In Bosnia and Herzegovina, a New Law Helps Firms Bounce Back

For decades, the Kosmos manufacturing company thrived in Banja Luka, the second-largest city in Bosnia and Herzegovina. Since its founding in 1958, the firm has made everything from wind turbines to radar systems. But in 2016—mired in debt and unable to pay workers—Kosmos was on the verge of collapse. Officials believed that bankruptcy was the company's only option, despite the expected social and economic harm that layoffs would have in the area.

But a new insolvency law, supported by IFC and the World Bank, offered Kosmos a lifeline. The legislation—approved by the regional government just months earlier—allowed the company to stay in business while it restructured and paid off its debts. Now, Kosmos is thriving. In 2017 the 200-employee company turned a profit for the first time in more than a decade, and its workers will remain employed.

"Workers have jobs, they have a future," said Dušan Vještica, Kosmos' acting general manager. "In the coming months, we expect that more jobs will be created and that production will expand."

The insolvency law is part of a larger effort to improve debt resolution in Bosnia and Herzegovina, a country of 3.5 million in south-east Europe, and the wider Western Balkans. The initiative has received financial support from the Government of Switzerland's State Secretariat for Economic Affairs (SECO). The establishment of a good business-enabling environment and the increase in employment are important areas of SECO's program in the country.

Before the law was passed, struggling companies in the region were often forced to file for bankruptcy, leaving workers jobless and creating economic holes in many communities. But the regulations changed that. In the 16 months since the law was implemented in Bosnia and Herzegovina, 11 restructuring processes were initiated, saving 600 jobs. Four firms have already completed restructuring.

Preserving Jobs is the Top Priority

The new insolvency law offers options for struggling corporations. The regulations include a provision whereby companies that are viable can work with financial institutions to make sure that they keep operating. This preserves much-needed jobs.

As a result of this law, "Companies can receive treatment and get healthy again, while continuing to operate," says Anton Kasipovic, Minister of Justice in the Republika Srpska, which issues regulations for Banja Luka.

Kosmos’ experience demonstrates how the insolvency law can change realities on the ground. Today, its Banja Luka plant is a hive of activity, full of metalworkers and mechanical engineers—many of whom are young, recent hires. Much of the work they are doing is on new equipment that was purchased because of corporate investment. The payoff: Kosmos turned a roughly $1 million profit in 2017, the first time in 12 years it was in the black.

Focusing on Regional Development

As IFC and the World Bank work together to help governments develop more effective bankruptcy systems, companies like Kosmos become stronger, workers remain employed, and economic development continues. This is important because billions of dollars in business value, jobs, and capital are lost every year when firms that could continue operations become insolvent.

The World Bank Group’s strategies to keep businesses afloat include international standard-setting, detailed diagnostics, and implementation assistance. This work helps to save viable businesses, while allowing failed businesses to wind down efficiently. Ultimately, this increases the return to stakeholders, like banks and other creditors, reduces dependency on the courts for debt recovery, and saves jobs through business restructuring.

The payoffs of this strategy are already evident at Kosmos, where many workers have been with the company for their entire adult life.

"We succeeded and today the company is stable again," said Mihajlo Zrnic, whose first job was with Kosmos—where he remained most of his adult life. Such a long tenure has given him perspective and an appreciation for the company’s rapid turnaround. Now, "Salaries are paid regularly... and there are no outstanding debts to the government. We were astonished with the progress."

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Published in January 2018.