawthat governs issues of applicable law, publicpolicy, choice of law by contracting parties andconflict of law rules. Before the entry into forceof Part III, civil relations between Russian andforeign persons were regulated by theprovisions of the 1964 Civil Code and by thelater 1991 Fundamentals of Civil Legislation.One of the key changes effected by the newsection is the determination of the lawapplicable to immovable property transactionscarried out by foreign persons in Russia, whichprovides that Russian law shall apply tocontracts relating to land and other immovableproperty and prescribes the form of suchcontracts. The new section also prescribes theinstances when the application of foreign law isprohibited on grounds of inconsistencies withRussian public policy considerations, whenthere is an “obvious” breach of Russian publicpolicy. Russian civil legislation, however, doesnot provide a clear definition of “public policy”.


Telecommunications law

At the request of the Russian authorities, the EBRD is providing assistance with respectto draft amendment to the existing FederalCommunications Law. This amendment, whenpassed, will facilitate the development of amodern telecommunications legislative andregulatory framework that will help attractprivate investment and enable the overalldevelopment of the sector. The objective of this project is to assist the Russian authoritiesin introducing legislation that incorporatesinternational best practice. To that end, theBank and its consultant will review the draftamendment to identify legal issues that may be in need of clarification, expansion orrevision and suggest the necessaryamendments or additions. Upon adoption ofthe draft amendment, the EBRD will considerthe provision of further regulatory reformassistance to the Russian authorities aimed at the development of the telecommunicationsregulatory framework and mechanismsreflected in the amended law. It is envisagedthat this additional assistance would coverissues such as interconnection, universalservice and licensing.

Russia

Regional


Corporate Governance Code

The EBRD has been assisting Russia’s FederalCommission for the Securities Market (FCSM)in preparing Russia’s Corporate GovernanceCode. As part of the consultation process, theFCSM presented the draft Code to the inter-national business and investor community in Boston, London, Moscow, New York andWashington D.C. between September andNovember 2001. On 28 November 2001 theRussian Government endorsed the draft Code.The Code’s provisions are of an advisorynature. However, companies will be required to disclose in their annual reports the degreeof compliance with the Code’s provisions. Thedraft Code is available on the internet in bothRussian and English (http://www.rid.ru), and is expected to be finalised by Spring 2002.

Legal developments

Commercial Code

On 3 October 2001, the parliament approvedan amendment to the Commercial Code, whichentered into effect in January 2002. Thisamendment strengthens minority shareholderrights and gives more power to creditors oftroubled firms. The new changes requiremajority shareholders to increase thetransparency of their disclosure by reportingadditional details on company results andmanagement decisions. The amendment, which brings Slovak commercial legislation into line with that of EU member countries,affects both joint stock companies and limitedliability companies. The management of jointstock companies is now required to providepublic access to all documents related to the company’s business license, such ascompany articles, annual financial statementsand auditors reports. The amendment alsoallows minority shareholders with a minimum 5 per cent stake (together or individually) to call special shareholders’ meetings topropose changes to management and to suecompany representatives for mismanagement.

Legal developments

Civil and Commercial Codes

In December 2001, the new umbrella Civil and Commercial Codes were approved byparliament and both Codes will enter into force in January 2003. The Civil Code containsimportant provisions regarding intellectualproperty protection and creditors’ rights. It is composed of eight volumes and coverscontracts, family and inheritance law, propertyrights, copyright and trademarks and privateinternational law. The new Civil Codeintroduces fines for the violation of intellectual

property rights and requires compensation tothe right holder for losses and the return ofprofits made through the illegal use ofintellectual property. The new Civil Code alsoamends the procedures for registeringcopyright and other intellectual property rights.

The Commercial Code covers corporate behav-iour, competition, securities law, insurance,banking and auditing. The Commercial Codeintroduces harsher sanctions that can beimposed on commercial entities for breach of contract, but does not take away from the freedom of parties to stipulate their own damages. The Commercial Code has been designed to operate in connection with the Civil Code.

