Chapter 8. Promoting and enabling responsible business conduct as a strategic choice
Responsible business conduct (RBC) is an important part of the investment climate and is increasingly integrated within policies aimed at attracting quality investment and enhancing sustainable development. In line with global trends, RBC has also emerged as an important topic in Croatia. This chapter provides an overview of the RBC landscape in Croatia and Croatia’s plans for its National Contact Point for the OECD Guidelines for Multinational Enterprises.
Countries that adhere to the Investment Declaration aim to encourage the positive contributions that businesses can make on economic and social progress. They commit to promote Responsible Business Conduct (RBC) principles and standards, as set out by the OECD Guidelines for Multinational Enterprises (the Guidelines). The Guidelines are the most comprehensive set of government-backed recommendations on RBC in existence today (See Box 8.1). Observance of the Guidelines is supported by their unique implementation mechanism – the National Contact Points (NCPs).
RBC is a key element of a healthy business environment – one that attracts quality investment, minimises risks for businesses, ensures stakeholder rights are respected and ultimately leads to broader value creation. RBC principles and standards set out an expectation that businesses should avoid and address adverse impacts of business activities, while contributing to sustainable development in countries where they operate. RBC emphasises the integration and consideration of environmental and social issues into core business operations. A key element of RBC is risk-based due diligence, a process through which businesses identify, prevent and mitigate actual and potential adverse impacts, and account for how these impacts are addressed. RBC expectations extend to business activities throughout the entire supply chain and linked to business operations, products or services by a business relationship.
While it is the role of businesses to behave responsibly, Governments have a primary duty to protect the public interest and an important role in promoting and enabling RBC. The RBC chapter in the OECD Policy Framework for Investment is a useful reference for designing and implementing a strong RBC policy framework. This entails establishing and enforcing an adequate legal framework that protects the public interest and underpins RBC, while monitoring business performance and compliance with the law. Setting and communicating clear expectations on RBC and providing guidance on what those expectations mean is important, while encouraging and engaging industry and stakeholders in collective initiatives and providing recognition and incentives to businesses that exemplify good practice is encouraged. It also entails ensuring that RBC principles and standards are observed in the context of the government’s role as an economic actor.
This chapter summarises Croatia’s plans for establishing an NCP, followed by a review of Croatia’s general policies for enabling RBC; policies in specific areas covered by the Guidelines; RBC in the context of the state as an economic actor; outlook and policy recommendations.
Addressed by Adherents to the OECD Declaration on International Investment and Multinational Enterprises to businesses operating in or from their jurisdictions, the Guidelines set out principles and standards in all major areas related to RBC, including information disclosure, human rights, employment and industrial relations, environment, bribery and corruption, consumer interests, science and technology, competition, and taxation.
Their purpose is to ensure that business operations are in harmony with government policies, to strengthen the basis of mutual confidence between businesses and the societies in which they operate, to improve foreign investment climate, and to enhance the contribution of the private sector to sustainable development. The Guidelines, together with the UN Guiding Principles and the fundamental ILO Conventions, are one of the major international instruments on RBC.
The Guidelines do not aim to introduce differences of treatment between multinational and domestic enterprises - they reflect good practice for all. Adherents wish to encourage the widest possible observance of the Guidelines to the fullest extent possible, including among small- and medium-sized enterprises even while acknowledging that these businesses may not have the same capacities as larger enterprises.
The Guidelines are supported by a unique implementation mechanism of National Contact Points (NCPs), agencies established by adhering government to promote and implement the Guidelines. The NCPs assist enterprises and their stakeholders to take appropriate measures to further the implementation of the Guidelines. They also provide a mediation and conciliation platform for resolving practical issues that may arise
Croatia’s plans for establishing an NCP
According to the Decision of the Council on the OECD Guidelines for Multinational Enterprises, all countries that adhere to the Guidelines are required to set up an NCP. NCPs have a mandate to further the effectiveness of the Guidelines by undertaking promotional activities, handling inquiries, and contributing to the resolution of issues that arise if the Guidelines are not observed by businesses in specific instances. NCPs provide one of the few government-based, non-judicial grievance mechanisms with such an effective and broad application.
Adherents are required to make human and financial resources available to their NCPs so they can effectively fulfil their responsibilities, taking into account internal budget priorities and practices. In accordance with the Procedural Guidance of the Decision of the Council on the Guidelines, NCPs are expected to operate in accordance with the “core criteria” of visibility, accessibility, transparency and accountability.
In early 2018, the OECD Secretariat, together with the NCPs from Poland and Latvia, delivered a technical workshop on RBC and the NCPs to Croatian authorities. The workshop focused on the main aspects of NCP functioning and RBC policies, as well as experience sharing on the structure and mandate of NCPs and an in-depth discussion on the expectations related to the NCP core criteria of visibility, accessibility, transparency and accountability.
Croatia consulted with stakeholders on the plans for its NCP in late 2018. Croatia also engaged with OECD institutional stakeholders (BIAC, TUAC, OECD Watch) for advice on the plans for the institutional arrangements for the Croatian NCP. Based on these consultations, the Croatian authorities set out the draft plan for the NCP as described below.
Institutional arrangements
NCP Structure
At the time of writing, the Croatian authorities expected a Government Decision by May 2019 to formalise the establishment of the NCP as a permanent mechanism for the promotion and implementation of the OECD Guidelines for Multinational Enterprises, and provide details on its role, composition, resources and reporting obligations.1
Pursuant to the draft proposal that had been prepared ahead of the adoption of the Government Decision, Croatia envisioned to have an NCP structured as a two-tier body, consisting of a “full-time NCP” dealing with day-to-day operations, administrative matters, and promotional activities, and a “multi-stakeholder group” providing technical advice on RBC-related matters and serving as a platform for high-level engagement. The two bodies were expected to collaborate and make joint decisions on specific instances, both as related to the process for handling specific instances as well as the determination of outcomes.
