Chapter 7. Public governance

This chapter first provides an overview of recent advances and remaining challenges relating to regulatory quality, drawing on the recent OECD Regulatory Review of Croatia. In particular, it considers how Croatian authorities review existing regulation and introduce new ones. It also provides an overview of the situation regarding corruption in Croatia: perceptions, criminal and preventive measures in place, and outstanding issues. In particular it analyses the measures to enhance public integrity that have proven effective and successful. The chapter also explores what the government, business associations and individual companies do in order to strengthen business integrity, with a particular focus on anti-corruption measures.

The quality of public governance has a significant influence on the climate for business and investment. Poorly designed or loosely applied regulations can slow business responsiveness, divert resources away from productive investments, hamper or delay entry into markets, reduce job creation and generally discourage entrepreneurship. From an investor’s perspective, regulatory policy should provide strong guidance and benchmarks for action by officials and set out what investors can expect from government regarding regulation. From the citizens’ point of view, regulation influences the quality of public services by shaping the behaviour of public and private actors, and can influence citizens’ involvement in policy-making. The quality of public services also significantly influences the investment climate as well as citizens’ life. In this regard, policies to ensure the transparency, predictability and effectiveness of the regulatory framework for investment are essential to reduce or eliminate potential or existing obstacles faced by companies when they consider investing in a country.

Integrity is also a crucial determinant of a favourable investment climate. Comparative evidence suggests a link between trust in politicians and public officials, both from the business community and citizens, and the perception of corruption. Integrity tools and mechanisms, aimed at preventing corruption and fostering high standards of behaviour, help to diffuse concerns by investors when considering investing in a country. Bribery and corruption also undermines the rule of law and the ethical values upon which democratic societies and their institutions are founded.

Ever since the end of the Homeland Wars, Croatia has made significant progress in stabilising the rule of law, increasing political stability as well as improving the regulatory quality, control of corruption and government effectiveness. Croatia has also made important strides in improving the quality of its regulatory processes, including through introducing regulatory impact assessment (RIA) and consultation requirements for primary legislation. The country has also significantly improved its anti-corruption framework, leading in particular to high profile prosecutions of senior members of previous governments

Despite the many encouraging steps taken, an unstable regulatory framework and burdensome administrative procedures still remain one of the most important constraints to doing business in Croatia. This is reflected in particular in the consistency with which existing ex ante assessment and consultation requirements apply to laws and regulations created at different levels of government. Croatia's public governance also suffers from the fragmentation of competences and from not always well-defined lines of accountability. Croatia has a rather complex and multi-layered network of public bodies and regulations. Such a multi-layered public administration creates a cumbersome and confusing environment for businesses and individuals who have to navigate through it.

The country also suffers from a negative image with respect to corruption. There are in particular strong suspicions of favouritism and political connections, especially at the local level, despite some significant steps taken by the government for ensuring the integrity of the country’s administrative and political system, including through the adoption of standards of public ethics; substantial reforms to enable a more transparent decision-making process; and stronger legal provisions on political party funding. Tailor-made specifications for particular companies and unclear selection or evaluation criteria are also believed to be widespread practices in public procurement.

Regulatory quality

As noted in the introduction to this Chapter, the quality of public regulation has a significant influence on countries’ investment climate. Well-designed regulations help entry into markets, facilitate job creation and encourage entrepreneurship. The benefits of high-quality regulation at one level of government might nevertheless be undermined by low-quality regulation at lower levels of government. To eliminate unnecessary regulatory divergences that create additional burdens on investors and to address national and county and municipal levels challenges pertaining to systemic risks (e.g. the environment, and human health and safety), governments need to better articulate regulations across different levels of government. These and other aspects related to the quality of public governance, horizontal to all aspects of the country’s investment climate, are discussed below.

Regulatory policy-making and quality

As captured by the World Bank’s World Governance Indicators, available for 155 economies globally since 19961 (Figure 7.1), Croatia has made progress in improvements in the rule of law, control of corruption, regulatory quality and other related aspects since mid-1990s. Still, it has been scoring below the EU average on the same indicators (Figure 7.2). Furthermore, the EU polls suggest that the level of trust in the government was among the lowest in the EU (only 15% reported to tend to trust the government in 2018). In addition, as highlighted in Chapter 6, several EU reports have highlighted the need to strengthen the government’s effectiveness, reduce administrative burdens and improve the regulatory quality in Croatia (European Commission, 2016-2018).2

Croatia has taken these grievances seriously. In the past years the government has undertaken or announced several reforms to improve the overall quality of regulatory processes. Moreover, in 2018-19 Croatia undertook a dedicated review of its regulatory policies (OECD, 2019b) to identify the issues at stake and reforms to be considered. The review assesses regulatory management capacities in Croatia, using the OECD Recommendation of the Council on Regulatory Policy and Governance (OECD, 2012) as a benchmark (see Box 7.1 Additionally, the OECD report on Better Regulation Practices across the European Union (OECD, 2019a) addresses steps taken by Croatia to improve its regulatory processes. Both reports (OECD, 2019a and OECD, 2019b) highlight several issues of relevance to this Review (see Figures 7.3 and 7.4 for a summary).

Figure 7.1. Overview of World Governance Indicators scores for Croatia, 1996-2017

Figure 7.2. Government effectiveness in Croatia and EU 28 according to the World Bank World Governance Indicators*

Overall, Croatia has made strides in improving the quality of its regulatory policy framework. First, as explored in more detail in the section below, Croatia has improved procedures for stakeholder consultation for developing new regulations, an aspect that has been raised as important by several stakeholders consulted in the process of this Review. This is reflected in a high score on OECD Indicators of Regulatory Policy and Governance pertaining to stakeholder consultation in developing new laws and subordinate regulations (Figure 7.3). Still, some issues are being raised as challenging, notably the consistency of application of consultation requirements in practice, in particular in early stages, and the ease of access of a diverse group of stakeholders to the regulating authorities in the process of preparing draft laws and regulations. Further progress on both aspects, in particular when important pieces of legislation are being developed, would be welcome.

Secondly, according to OECD (2019a) and OECD (2019b), Croatia has also introduced the use of ex ante Regulatory Impact Assessment (RIA). In 2017, a new RIA law entered into force. Currently, a full RIA has to be conducted for laws with a potentially high impact, requiring regulators to assess a broad range of environmental and social impacts. If deemed necessary, a test analysing the impacts on SMEs is also undertaken by the Ministry of Economy, Entrepreneurship and Crafts, focusing mostly on administrative costs.

This does not apply to secondary regulations, however, highlighting an important remaining gap that Croatia may wish to address in the future (Figure 7.2). In addition, RIAs conducted by different bodies at the national level are still not of sufficient quality, partly due to a lack of analytical capacity in ministries (OECD, 2019a and OECD, 2019b). According to the stakeholders consulted in this Review, the predominant approach to the conduct of RIA is still legalistic and perceived as a formality and a “second-rate task” by the responsible authorities (Petak, 2015). Conscious of this problem, the government is taking steps to increase the awareness of the importance of RIAs among relevant government bodies. In this context, Croatia could build on its efforts and consider creating analytical centres with “RIA champions” in the most important ministries in order to strengthen internal capacities (OECD, 2019a and OECD, 2019b).

Croatia has also not yet developed systematic approaches towards ex post evaluations of regulations, neither at the level of primary laws nor subordinate regulations, only along few other EU countries. As such, and as outlined in Chapter 6, administrative burdens are still quoted as one of more significant barriers to doing business in the country. Currently, ex post reviews of regulation are limited to administrative burden reduction and ad hoc recommendations from working groups. As highlighted in both OECD reports on regulatory quality in Croatia, the government should envisage targeted ex post reviews focusing on the performance of regulations or on particular sectors to achieve progress (OECD 2019a and OECD, 2019b). This could help address some of the issues raised in chapter 6 of this Review, relating to administrative barriers to investment, on a more long-term basis.

Box 7.1. Recommendation of the OECD Council on Regulatory Policy and Governance

On 22 March 2012, the Council of the OECD adopted the Recommendation of the Council on Regulatory Policy and Governance (OECD, 2012). The Recommendation was the first international instrument to address regulatory policy, management and governance as a whole-of-government activity that can and should be addressed by sectoral ministries, regulatory and competition agencies.

