When the State Changes the Rules, Investors Seek Justice in Court

Franjo Pašalić, an investor in the Rogoznica resort Medine worth 300 million euros, spoke out in the media last week regarding the new Spatial Planning Act, under which he will not be able to subdivide his properties within tourist zones, and consequently, he will not be able to sell them separately in the future. Unfortunately, he is not the only one in our country whose investments are threatened by new regulations, and it is questionable what investors can do other than retreat to the courts to sue the state. And even that is not certain for them.

Many problems for entrepreneurs arise from state and local authorities changing regulations, especially in advanced stages of investments. It is simply incredible knowing that both the government of Prime Minister Andrej Plenković and local self-government units swear to be ready to attract investors to Croatia. And then, when they jeopardize investments with a stroke of a pen, they shrug their shoulders.

This, however, is not what they tell us at the Ministry of Economy, but judging by unofficial statements from investors, it is so. There used to be an Agency for Investments and Competitiveness, which was shut down on the first day of 2019. Although it was never officially stated that it was closed due to inefficiency, we can say with certainty that it did not fulfill its task, so the government entrusted its work to the Ministry of Economy, which told us that the Agency was closed for ‘improving and rationalizing state administration.’ Thus, the activities and expertise of the former Agency continued within the Directorate for Internationalization of the Ministry of Economy, which provides ‘free and operational support to investors in all phases of investment realization.’

– Support is focused on investments in manufacturing-processing and development-innovation activities, as well as business support and high value-added services. We emphasize the importance of timely contact with the Directorate because a large part of administrative difficulties and delays can be avoided by timely directing investors through legal and procedural frameworks – they state from the Ministry, adding that the contacts of responsible persons are also available on a special page of the Ministry.

An Association is Being Established

Of course, it is questionable how much the mentioned Directorate can actually do in cases where regulatory changes stop or slow down investments. Because, as Pašalić says, ‘the new law does not define at all what status projects that have already started would have. It is full of legal gaps and inconsistencies that imply it was crafted by some lobbying group.’

Unofficially, some large hotel companies allegedly lobbied to include a ban on subdivision in the Spatial Planning Act for projects like Pašalić’s resort. It is hard to prove, but the very fact that the new law does not mention already started projects, i.e., there are no transitional provisions, suggests that there may have been some lobbying groups that wanted to eliminate or slow down competition. In this sense, Pašalić’s potential appeal to the Directorate for Internationalization is practically a futile effort due to the existing lobby, even if the Directorate tried to influence the amendment of the disputed legal provision before the parliamentary discussion. But even without the alleged lobby, the Directorate’s space for action is narrowed, practically rendered impossible because nothing can be done outside the law.

Investors facing similar problems to Pašalić include Danko Končar in Istria, the Evaco group on Šolta, Falkensteiner in Zadar, resort Marina in Cavtat… and, as we unofficially learn, they will soon go public and announce that they will establish an association to fight for their rights.

Pašalić also has problems with the Šibenik-Knin County because when he started that project, an Urban Development Plan (UPU) for Medine was being developed. At that time, he claims, it was very clearly stated that an environmental impact study was not required for the project. However, at the moment of submitting the application for the location permit, this suddenly and inexplicably changed, resulting in a loss of two years in correspondence with the County. In the end, he gave in and completed the study six months ago, but the County has not yet done its part to open a public discussion, which is a prerequisite for obtaining the location permit and starting construction.

Interestingly, it was precisely Plenković’s government that designated the project as strategic, which should guarantee not only the acceleration of administration but also maximum ‘centralization’ of decision-making. None of that. We asked him if he had approached any institutions, and he answered affirmatively.

– Not so that someone would manage our investment process or favor us, but simply because we wanted a culture of dialogue in the context of a project that the Government of the Republic of Croatia declared strategic. However, we have seen that in the Croatian institutional system, information is not coordinated and fluid, and often the relevant bodies give contradictory opinions after a long wait and slow down projects due to bureaucratic inertia. In fact, for some reason, we have the greatest blockage in Šibenik-Knin County. We still do not understand what it is about – says Pašalić.

As for the Spatial Planning Act, he says that for now, no damage has occurred because the Act has not come into force.

– We will see what will come of it all. I believe that the ruling party will act wisely and objectively and that there is still time for a compromise with investors and finding the best solution. All investors agree that space in an urban sense should be protected and that the issue of subdivision should be regulated. However, the essence is that everything should be placed in the correct and fair context – emphasizes Pašalić.

Catch-22

Whether there will be wisdom primarily depends on whether the Law in such a form will be rejected, or whether another legal solution will be offered. However, from experience with investors in renewable energy sources (RES), it is hard for Pašalić to expect anything, although perhaps the Ban’s Court will pleasantly surprise him. And when we talk about RES, the association RES Croatia points out that investments of its members have been absurdly halted by the adoption of the Electricity Market Act (ZoTEE), which came into force in October 2021.