Land Code

On 13 November 2001, the presidentpromulgated the new Land Code, which cameinto effect on 1 January 2002. The new Codeclarifies land property rights and regulatesrelations based on the principle of the privateownership of land. The long-awaited adoption of the Land Code ends a heated debate on private ownership of rural land, includingagricultural land. The new Code consolidatesexisting, sometimes contradictory, regulationson land relations and clarifies privateownership. It clearly defines land use and the categories of people who may own land.The new Code adopts a liberal definition ofagricultural land, granting the Government the authority to define the procedure forchanging the use of land, and local councilsand regional authorities, rather than parliamentas is currently the case, the authority to approve each case. The Code defines allland as a commodity, which can be acquired,sold, pledged, exchanged, inherited and givenas a gift. However, the sale of land will onlybecome legal at the earliest on 1 January2005. The Code permits the sale of virtually all non-agricultural land to any potential buyer, including foreigners. Foreigners arebarred from acquiring agricultural land inprinciple, while they are entitled to acquire non-agricultural plots if these plots are thelocation for their business activities. It isanticipated that 15 laws and 20 by-laws arerequired to fully implement the new Land Code.The key issues that these laws will deal withinclude land valuation, the establishment of aproperty registry, the use of land as collateral,the creation of a mortgage bank and thedevelopment of bankruptcy procedures.

Deposit insurance law

On 20 September 2001, a new Law on theFund Guaranteeing the Deposits of NaturalPersons was approved and became effectiveon 24 October 2001. The new Law requiresthat all banks holding a banking license inUkraine make an initial payment into thedeposit guarantee fund equal to 1 per cent

of the bank’s registered statutory capital within 30 days of the bank receiving itsbanking license. In addition, each bank mustpay biannually an amount equal to 0.25 percent of the total amount of its deposits,including accrued interest, by 31 Decemberand 30 June of each year.

Financial services legislation

On 22 August 2001, a new Law on FinancialServices and State Control over FinancialServices Markets dated 12 July 2001 cameinto force. The new Law governs the provisionof financial services in Ukraine. Under the Law,a license must be obtained for activitiesrelevant to insurance funds, pension funds, the use of withdrawn funds for provision of financial loans and direct or indirect use of financial assets owned by individuals for the provision of any financial services.

Enforcement of foreign judgements

In December 2001, parliament passed a Law on the Enforcement of Foreign CourtJudgements. The new Law allows foreign court verdicts in civil, labour, family andcriminal cases and also of foreign arbitrationbodies to be enforced in Ukraine by means ofthe State Enforcement Service, which will acton the basis of permission from the districtappeals courts, the Kiev and Sebastopol citycourts and the Crimean Court of Appeal,depending on where the defendant resides.Ukrainian courts may decline enforcement ifthe foreign court decision has not yet takeneffect or the claim is not subject to litigationunder Ukrainian law.

State-enterprises legislation

In December 2001, the president of Ukrainesigned into law a bill imposing a moratorium on the forced sale of assets of companies inwhich the state owns 25 percent or more. The moratorium will remain in effect untilparliament amends the nation’s bankruptcylaws, making it more difficult for creditors to thwart the privatisation of state-ownedenterprises by forcing them into bankruptcyover debts. In the past, creditors could compelthe sale of the state firms’ most valuableassets, often at fire-sale prices, leaving thestate with little of value to privatise. Adoptionof the law came more than six months aftercreditors forced the sale of assets belonging to a handful of Ukraine’s largest state-ownedcompanies, which sales were sharply criticisedby analysts and investors, arguing that theassets were transferred in a non-transparentmanner at prices well below their actual valuesprior to scheduled privatisations. The new lawis seen to protect the interests of both thestate and of potential investors.

Ukraine

Slovak Republic


Legal developments

Currency convertibility regulations

On 22 June 2001, the Cabinet of Ministerspassed a Resolution on Measures for FurtherLiberalisation of the Foreign Exchange Market,which establishes new rules on certaincurrency conversion matters. Amongst otherthings, small and medium-sized enterprises(SMEs) are now exempt from the mandatorysale of convertible currency proceeds and mayexport goods and services for payment in cashin convertible currency. Also, as of 1 July 2001non-SMEs that are subject to the mandatoryconvertible currency sale requirements mustsell 50 per cent of their convertible currencyexport proceeds at the market rate, asopposed to the Central Bank rate.

On 10 July 2001, the Cabinet of Ministerspassed a Resolution on Measures to Organise the Operations of the Over-the-Counter Foreign Exchange Market, designed to improve the cumbersome process ofchanging soums into convertible currency,implementing the 22 June Resolution. The July Resolution puts in place a procedurefor purchasing and selling convertible currencyon the over-the-counter market and establishesnew rules on the conversion of local currencyinto convertible currency.

On 18 July 2001, the Cabinet of Ministerspassed a Resolution on Additional Incentivesfor Liberalisation of Secondary ExchangeMarket which has abolished from 1 August2001 the system of licensing by the CentralBank of foreign currency purchases byimporters of consumer goods. The resolutionstates that companies importing “sociallysignificant” consumer goods and medicine may purchase foreign currency from theauthorised banks within the limits establishedfor each bank per quarter. However, theresolution does not provide a list of the“socially significant” goods and medicine.

