Assessing Bosnia and Herzegovina's Reform Agenda for Private Sector Development

Executive summary

In 2023, the European Union (EU) launched its Growth Plan for the Western Balkans to accelerate socio-economic convergence and deepen integration into the EU Single Market. The plan is backed by the Reform and Growth Facility, which provides EUR 6 billion to support reform efforts. Accessing this funding requires preparing and submitting a Reform Agenda, which serves both as a prerequisite for funding and as a roadmap for essential reforms. After significant delays, Bosnia and Herzegovina adopted its Reform Agenda on 30 September 2025, although its finalisation was still pending at the time of this report’s drafting. All Reform Agendas follow a shared structure, including a pillar on “Private Sector Development and Business Environment,” on which this report focuses.

This report, Assessing Bosnia and Herzegovina's Reform Agenda for Private Sector Development, examines the country’s current position in relation to—though not limited to—this pillar and provides additional reform areas that can be considered in future version of the Agenda. It comprises five substantive chapters: (i) state-owned enterprises (SOEs); (ii) business registration and licensing; (iii) transparency and accountability in business practices; (iv) access to finance; and (v) vocational education and training. Each chapter assesses the current situation, identifies key challenges and policy bottlenecks and proposes practical steps forward. These recommendations not only aim to accelerate reform implementation, but also highlight areas requiring further preparation and provide the basis to support ongoing monitoring.

Key policy areas

State-owned enterprises (SOEs)

Recent developments reveal some advances in the governance and monitoring of SOEs, while alignment with key EU standards on state aid and sustainability has advanced slowly.

Ownership and corporate governance arrangements are gradually strengthening, although significant gaps still remain. Institutional oversight has improved, notably with the establishment of the Public Enterprises Oversight Co-ordination Department (OCD) in Republika Srpska (RS) and plans to formalise recently established oversight units in the Federation of Bosnia and Herzegovina (FBiH). At the policy level, no unified ownership framework exists, and the rationale for state ownership remains undefined, leaving SOEs under public control without clearly articulated objectives. Board professionalisation remains limited, with varying nomination procedures, partial transparency and continued politicisation, reflecting the need for greater independence and governance standards.

Monitoring and reporting on SOE performance is advancing but remains uneven. RS has made progress with the publication of its first aggregate report in 2025, and draft legislation mandating annual reporting to government signals a move toward institutionalised oversight. In the FBiH, parliamentary reporting requirements are in place, but the absence of public disclosure limits transparency and accountability. Improvements in data collection are reinforcing these efforts: RS is developing a centralised SOE database for direct reporting, while the FBiH’s registry provides structured, regularly updated information on all SOEs, although aggregate data on them is still unavailable. Despite these advances, weak compliance with financial and disclosure standards, along with minimal non-financial reporting, continues to constrain transparency, accountability and effective governance of SOEs.

State support for SOEs leads to an uneven playing field for private companies. SOEs receive direct or indirect subsidies despite persistent underperformance, reflected in negative returns on both capital and assets, and with SOEs accounting for 67% of all tax arrears. The situation is further compounded by state aid legislation and practices that remain misaligned with EU rules, with subsidies often granted without ex ante scrutiny or clearly defined conditions, reinforcing competitive distortions.

Sustainability expectations for SOEs are almost entirely absent. Despite their dominant role in sectors with high environmental impacts, accounting for an estimated 77% of employment in the energy sector and 80% in mining, both entities have yet to set clear requirements for SOEs’ sustainability strategies or disclosure. Initial efforts have so far focused on raising awareness of EU sustainability reporting standards.

Business registration and licensing

Some gains have been made in business registration through the creation of an enabling environment for e-registration, but mutual recognition of licenses across the country remains unaddressed.

In the absence of centralised, fully operational digital portals, business registration procedures leave room for improvement in terms of efficiency. Both entities and Brčko District have taken steps to create an enabling environment, including adopting amendments or bylaws that support electronic registration, digitising court archives and, in some cases, such as in the FBiH, piloting small-scale e-registration programmes. Despite these efforts, current digital portals do not provide a fully online experience, as in-person visits are still required for key steps such as paying registration fees, obtaining customs and tax identification numbers and completing other essential procedures.