Namely, it was prescribed that for projects for which ‘renewables’ have already requested connection agreements, an energy approval must be obtained beforehand. Since this approval, according to the new law from 2021, is issued only after the location permit, and that only after the connection agreement, an absurd ‘Catch-22’ was created in which investors were spinning in circles and could not meet the conditions that were retroactively imposed on them. In addition, the Croatian Transmission System Operator (HOPS) stopped concluding connection agreements, and neither the Ministry of Economy nor the Croatian Energy Regulatory Agency (HERA) attempted to resolve this complex situation. Nevertheless, for a smaller number of projects, HOPS offered contracts at the end of 2021, but on the condition that they finance 80% of the cost of constructing a new, capital 400-kilovolt power line from Split to Rijeka.

State Blackmail

– This is an investment of national significance. To use an analogy, the importance of that power line is the same as that of the Zagreb – Split highway, and in the professional and scientific community, it was identified as a strategic project back in the 90s when RES projects were not even planned. Additionally, this power line is necessary to fulfill Croatia’s international obligations for enabling cross-border electricity trading and is actually a significant investment of supranational importance. However, HOPS has continuously postponed this project, and in 2021, it unjustifiably decided to present it solely as an investment being made only for the connection of new producers – they explain in RESH.

Thus, instead of helping investors, the state, by imposing a new law, practically blackmailed companies with the offer that they would receive a connection agreement if they financed the construction of the power line. One must ask how HOPS could even offer connection agreements when investors did not have energy approval and location permits, as that would violate the then-adopted ZoTEE!

Entrepreneurs, as we see from these examples, cannot rely on any institution. Interestingly, there is another fact – that besides the Directorate for Internationalization, which should help investors, there is also a Directorate for Energy in the Ministry of Economy, which inherited the tasks of the also-defunct Center for Monitoring the Business of the Energy Sector and Investments. But even that Directorate has not been of much help, to be mild in our assessment of its work, to investors in energy. Therefore, litigation is the only way to cope with state manipulations with entrepreneurs. But in our example, we see that they have given up due to fears of the lengthy process. It might be a bit too much for us to say that investors behaved according to the saying ‘the smarter one yields’ and restarted their projects, but in fact, retreating to the courts is the only somewhat viable defense against state interventions.

In this sense, we spoke with our commercial law expert, attorney Mićo Ljubenko, who warned us to approach this problem cautiously because, he tells us, at a recent conference ‘Instasolar 2025,’ where he participated as a speaker, it was emphasized that regulations for investments in solar energy have been significantly eased considering security risks, etc.

However, every investor must be prepared for the possibility of litigation, and even in preparing for the implementation of the investment, they should seek legal advice from authorized experts.

– According to our laws, the only authorized experts for providing legal advice are attorneys. There is a noticeable trend in recent years that business consultants provide legal advice, although it is not possible by law to register the activity of ‘legal consulting’ for consultants, and it could even be interpreted that providing legal assistance through legal consulting is a criminal act of unauthorized practice. For greater protection of ‘investor rights,’ it is necessary to address authorized persons – they advise.

Although lawsuits are slow, investors are, ironically, condemned to them. For example, we recently wrote about how the Municipality of Lasinja amended the Spatial Plan, thereby questioning the investment of the company Kamen-Psunj. The High Administrative Court (VUS) annulled it, but not to rule in favor of the investor, but because the councilors of the Municipal Council made procedural errors in their decision-making. Also, VUS recently annulled the Decision on the Communal Order of the Split City Council. As many as six companies and one association submitted a request for a legality assessment, which VUS accepted because many parts of the Decision are vague and unclear.

Retroactivity of Regulations

However, one thing is concerning. In all the previous examples, many have accused state and local authorities of retroactive action of regulations, as was the case with Pašalić, but also with ‘renewables.’ In the case of the six Split companies and the association, retroactive action is also highlighted because Article 159 of the Decision states: ‘Procedures initiated before the entry into force of this Decision will continue and be completed according to the provisions of this Decision.’ However, and this is what should concern investors, VUS believes that in this part, the Split city fathers did not err and that this article is not illegal ‘because it does not prescribe the retroactive application of a general act to completed legal relations, but applies pro futuro.

Looking at it this way, what seems reasonable to us, albeit laymen, does not guarantee that the court will accept the retroactive action of regulations. After all, Ljubenko also says: – So far, we have not noticed larger cases in which investors would prove the state’s responsibility due to changes in regulations.

Thus, we cannot say that the courts are a salvation for investors, although they are their greatest chance or, better said, hope. If the state truly wants to help investors, it should include a provision in the change of regulations that all investments initiated during the previous regulation must continue in accordance with it, not with the new one. However, there lies a danger because, in that case, lobbyists could push for a new, more restrictive regulation for new investors, which would eliminate competition. But at least let us try to see how this will go.