Draft production sharing law

During its August 2001 session, parliamentpassed in its first reading the draft of a newLaw on Production Sharing Agreements.Pursuant to the draft Law, foreign investors can obtain exclusive rights to explore andproduce mineral resources in Uzbekistan attheir expense and risk by entering into aproduction sharing agreement. Until the draftLaw is adopted, all proposals for productionsharing agreements continue to requireapproval by specific presidential decree, whichhinders investment. As an alternative, investorshave been strongly encouraged to participate in a joint venture with a domestic entity and to share in the use of such entity’s licenserights. The draft Law, which is anticipated to be adopted by the end of December 2001,constitutes on import development in the legalframework for the exploration and production of mineral resources by foreign investors in Uzbekistan.

Uzbekistan


EBRDLegal Transition Team

David BernsteinChief counsel and head of legal transition team

Craig AverchCounsel, Corporate Recovery/bankruptcy reform

Hsianmin ChenCounsel, Capital market regulation and corporate governance

Frederique DahanCounsel, secured transactions project

Paul MoffattCounsel, telecommunications regulatory reform

Alexei ZverevCounsel, concessions/Russia legal reform

Anila GramshiAssociate, financial market regulation

Joint Vienna Institute (JVI) seminar on business practices, Vienna

In September 2001 the JVI ran a one weekseminar on Western business practices targetedprimarily at Yugoslav private sector executives.The JVI, a training institute established at theinitiative of a number of international organisa-tions including the EBRD, offers a variety ofmanagement courses to individuals from theEBRD’s countries of operations. These coursesare designed to build the basic economic,financial and managerial skills necessary for the transition from centrally planned to marketeconomies. At the seminar on businesspractices, EBRD Associate Banker Marek Lorincoutlined the Bank’s role in transition countries.EBRD Counsel Francis Delaey made apresentation on the contractual frameworkunderpinning project finance transactions and the legal issues arising in connection with such transactions.

OECD Roundtable on corporategovernance in south-east Europe,Bucharest

The Organisation for Economic Co-operation and Development (OECD) and World Bank Group sponsored the first South-east EuropeCorporate Governance Roundtable, which was held in September 2001. The Roundtablewas hosted by the Bucharest Stock Exchangeand the Romanian National SecuritiesCommission. The meeting brought togetherpublic and private sector experts primarily from the countries of south-eastern Europe(SEE), including the chairmen of securitiescommissions and heads of national stockexchanges. The participants discussedshareholder rights and equitable treatment.

The Roundtable provided a forum to sharenational experiences and problems and todiscuss how to adapt various remedies adoptedin OECD countries. The participants agreed that:

■ SEE countries suffer from similar corporategovernance difficulties;

■ weak enforcement of existing laws andregulations is a critical problem throughout the region;

■ improving corporate governance practices will help to develop regional equity markets.

The participants agreed to use the Roundtableprocess to develop a regional White Paper thatwill propose a set of practical recommendations,which can serve as a means to set priorities forimplementing corporate governance reform atthe national and corporate level.

The next SEE Roundtable on CorporateGovernance is scheduled for May 2002 in Bulgaria and will focus on issues oftransparency and disclosure.

United Nations Commission onInternational Trade Law (UNCITRAL)sessions on secured transactions,Vienna

At its 34th session in July 2001, UNCITRAL’ssecured transactions Working Group met anddecided to prepare a legislative guide on securedtransactions. The Working Group agreed that the guide would adopt an integrated approach to secured transactions by including generalrules applicable to tangible assets and then identifying any different rules necessary for intangible assets. This was the preferredapproach because, in practice, a securitypackage is likely to include both tangible and intangible assets. In December 2001, an Expert Group met in Vienna to begin

developing a first draft of the securedtransactions legislative guide. At the ExpertGroup meeting it was decided that the first draft of the guide would be prepared in time to be discussed at the joint Commercial FinanceAssociation-International Bar Association-UNCITRAL colloquium in March 2002 in Vienna.A revised draft of the legislative guide would then be prepared for the next Working Groupmeeting in New York on 20–24 May 2002.

UNCITRAL Privately FinancedInfrastructure Projects Working Groupand Experts Group meetings, Vienna

As part of its ongoing programme on privatefinancing for infrastructure projects, UNCITRALhas established a Working Group with the task of drafting core model legislative provisionsbased upon recommendations contained in the UNCITRAL Legislative Guide for PrivatelyFinanced Infrastructure Projects. These model provisions are intended to serve as an addendum to the Guide. This decision reflects the significant demand for modellegislative provisions to provide specificguidance to countries in the process of enacting new legislation or revising existinglegislation, particularly in developing andtransition countries.