The full-time NCP will be located in the Ministry of Foreign and European Affairs (MOFEA). It will be staffed with two full-time members recruited from MOFEA and the Ministry of Economy, Entrepreneurship and Crafts (MEEC), which has a mandate to promote RBC. The MOFEA has been the main coordinating body for co-operation with the OECD so far, including with the Investment Committee, and as such has experience in areas related to investment policies. The MEEC is in charge of the implementation of domestic regulations on investment incentives and strategic investments, as well as promotion of RBC. In the government’s view, the complementary mandates and expertise of these two ministries will ensure appropriate handling of NCP and RBC-related matters. Additionally, since August 2018, both ministries are participating in the newly created board of the Croatian CSR Index (see infra, section on General Policies for Promoting RBC).2 In line with the recommendations of OECD’s institutional stakeholders and pending approval from the MOFEA and MEEC, the two NCP full-time members are expected to share the same office space to ensure ongoing collaboration and efficiency.
The multi-stakeholder group will count up to nine members, and maintain a balanced representation of trade unions, NGOs, businesses and government. At the time of writing, several organisations had expressed their interest to participate in the NCP. These included the Croatian Employers Association, the Croatian Business Council for Sustainable Development, the Croatian Chamber of Economy, the Ministry of Labour and Pension System, the Ministry of Environment and Energy, Human Rights House, WWF Adria, the Association of Independent Trade Unions (AITU) and the Independent Trade Union for Science and Tertiary Education (ITUSTE). Ministries were expected to select experts in their respective fields to be part of the multi-stakeholder group. At the time of writing, AITU and ITUSTE had already appointed their respective representatives. A representative from WWF Adria had been selected through a procedure facilitated by the Government Office for NGOs.
This structure has been defined to take into consideration the recommendations made by OECD’s institutional stakeholders, in particular when it comes to preventing potential conflicts of interest. The multi-stakeholder representation in the group was expected to introduce various checks and balances in the work of the NCP, as well as a way to build trust with external stakeholders. The draft also envisioned that general meetings gathering the full-time NCP and the multi-stakeholder group will be held three to five times a year, in addition to ad hoc meetings, for example in relation to specific instances.
Stakeholder engagement
Throughout the planned process to establish the NCP, Croatia’s Working Group for the Investment Policy Review (WGIPR) - set up by the Croatian authorities to assist the OECD in the conduct of the Review and comprising key ministries and governmental agencies as well as civil society and business representatives - will serve as the primary venue for engaging with Croatian stakeholders. The government also plans to leverage existing initiatives, such as the annual conference on RBC organised by the Croatian Business Council for Sustainable Development in November 2018 to engage with stakeholders on the role and plans for the NCP.
Once the NCP is formally established, the Croatian authorities plan to organise an annual meeting gathering various stakeholders. Members of the multi-stakeholder group are expected to make the link with diverse stakeholder groups and to facilitate engagement with business associations, trade unions and civil society organisations.
The NCP will have a dedicated website and will be reachable by email and phone. Regular awareness raising seminars and workshops are planned to inform stakeholders of the NCP’s activities. The government plans to publish a report on the NCP website after each major meeting. The NCP will rely on external outlets such as business dailies, magazines, as well as radio and television programs to inform the wider public and stakeholders of the activities of the NCP. The NCP will be expected to report at least once a year on its activities to the Prime Minister’s Office, in addition to reporting to the OECD.
Resources
After the establishment of the NCP, resources will be allocated to the NCP from the budgets of the MOFEA and the MEEC. The NCP budget will be validated on a yearly basis, through regular annual budget planning. The NCP will have a dedicated budget to cover for the salaries of at least two full-time members, website set-up and maintenance, handling of specific instances, and organising meetings of the multi-stakeholder group, as well as promotional activities such as seminars and conferences. The participation in the multi-stakeholder group will be on volunteer basis.
Handling of specific instances
The full-time NCP will be the main contact point for submission of specific instances. Upon reception, specific instances will be transmitted to the multi-stakeholder group and discussed among the two bodies. All decisions will be made jointly by the full-time NCP and the multi-stakeholder group. The exact decision-making process will be established when the rules of procedures for handling specific instances are developed.
Rules of procedures for handling specific instances will be developed in the first six months of activity of the NCP (See Table 2) through a participative process involving relevant stakeholders and the multi-stakeholder group. External stakeholders will also be invited to comment and contribute to the development of the rules of procedures through a public consultation period. Once finalised, the rules of procedures will be published and made available on the NCP website.
It is envisioned that the two full-time members of the full-time NCP will receive mediation training before handling specific instances. In some cases, a professional mediator may be called for support. The exact modalities of this process will be defined in the rules of procedures. Additionally, it is envisioned that upon resolution of the case, a report will be drafted by the Full-time NCP with input from the multi-stakeholder group. Once the report is approved by all parties, a final version of the report will be sent to the OECD Secretariat and published on the NCP website.
Promotional Activities
The Croatian government has elaborated a draft plan for various activities the first year of functioning of the NCP. Planned activities include translation and dissemination of key RBC instruments, including the Guidelines and due diligence guidances, creation of the NCP website, and awareness-raising events such as conferences and seminars. The first year will also focus on building the capacity of the NCP by attending mediation courses, participating in peer learning activities and workshops on the resolution of specific instances. The NCP will attend the OECD NCP meetings in Paris and seek opportunities to engage with other NCPs on the handling of specific instances.
