Serbia & Montenegro

                 Belgrade Airport .... .... ...... ......... Belgrade Railway Station

Following the fall of the Milosevic Government in October 2000, the Bank and the European Commission prepared, in collaboration with the Federal and Republican Governments, a comprehensive Economic Recovery and Transition Program describing the main actions needed for a return to sustained economic growth. This program, which includes a transport chapter, was presented to a major donor conference in June 2001. The Bank carried out a complete Transport Analysis in the context of this effort and the IFC completed a review of transport services and storage facilities.

Transport Analysis Summary. There are major deficiencies as well as opportunities in the transport sector of Serbia and Montenegro. On the whole, the sector is now much weaker than it was ten years ago. Unsustainable tariff and financial policies and inadequate use of existing funds have resulted in a significant de-capitalization of the sector. In general, the quality of infrastructure and equipment is now significantly lower than in neighboring countries. The capability of institutions has also much weakened, as systems and procedures for planning, monitoring, and managing transport activities have been neglected or even misused. Over the past decade, institutions have had to focus on coping with emergencies, leaving little room for developing and implementing long-term plans. This has resulted in inefficiencies and bottlenecks which are bound to slow down economic recovery if not addressed soon. How much and how fast the sector rebounds will depend essentially on the quality of the market-based incentive framework that the new government will establish for operators and investors in the sector, and the restoration of institutions.

Throughout the transport sector, coherent reforms are needed in the following four areas: (a) increased funding of maintenance and rehabilitation (rather than new construction); (b) institutional reform and institution building; (c) improvement of the legal and regulatory framework; and (d) private sector development and participation. In spite of the short-run fiscal costs of some of these reforms, their implementation will be critical to support the recovery, and will have implications for growth not only in Serbia and Montenegro but in the Southeast European region as a whole. Every effort should be made to minimize public costs of the reforms by charging users wherever reasonable and through increased private sector participation wherever there is sufficient scope for competition under a well functioning legal and regulatory framework. As traffic resumes, there may be some scope in the medium term for selected privately funded transport infrastructure projects. There is more potential for small private investments in transport services though. Since the June 2001 donor conference, international and bilateral financing institutions have been quite active in the transport sector. EIB and EBRD, in particular, have signed major loans for road and railway rehabilitation.

Roads and Road Transport. Serbia and Montenegro has a well developed intercity road network, comparable in terms of density and pavement type to that of the most advanced Central and East European countries. In both Serbia and Montenegro, there is presently no obvious road capacity problem and no need for new construction in the medium term. However, the funding of road maintenance has decreased dramatically over the past decade. As a result, the network is in poor condition and in some places deteriorating rapidly. On the positive side, there is a well-developed construction industry in Serbia and Montenegro, which was successful in international markets until the early 1990s. There is also a dynamic and entrepreneurial road transport industry with extensive experience and know-how.

The objectives of the governments in Serbia and Montenegro in the roads and road transportation sector should be:

• To increase considerably the funding available for road maintenance and rehabilitation to address bottlenecks and to stop the long term deterioration of the road network.
• To set up an efficient system of road user charges in Serbia.
• To reinstate the quality of the republican road administrations.
• To develop the road maintenance and construction industry.
• To improve the regulation and competitiveness of the road transport industry in both Serbia and Montenegro.

Railways. Over the past decade, a lack of funds, poor expenditure policies at the republican level, and economic sanctions have resulted in inadequate maintenance and almost no renewal of assets in the republican railways. The consequences are striking. The condition of the track has much deteriorated. There is also a serious problem with the fleet of locomotives, freight wagons and passenger coaches. As with the road sub-sector, most of the damage inflicted during the Kosovo conflict has been repaired. The financial situation of the railways is not sustainable. Only about 30 percent of revenues from operations is paid by freight and passenger customers. The railways operate as public enterprises dependent on the republican governments for their essential resources and key decisions, and are not fully accountable for their results. They have a traditional organization by functions, and not one based on business lines as in modern railways.

Specific near-term and medium-term objectives in the railways sectors of Serbia and Montenegro include:

• To address the most serious operational constraints on the republican railways through a targeted program of investments.
• To put the railways on a sound financial footing through financial restructuring efforts.
• To reorganize the republican railways into autonomous enterprises capable of competing successfully on the internal transport market.

Maritime Transport. The only major maritime facility in Serbia and Montenegro is the Port of Bar on the Montenegrin coast. It is a well run and well equipped facility. However, it operated at only 20 percent of its capacity in 2001. The port is a commercially-managed joint stock company looking forward to a privatization of its activities. While the port offers good performance to its users, its weak interior connections affect its overall competitiveness.

The port's future will depend on its ability to attract additional traffic. To facilitate this, the existing road and rail infrastructure is in serious need of periodic maintenance and, in some cases, upgrading (as explained above). In addition, sound policies need to be in place to facilitate the capture of traffic from neighboring countries and to ensure that traffic from Serbia is not hindered by cumbersome customs checkpoints. This for instance entailed the immediate removal of the 3 percent tax on Albanian traffic and a continuous focus on trade and transport facilitation within Serbia and Montenegro and with the port's main commercial partners. To attract external partners, the port will need to reduce the current level of uncertainty. In the medium-term, the Republic of Montenegro will also have to review the various options available to privatize port operations progressively, with a careful analysis of the regulatory implications of privatization.

River Transport. Serbia and Montenegro is endowed with 1300 km of rivers and canals accepting up to 1,500 tons vessels. The Danube (588 km), which carries most of this traffic, was until the recent Kosovo conflict a major transit corridor connecting the Black Sea to the North Sea through the Main and Rhine rivers. The river's condition and navigability are the most significant concerns today for river transport. In addition to damage during the Kosovo conflict, maintenance of the river bed was significantly reduced over the past ten years.

Most river operators expect traffic to resume rapidly once the river beds have been cleaned up, a process which is now well underway. The government strategy should consist, in the near-term, of restoring safe navigation on the Danube and the Sava River, and allowing the privatization of ports and the river fleet under sound conditions. In the medium-term, the strategy should focus on upgrading river navigability and signaling to offset the past reduced maintenance and adapt waterways to new international standards. Restoring the river network would benefit not only Serbia and Montenegro but also neighboring countries, such as Romania or Bulgaria, which have been affected by the loss of this cheap transport link with Western Europe.

Trade and Road Transport Facilitation. Traders in Serbia and Montenegro, as in most of Southeast Europe, face excessive logistical costs for their export, import and transit operations. Long delays and costly procedures increase the logistical costs and force companies to carry excess inventories to ensure timely deliveries. Addressing trade and transport facilitation issues will require an integrated effort entailing: (a) regional reintegration; (b) strengthening of transport operators and freight forwarders, and entry to market; (c) customs administration reforms; and (d) border crossing improvements.

World Bank  Ongoing Activities. Serbia and Montenegro has been included in the Trade and Transport Facilitation in Southeast Europe Program since mid-2002. This project aims at improving the performance of the Customs Administrations in Serbia and Montenegro and at removing impediments to international road transport, particularly by improving the efficiency of road border crossing points. Transport Rehabilitation Project has been approved in 2004. The main objectives of this project are to improve the effectiveness of the policies of the Serbian Road Directorate (SRD) for road maintenance and rehabilitation, through the introduction of new contracting arrangements with the private sector in two pilot districts, and, enhance the sustainability of the use of network analysis, in the selection of road rehabilitation segments.

Updated January 3, 2006