The Recommendation sets out the measures that Governments can and should take to support the implementation and advancement of systemic regulatory reform to deliver regulations that meet public policy objectives and will have a positive impact on the economy and society. These measures are integrated in a comprehensive policy cycle in which regulations are designed, assessed and evaluated ex ante and ex post, revised and enforced at all levels of government, supported by appropriate institutions.

Many topics such as consultation and citizen engagement, regulatory impact assessment, multi-level coherence, risk and regulation, institutional responsibility for policy coherence and oversight, and the role of regulatory agencies are developed more fully and more practically than in the earlier guidance of the 1995 and 2005 OECD principles.

Together the principles in the Recommendation provide countries with the basis for a comprehensive assessment of the performance of the policies, tools and institutions that underpin the use of efficient and effective regulation to achieve social, environmental and economic goals. Through its work programme, the Regulatory Policy Committee supports countries to implement the principles in the Recommendation. In particular, the OECD Regulatory Policy Reviews assess regulatory management capacities in different countries, including policies, tools and institutions for ensuring regulatory quality, using the Recommendation as an assessment framework.

Croatia underwent such a Review in 2019 (OECD, 2019b), which is publically available on the OECD website. Croatia is included in the OECD report on Better Regulation Practices across the European Union (OECD, 2019a).

Figure 7.3. Indicators of Regulatory Policy and Governance (iREG): Croatia, 2018

Table 7.1. Requirements to use regulatory management tools for EU-made laws: Croatia
Stakeholder engagement		Regulatory impact assessment
Development Stage
The government facilitates the engagement of domestic stakeholders in the European Commission’s consultation process	No
Negotiation stage
Stakeholder engagement is required to define the negotiating position for EU directives/regulations	No	RIA is required to define the negotiating position for EU directives/regulations	No
Consultation is required to be open to the general public	No
Transposition stage
Stakeholder engagement is required when transposing EU directives	Yes	RIA is required when transposing EU directives	Yes
The same requirements and processes apply as for domestically made laws	Yes	The same requirements and processes for RIA apply as for domestically made laws	Yes
Consultation is required to be open to the general public	Yes	RIA includes a specific assessment of provisions added at the national level beyond those in the EU directives	No
		RIA distinguishes between impacts stemming from EU requirements and additional national implementation measures	No
Source: OECD Indicators of Regulatory Policy and Governance (iREG) 2018 and its extension to all EU member states, http://oe.cd/ireg, see OECD (2019a).

Stakeholder engagement and transparency of policy-making

Businesses have been regularly calling for more frequent consultations on draft regulations and laws. Some business associations have been advocating for greater involvement of Croatia's business sector as well as of foreign investors in Croatia’s policy-making (Foreign Investors Council, 2016, 2017 and 2018). Croatia has made strides to engage citizens and other interested parties in decision-making.

One step in this direction was the introduction, in 2009, of formal consultations with the interested public. Two years later, the 2011 Regulatory Impact Assessment Law introduced mandatory public consultations on new regulations. Another step towards ensuring greater involvement of citizens and business in policy-making were the amendments to the Government’s Rules of Procedure (Official Gazette no. 54/11, no. 121/12, no. 7/13, no. 61/15, no. 99/16, no. 57/17). They confirmed that public consultations are an integral part of decision-making process on the level of the Croatian Government.

A further step towards improving the framework for consultations was taken in 2013 with the adoption of the Law on the Right of Access to Information (Official Gazette no. 25/2013, as amended). The act stipulates that all state administration bodies responsible for drafting laws and subordinate regulations must publish draft regulations about which the consultations with the interested public are conducted on the central state portal “e-Consultations” e-Savjetovanja for a period of 30 days (Table 7.2-7.3). In practice, major draft regulations are published for consultation on the platform (OECD, 2019a). Qualified authority responsible for drafting regulation can voluntarily go beyond legally defined time limits, but practice also varies widely due to management or capacity of the different bodies involved in the process or circumstances (elections, adoption of the state budget). For example, in 2016 public consultations for Labour Act Amendments took almost a year, and for the whole tax package three days. As such, ensuring greater homogeneity in respecting consultation requirements across different agencies appears to still remain a challenge.

After the consultation, the state administration bodies are required to publically notify the interested public through the central state portal for public consultations on which they publish a report on the conducted consultation that they submit to the Government. RIA statements are also made available alongside major draft primary laws for comments. The central internet portal for public consultation has been functioning since the spring of 2015. Since then, the number of regulations and draft laws open to the public has constantly increased. Croatia also makes use of ad hoc working groups including representatives from civil society, businesses and academia early in the process. As such, today, Croatia has one of the most advanced legal frameworks for public stakeholder consultations among the EU Members (see Figure 7.4 and OECD, 2019a and OECD, 2019b), even though issues, related primarily to the consistency of application of consultation and an ex ante assessment processes when drafting new laws and regulations in particular at the subordinate level, are stressed as problematic by business as well as by the European Commission (AmCham, 2018; Foreign Investors Council, 2017; European Commission, 2018a).

Table 7.2. Minimum periods for consultations in EU member states
	No minimum period	1-3 weeks	4-5 weeks	6 weeks	12 weeks
Primary laws	Czech Republic; Denmark; France; Germany; Ireland, Malta; United Kingdom	Hungary; Latvia; Lithuania; Poland; Romania; Spain	Belgium; Bulgaria; Croatia; Cyprus; Estonia; Greece; Italy; Luxemburg; Netherlands; Portugal; Slovak Republic; Slovenia;	Austria; Finland	Sweden
Subordinate regulations	Czech Republic; Denmark; Germany; Greece; Ireland, Malta; United Kingdom	Hungary; Latvia; Lithuania; Poland; Romania, Spain; France	Belgium; Bulgaria; Croatia; Cyprus; Estonia; Italy; Luxemburg; Netherlands; Portugal; Slovak Republic, Slovenia;	Austria; Finland	Sweden
Note: Data is based on 28 EU member states.
Source: Indicators of Regulatory Policy and Governance Surveys 2014 and 2017, and the extension to all EU member states, http://oe.cd/ireg, see OECD (2019a).

Table 7.3. Selected consultation portals in EU member states
EU member state
Austria	Since September 2017, all draft primary laws are available on the website of Parliament together with a short description of the legislative project in accessible language, the RIA and other accompanying documents. The public can submit comments on the draft regulation or support comments made by others online.
Croatia	On the interactive consultation portal e-Savjetovanja, major draft regulations are published for consultation for a minimum of 30 days. The website allows the public to provide general feedback on the draft or to provide comments on the individual articles of a draft regulation. The comments are publicly displayed alongside the draft, allowing other members of the public or policymakers to react. For major draft primary laws, RIA statements are also made available for comments.
Estonia	The Electronic Coordination System for Draft Legislation (EIS) tracks the development of all Estonian and EU draft legal acts, and makes available RIAs and documents of legislative intent (describing the problem to be addressed, analysing policy options and determining initial likely impacts). The website www.osale.ee/ is an interactive website of all ongoing consultations where every member of the public can submit comments on legislative proposals or other policy documents prepared by the Government and review comments made by others. EIS and www.osale.ee/ are linked, i.e. EIS takes into consideration opinions submitted via www.osale.ee/ and provides a direct link to them.
Greece	The Greek Government publishes draft laws and explanatory material on its central consultation portal to the general public. It allows the public to comment separately on individual proposed clauses in a virtual ‘discussion room’ where members of the public and policymakers can react and add further comments. Comments received during the consultation period are presented to the Greek Parliament, along with the draft law and other relevant materials.
Netherlands	Major draft regulations are published on the Dutch central consultation portal http://www.internetconsultatie.nl/, with the possibilities for the public to visibly publish comments on the drafts was well as a summary of the impact assessment. The use of the website has been further promoted in recent years and is more frequently used to consult also on policy documents informing about the nature of the problem and possible solutions.
Note: Data is based on 28 EU member states.
Source: Indicators of Regulatory Policy and Governance Surveys 2014 and 2017, and the extension to all EU member states, http://oe.cd/ireg.; OECD Pilot database on stakeholder engagement practices in regulatory policy. See www.oecd.org/gov/regulatory-policy/pilot-database-on-stakeholder-engagement-practices.htm, and OECD (2019a).