General policies for promoting responsible business conduct
RBC in not a new concept in Croatia. The opening of the economy played an important role in this regard. The arrival of foreign companies with strong RBC policies in mid-1990s contributed to awareness raising of RBC-related topics in the country (Idowu, Schmidpeter, Fifka, 2015). Croatia’s accession to the EU led to a series of reforms that reinforced the legal framework that underpins RBC.
A number of Croatian national strategies and policies include references to sustainability and corporate social responsibility (CSR). The 2009 Strategy for Sustainable Development of the Republic of Croatia refers to CSR as one of the principles that will direct Croatia towards sustainable development (United Nations, 2011); the Tourism Development Strategy until 2020 has integrated sustainability as the key element of the contribution of the sector to development (Ministry of Tourism, 2013); policy on sustainable consumption and production cites “promoting sustainable patterns of behaviour and doing business in all economic sectors” (Ministry of Environment and Energy, 2018). Although the government has attempted to elaborate a Strategic Framework for CSR in the past, a national action plan or policy has so far not been adopted.3 As Croatia is currently developing a new Sustainable Development Strategy for the period 2020-2030, as well as a National Development Strategy for Croatia until 2030, the government has an opportunity to embed RBC principles into these strategies and include direct references to key RBC instruments. Ensuring coherence between these two strategies, which are currently being developed under the responsibilities of two different Ministries4, will be an important aspect of communication clear expectations on RBC.
Businesses have been active in promoting a common understanding and implementation of RBC standards in the country, and have been a driving force for RBC promotion. Early initiatives include the creation of the Croatian chapter of the Business Council for Sustainable Development (HR PSOR) in 1997 by 18 Croatian companies committed to promote and implement sustainable practices in their businesses. Since then, HR PSOR has pursued various awareness-raising and capacity-building activities on RBC, including the organisation of workshops and seminars, as well as the publication of newsletters and educational materials such on CSR (CSR for All, 2013). In 2005, the CSR Affiliation at the Croatian Chamber of Economy (CCE) was established to provide logistical support to the CCE in the promotion of CSR in Croatia (CSR for All, 2013).
In 2006, the HR PSOR and CCE spearheaded the creation of a CSR Index and award process to incentivise CSR practices in Croatia. The index methodology was developed by a group of experts from various fields who created a set of indicators and a survey to assess and compare companies across different dimensions of CSR. In 2018, 116 companies participated in the initiative, which represents an increase from previous years (98 businesses participated in 2010 and 78 in 2012) (CSR for All, 2013). Awards are announced yearly at a national conference organised by HR PSOR and the CCE. The government supports this initiative and regularly attends the conference.
Policies in specific areas covered by the Guidelines
The scope of RBC is broad and cross cutting as impacts to society, both positive and negative, cover a range of substantive areas. In addition to general recommendations on RBC, the Guidelines include specific recommendations to enterprises in the areas of information disclosure, human rights, employment and industrial relations, environment, bribery and corruption, consumer interests, science and technology, competition, and taxation. Croatia’s accession to the EU acted as an anchor for reforms that strengthened the legal framework that underpins RBC in all these policy areas. Since accession, recent legislative developments have consolidated the progress made in a number of areas including disclosure, corruption and environmental protection. Nevertheless, challenges persist in relation to implementation of legislation. Legislative advances have not always translated into changes in business practices.
Croatia has largely aligned the legal framework with the EU standards in policy areas covered by the Guidelines
Croatia’s EU accession process involved an assessment of Croatia’s ability to meet the requirements of EU membership, and led to a set of reforms that strengthened Croatia’s legal framework. As part of the accession process, Croatia had to accept and implement the acquis communautaire (hereafter: the acquis), which constitutes the body of European Union law and obligations (EC, 2016a). For the purpose of accession negotiations, the acquis is divided into 35 main thematic chapters, which include company law, judiciary and fundamental rights, environment, competition policy, social policy and employment, enterprise and industrial policy, science and research, and consumer and health protection as related to the areas covered by the Guidelines.
Croatia’s accession negotiations were formally opened in 2005 and closed in 2011, when all EU governments were satisfied with the progress made by Croatia in each negotiation chapter (See Box 8.2). The Accession Treaty was signed in 2011. Between 2011 and effective accession, Croatia’s preparations were still monitored by the European Commission, based on the findings and priority actions identified throughout the negotiation process. The last monitoring report in this context concluded that Croatia had completed the required priority actions and had shown the willingness and ability to fulfil all outstanding commitments in good time before accession. It also noted that EU membership was an additional incentive to build on the achievements made to continue reforms in Croatia, such as continuing reforms to strengthen rule of law, notably in the fight against corruption (EC, 2013). Croatia effectively acceded to the EU on 1 July 2013.
In terms of areas for continued reforms, Croatia’s accession treaty contained 10 specific commitments related to key aspects of the negotiations for Chapter 23: Judiciary and Fundamental Rights. Among others, these commitments included commitments to continue to improve the efficiency of the judiciary, strengthening prevention measures in the fight against corruption and conflicts of interest, protection of minorities and human rights. The treaty also contained transitional measures, some of which are still ongoing, on a number of chapters, including in relation to the implementation of EU legislations in the areas related to air quality, climate change, waste management, water quality, industrial pollution, risk management and chemicals.