A key factor limiting the full digitalisation of these portals is the introduction and use of e-signatures, which has encountered significant barriers. The new state-level Law on Electronic Identification and Other Trust Services, aligned with key EU regulations on e-signatures, has not yet been adopted due to ongoing legal challenges. In addition, the lack of accredited providers issuing digital signatures for businesses further restricts uptake. Without functional e-signatures, the entity and Brčko District e-registration portals cannot be fully operational, representing a major obstacle to streamlining the registration process.

Licensing and permitting have benefitted from some streamlining, although barriers remain, particularly around mutual recognition and administrative complexity. Efforts such as reviews of permits and licenses in RS and Brčko District aim to reduce complexity, while digitalisation initiatives—including centralised portals in RS and select FBiH cantons—have been emerging. Yet, online applications remain limited, and companies must often navigate multiple government levels. Divergent bylaws across entities force firms to reapply for licenses nationwide, with no ongoing efforts to harmonise regulations for mutual recognition. The revenue-generating role of licenses and permits constrains efforts toward their simplification and alignment.

Transparency and accountability in business practices

Although legislative progress has been achieved in areas such as preventing conflicts of interest and strengthening anti-money laundering/combating the financing of terrorism (AML/CFT), advancements in whistleblower protection and the uptake of alternative dispute resolution mechanisms remain limited.

Oversight of business integrity and corporate accountability remains fragmented and inconsistently enforced. Although a new state-level definition of “beneficial owner” has been aligned with EU regulations, its application still varies across the country, with different thresholds in RS and no definition in the FBiH or Brčko District. The lack of a unified approach is also evident in the absence of beneficial ownership registers in the FBiH and Brčko District, and in RS where the register exists but authorities do not actively verify its accuracy or timeliness. More broadly, there are no policy frameworks at any level of government to guide and promote business integrity in the private sector. Corporate liability frameworks are in place but do not require due diligence, and enforcement is very limited: in 2024, of 14 recorded corruption cases, only one involved a company or organisation.

Preventing corruption in Bosnia and Herzegovina has seen some legislative progress, but significant gaps and inconsistencies remain. Recent developments at the state level, including the Law on Preventing Conflict of Interest and the establishment of the new Commission for Deciding on Conflicts of Interest, signal attempts to strengthen oversight and accountability. However, fragmentation across jurisdictions, weak enforcement and gaps in entity-level frameworks—most notably the absence of a functioning conflicts-of-interest oversight body in the FBiH—continue to undermine effectiveness. Whistleblower protections remain narrowly defined and inconsistently applied, creating an environment of uncertainty that discourages reporting. Only 10 individuals were granted whistleblower status at the state level between 2014 and 2022.

Strengthened AML/CFT frameworks are limited by challenges in implementation. A key milestone was the adoption of the new AML/CFT Law in February 2024, which aims to align the country more closely with international standards while enhancing co-ordination among domestic authorities and with international partners. Despite these advances, compliance remains rather limited: the country meets only 4 of the 40 Financial Action Task Force’s Recommendations, highlighting persistent weaknesses in adherence to global AML/CFT standards. In practice, enforcement remains insufficient, as evidenced by the low number of investigations and prosecutions of money laundering and terrorist financing offences.

Use of alternative dispute resolution (ADR) remains limited. Despite an average court disposition time of 538 days, ADR mechanisms are underutilised as a means of resolving disputes. Available data illustrate this low uptake: in 2023, only 148 new mediation cases were recorded, with 5.9 mediators per 100 000 inhabitants—well below the regional average of 17.8. For arbitration, data are lacking, with no figures on case numbers or the overall volume of business disputes. This limited use reflects both structural and practical constraints. Legally, both entities and Brčko District lack dedicated arbitration and mediation laws, instead relying on civil and criminal procedure codes, which limits clarity and predictability. Practical uptake is further constrained by low awareness of ADR mechanisms among businesses and limited familiarity among legal professionals.

