Industry Snapshot

Clearing antipersonnel landmines is a EUR 267 million business globally. The industry requires specialist machinery and equipment to detect and clear mines and service providers that conduct mine clearance. Demand comes primarily from humanitarian “mine action programs.”

Profitability is low in Croatia. Between 2014 and 2016, the total profit for demining service providers in Croatia was only around EUR 1 million for the entire subcategory (40 firms). The average net profit margin was only 2.63 percent.

Emerging Strategic segments

Mine action companies are increasingly leveraging their core value of “making things safe” to diversify their businesses. Historically, these firms have focused on detecting mines and clearing explosives. Today, they are widening their focus to identifying threats of many kinds (terrorism for example) and clearing areas of many types of hazards (such as pollution). We call these newer segments “surveillance and detection” and “remediation,” respectively.

There are two critical markets for “surveillance and detection” solutions: “uninhabited areas” and “inhabited areas.” Uninhabited areas include vast rural territories, agricultural land, and remote areas. Inhabited areas, by contrast, are dense urban, metropolitan (and populated rural) areas.

“Urban surveillance and detection”

The market for “surveillance and detection” solutions in inhabited areas is especially attractive for Croatia. We refer to this as the “urban surveillance and detection” strategic segment.

In the “urban surveillance and detection” strategic segment, the threat to safety is unknown. Companies are offering advanced detection systems and quick threat neutralization.

The “urban surveillance and detection” strategic segment is part of the national security industry. This strategic segment overlaps with homeland security, counterterrorism, and public safety. At a 13.4 percent compound annual growth rate, Europe’s internal security market will reach EUR 130 billion by 2020.

The “urban surveillance and detection” strategic segment focuses on preventive safety solutions in densely populated and urban areas. Dense metropolitan areas, public transport routes and hubs, and tourist destinations require advanced preventive security. Privately run public spaces—such as stadiums, retail centers, hotels, and commercial areas—require the same vigilance. In these areas, any incidents can lead to the loss of human lives.

Private firms in the “urban surveillance and detection” strategic segment are assuming some traditional public safety roles. Private companies are cooperating with civil law enforcement to ensure the safety of civilians.

New technologies are coming online in the “urban surveillance and detection” strategic segment. Innovative products include advanced software for detecting suspicious activities, portable scanning devices, driverless explosive neutralization machinery, and advanced aerial surveillance.

Advanced buyers in the “urban surveillance and detection” strategic segment have zero tolerance for mistakes. Any errors can endanger lives.

“Remediation”

Firms in the “remediation” strategic segment prepare contaminated land for reuse. By removing toxins and pollutants, remediation unleashes the potential for future redevelopment.

At a compound annual growth rate of 7.62 percent, the “remediation” market will reach EUR 109 billion by 2022. In Europe alone, there are 3.5 million brownfields. (“Brownfields” are former industrial, commercial, or military sites where environmental contamination limits future use.)

Several factors drive demand for goods and services in the “remediation” strategic segment. Interest in environmental protection has been increasing, pollution is growing, and government regulations are becoming stricter.

Demand for the “remediation” strategic segment comes from many industries. They include real estate, oil and gas, mining, agriculture, forestry, and automotive.

Advanced buyers in the “remediation” strategic segment can be private site developers or public authorities. Private buyers will demand land remediation services only when the value of the land ensures a profitable return on their investment. Where this is not true, the advanced buyers will represent public-private partnership arrangements or publicly driven demand.

Both types of buyers demand exacting standards. For both, the final quality of the result is what matters. The remediation work must meet the highest regulatory standards.

Making Croatia Competitive

Where is the value chain weak?

To thrive in the emerging “remediation” and “urban surveillance and prevention” strategic segments, Croatian firms need to evolve their offerings to meet buyers’ demands. These specific opportunities in the value chain in Croatia require strengthening to support both strategic segments:

National regulation is not conducive to developing the local industry. Regulation should prescribe high mandatory industrial standards.
Education, technology transfer, skills, and knowledge improvement are needed to increase the competitiveness of local firms.
Technology and solutions development are lacking. Successful participation in this activity captures the biggest margin in the value chain.
R&D and innovation lags. Innovative research leads to successful technology and solutions development. It contributes to the competitiveness of the local cluster and fosters export opportunities.
Testing and certification are limited. Appropriate verification is needed to ensure that the workforce involved in remediating land and providing security is trained following the highest industry standards.