Figure 7.4. Composite indicators: Stakeholder engagement in developing primary laws, 2018

Ensuring fair access of stakeholders to the government authorities indeed appears to be a remaining concern in Croatia. Over the past two decades Croatia has created new procedures and institutional arrangements to accommodate a wider set of stakeholders and opinions. For example, the National Competiveness Council includes representatives of business as well as trade unions and academia (see Box 7.2) and tripartite social dialogue has been institutionalised through the Economic and Social Council (Gospodarsko-socijalno vijeće/GSV). Still, according to some local observers of Croatia’s politics, transparency in selection into various groups that are being consulted is at time lacking and many informal networks – and this would include large companies and business associations – would weight over policy directions (European Commission, 2018a). Meanwhile, as highlighted further down in this Chapter in relation to Croatia’s anti-corruption policies as well as in Chapter 8, the influence of civil society, in comparison with these networks, would be weak, except in some policy areas such as human rights and environmental protection.

Participation of stakeholders in the agenda setting at the regional (counties) and local level also appears to be challenging. For sure, local governments vested with public authority are expected to carry out public consultations online, via their internet sites. Despite such participatory channels – when they actually exist- stakeholder’s involvement in the decision process remain reportedly uneven (Koprić and Klarić 2015; European Commission, 2019a).

Box 7.2. National Competitiveness Council – NCC (Nacionalno vijeće za konkurentnost)

The National Competitiveness Council was established in 2002 at the initiative of the Croatian business society and the Croatian Employers' Association and on the basis of a decision of the Government of the Republic of Croatia in response to the challenges that the country was facing at the beginning of the 21st century. These challenges included the process of globalization, the transition to a market economy and strengthening the competitiveness of the private and public sectors in Croatia.

The Council is an independent advisory body comprised of 24 members and four key interest groups – the business sector, government, trade unions, and the academic community – with the goal of creating dialogue, partnership and consensus on programs and policies that are critical to the sustainable growth and development of the country.

The goals of the Council are:

to act to increase the competitiveness of the Croatian economy
to make Croatia one of the 40 most competitive economies in the world

To achieve these goals the Council acts:

by encouraging policies for reform
by recommending and creating guidelines for development policies
by constructing coalitions with stakeholders that support reform
by increasing public understanding of and support for reforms
by encouraging dialogue between the public and private sectors
by expanding knowledge of the importance of competitiveness
by monitoring and evaluating reforms that have been implemented

The fragmentation of the public administration complicates business operations

Croatia suffers from additional shortcomings and complications for business operations due to the fragmentation of administrative procedures and institutions, which hinders the delivery of public services and the provision of quality regulation. Over the past two decades there has been an exponential increase in the number of institutions vested with public powers to perform specific tasks (European Commission, 2016). Croatia has three levels of public governance: central, regional (counties) and local level (municipalities and towns) (Box 7.3).

Because of Croatia’s internal administrative structure, there are different bodies at central and local levels involved in similar tasks and insufficient coordination for effective operation. The institutional set-up for investment promotion and facilitation policy at the central level of government is illustrative of this. Until January 2019, two national-level agencies had similar types of competences relating to investment attraction, with a division of labour grounded in the size of the investor serviced, a set up that is not typically found in OECD countries, as discussed in Chapter 6. The degree of coordination with other relevant ministries, such as with the Ministry of Foreign and European Affairs (MOFEA) is also believed to be low, as ascertained during interviews conducted in the process of this Review, even though MOFEA has relevant competencies and disposes of a network of embassies and consulates abroad that are of high relevance to investment promotion and facilitation.

Box 7.3. Levels of government in Croatia

Croatia is a unitary state with three levels of government: central, regional (counties – županija) and local (towns and municipalities – grad and općina).

Structure

The administration at central level consists of 20 ministries, five central state offices, 13 government offices, and seven state administrative organisations. The functions of central state administration agencies are performed through a network of 1279 branch offices of ministries and other central state administration offices in counties, cities, and municipalities. Another 20 first-line offices of state administration, tasked with the functions related to the county-level administration, operate in counties. 91 deconcentrated offices and 302 registry offices operate in municipalities and small towns.

In addition to the central level of government, Croatia has 20 counties (plus the City of Zagreb), 428 municipalities and 127 towns.

Competencies

The state administration has jurisdiction over areas such as economic affairs and management of state assets; finance, tax and customs; regional development and policy; energy and electricity; water policy and management; public transport (e.g. highways, railways, air traffic). Jurisdiction over spatial planning, land registry office (cadastre) and environmental protection is shared with counties and towns and municipalities

Pursuant to Article 135 of the Constitution and the Law on Local and Regional Self-Government, counties have jurisdiction over regional affairs, including economic development and tourism (counties’ strategic plans and regulations), zoning and urban planning, transport and transport infrastructure, public roads maintenance, and issuance of construction permits.

Towns and municipalities have jurisdiction over local affairs, such as utilities, urban planning, consumer protection, protection of environment, management of local assets, and other similar domains. So-called “large cities”, i.e. local units/cities with more than 35 000 inhabitants, in addition to the above competencies, carry out maintenance of public roads and issuance of construction permits.

Source: Croatia (2018), European Commission (2018a)

This problem is exacerbated by the fact that counties also have roles with regards to investment promotion. They are responsible for (regional) economic development, which includes promotion of investment in tourism (see Box 7.3 above). In addition, separate entities offer investment facilitation solutions at the sub-national level (e.g. HAMAG-BICRO’s one stop shop services centres, HITRO.HR one-stop shop solutions within the Financial Agency offices, etc.) Such overlapping network of bodies and entities underlies the absence of one single vision for investment promotion as noted in Chapter 6, and is likely to confuse potential investors. As the first step, the government may wish to ensure that it has a full understanding of different actors involved and services offered on investment promotion and facilitation at the sub-national level to attempt to develop more coordinated approaches to communicating with investors.

Croatia’s administrative fragmentation also impacts the quality of service delivery at local level because of scare resources of most local governments. Almost 51% of local governments have less than 3 000 inhabitants, and some additional 20% have fewer than 5 000 inhabitants. As a result, their ability in providing high quality public services is often limited, except in the case of the largest cities. One example is the city of Zagreb, which, according to local observers, has the best organizational capacities among local governments. Elsewhere, the provision of local services is often poor, leaving entrepreneurs and citizens with limited access to effective local public services (European Commission, 2018a).

A sheer reduction of administrative bodies is, however, not necessarily the right approach, and should be approached with caution. For example, as part of recent measures aiming at rationalising the number of state bodies and agencies at the national level, Croatia has abolished 54 central-government level agencies. One of the abolished agency was the Agency for Investments and Competitiveness (AIK) responsible for attraction of large private and public-private investment projects, analysed in Chapter 6. It appears that abolishment has been primarily driven by a desire to downsize public administration but appears not to have been preceded by a reflection on the future functioning of a department within the Ministry of Economy, Entrepreneurship and Crafts that took over the agency’s tasks. As argued in Chapter 6, while such a change may potentially be used by the government to rethink, and improve, the institutional set up for investment promotion in the country, it also involves a number of risks, which should be considered before the reform is decided on.

Corruption

Additional mechanisms are important to reduce potential and existing obstacles faced by companies when they decide to invest. These obstacles include the risk of corruption when interacting with government officials.

Corruption continues to be perceived by foreign investors and domestic entrepreneurs as an issue in Croatia, despite strong anti-corruption efforts over the past decade, which in particular have resulted in high-profile prosecutions of senior members of prior governments. Croatia has made laudable efforts in combatting corruption. In its latest monitoring report on Croatia's state of preparedness for EU membership, the European Commission acknowledged progress made by Croatia.3 The Group of States against corruption (GRECO) of the Council of Europe has also regularly commended in its reports Croatia's achievements. Croatia is also one of the best performing countries among members of the OECD Anti-Corruption Network for Eastern Europe and Central Asia (ACN), a network that supports countries of Eastern Europe and Central Asia in their efforts to prevent and fight corruption.