Financial support for businesses and innovative start-ups

Businesses’ growth and competitiveness are hampered by financial constraints and underdeveloped or missing innovation frameworks, with more consistent support emerging only in the area of digitalisation.

Business segments and activities that are not easily served by the banking sector have few alternative financing options. Although the banking sector is well-capitalised, high-risk segments, such as start-ups, face stringent collateral requirements. Guarantee funds could help mitigate these barriers, but the existing ones’ uptake remains limited, while opaque application and granting procedures reduce their effectiveness. Non-bank financing options are also underdeveloped: leasing and factoring operate below potential, and capital markets remain shallow, with market capitalisation at just 20.2% of GDP—less than half the EU average of 56.6%. Early-stage financing is virtually absent, constrained by regulatory, market, and institutional barriers: no angel investments had been recorded as of July 2025, and venture capital amounted to only EUR 2.6 million in 2024.

The country’s innovation system is fragmented and lacks coherence, with limited progress in improving co-ordination and overall policy alignment. At the state level, no overarching strategy exists to co-ordinate innovation policy. Entity- and district-level approaches are at different stages of development: RS has a relatively well-developed innovation strategy and supporting legislation, while the FBiH and Brčko District lack dedicated overarching strategic frameworks. Even then, plans to establish entity-level innovation funds have yet to be operationalised. This uneven landscape has resulted in compartmentalised policies and isolated initiatives, limiting the ability to leverage national economies of scale. The Smart Specialisation Strategy offers a potential opportunity to address this fragmentation by providing a coherent state-level framework, but its development has been slow, and the strategy remains unfinished despite being initiated in 2020.

Support twin transition of SMEs is largely concentrated on digitalisation, despite the critical role of greening in enabling businesses to integrate into the EU market. Businesses seeking to green their operations or develop environmentally friendly products and services rely on environmental protection funds, as well as loans and grants provided by domestic financial institutions and international donor programmes. Despite these efforts, support remains insufficient, particularly for export-oriented firms preparing for the EU’s Carbon Border Adjustment Mechanism. Ad hoc initiatives, including technical assistance in the FBiH and workshops on reporting requirements in RS, aim to help businesses meet regulatory obligations, but their reach is limited. In contrast, support for SME digitalisation is more structured, combining dedicated funding calls in both entities with institutional backing through Digital Innovation Hubs and, in RS, the Centre for Digital Transformation.

Vocational education and training (VET)

VET has advanced work-based learning through new legislation, but limited reforms in adult learning and professional development of teachers and trainers constrain the system’s capacity to deliver skills demanded by the private sector.

Despite ongoing reforms, VET systems remain ineffective in equipping students with practical, work-based skills that match labour market needs. Current exposure to work-based learning is far below target values, with only 15% of VET students participating compared with the 40% goal, limiting practical skills development among graduates and reducing their attractiveness to employers. Dual VET has gained traction as a mechanism to address this gap, providing students with real-world experience and offering the private sector a channel to communicate skills needs. Recent efforts include strengthening legal and regulatory frameworks to clarify elements of dual VET and introducing financial incentives, although a comprehensive framework is still lacking at all levels of the country.

Although adult learning programmes have broad coverage, low participation rates and limited alignment with labour market needs constrain their effectiveness and reduce their impact in addressing skills gaps. Despite elevated long-term unemployment, only 1.8% of adults participated in some form of learning in 2023, far below the EU average of 12.8%. Uneven provider capacity, insufficient financial support to sustain participation and the underutilisation of skills intelligence in programme design limit effectiveness. Weak quality assurance also hampers efforts to evaluate outcomes and improve provision.

Challenges in VET quality and relevance are further compounded by insufficient preparation and training of both teachers and mentors. While continuing professional development is mandatory for VET teachers, mentors and trainers often face no training requirements. They also encounter access barriers, particularly when they must fund participation themselves, which can limit the quality of instruction provided to students. Moreover, for all pedagogical staff, existing training is inadequate for covering skills related to the twin transitions, restricting their awareness of these key concepts to both student and adult learners, despite a growing number of donor-led initiatives aimed at cultivating these skills.