In September 2001, the Working Group held its first session and is expected to have itssecond meeting in September 2002. In order to begin drafting the model legislative provisions,UNCITRAL formed an Experts Group which met in Vienna in January 2002. During the ExpertGroup meeting, a first draft of the provisionsprepared by the UNCITRAL Secretariat wasdiscussed and debated. EBRD Counsel, AlexeiZverev, is a member of both the Working andExpert Groups.

Legal transitionevents


Russian Corporate Governance Codeseminar, London

On 22 October 2001, the EBRD hosted aseminar to introduce the draft of Russia’sCorporate Governance Code at its Londonheadquarters. The EBRD, with funding from theGovernment of Japan, is working with Russia’sFederal Commission for the Securities Market(FCSM) to help develop the CorporateGovernance Code. The seminar was opened byEBRD First Vice President, Noreen Doyle, andmoderated by EBRD General Counsel, EmmanuelMaurice. FCSM Chairman Igor Kostikovpresented the draft Code to representatives ofthe business, investor and legal communities in the UK, with a particular interest in Russia.Alexei Zverev, EBRD Counsel, and lawyers fromCouderts Brothers, representing the consultants’consortium, discussed the issues raised duringthe drafting process and preparation of the draft Code. The speakers provided a detailedoverview of the draft Code and its implicationsfor business development in Russia. Interestedparticipants were invited to comment and to take part in consultations on the draft Code.

Presentations to the Japan Institute for Overseas Investment and JapaneseBar Association, Tokyo

On 10 December 2001, the Japan Institute for Overseas Investment (JOI) hosted a seminarat which EBRD General Counsel EmmanuelMaurice gave a presentation on the issue of concessions and public-private partnerships in central and eastern Europe. He outlined theresults on concession law development from the EBRD’s annual Legal Indicator Survey. The seminar was chaired by Yutaka Yokoyama,Deputy Director of the JOI, and the audienceconsisted of members of the Japanesegovernment and business communities. On thesame day, the Japanese Bar Association held aseminar on contract enforcement. EmmanuelMaurice made a presentation on the EBRD’sexperiences in contract enforcement in thetransition countries as part of a panel of experts.The Bar Association seminar was attended by leading members of the Japanese legalcommunity, including legal academics.

UNCITRAL Insolvency Law WorkingGroup, Vienna

UNCITRAL held a session of its Working Group on insolvency law in Vienna in December 2001.The EBRD was among a select number of organisations invited to attend the Working Group’s session as an observer.

UNCITRAL has undertaken an ambitious task of preparing: (i) a comprehensive statement of key insolvency law objectives and core

provisions of an effective and efficient insolvencyregime; (ii) a legislative guide on insolvency law;and (iii) alternative approaches to out-of-courtinsolvency procedures. Despite the significantamount of progress made at the session, morework is required. Accordingly, UNCITRAL hastentatively established another meeting of the Working Group for May 2002 in New York.

OECD Corporate GovernanceRoundtable for Russia, White Paper on Corporate Governance, Moscow

In January 2002, the OECD hosted a session of its Russian Corporate Governance Roundtablein Moscow in order to finalise the Roundtable’sWhite Paper on Corporate Governance. The White Paper is the product of two years of debate and discussion between Russian and international experts that have participatedin the four meetings of the Roundtable. It is an agenda for action addressed to all the key players of corporate governance reform in Russia: the government, regulators, judges,professional associations, investors, andcorporate boards and management. At the January meeting, a small group ofrepresentatives from key Russian private and public sector bodies and internationalorganisations, including the EBRD, met to discuss two new White Paper chapters on boards of directors and stakeholders. Therepresentatives also reviewed comments on theWhite Paper provided since the last Roundtablemeeting and agreed on comments needed tofinalise the Paper. In addition, the Roundtableparticipants adopted priorities for the implemen-tation of the White Paper recommendationsprepared by the OECD. The final version of the White Paper on Corporate Governance in Russia was presented to an audience ofsenior Russian and international decision-makers from the public and private sectors inlate March 2001.


page

1 ForewordNoreen Doyle, First Vice President, Banking, EBRD

2 Ten years of progress for intellectual property rights in transition countriesJenö Bobrovszky, Acting Director, Division for Co-operation with certain Countries inEurope and Asia, World Intellectual Property Organisation

10 Fighting corruption through an independent judicial systemPeter Eigen, Chairman, Transparency International

16 European energy security and co-operation: the Energy Charter Treaty and itsProtocol on TransitKarl Petter Waern, Senior Expert, the Energy Charter Secretariat