Table 8.2 provides an overview of key reforms undertaken by Croatia through the EU accession process to align its legislation with the EU acquis in policy areas covered by the Guidelines.
The accession negotiations are the process through which candidate countries accede to EU membership. Negotiations take place between ministers and ambassadors of the EU governments and the candidate country in an intergovernmental conference.
The first phase of EU accession negotiations entails a screening of the candidate country’s legislations. This process determines whether negotiations can be opened directly or whether certain conditions called “opening benchmarks” should be met first. Before actual negotiations can start, the candidate country submits its position, and the EU must adopt a common position. In this position, the EU will generally set closing benchmarks that need to be met before negotiations in the policy field concerned can be closed.
Accession negotiations on each chapter can be closed only when every EU government is satisfied with the candidate’s progress in that field, as analysed by the European Commission. The whole negotiation process is concluded once all chapters have been closed.
The Accession Treaty then cements the country’s membership to the EU. It contains the terms and conditions of membership, along with potential transitional arrangements and deadlines.
The candidate country becomes a full EU member when the treaty has been ratified. In the interim, it benefits from special arrangements, such as being able to comment on draft EU proposals, communications, recommendations or initiatives, and “active observer status” on EU bodies and agencies.
Source: EU (2018), Steps Towards Joining, European Commission, Brussels, https://ec.europa.eu/neighbourhood-enlargement/policy/steps-towards-joining_en
Recent notable developments in policy areas covered by the Guidelines
Non-financial disclosure
The Guidelines call for timely and accurate disclosure on all material matters regarding the corporation, including the financial situation, performance, ownership and governance of the company. The Guidelines also encourage disclosure in areas where reporting standards are still evolving such as, for example, social, environmental and risk reporting. These expectations align with the expectations set out in the G20/OECD Principles of Corporate Governance as well.
As an EU member, Croatia has an obligation to transpose EU directives into national legislation, including the EU Directive 2014/95/EU on Non-Financial Disclosure and Diversity information by certain large undertakings and groups which requires public-interest entities to disclose social and environmental information in their annual reports (EC, 2018b). The Directive leaves flexibility to businesses as to the form chosen (sustainability report, annual report, environmental or social report). In terms of framework, businesses are to rely on national or international frameworks such as the Guidelines, ISO 26000, the UN Guiding Principles for Business and Human Rights or other recognised international frameworks (EC, 2014).
The directive was integrated into the Croatian legislation with the latest amendment of the Croatian Accounting Act, which entered into force on 1 January 2017 (Official Gazette 78/2015, 134/2015, 120/2016). Enterprises under the scope of the Act were required to prepare and publish non-financial statements for the first time for the financial year 2017. Limited data on the implementation of the Directive by businesses was available at the time of writing this report. The Ministry of Finance is currently reviewing the fulfillment of non-financial disclosure obligations. Nevertheless, studies on disclosure before the amendment of the Law on Accounting indicate that although large companies do disclose non-financial information, it is not a systematic practice and the quality of information is often uneven among companies. For example, a survey of 221 companies of 400 employees or more done in 2015 indicated that for the year 2014, only 17% published sustainability reports (Peršić, M., Lahorka, H., 2018). Implementation of the Directive is expected to bring about more disclosure as well as more coherent approach to the quality of information reported.
Fundamental rights are protected under Croatian law but there is scope to increase the participation of women and minorities
As recognised by the Guidelines and the UN Guiding Principles, states have a primary duty to protect human rights. However, businesses are expected to respect human rights independently of the state ability and/or willingness to fulfil its human rights obligations. Failure either to enforce relevant domestic laws or to implement international human rights obligations, or the fact that the state may act contrary to those laws and obligations, does not diminish obligation of businesses to respect human rights.
Croatia has ratified seven of the nine instruments on internationally recognised human rights as expressed in the Universal Declaration of Human Rights and the main instruments through which it has been codified: the International Covenant on Civil and Political Rights and the International Covenant on Economic, Social and Cultural Rights. The two remaining instruments are the International Convention for the Protection of all Persons from Enforced Disappearance (signed in 2007, but not ratified) and the International Convention on the Protection of the Rights of All Migrant Workers and Members of Their Families (OHCHR, 2018).5
Human rights are protected by the Constitution. Article 3 recognises human rights as being of the highest value to the constitutional order and Chapter III guarantees all basic human rights and freedoms. The Office of the Ombudsman, the Office of the Ombudsperson for gender equality, and the Office of the Ombudsman for Children, have been established as independent institutions. Additional offices and special bodies exist within the State administration, for example, the Government Commission for Human Rights (MVEP, 2018). At the end of the EU accession negotiations in 2012, the European Commission concluded that “human rights continue[d] to be generally well-respected,” while stressing the need to provide adequate resources to the Ombudsman. The Comprehensive Monitoring Report on Croatia’s state of preparedness for EU membership also noted the improvements made by Croatia in the protection of minorities, though minority employment in state administration and judiciary remained below legal requirements at the time (EC, 2012).
The latest report of the Ombudswoman of the Republic of Croatia reported that across all citizens’ complaints related to discrimination received by the office, the most widespread are on the basis of race, ethnicity or skin colour, or national origin (24% of all complaints). Considering all Croatian Ombuds institutions combined - the Office of the Ombudswoman, the Ombudswoman for Persons with Disabilities, the Ombudswoman for Children and the Ombudswoman for Gender Equality - the most prevalent type of complaints received is on the ground of gender at 50% (Office of the Ombudswoman, 2016). The Office of the Ombudswoman also reported that citizen’s complaints related to discrimination most frequently referred to work and employment issues (43.6% of total cases), followed by those related to the work of the public administration (9.1%).