Despite important efforts invested by Croatia, both in preparation for its accession to the EU and since then, the country still suffers from a negative perception with respect to corruption. According to the 2017 Flash Eurobarometer on businesses' attitudes towards corruption in the EU, 92% of respondents operating in Croatia described corruption as widespread (EU-28 average: 67%).4 In another survey, conducted by a private consulting firm between November 2016 and January 2017 in 41 countries across Europe, the Middle East, India and Africa, the proportion of company respondents in Croatia perceiving corruption as widespread in doing business in the country was 79%, at par with other EU countries such as Greece, Hungary, and Slovakia and non-European nations such as India, Kenya and South Africa.5 According to the 2017–18 Global Competitiveness Report, corruption was identified as the fourth most problematic factor for doing business in Croatia.6 According to another survey, also conducted in 2017, one fifth of business respondents considered that corruption was still one of the biggest shortcomings when it comes to business conditions in Croatia compared to other countries in the region.7

Reportedly, corruption has affected first SMEs and, with some notable and much newsworthy exceptions, has primarily taken the form of "grease" payments, i.e. bribes or unofficial payments of a small amount to secure or expedite the performance of a routine or necessary action (UNODC, 2013). Investors have also pointed out favouritism and political connections, especially at local level, as undermining Croatia’s business environment. Businesses and the public have in general viewed local and regional governments as particularly vulnerable to corruption, notably due to the fact that they manage their own budget from which they can spend a significant portion on public procurement projects, and that they are empowered to grant high-value licences and permits such as construction permits (see Box 7.3 above).

Combatting corruption, cronyism, favouritism requires simultaneous actions in many areas and by many national institutions, encompassing both preventive and repressive measures. In this regard, Croatia, in line with best practices, has followed a holistic approach, engaging in important reforms with a view to strengthening repressive measures and enhancing good governance, transparency and accountability in public service. Individual reforms have been embedded in a series of long-term anti-corruption strategies, which have been seen as integral parts of Croatia's national development objectives. In addition, Croatia has established an institutional structure for the monitoring of anti-corruption measures – the Committee for the Monitoring of the Implementation of Anti-Corruption Measures (presided by the Minister of Justice) and the National Council for Monitoring of the Implementation of the Anti-Corruption Strategy (body of the parliament).8

Effective prosecution and sanctioning of corruption

Significant progress has been achieved over the past 15 years as regards adoption of criminal legislation and establishment of agencies and law enforcement mechanisms specifically dedicated to the detection, prosecution and sanctioning of corruption. Croatia's actions have been guided inter alia by its obligations under the UN Convention Against Corruption and other relevant Council of Europe and EU instruments, to which it is a party. Modern legislation has been in place for several years, largely meeting the standards of the Council of Europe, the European Union and the United Nations, and relying upon a penal code that presents a range of offences each covering offending of a particular kind, as well as a Corporate Criminal Liability Act (Official Gazette no. 151/2003), which makes companies criminally liable for corrupt practices.9

The institutional setting of the law enforcement system has been a particular focus of reform. With the objective of better coping with the complexity of corruption and related offences, law enforcement structures were strengthened in 2001 through the establishment of the USKOK, the Office for the Suppression of Corruption and Organised Crime attached to the State Attorney General's Office, which combines detection, investigation and prosecution of corruption into one law enforcement body (Box 7.4).

At first under-resourced and ineffective, USKOK has since then been described by some observers (Kuris, 2013) as one of the world’s most respected anti-corruption outfits, having prosecuted more than 2 000 defendants during its first ten years of existence and achieving in 2017 a conviction rate of roughly 90% (Ministry of Justice of Croatia, 2018). Defendants have included a former prime minister and a former vice president (for the criminal offences of abuse of office and authority, forging an official document, and illegal intercession), former ministers, mayors of major cities, heads of municipalities, several vice-presidents of the now defunct Croatian Privatisation Fund, as well as lower-ranking civil servants such as tax officials. Croatia has also a rich practice in implementation of its legislation on corporate liability (OECD, 2015b). Investors have acknowledged these achievements: In 2017, 60% of business respondents operating in Croatia thought that corrupt people or companies would be caught, much above the EU-28 average of 43%.10

Box 7.4. The office for the Suppression of Corruption and Organised Crime

The Office for the Suppression of Corruption and Organised Crime (Ured za suzbijanje korupcije I organiziranog kriminaliteta – USKOK) is a special body within Croatia’s Public Prosecutor’s Office with the mandate to direct police investigations and conduct prosecutions in corruption and organised crime cases. Established in 2001 in response to a rather high level of corruption and organised crime in Croatia, which had emerged from the Homeland Wars and post-communist transition, the USKOK has intelligence, investigative, prosecutorial and preventive functions and is responsible for international co-operation and exchange of information in complex investigations.

USKOK has jurisdiction over criminal offences such as abuse in performing governmental duties; illegal intercession; accepting and offering a bribe, including in economic transactions; abuse of office and official authority; money laundering; evasion of tax and other levies.

USKOK consists of five Departments: the Research and Documentation Department, the Corruption Prevention and Public Relations Department, the Prosecutor's Department, the Department for Investigation of Property Gain Acquired by Criminal Offense, and the Department of International Cooperation and Joint Investigations.

Source: Adapted from OECD (2013), Specialised Anti-Corruption Institutions Review of Models: Second Edition, Anti-Corruption Network for Eastern Europe and Central Asia, OECD Publishing, Paris.

Particular attention has been paid to strengthen procedural means to make Croatia's law enforcement agencies more efficient to detect and investigate corruption. With the new Criminal Procedure Act, which entered into force in 2009, procedures in corruption cases have been accelerated, and a more efficient system put in place to detect, prosecute and sanction perpetrators of corruption acts.11 Interagency cooperation has been an important component of Croatia's policy. Specialised court departments, state attorney's offices and police bodies for combating corruption have acted in synergy through the "USKOK vertical" specialisation of institutions competent for the fight against corruption in Croatia.12 In line with best practices for an effective detection, prosecution and sanctioning of corruption, memoranda of understanding have been signed between USKOK and other relevant bodies with the aim of strengthening interagency cooperation and of enabling USKOK to have direct access to essential databases.13

Other ways to tackle and deter corruption have involved confiscation of assets, which is being carried out in Croatia both permanently and temporarily to recover property derived from corruption. It is widely acknowledged that the confiscation of the proceeds and instrumentalities of a crime constitutes an additional deterrent that may have as great an effect as a fine or prison term; the threat of confiscation is also a preventive measure, as it makes bribes solicitation less attractive to public officials. In this regard, Croatia has modern legislation in place, which makes it mandatary to confiscate the proceeds and instrumentalities of crime and largely complies with both the international and European standards concerning the asset recovery process. When compared with its neighbours in Southern Europe and based on the available statistics on the amounts of proceeds and instrumentalities of crime seized over time, Croatia has proven to be more proactive than countries such as Bulgaria and Moldova (OSCE, 2018).

Protecting sources of information

In complement to the procedural means developed by Croatia to detect, investigate and sanction corruption, legal provisions on whistle-blower protection have been established or expanded to encourage and better protect citizens as an important source of information leading to the detection of corruption and other forms of illegal conduct. Reporting of wrongdoings can indeed play a role in the detection of violations of anti-corruption legislation and public integrity standards (OECD, 2015a).