23 The EU acquis communautaire and the position of employees in the event oftheir employer’s insolvency: a comparison of statutory regulationsMario Thurner, Managing Director, and Anton Kraft, Project Manager Research, Centre ofLegal Competence

30 Focus on south-eastern Europe

31 Private sector development and the role of the EBRD in south-eastern EuropeOlivier Descamps, Business Group Director, EBRD

39 Reforming the legal environment in post-conflict societies: legal and policyaspects of the EBRD’s activities in south-eastern EuropeKamen Zahariev, Senior Counsel, EBRD

44 Survey of judicial codes of conduct in south-eastern EuropeAngela K. Conway, Country Director, & Amanda Gilman, Program Associate, AmericanBar Association – Central and East European Law Initiative

51 Mobilising the private sector in municipal infrastructure projects in south-eastern EuropeKalo & Associates, Eurolex Bulgaria, Law Office Bogdanovic & Dolicki, Law OfficePolenak, Nestor Nestor Diculescu, Karanovic & Nikolic Advokati

62 Romania’s legal regime for security interests in personal propertyCristiana I. Stoica and Valeriu Stoica, Stoica & Associates

67 Bulgaria: from paper-based registries to electronic, central registriesStephan Z. Kyutchukov, Partner, Djingov, Kyutchukov & Velichkov

72 Legal transition developments

78 Legal transition events

General Counsel of the EBRDEmmanuel Maurice

Co-Editors-in-Chief Gerard Sanders, David Bernstein

Focus EditorKamen Zahariev

Production EditorsAnila Gramshi, Nadia Hadjova

SupportRichard Bate, Sandy Donaldson,Adrian Jonker, Anthony Martin,Olivia Oddi, Jon Page,Tabitha Sutcliffe

The Office of the General Counselgratefully acknowledges the generoussupport of the Government of theNetherlands for funding the production of this issue of Law in transition.

Law in transitionSpring 2002

The European Bank for Reconstruction and Development (EBRD) is an international institution

whose members comprise 60 countries, the European Community and the European Investment Bank.

The EBRD operates in the countries of central and eastern Europe and the Commonwealth

of Independent States committed to multiparty democracy, pluralism, and market economies.

The EBRD’s countries of operations are: Albania, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina,

Bulgaria, Croatia, Czech Republic, Estonia, FR Yugoslavia, FYR Macedonia, Georgia, Hungary, Kazakhstan,

Kyrgyzstan, Latvia, Lithuania, Moldova, Poland, Romania, Russian Federation, Slovak Republic, Slovenia,

Tajikistan, Turkmenistan, Ukraine and Uzbekistan.

The EBRD works through the Legal Transition Programme, which is administered by the Office

of the General Counsel, to improve the legal environment of the countries in which the EBRD operates.

The purpose of the Legal Transition Programme is to foster interest in, and help to define, legal reform

throughout the region. The EBRD supports this goal by providing or mobilising technical assistance for

specific legal assistance projects which are requested or supported by governments

of the region. Legal reform activities focus on the development of the legal rules, institutions and

culture on which a vibrant market-oriented economy depends.

Law in transition is a publication of the Office of the General Counsel of the EBRD. It is published twice a year and is available in English and Russian. The editors welcome ideas, contributions and letters, butassume no responsibility regarding them. Submissions should be sent to David Bernstein, Office of the General Counsel, EBRD, One Exchange Square, London EC2A 2JN, United Kingdom; or [email protected]

The contents of Law in transition are copyrighted and reflect the opinions of the individual authors and do notnecessarily reflect the views of the authors’ employers, law firms, the editors, the EBRD’s Office of the GeneralCounsel or the EBRD generally. Nothing in the articles should be taken as legal advice.

© European Bank for Reconstruction and Development, Spring 2002.

All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means,including photocopying and recording, without the written permission of the copyright holder. Such written permissionmust also be obtained before any part of this publication is stored in a retrieval system of any nature.

European Bank for Reconstruction and DevelopmentOne Exchange SquareLondon EC2A 2JNUnited KingdomTel: +44 20 7338 6000Fax: +44 20 7338 6100http://www.ebrd.com

Law in transition is printed on Hannoart matt which is an environmentally responsible paper. The pulp used in its manufacture is taken from sustainable forest sources and is 100% TCF (Totally Chlorine Free).

The report is printed by Hyway Printing Group, London, using the waterless offset litho process. Hyway hold the ISO 14001 international standard for effective management of environmental impact including wasteminimalisation and recycling.

Ref: 5188 Law in transition, Spring 2002.