In 2017, female labour force participation was at 45% in Croatia, lower than OECD average (51%) and EU average (50%) (World Bank, 2018). In 2016, the Commissioner for Human Rights of the Council of Europe expressed its concern that the number of representatives of national minorities employed in public service was insufficient (only 3.4% while national minorities account for 7.6% of the population), with a decrease in their employment in recent years. Concerning access to employment more broadly, the Commissioner noted that persons belonging to the Serb minority faced difficulties in accessing the private labour market (Council of Europe, 2016a).
In terms of labour rights, Croatia has ratified all ILO core conventions. The Labour Act is the main act regulating labour law. It prohibits direct and indirect discrimination and regulates key aspects of employment such as employment agreements, age for employment, leaves, maternity leaves, salaries and strikes. The Labour Act was amended in 2014. The reform aimed to address rigidities in the Croatian labour market, increase labour force participation and support more flexible business models adapted to market demands. The Act introduced greater flexibility in working hours, easier termination of contracts, and encouraged atypical forms of employment. It also aimed to maintain employee protection and combat the grey economy (Eurofound, 2015).
While praised by many for addressing key issues that limited both employment and competitiveness, social partners have voiced concerns with the final version of the act. For employers, the changes were not significant enough to have an impact on market rigidities (Eurofound, 2015). The Croatia Employers Association, for example, pointed out that the changes were not profound enough to allow a greater number of workers to enter the market, and later move from non-standard to standard forms of employment (Butkovic, Samardzija, 2016). Trade unions considered that the changes were unnecessary as the national legislation was already aligned with EU acquis, and disrupted the balance between employment protection and flexibility in favour of employers (Butkovic and Samardzija, 2016).
Collective bargaining is regulated by the Labour Act and the 2014 Act on Representativeness of Employers' Associations and Trade Unions (ILO, 2015). Trade union density, which is estimated to be about 30 % in Croatia, is above EU average (approximately 23 %) and OECD average (approximately 17 percent). However, like in the rest of Europe, this number is gradually declining (OECD, 2018). According to the Act on Representativeness (Official Gazette no 93/14, 26/15), four trade union confederations fulfil representativeness criteria for collective bargaining (the Independent Trade Unions of Croatia (ITUC), the Union of Autonomous Trade Unions of Croatia (UATUC), the Association of Croatian Trade Unions (MACT) and the Croatian Trade Union Association (CTA)). The Croatian Employers Association is the only representative employers association, with 6 000 members that employ 400 000 people (Butkovic and Samardzija, 2016). There have been reports of weakening social dialogue and a shifting focus of collective agreements from wages and material rights to keeping employment (ibid). It is estimated that for about half of the valid collective agreements, provisions on workers’ pay rights such as the basic wage are not fully defined (Eurofound, 2017).
Compliance with the Labour Law also remains a challenge. The Office of the Labour Inspectorate in 2016 recorded violations such as employing workers without work permits, illegal labour contracts, failure to pay wages or benefits, failure to grant leave, failure to register employees with the pension authority, employing workers not registered with a health insurance agency, and failure to report overtime (U.S Department of State, 2017). The non-compliance with the law is also compounded by the informal economy. Although some estimate that the informal economy has decreased over time, undeclared work remains substantial in Croatia. Estimates of the share of undeclared work vary between 8% and 30% of Croatian GDP (Bejakovic et al., 2017). A study conducted in 2017, based on a representative survey of 521 companies conducted among businesses from various sectors, indicated that more than 92% of respondents perceived the share of undeclared work in Croatia to be above 20%. Nearly 30% of respondents thought that the share of undeclared work was higher than 50% (Ibid).
Environmental protection is of strategic importance for the country’s economy
The Guidelines call on enterprises to take due account of the need to protect the environment, public health and safety, and generally to conduct their activities in a manner contributing to the wider goal of sustainable development. This entails sound environmental management that aims to control both direct and indirect environmental impacts; establishing and maintaining appropriate environmental management systems; improving environmental performance; being transparent about the environmental impacts and risks, including also reporting and communicating with outside stakeholders; being proactive in avoiding environmental damage; working to improve the level of environmental performance in all parts of their operations, even where this may not be formally required; and training and education of their employees with regard to environmental matters.
Croatia’s economy relies greatly on its exceptional coasts and natural resources. This is especially true for the tourism sector, but also for example for agriculture. The first Environmental Protection Act (EPA) was promulgated in 1994, and amended in 1999. Croatia successfully concluded EU negotiations on environment in 2010 (see Table 2) and became part of Natura 2000, a network of protected areas. In 2017, the Ministry of Environment signed a cooperation agreement with directors of nature parks to further develop the network and management of Natura 2000 (Rogulj, 2017). In 2018, Croatia ranked 41 out of 180 countries on the Yale Environmental Performance Index. Compared with other EU countries, however, Croatia ranks in the lower fifth, above Hungary (43), Romania (45), Estonia (48) and Poland (50). Croatia’s best performances are recorded in Biodiversity and Habitat (14/180), Heavy Metals (18/180) and Agriculture (32/180). The lowest scores concern Air Quality (106/180) and Air Pollution (112/180) (Yale, 2018).