Until recently, Croatia has been relying on specific provisions built into its criminal code, labour law, civil service act, data protection act and others, which provide protection against retaliatory acts or unjust dismissal.14 To facilitate citizens' reporting of corruption and in line with good practices, a range of government agencies have been offering hotlines, and providing, at least for some of them, practical information for disclosure.15

Croatian civil society organisations and the public were nevertheless critical of the legal framework, which was seen as not providing adequate protection. The overall view was that employers could retaliate against whistle-blowers with impunity. In a survey conducted in 2013 by the Ministry of Justice among its employees, almost half of respondents said that, should they learn of wrongdoing, they would not denounce it, while more than two thirds felt that reporting might be harmful for them. When asked whether they deem whistle-blower protection in the Croatian legal system adequate, over 90% of respondents gave a negative answer.16 The European Commission had also regularly evaluated Croatia’s whistle-blower protection system as requiring improvement.17

Fear of retaliation is widely recognised as the main disincentive to report on other's misconduct. The effectiveness of any whistle-blower mechanism depends on public confidence that people who make bona fide reports about wrongdoings receive proper protection against retaliation (OECD, 2016a). With the aim of eliminating this potential obstacle to effective detection, a whistle-blower protection law was enacted in 2019 (Zakon o zaštiti prijavitelja nepravilnosti). Under the Act, which applies to both private and public organisations, whistle-blowers are entitled to court protection, compensation, identity protection and confidentiality. The law is a lex specialis and as such supplements the whistle-blower provisions that can be found in other laws. Full implementation of the Act will not only benefit Croatia's overall anti-corruption system but also increase pressure on companies to set-up internal compliance programmes, discussed below.

Preventing misconduct in the public sector

Enhancing integrity and transparency in the public sector has been another priority of the government and, as such, has become a cornerstone of Croatia's anti-corruption policies. Croatia has made important strides in strengthening its safeguards against corruption and other forms of misconduct in the public sector and has now a fairly developed, albeit imperfect, ethics infrastructure with regards to public officials and civil servants.

For example, apart from several laws passed for better safeguarding the integrity of Croatia’s civil service,18 the Act on Prevention of Conflict of Interest regulates the exercise of the public office by high-level elected and appointed officials at both central and local level. Passed in 2003, it has been amended almost annually since then, notably with regard to the scope of provisions, the disclosure obligations, the verification procedures and the sanctions regime.19 Implementation of the act is monitored by a special committee, the Commission for the Resolution of Conflicts of Interest, which has been given an important role in providing guidance on the applicable rules and in verifying compliance with the act, in particular with regard to asset declaration. As in a number of countries, enforcement is nevertheless challenging, due in particular to insufficient technical and personnel resources of the Commission. As a result, in its 2018 Report to the European Council, the EC stressed the need for Croatia to strengthen its mechanisms for asset and conflict-of-interest disclosures.20

The authorities have also taken some substantial measures to improve the country's public management system, consistent with the overall objective of immunising the public administration against undue interference. One step is this direction has been the enactment of the law on the right of access to information in 2013, which establishes a process for citizens to request information produced by governmental institutions, thus making it possible to track decisions and actions. Another step has been the use of information technology to provide an ever-expanding number of on-line public services to the public - an approach often referred to as e-government and which aims at depersonalising administrative processes and reduce instances of close and regular public-private contacts, as they may give rise to unjustified preferential treatment and the solicitation of bribes.

Advances in the provision of e-government services have also allowed the government to launch in 2015 – as discussed earlier in this Chapter- a central e-consultation platform, which provides a single access point to all open public consultations launched by state bodies, thus enabling a more transparent decision-making process.21 As highlighted earlier in this chapter, Croatia has also been increasingly seeking to involve various stakeholders, including private-sector representatives, in the process of preparing draft laws and regulations through the establishment of ad hoc working groups bringing together experts and professionals in a specific field. As noted earlier in this Chapter, selection criteria for participation in those ad hoc groups remain nevertheless unclear, potentially disrupting the objective of reducing the risk of policy capture. Channels for public consultations at local and county levels have also yet to be enhanced.

Preventing undue relations between business and politics

Croatia has also made strides in strengthening the overall political integrity of the country. Measures to serve this purpose have included the development of new regulations aimed at enhancing the integrity of politicians and elected officials and enhancing transparency in the funding of political parties.

Croatia’s legal framework for party funding is now fairly developed (Council of Europe, 2013; Transparency International, 2013), although, as in many countries in the world, its implementation and enforcement remain a challenge. Legal provisions on political party funding were significantly improved through the Act on political activity and electoral campaign financing, adopted in 2011 and amended several times since then. The law notably sets a fixed limit on the amount of donations, prohibits anonymous donations as well as funding by public sector entities including SOEs, requires political parties to disclose detailed financial reports, and prescribes administrative and misdemeanour sanctions for violations of the law (up to EUR 68 000 for most severe violations). In addition, the State Audit Office conducts yearly audits of all political parties and its reports are publicly available, in addition to be shared with the State Election Commission and the State's Attorney Office for follow-up actions.

Other laws, such as the Act on the Election of Representatives to the Croatian Parliament (Official Gazette no. 19/15) and the Act on the State Administration System (Official Gazette no. 150/2011, no. 12/2013, no. 93/2016 and no. 104/2016), list cases of incompatibilities between the post of MP and other positions. For example, article 6 of the State Administration System Act prohibits state officials to perform simultaneously duties in bodies of legislative authority or act as members of the representative body of local and regional self-government units.

Although the changes in the regulations governing the political sphere represent significant progress with respect to the overall political integrity of the country, Croatia’s policy framework in this field is still a work in progress. Although an Electoral Code of Ethics has been in force since November 2007, there are no codes of conduct for elected officials neither at central nor at local level, unlike the situation in an increasing number of countries in the OSCE region and elsewhere (Leone, 2017; ADB and OECD, 2006). While progress have been made in preparing a draft code of conduct and ethics for parliamentarians, at the time of writing the Croatian Parliament still had not adopted it. Experience in other countries in setting up a modern integrity policy to uphold ethical standards for members of parliament and of other bodies of legislative authority, and thus in ensuring they perform their functions without undue interference, may provide good examples to Croatia to act in this regard. For example, Australia and Korea require parliamentarians to disclose their financial interests before debating an issue related to those interests and Australia prohibits MPs from voting on issues that could give rise to conflicts of interest. Australia's code of conduct also requires parliamentarians to disclose gifts exceeding a certain value limit, as well as sponsored travel.

Croatia does not regulate lobbying activities either. Despite some discussions at government level on the need for regulation in this area, no such initiative has materialised to date. As a result, no transparency standards are set in this field, potentially increasing the risk of policy capture. Some initiatives aimed at addressing this risk have been developed such as that of the Croatian Society of Lobbyists – Association for Promotion of Transparent Advocacy (CSL), which has called for the adoption of a law on public advocacy, albeit with very mixed results so far.22

The lack of regulations on the financing of referendum campaigns has also been considered as problematic (European Parliament, 2017), as decisions adopted in referendums may have a direct impact on existing and proposed policies designed for the benefit of all and thus increase the risk of regulatory capture.23 In response to this concern, in March 2019 the government sent to parliament a bill on political financing, election campaigns and referendums, introducing a series of new rules on funding election and referendum campaigns. If passed by parliament, the law would set a fixed limit on the amount of donations, including those coming from businesses, prohibit anonymous donations as well as funding by state and local government-owned companies, and require referendum initiatives' organising committees to submit financial reports.

Enhancing integrity and transparency of public procurement

Unfair or opaque procurement processes may send negative signals to businesses, and mislead them into considering that corruption is part of the normal course of doing business in a country. Public procurement in Croatia has been considered as another area vulnerable to corruption risks. According to a Rand study commissioned by the European Parliament, in 2016 Croatia was, among the 28 EU member states, the country which presented the highest risk of corruption in public procurement contracts (Hafner et al., 2016).

In 2017, public procurement amounted to 13.4% of the GDP,24 more or less at par with the average figure in OECD countries (12% of GDP). Partly following public pressure which aroused from several major corruption scandals associated with awarding public contracts to loyal companies managed by persons closely connected with the politicians in power,25 Croatia has taken important steps to address integrity and transparency in public procurement. The legislation governing public procurement has been amended substantially on several occasions, with each version making the process more rigorous, better controlled, more transparent and overall more business friendly.

Measures aimed at enhancing transparency and integrity of the process have included the introduction, in 2008, of an e-procurement system, now used by all contracting parties above applicable thresholds, and the legal obligation, since 2016, to allow e-submission of tenders, above as well as below EU thresholds. With the transposition of the EU Directives 2014/25/EU and 2015/24/EU, there is also now an obligation for all public procurement procedures to be based on the Most Economically Advantageous Tender criteria.

