Croatia's tourism industry takes on grey economy

DUBROVNIK, Croatia, June 4 (Reuters) Dazzling cruise ships are anchored in the azure waters off the stone-walled port and tourists throng the narrow marbled alleys of this medieval city.

Dubrovnik, a fortress port in the southern Adriatic, is steadily recovering after it fell off tourists' radar screens following Croatia's 1991-95 war of independence.

Since the war, during which Yugoslav army shells slammed into the Old City, Dubrovnik has been rebuilt and its hotels restored to their former splendour, making the city Croatia's most prestigious tourist destination.

But Dubrovnik also showcases some of the problems bedevilling the tourism industry as the grey economy, tax evasion and semi-legal hotel services nibble away at revenues.

The grey economy, which illegally employs 100,000 people, is believed to suck up between 20 and 25 per cent of Croatia's tourist income.

Tourism is the main hard currency earner and, with revenues of around 6 billion euros, it accounts for some 20 percent of gross domestic product.

But many small private tourist businesses here operate illegally. Or, if they are formally registered, they don't declare all their guests to avoid paying taxes.

''In the summer, the behaviour of some of those who offer private accommodation is really shameful. For instance, they gather at the bus station and pull tourists' sleeves to lure them to stay in their houses,'' said Tonci Skvrce of the Dubrovnik tourist board.

''Their aggressive approach sometimes causes quite unpleasant situations for guests,'' he said.

CRACKDOWN Analysts say the grey economy accounts for up to 15 per cent of the European Union candidate country's total GDP, which grew by 4.3 per cent in 2005 to 229 billion kuna thanks to booming investment, tourism and exports.

Last year the government vowed to crack down on the grey economy, reintroducing financial police to control the payment of taxes and other duties.

Dubrovnik's tourist authorities are spearheading their own crackdown.

''We plan to divide private accommodation owners into six city sectors and mark them on a display at the bus station so the tourists can know who runs a legal business,'' Skvrce said.

The display would clearly state how far from the sea each house is, so guests would not be misinformed. It would also show which places had vacancies and would prevent hotel owners from grabbing potential guests for a face-to-face hard-sell.

''This is an original idea and we hope it will work. The state inspectorate and police are quite content,'' Skvrce said.

Croatia has some 50,000 registered small private hoteliers, each offering up to 20 beds. Some foreigners who own houses on the Adriatic coast also offer accommodation but, according to the tourism ministry, not necessarily legally.

''The foreign owners simply rent their houses by giving keys to guests whom they claim are their friends or relatives. The owners themselves are not even present,'' said Zelimir Kramaric from the tourism ministry.

Inspectors will in future require that owners be present during spot checks to verify whether guests are legally registered, Kramaric said. Those who are not present could be fined, as could Croatian homeowners in similar situations.

''We give financial incentives to those who want to run legal, quality family hotels and we will also allow foreigners to run such businesses. But the state inspectorate will this year intensify control of those active in the tourist industry.'' Tackling the grey economy is also important for Croatia's bid to join the EU Brussels will want Croatia to include the grey economy in its GDP estimate when discussing disbursement of structural funds, after Croatia becomes a member, most likely in 2010.

''That 15 per cent will have to be gradually encompassed in the country's GDP as the EU entry date nears. Naturally, Brussels wants us to get our statistics in line with EU standards before membership,'' said Danijel Nestic of the Zagreb Economy Institute.

REUTERS SY KP0923