In 2017, 48.3% of Croatia’s energy consumption came from imports, which is slightly less than EU average (54%). Croatia’s energy mix of primary products include a high share of oil (41%), natural gas (26%) followed by a relatively high proportion of renewables (25% compared with 13% on average at EU level) and solid fuels (8%) (EC, 2017a). Over the last decade, Croatia has made important efforts to reduce its dependence on oil imports and electricity supply, while preserving environmental sustainability. The Energy Strategy of the Republic of Croatia for 2009-2020 aims to develop and apply renewable energy sources as a measure to both decrease greenhouse gas emissions and increase the energy supply security using local energy sources. As part of this strategy, the government set the objective to increase the electricity-generating capacity in large hydropower plants (MINGO, 2009). In 2016, the Act on Renewable Energy Sources and High-efficiency Cogeneration (Official Gazette no. 100/15 and no. 123/16) introduced a support scheme for renewable energy projects, in the form of a premium tariff and guaranteed feed-in tariff, with a view to achieve efficient use of energy and reduce the impact of fossil fuels on the environment (IEA, 2018).
Hydropower plants as a renewable energy source are the largest producer of renewable electricity in Croatia (EC, 2017a). Several dozen small hydroelectric power projects are planned across the country, either by state-run HEP national energy group or private companies (Veselica, 2017). Even though they do not emit greenhouse gases or other pollutants, such projects may constitute a serious threat to biodiversity and surrounding nature, as well as communities. In 2013, a project of construction of an underground power plant close to Vilina Cave – Ombla Spring, an area of high cave fauna biodiversity, was abandoned following an environmental impact assessment and under mounting pressure from civil society. The EIA identified potential negative impact on a number of cave species, leading the EBRD to withdraw from the loan originally approved to finance the project (UNECE, 2014). The multiplication of small hydropower plants in the country may impact the appeal of touristic waterways.
The revision of the Environmental Protection Act in 2007 included obligations to improve the quality and implementation of EIA and introduced Strategic Environmental Assessments (SEA). In 2017, the latest EU Environmental Implementation Review of Croatia, indicated that while Croatia had aligned its legislation with the Strategic Environmental Assessment Directive, further efforts were still necessary to achieve full conformity with the Environmental Impact Assessment Directive (2014/52/EU) (EC, 2017b). In February 2018, Croatia amended the Environmental Protection Act to transpose provisions of the Environmental Impact Assessment Directive 2014/52/EU into national legislation (Official Gazette no. 12/2018).
Waste management is another important environmental issue in Croatia. The Act on Sustainable Waste Management was adopted in July 2013 and entered into force 23 July 2013 (UNECE, 2014). In 2017, a Waste Management Plan for the period 2017-2022 was adopted to improve the status of waste management in the country and meet EU requirements (GoRC, 2017).
In March 2018, the EC referred Croatia to the Court of Justice of the EU over Croatia’s management of industrial waste deposited at the Biljane Donje site (town of Benkovac, Zadar county), at the so-called "Crno brdo" (“Black hill”) illegal industrial waste landfill. In this case, Croatian authorities allegedly failed to classify material as waste in line with EU Directive, leading to 140 000 tons of harmful stone aggregate deposited directly on soil, threatening local populations and the environment. The European Commission opened the infringement proceedings in 2015, and concluded in 2018 that no progress had been made to ensure proper waste management that does not endanger human health and harm the environment (EC, 2018c). According to the Ministry of Environment and Energy, the company that temporarily stored industrial waste at the Biljane Donje site had failed execute an inspectional decision ordering the removal of the waste. To address this issue, and following the opening of the European Commission’s infringement proceedings, the Croatian government undertook a series of activities in 2017 and 2018, including commissioning opinions and analyses of the waste. These analyses6 concluded that the waste was a mineral raw material which could be used in the construction industry and was not hazardous for the environment. Since the state is the legal owner of this material, the government decided to use this material for construction purposes on property owned by Croatia near Zemunik Airport. The Ministry of Environment and Energy issued a Decision on the Suspension of the Execution of the Inspectional Decision.
Despite significant efforts, corruption still weighs on the business climate
As discussed in Chapter 7, corruption continues to be perceived by entrepreneurs as an important barrier to doing business in Croatia, despite significant efforts from the Croatian government to address the issue. The Government has carried out a series of anti-corruption strategies and programs, as well as measures to strengthen the institutional law enforcement framework. A whistle-blower protection act was enacted in 2019. In line with global trends, companies have started adopting corporate codes of conduct to prevent corruption. However, awareness of such standards internally remains low and so far has been barely supported by internal guidelines, policies and training on corruption.
Implementation of the Guidelines by businesses may play a role in supporting Croatia’s efforts to reduce corruption. The Guidelines set up the expectation that enterprises should not, directly or indirectly, offer, promise, give, or demand a bribe or other undue advantage to obtain or retain business or other improper advantage, and should also resist the solicitation of bribes and extortion. The Guidelines also provide guidance on systems and processes that companies can implement for preventing and detecting bribery, based on a risk assessment tailored to the specific context of the company. They include a recommendation for enterprises themselves to introduce safeguards in their own policies to protect bona fide whistle-blowing activities, including protection of employees who, in the absence of timely remedial action or in the face of reasonable risk of negative employment action, report practices that contravene the law to the competent public authorities.
Responsible business conduct and the state as an economic actor
Governments are expected to behave responsibly in the context of state as an economic actor. This includes activities as employers, in procurement agencies and state-owned enterprises (SOEs). Not only is this in the public interest, it also enhances the government’s legitimacy in making recommendations on RBC to businesses.
Governments can promote RBC principles and standards through engagement with enterprises that are recognised as behaving responsibly. The OECD Recommendation of the Council on Public Procurement (OECD, 2015a) encourages the use of secondary policy objectives, including responsible business conduct standards, for public procurement processes.