Other measures that have been introduced by Croatia include the requirement for all contracting authorities to publish procurement plans for the business year on the on-line procurement portal as well as, since 2017, to conduct prior market consultations with the interested economic operators on the draft procurement documents and publish reports on the outcomes of these consultations. Contracting authorities are also required to publish declarations regarding conflict of interest, which include a list of companies with which they have a conflict of interest. Contracting persons are also obliged to publish concluded and executed public procurement contracts. Access to public sector contracts is denied to companies or individuals convicted of bribery and other criminal offences.26

Croatia has also developed control mechanisms for better oversight of the procurement process. They include the State Commission for Supervision of Public Procurement, an independent government body in charge of supervising public procurement procedures, as well as public oversight exercised by civil society organisations.27 Public scrutiny can indeed act as a disincentive to corruption, favouritism and conflicts of interest, and help reveal transgressions when they occur, although some local observers have questioned the ability of Croatia’s citizens to hold contracting authorities accountable (Podumljak and David-Barrett, 2015).

Despite this new environment, the proportion of businesses that regard corruption as very or fairly widespread in Croatia’s public procurement was as high as 73% in late 2017, well above the EU average. It had even increased from 62% of those polled in the previous 2015 survey.28 Specifically, tailor-made specifications for particular companies and unclear selection or evaluation criteria are believed to be recurrent practices in public procurement, affecting business decisions and competition.

A 2016 study commissioned by the EC underscored that political influence and favouritism continue to play a role in the procurement system, especially at the local level, due in part to Croatia’s fragmented public administration and lack of sufficient resources for oversight bodies (European Commission, 2016). Another study, on public procurement contracts awarded in 2011-2013 in the construction sector, noted that, despite high standards set by the public procurement legislation, around half of the total contract value of public procurement was won by state owned companies that were outside of the control framework, thus raising questions on the integrity of the public procurement process (Podumljak and David-Berret, 2015). While these issues should be further addressed in the legislation governing public procurement, further integrating responsible business conduct (RBC) standards within SOEs, would likely also address business concerns about the integrity of the procurement process.

Corruption prevention in the corporate sector

Compared with reforms aimed at strengthening integrity in the public sector, until recently corruption prevention in the corporate sector has been significantly lower on the government's reform agenda. The OECD Guidelines for Multinational Enterprises (the Guidelines) recognise the important role of the private sector in combating bribery and corruption, and recommend that enterprises develop and adopt adequate internal controls, ethics and compliance programmes or measures for preventing and detecting bribery, on the basis of a risk assessment addressing the individual circumstances of an enterprise. The Guidelines also include recommendations for enterprises to introduce safeguards in their own policies to protect bona fide whistle-blowing activities. The OECD Due Diligence Guidance for Responsible Business Conduct provides practical guidance that can help enterprises avoid and address risks of corruption that may be associated with their operations, supply chains and other business relationships.

Until the enactment of a Whistle-blower Protection Act in February 2019, which notably requires companies to establish internal procedures for reporting irregularities, the authorities had made timid efforts to encourage the development of good practices in their corporate sector. For sure, rules on disclosure of ownership and control, governance by shareholders and supervisory boards and regulations governing accounting and auditing have been in place for a long time. Requiring companies to keep records that accurately and fairly reflect financial transactions in reasonable detail may indeed prevent practices associated with improper transactions such as the giving of bribes. This is not enough, though. Examples of good practices in OECD and non-OECD countries include the distribution to business organisations of guidelines drawing the attention of companies to the need for establishing internal reporting mechanisms and for training employees on anti-corruption compliance and business ethics or even the legal requirement for companies to establish internal mechanisms for reporting wrongdoings.

Reflecting Croatia's relative timid efforts in promoting the adoption of corporate codes of conduct and other tools such as internal hotlines or other forms of reporting mechanism, Croatian companies have so far invested relatively modest effort in organising and disciplining their business. According to latest data, in 2012 roughly four in ten (40.1%) companies (large corporations essentially) had an internal code of ethics and only a fifth (21%) had such codes supplemented by internal guidelines and policies. Even less (about 10%) had designed measures to ensure communication and training on the company’s ethics and compliance programme.29 Not surprisingly, in a 2017 business survey, only 6% of Croatian respondents said that they were aware that their company had established internal channels for reporting breaches of the law or ethics occurring within the company.30

The relatively cautious efforts of the government in promoting the widespread adoption of specific integrity standards and reporting mechanisms have been barely complemented by local business ethics initiatives. With a few exceptions, local business organisations have played a limited role in encouraging the development of ethics codes and other corporate measures aimed at preventing bribery and corruption. For example, the code of business ethics that the Croatian Chamber of Economy adopted in 2005 - that its member companies are encouraged to adopt - contains measures mainly of a general nature, without explicitly making the rejection of bribery part of its membership's business culture. It is first and foremost international business associations which, until recently, have been the prime vehicle for awareness-raising efforts and involvement of Croatia’s business sector in the prevention of corruption. For example, in 2017, Croatian businesses were informed about business integrity at a conference organised in Zagreb by the International Chamber of Commerce (ICC) on the topic “Strengthening the Integrity of Croatian Companies in Fighting Corruption – Challenges of Corporate Compliance“. Similarly, it is first and foremost large Croatian companies operating internationally - such as Pliva, a member of the Israeli pharmaceutical group Teva - which have taken measures to actively promote ethical business internally.

Since then, through the enactment of the Whistle-blower Protection Act, Croatia has taken steps to improve awareness among companies of the need to develop and adopt ethics programmes or measures for the purpose of preventing and detecting irregularities. The Act’s practical effect is that the development of internal channels for reporting is now a statutory requirement for all employers with more than 50 employees. Guidance and assistance in training to companies on the adoption and implementation of internal whistle-blower mechanisms will be essential to ensure the effectiveness of any such mechanism.

Ensuring transparency and integrity of state-owned enterprises

Reforms aimed at improving the governance and fostering integrity of state-owned enterprises (SOEs) have also advanced slowly. As noted in Chapter 3, SOEs continue to occupy a central place in the national economy due to their size and presence in numerous sectors. SOEs can be particularly exposed to corruption risks, which may include bribery of SOEs employees by other parties or the feeling of employees and board members of SOEs that they can use their positions for gaining a personal advantage for themselves (Crane-Charef, 2015). Many Croatian SOEs have unique positions in the market that can be used for winning unfair advantages. Their proximity to the government also exacerbates corruption risks. Many SOEs suffer from political board appointments without transparent and competitive selection procedures. Recent corruption-related scandals have shown how public trust in SOEs and the state or local governments as owners can be damaged by unethical practices in the SOE sector.

The government, has been gradually, albeit slowly, trying to tackle the issues of mismanagement and vested interests in SOEs through the adoption of measures aimed at strengthening their integrity. In the late 2000s Croatia, in line with good practices, adopted a comprehensive Anti-Corruption Program for State Owned Companies. The programme, which run from 2010 to 2012, set three objectives (strengthening of integrity, accountability and transparency in the work of SOEs; creation of preconditions for the prevention of corruption at all levels of companies; affirmation of “zero tolerance” approach to corruption) and defined eighteen measures, which had to be transformed into particular activities to be included in action plans of all companies in majority state ownership (OECD 2016c). The ambition of the reform, however, diminished after Croatia’s accession to the EU and, as a result, the programme was not extended after its originally envisaged termination.

Since then, Croatia has taken new steps towards improving the framework for SOEs. In 2018, work begun to revitalise the anti-corruption programme for SOEs through the development of a new one for the period 2019-2020. The new programme focuses on preventing conflicts of interests and further strengthening ethics and integrity of SOEs. It envisages new anticorruption mechanisms for SOEs, including the incorporation of rules on the prevention of conflict of interest into the codes of ethics and internal acts of SOEs, the requirement for all SOEs to implement internal control of business operations, independent monitoring of sponsorship and donations and of public procurement procedures – including control mechanisms of irregularities. The programme also recognises the role of employees in detecting and reporting evidence of bribery by requiring SOEs to provide channels for communication by, and protection of, persons willing to report breaches of the law or professional standards or ethics occurring within the company. The programme also insists on the need for training programmes to increase employee awareness of corruption risks and compliance with the company’s ethics.