Several activities also need strengthening in the “urban surveillance and detection” strategic segment in Croatia:

Croatian firms do not provide active, technology-driven threat prevention and detection. Applying cutting-edge technologies is crucial to competitiveness.
Firms do not offer advanced security services. This is the central activity in the value chain.
Croatia does not have many skilled private security providers. Public law enforcement bodies cannot handle the complexity of recent threats alone, but Croatia does not have firms ready to help them.

Also, several value chain activities require strengthening specifically for the “remediation” strategic segment:

Croatia does not have a brownfield registry. A database that holds detailed information on contaminated sites is vital.
Local firms use old technology. Advanced foreign firms use innovative technologies for on-site investigation and risk assessment. Local firms should adopt the latest industry standards.
Croatian firms have low capabilities for remediation. There are many remediation methods. Understanding the technologies and their tradeoffs is essential to selecting the right approach to use in a given
Croatia lacks a regime for inspection and quality verification. Quality verification is independent proof that the treated land is no longer a threat to the local population or the environment.
Croatia lacks diverse sources of financing. Different types of sites require different sources of financing.

Areas for reform

Certain aspects of the industry ecosystem limit Croatia’s competitiveness in the emerging “remediation” and “urban surveillance and detection” strategic segments.

Demand conditions

The export sector is concentrated. Two demining machine producers account for most of Croatia’s exports in the mine action industry. Total annual exports are EUR 30 million by both companies combined (2016).

Domestic demand is low. There is only one domestic buyer of mine action services, the state-owned Croatian Mine Action Centre. Local demand is necessary to acquire the capabilities to compete in the international market.

Factor conditions

Three factor conditions affect both segments:

Labor productivity is low. From 2000 to 2014, productivity increased by only 20 percent while real wages increased by over 70 percent.
Finance is hard to access. Typical short-term loans are charged interest rates of 4.7 percent in Croatia.
Finding qualified workers is challenging. The number of science, math, computing and engineering graduates in Croatia is not high. In 2013, 5,300 students completed a degree in an engineering field, and only 2,900 in sciences, math, and computing.

Strategy, structure, and rivalry

Participation by local firms is limited. Local firms offer basic services; foreign firms seize more demanding opportunities. Local companies use outdated equipment, respond to emergencies, and sometimes dispose of contaminants in landfills.

Croatia does not have a “safety” cluster. Clustering pressures local firms to innovate and improve. It also creates an environment where firms can more easily share skills.

Related and supporting industries

Participation in the new segments requires the proper functioning of several associated industries. They include machinery, logistics, and supporting technologies. These industries do not have to be local. However, the local workforce needs training to use and apply the technology efficiently.

Croatia needs to improve telecommunication infrastructure. Prompt information exchange increases the efficiency of threat neutralization.

Recommendations

Croatia could improve its position in the emerging “remediation” and “urban surveillance and detection” strategic segments by:

Funding development of preventive threat detection technologies. The Ministry of Economy Entrepreneurship and Crafts (MoEEC) could implement this recommendation (via a ‘level 2’ fiduciary implementing body) as a matching grants program. Estimated timeframe: 7-10 years.
Jumpstarting advanced demand. A public agency could issue a tender for Croatian companies to develop integrated technologies and response capacities for specific threats. Implementation of this recommendation would be supported by a comprehensive financial support scheme for public procurement of innovative goods and services (as a technical assistance program for line ministries). Estimated timeframe: 7-10 years.
Providing training on environment protection and waste management. MoEEC could contract this program to relevant government agencies as a technical assistance program. Estimated timeframe: Includes short- (1 year) and long-term (10 year) programs.
Supplying business mentoring in product innovation, opportunity recognition, risk perception, entrepreneurship, and professional networking. MoEEC (through EBRD) or the Croatian Chamber of Economy could implement the mentoring program (through a technical assistance program) as a matching grants scheme. Estimated timeframe: 2 years.
Reforming the regulatory framework for land remediation industries to create the right incentives for Croatian firms. Needed measures include: (i) developing a unique database of all contaminated sites and (ii) adopting a soil protection act. MoEEC and other relevant agencies could implement this recommendation through public institutions and government agencies. Estimated timeframe: 3 years.