As already highlighted in the previous Chapter of this Review, public procurement in Croatia amounted to 13.4% of the GDP in 2017, at par with the average figure in OECD countries (12% of GDP). The Public Procurement Act of 2012 (as amended) is the main legislation regulating public procurement in Croatia, transposing EU directives and prescribing procedures on all categories of contracts (EC, 2016). 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 (“MEAT”) Criteria, giving more prominence to environmental and social criteria.
In 2015, the Croatian government adopted the first National Action Plan on Green Public Procurement for the period 2015-2017, which aimed to increase the use of environmental criteria in public procurement. The government is currently conducting an analysis that aims to identify opportunities to improve the implementation of Green Public Procurement. The results of this analysis will inform the development of a new National Action Plan for Green Public Procurement.
As discussed in the previous chapter of this Review, measures to enhance transparency and integrity of the process have included the introduction of an e-procurement system in 2008 and the legal obligation since 2016 to allow e-submission of tenders. Other measures 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.
Nevertheless, public procurement in Croatia continues to be considered vulnerable to risks of corruption. As quoted in Chapter 7, a 2016 study commissioned by the European Parliament concluded that among the 28 EU member states, Croatia had the highest risks of corruption in public procurement contracts (Hafner et al., 2016). Another 2016 study, also quoted in Chapter 7, this time commissioned by the EC, underscored that political influence continues 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 (EC, 2016c).
The Guidelines apply to all entities within the enterprise sector whether private, state or mixed. The Guidelines on Corporate Governance of State-Owned Enterprises (SOE Guidelines) also recommends that SOEs “observe high standards of responsible business conduct” and state that “expectations established by the government in this regard should be publicly disclosed and mechanisms for their implementation be clearly established” (OECD, 2015b). The SOE Guidelines’ Annotations further encourage measures to report on foreseeable risks, including in the areas of human rights, labour, the environment, and risks related to corruption and taxation.
As highlighted in Chapter 3 of this Review, Croatian SOEs dominate large parts of the economy, in particular in the infrastructure sector. SOEs also operate in competitive industries such as agribusiness and manufacturing. The EBRD estimated that in 2017 SOEs controlled about 30% of total assets in the economy, contributed 15% of the total revenue, and employed some 73 000 employees, or 5% of the total workforce (EBRD, 2018).
As noted in the previous chapter, the government has identified mismanagement and vested interests in the SOE sector as underlying causes of continuous losses incurred by SOEs and harming competition and, in this respect, has been gradually, albeit slowly, trying to tackle these issues through the adoption of several measures aimed at preventing corruption and strengthening integrity in SOEs. Against this background, a series of practical and legislative steps have been taken recently, including the development of a new anti-corruption programme for SOEs for the period 2019-2020, focusing on preventing conflicts of interests and further strengthening ethics and integrity of SOEs. The details of the programme were still under consideration at the end of March 2019.
Chapter 7 has highlighted additional measures taken by the government. In 2017, Croatia adopted a 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; in addition, as discussed in the previous chapter of this Review, the act on political activity and electoral campaign financing prohibits funding by state and local government-owned companies.
Outlook and policy recommendations
Croatia has taken significant steps to strengthen the legal framework that underpins RBC in the country, notably in the context of EU accession. Croatia has aligned its legislation with EU standards in all the policy areas covered by the OECD Guidelines for Multinational Enterprises. Significant progress has been achieved in the area of corruption, the judiciary and the protection of fundamental rights. Furthermore, since accession, Croatia has an obligation to transpose EU legislation into national law and has done so, for example as evidenced in the transposition of the EU Directive 2014/95/EU on Non-Financial Disclosure and Diversity information by certain large undertakings and groups and the EU Directive 2014/52/EU on environmental impact assessments.
Despite significant legislative advances, some challenges persist. Perceived corruption in particular remains high. Despite important efforts in the field of equal opportunities and anti-discrimination, female labour force participation is lower than OECD and EU averages (45% vs 51%). While environmental protection has long been a focus for the government, negative social and environmental impacts in relation to energy projects and industrial waste still pose a threat to the country’s biodiversity and sustainability of key sectors of the economy such as tourism. Raising awareness and understanding of RBC could facilitate businesses in complying with national legislations and meeting RBC expectations. In particular, promoting and actively supporting the use of OECD due diligence guidances by enterprises operating in or from Croatia could contribute to avoiding and address environmental and social impacts related to energy projects and industrial activities.
Business associations have played an important role in raising awareness of RBC in the country, pioneering multi-stakeholder initiatives, as well as the development of materials and events aimed at promoting RBC. This is a good sign and the Croatian government has a ripe opportunity to build on these successes. Developing a national, overarching framework on RBC could help engage a wider range of stakeholders, including NGOs and trade unions and promote further policy coherence, including in areas related to state as an economic actor.
The establishment of a strong NCP will raise awareness of RBC in the country, support implementation of RBC principles and standards by businesses and contribute to improved accountability in case of issues that can arise from non-observance of the Guidelines. Croatia has set out and consulted on the plans for establishing the NCP, both with Croatian stakeholders and OECD institutional stakeholders. The composition envisioned for the NCP includes representatives from the government, business associations, NGOs and trade unions. Having a balanced representation of stakeholders will be key to ensure that the NCP can operate in an impartial manner. In addition, throughout the process of establishing the NCP, actively engaging with stakeholders, in particular trade unions and civil society organisations, is an important aspect of building the confidence of social partners.