The programme, if adopted, would complement other measures recently put in place by Croatia to deter and prevent conflicts of interest in several sensitive areas. For example, to enhance transparency and integrity around personal finance of SOEs senior managers, members of management boards are now subject to financial disclosure and in 2017 Croatia adopted a long-awaited new Code of Corporate Governance for SOEs, which contains conflict of interest guidance for members of the supervisory board of SOEs. To raise transparency and integrity around donations to SOEs and party funding by SOEs, Croatia now maintains a database on sponsorships and donations to government-owned companies; as noted earlier in this Chapter, the act on political activity and electoral campaign financing prohibits funding by state and local government-owned companies.

It can reasonably be argued that the steps taken by Croatia are moving in the right direction. The reforms will nevertheless take time to permeate through the system. Croatia's governance system for SOEs is in transition and as a result, there are a number of issues that have not been addressed yet. In line with the OECD Guidelines on Corporate Governance of State-Owned Enterprises and international experience, additional steps should be taken to strengthen the integrity and transparency of SOEs. Some of these have already been highlighted in Chapter 3 of this Review. They include more financial resources devoted to financial oversight and continuous efforts to make SOE boards more professional. Greater consistency is also needed with regard to ethical rules and standards that apply to companies owned by local governments and companies in which the state is a majority owner. Overall, as highlighted in the Guidelines on Corporate Governance of State-Owned Enterprises, which address transparency extensively, “state-owned enterprises should observe high standards of transparency and be subject to the same high quality accounting, disclosure, compliance and auditing standards as listed companies” (OECD, 2015c :26).

Outlook and policy recommendations

Croatia has made significant progress in improving the legal framework to ensure a more stable regulatory environment and better quality of regulations. For example, the legal framework for consultations is among one of the most developed among the EU member states, even if there are still differences in how stringently these rules apply in practice. The new law on RIA has also strengthened the quality of ex ante review of regulations in Croatia.

Such formal processes do not, however, yet apply to secondary regulations in Croatia. Consequently, it is not surprising that those still remain a challenge in the country. In addition, Croatia has not yet developed a systematic approach towards ex post evaluations. As such, as highlighted in Chapter 6, systematic reduction of administrative burdens still remains a challenge. Further advances in extending good regulatory practices to secondary regulations, conducting targeted ex post reviews focusing on the performance of regulations or specific sectors (see OECD, 2019a and OECD, 2019b) as well as ensuring greater homogeneity in application and enforcement of regulations at the national and sub-national level could help the country address one of the most prevalent weaknesses of its investment climate.

The quality of Croatia's public governance also suffers from the fragmentation of competences and of not always well-defined lines of accountability. Croatia has a rather complex and multi-layered network of public administrations and regulations. The number of counties, municipalities, and public agencies is very high, especially in relation to the size of population and administrative capacity. Such a multi-layered public administration creates a cumbersome and confusing environment for businesses who have to navigate through it. Streamlining this structure would help reduce red tape and disparities in regulation and in the scope and quality of public services. Better public administration would have high payoffs in boosting medium-term growth. It would also further support Croatia’s anti-corruption efforts.

Croatia has made important strides in reducing opportunities for corruption and limiting discretion in public decision-making. At the central level, appropriate standards of integrity are mostly in place and obligations to report personal assets and liabilities are now the prevalent rule. The development of eGovernment services and other approaches is progressing. The legislation governing public procurement has been amended on several occasions, with each version enhancing transparency and control. Significant developments have also taken place to strengthen the efficiency of law enforcement agencies. A track record of effective investigation, detection and prosecution of corruption has been established.

Some elements of a functioning anti-corruption framework are nevertheless still missing. Despite the many encouraging steps taken, business’ trust in the government’s combat against corruption remains low. According to the 2017 Flash Eurobarometer on businesses' attitudes towards corruption in the EU, the proportion of entrepreneurs that regard corruption as widespread in Croatia had even increased between 2015 and 2017, from 90% of those polled in the previous 2015 survey to 92% of respondents to the 2017 survey. This perception suggests the need for the development of a targeted communication policy that reflects on the important reforms already introduced and those in the pipeline. But not only. It also suggests that further efforts are needed to defuse concerns about the level of corruption in Croatia by businesses and the population at large.

In this regard, the quality of the ethics framework requires further improvement to dispel shadows of doubt on the integrity of the public sector. In particular, considering the vulnerability of the local and regional governments to corruption, ties between business and politics, and favouritism, Croatia should promote stronger ethical standards among local self-government. With a few exceptions at county level, their officials and other employees are not bound by any integrity standards, which may easily lead to conflicts of interest or abuses of favouritism. While the Strategy for Suppression of Corruption 2008 set as an objective the establishment of anti-corruption commissions at regional level, only 17 out of the country’s 20 counties had done so as of March 2019 and even less had adopted internal anti-corruption plans.

Furthermore, despite Croatia’s efforts to improve the political funding system, notably by imposing limitations on donations and subjecting political parties to disclosure of financial resources and auditing, lobbying activities have not yet been addressed. As they can lead to corruption and regulatory capture, rules on lobbying could help address these concerns (OECD, 2013b). In this regard, Croatia could make use of the Principles for Transparency and Integrity in Lobbying adopted by the OECD in 2010, which are international principles providing guidance on how to meet expectations of transparency and accountability in the public decision-making process.

Croatia’s latest national anti-corruption strategy for 2015-2020 has identified many of these shortfalls. The strategy focuses on promoting integrity and transparency in the work of public bodies and institutions further. This is planned to be achieved notably through the setting up of a unified ethics infrastructure covering all public administration employees at both national and local level (in issues such as conflict of interest, favouring private benefits, corruption, personal connections, etc.). This will include the obligation of establishing codes of ethics and institutional standards for their implementation in state administration bodies, regional and local self-government units and public institutions. Such actions and other reforms in the pipeline will likely make unethical behaviour easier to prevent and harder to commit and could ultimately recast business confidence in Croatia’s public administration.

Reforms aimed at fostering the integrity of state-owned enterprises (SOEs) are also progressing, though more slowly than scheduled. Given that SOEs are still present in many sectors of the economy, additional steps - in line with the OECD Guidelines on Corporate Governance of State-Owned Enterprises - should be taken to make them more transparent and ensure a level playing field.

Enhancing ethics in the private sector is also important for Croatia’s success in preventing and combatting corruption. The recent adoption of the Whistle-blower Protection Act should help to address Croatia’s private sector weaknesses in this regard but its implementation will remain crucial. Actions will be required to advise and assist companies in their efforts to prevent and detect irregularities related to corruption or arising from a conflict of interest. The OECD Guidelines for Multinational Enterprises provide guidance on processes and systems - such as internal controls, ethics and compliance programmes - that companies can implement to address corruption. Croatia could also make use of the OECD Good Practice Guidance on Internal Controls, Ethics and Compliance (OECD, 2010). This additional guidance can be a useful reference for promoting, designing and implementing strong corporate compliance programmes and internal reporting mechanisms, in particular for SMEs seeking to be active on foreign markets.

Policy recommendations

Build on the efforts to improve regulatory quality in the country, in particular by implementing the OECD recommendations identified in the Regulatory Policy Review (OECD, forthcoming). This applies to the processes pertaining to creating secondary regulations and the use of ex post regulatory reviews.
Perfect the public integrity framework as foreseen in the Anti-Corruption Strategy 2015-2020. This could include: developing comprehensive codes of conduct for elected officials at regional and local level as well as a code of conduct for parliamentarians and ensuring corresponding accountability tools and dissuasive sanctions for potential violations of such codes; regulating lobbying activities; strengthening the capacity of existing control mechanisms with respect to public procurement.
Continue efforts to improve the corporate governance framework for state-owned enterprises (SOEs) with the objective to improve their integrity, transparency and professionalism. Reforms aimed at fostering the governance and integrity of SOEs are progressing, though more slowly than scheduled.
Take action, as appropriate in cooperation with business organisations and other stakeholders, to improve awareness among companies throughout Croatia, including state-owned enterprises and small and medium enterprises, which are traditionally at high risk of bribe solicitation by public officials, of Croatia’s new legislation regarding whistle-blower protection, and to advise and assist companies in their efforts to establish internal channels for reporting irregularities through, for example, the development of seminars, guidelines and other forms of guidance. Making anti-corruption compliance part of one’s corporate culture is the best way to prevent corrupt acts before they happen.
Signal changes in the fight against corruption to the public and businesses. Increasing raising awareness efforts is of much importance to close the perception gap about actions already taken and reforms in the pipeline. A targeted communication strategy for the public through an on-line platform is in the offing but needs to materialize in practice.