As an economic actor, the Croatian government is expected to lead by example on RBC and implement the Guidelines in its own practice, including through public procurement and in the activities of SOEs. As noted in previous chapters of this Review, while the Government has made important strides in strengthening public governance in Croatia, both public procurement and SOEs remain areas that are particularly vulnerable to risks of corruption. Implementation of the Guidelines and integration of RBC expectations in the Government’s activities as an economic actor could play a role in supporting the Government’s efforts to further reduce corruption and enhance the transparency and integrity of the public sector. In addition, by exemplifying RBC in their own role within the economy, Governments can enable RBC and incentivise best practices with regards to RBC. In line with recommendations made to EU member states by the Committee of Ministers, the Croatian government could consider taking into account recommendations made by NCPs in their decisions on public procurement, export credit or investment guarantees (Council of Europe, 2016b).
Policy recommendations
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Establish an effectively functioning NCP to further the effectiveness of the Guidelines. All Adherents to the OECD Declaration have an obligation to establish an NCP, in accordance with the Decision of the Council on the OECD Guidelines for Multinational Enterprises. Croatia should ensure that the decision-making process in the NCP is well-defined and clear, particularly as related to the respective roles of the two main NCP bodies.
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Actively promote the Guidelines and the NCP among businesses operating in Croatia and Croatian companies operating abroad, as well as among trade unions, workers' organisations and civil society representatives, including measuring business awareness and commitment to implement the Guidelines. Raising awareness of the Guidelines, as well as RBC principles and standards among all relevant stakeholders is an important aspect of ensuring that the NCP can effectively fulfil its mandate.
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Take a proactive approach to engage with all stakeholders, in particular trade unions and civil society organisations. Croatia has consulted with stakeholders on the plans for the NCP, and plans to involve various stakeholders in the activities of the NCP through a multi-stakeholder group. However, NGOs and trade unions are currently underrepresented in plans for the multi-stakeholder group. Engaging with all stakeholders is key to building confidence.
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Undertake a capacity building exercise for the NCP within one year after adherence and, in that context, report back to the WPRBC on the progress made in implementing the recommendations made to improve the effective functioning of the NCP. Particular attention should be paid to ensuring that the decision-making process in the NCP is well-defined and clear, particularly as related to the respective roles of the two main NCP bodies.
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Promote the use of the OECD due diligence guidances by enterprises operating in or from Croatia, through active support to these enterprises in implementing the recommendations of the due diligence guidances, and ensure the widest possible dissemination of the various sector guidance and their use by various stakeholders. Countries that adhere to the OECD Declaration commit to also adhere to all of the related OECD legal instruments aimed at supporting the implementation of the OECD Guidelines, including the OECD due diligence guidances. Promoting and supporting implementation of these instruments will contribute to facilitate businesses in meeting RBC expectations in Croatia.
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Promote policy coherence and improve coordination on RBC-related policies within the government. In particular, developing a National Action Plan on RBC in co-operation with relevant stakeholders including businesses, trade unions and civil society organisations could be useful in this regard. Policy coherence is crucial to ensure effective design and implementation of policies to promote RBC.
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Notes
← 1. On 23 May 2019, at its 158th Session, the Government adopted the draft Government Decision on the Establishment of the National Contact Point (Prijedlog odluke o osnivanju Nacionalne kontaktne točke kao trajnog mehanizma za promicanje i primjenu Smjernica za odgovorno poslovanje Organizacije za gospodarsku suradnju i razvoj (OECD)). Government Decisions are legal acts approved by the Government and signed by the Prime Minister, and are published in the Official Gazette. They remain valid until revoked or cancelled by the Government.
← 2. The board of the CSR Index created at the end of August 2018 was established in the Croatian Chamber of Economy. The Board consists of members from the Croatian Business Council for Sustainable Development, Croatian Chamber of Economy, School of Economy of the University of Zagreb, Zagreb School of Economy and Management, Institute for Social Research, Ministry of Economy, Entrepreneurship and Crafts, Ministry of Foreign and European Affairs, Ministry of Environment and Energy, Ministry of Labor and Pension System, Ministry of Finance, Ministry of Regional Development and EU Funds and Ministry for Demography, Family, Youth and Social Policy.
← 3. A specific project on CSR, led by the Ministry of Economy and funded by the EU in 2010, was developed in previous years aiming to bring together CSOs, business associations and international organisations together through a CSR Platform. A Strategic Framework for CSR was created to serve as a basis for the development of a National CSR Strategy through this project. The strategy envisions awareness raising on CSR, support for multi-stakeholder initiatives and positioning Croatia as a regional CSR leader, as well as establishing a centre of excellence for CSR. However, it was never adopted, and to date no overarching policy or framework on RBC exists. The platform to date has also been inactive, but it is currently under consideration for reactivation.
← 4. The Sustainable Development Strategy will expire at the end of 2019 and is currently being prepared for the next period under the responsibility of the Ministry of Environment and Energy, which coordinates with relevant state authorities. Coordination of the preparation National Development Strategy falls under the responsibility of the Ministry of Regional Development and EU funds.
← 5. Globally, 53 countries have ratified the International Convention on the Protection of the Rights of All Migrant Workers and Members of their Families; 14 have signed it but not ratified it; 131 have not taken any action (OHCHR, 2018).
← 6. Analyses and opinions obtained include: opinion of the Ministry of Economy, Mining Directorate, dated 27 April 2018; findings and opinions of the Faculty of Mining, Geology and Petroleum Engineering of the University of Zagreb, dated 21 June 2018; findings and opinions of the Croatian Geological Survey, No. 26/18, dated June 2018; addendum to the findings and opinions of the Croatian Geological Survey, dated August 2018.