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Podumljak, M. and E. David-Barrett (2015), The Public Procurement of Construction Works: The Case of Croatia, Partnership for Social Development, Zagreb, www.vkontrole.lt/tf/files/files/The%20Public%20Procurement%20of%20Construction%20Work-The%20Case%20of%20Croatia.pdf

Transparency International (2013), Transparency in Funding of Political Parties. Croatia, 2013, www.transparency.org/files/content/feature/2013_CRINIS_Croatia_EN.pdf

UNODC (2013), Business, corruption and crime in Croatia: The impact of bribery and other crime on private enterprise, United Nations Office on Drugs and Crime, Vienna, www.unodc.org/documents/data-and-analysis/statistics/corruption/Croatia_Business_corruption_report.pdf

Notes

← 1. See Kaufmann, Kraay and Mastruzzi, 2010 for the description of the methodology.

← 2. Standard Eurobarometer 89, Public Opinion in the European Union.

← 3. European Commission (2012), Communication from the Commission to the European Parliament and the Council on the Main Findings of the Comprehensive Monitoring Report on Croatia’s state of preparedness for EU membership, COM(2012) 601 final. While emphasising the need for increased efforts to continue strengthening the rule of law, to improve administration and the judicial system, and to fight and prevent corruption effectively, the Commission noted that Croatia had put in place an adequate legal and institutional framework for the fight against corruption.

← 4. Flash Eurobarometer 457, Businesses' attitudes towards corruption in the EU, fieldwork: October 2017, publication: December 2017.

← 5. Ernst & Young (2017), Europe, Middle East, India and Africa Fraud Survey 2017. The survey is based on interviews covering a mixture of company sizes, job roles and industry sectors.

← 6. World Economic Forum (2017), The Global Competitiveness Report 2017–2018, World Economic Forum, Geneva, www3.weforum.org/docs/GCR2017-2018/05FullReport/TheGlobalCompetitivenessReport2017%E2%80%932018.pdf.

← 7. American Chamber of Commerce in Croatia (2018), Survey of the Business Environment in Croatia, Zagreb: March 2018, www.amcham.hr/storage/upload/doc_library/amcham_-_survey_of_the_business_environment_in_croatia_143454.pdf

← 8. OECD (2015), Prevention of Corruption in the Public Sector in Eastern Europe and Central Asia, Paris, www.oecd.org/corruption/acn/ACN-Prevention-Corruption-Report.pdf

← 9. For a comparison of Croatia's incrimination system with other European countries, see Roderick Macauley, Fighting Corruption: Incriminations. Thematic Review of GRECO’s Third Evaluation Round, Council of Europe Publishing, 2012. For a UN assessment of Croatia’s criminal law and procedure, see UNODC (2012), Country Review Report of Croatia, www.unodc.org/documents/treaties/UNCAC/CountryVisitFinalReports/2013_10_29_Croatia_Final_country_report.pdf

← 10. Flash Eurobarometer 457, Businesses' attitudes towards corruption in the EU.

← 11. Namely, from 1 July 2009, the new Criminal Procedure Code introduced prosecutor’s investigation instead of court investigation and, in order to avoid lengthy trials and boost judicial efficiency, the possibility of plea bargaining.

← 12. The so-called “USKOK vertical” covers the National Police Office for the Suppression of Corruption and Organised Crime (PNUSKOK), the USKOK and Departments for USKOK in four county courts in Zagreb, Split, Osijek and Rijeka.

← 13. Memoranda of understanding have been signed with a number of agencies, including the chief police directorate, the office for prevention of money laundering, the tax and customs administrations, the public procurement system administration (DPPS) within the Ministry of Economy, the central public procurement office, the financial inspectorate, and the Ministry of Entrepreneurship and Crafts.

← 14. For example, the Labour Act, as amended in 2009, contains provisions prohibiting the dismissal of employees who report in good faith and on reasonable grounds suspected acts of corruption. The criminal code prohibits dismissing an employee whose report is found to be true by a court; violating this provision, or failing to reinstate a worker in defiance of a judicial decision, is punishable by up to three years in prison.

← 15. On the Ministry of Justice's website, prospective whistle-blowers are advised to contact the USKOK or the police, including anonymously: https://pravosudje.gov.hr/istaknute-teme/antikorupcija/kome-prijaviti/6176

← 16. “Survey among Civil Servants in the Ministry of Justice on the Effectiveness of the Protection of Whistle-blowers in 2013” in Gregor Thüsing and Gerrit Forst, eds., Whistleblowing - A Comparative Study, Springer International Publishing Switzerland, 2016.

← 17. Country Report Croatia 2018 including an In-Depth Review on the prevention and correction of macroeconomic imbalances, 2018 European Semester, European Commission, 2018.

← 18. The Act on the State Administration System, the Civil Servants Act, the Law on Civil Servants and Employees in Local and Regional Self-Government, which regulate conflicts of interest and asset disclosure for civil servants, as well as the Code of ethics for civil servants, which is the main instrument safeguarding the integrity of civil servants employed in state administration bodies.

← 19. For example, amendments passed in 2013 introduced the verification of official's asset records, strengthened prevention, and increased professionalism.

← 20. European Commission (2018), Recommendation for a Council Recommendation on the 2018 National Reform Programme of Croatia and delivering a Council opinion on the 2018 Convergence Programme of Croatia, COM(2018) 410 final. https://ec.europa.eu/info/sites/info/files/file_import/2018-european-semester-country-specific-recommendation-commission-recommendation-croatia-en.pdf

← 21. The platform is accessible at https://esavjetovanja.gov.hr/ECon/Dashboard.

← 22. The Association circulated a draft bill to ministers and other interested constituencies in 2014-16. The draft foresaw mandatory registration for those who wish to influence public authorities, a public register, and sanctions applicable in case of breaches of mandatory registration rules. See the Association's website: http://hdl.com.hr/en/news/ [accessed on 5 September 2018]

← 23. By Croatian law, if anybody is able to find 10% of the electorate signing a form demanding for a referendum within two weeks, a referendum must be held.

← 24. Ministry of Economy, Entrepreneurship and Crafts, Statistička izvješća o javnoj nabavi za 2017. Godinu [Statistical report on public procurement for 2017]. Available at: www.javnanabava.hr/default.aspx?id=3425 [accessed on 30 March 2019]

← 25. For example, the so-called FIMI media case involving very senior politicians in a scheme that used public procurement to trade political donations for contracts.

← 26. Article 251 of the Law on public procurement.

← 27. One example of oversight exercised by civil society organisations is that of the Partnerstvo za društveni razvoj (Partnership for Social Development), which set up in 2013 a webportal giving public access to information on the implementation of public procurement procedures and on the companies involved in such procedures as well as on the assets and interests of public officials.

← 28. Flash Eurobarometer 457, Businesses' attitudes towards corruption in the EU, fieldwork: October 2017, publication: December 2017; Flash Eurobarometer 428, Businesses' attitudes towards corruption in the EU, fieldwork: September-October 2015, publication: December 2015.

← 29. UNODC (2013), Business, corruption and crime in Croatia: The impact of bribery and other crime on private enterprise, United Nations Office on Drugs and Crime, Vienna, www.unodc.org/documents/data-and-analysis/statistics/corruption/Croatia_Business_corruption_report.pdf

← 30. Ernst & Young, Europe, Middle East, India and Africa Fraud Survey 2017: Awareness of whistleblowing hotlines by country, accessed at https://fraudsurveys.ey.com/ey-emeia-fraud-survey-2017/detailed-results/awareness-of-whistleblowing-hotlines-by-country/ on 25 November 2018.

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