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Business Insight: Kosovo

In Kosovo, international community looks to shift role

By Johanna Wiese15 October 2012

U.S. Secretary of State Hillary Rodham Clinton meets with Kosovar Prime Minister Hashim Thaci at the U.S. Department of State in Washington, D.C., on April 4, 2012. Photo by: U.S. Department of State / CC BY-NC-SA

The world has heard little about Kosovo since dominating global headlines in the late 1990s, but significant events continue to unfold in the once war-torn state. Most recently, the International Civilian Office closed, signifying the start of a new phase in Kosovo’s quest for full sovereignty and holding implications for how the international community invests in and works with the Kosovo government.

“When the International Steering Group declares an end to supervision on September 10… the Constitution will stand alone as the fundamental legal framework in this country.” International Civilian Representative Pieter Feith proclaimed ahead of the ICO closure on September 10, 2012.

In 2008, Kosovo declared its independence from Serbia. Around the same time, the ICO and the International Steering Group, represented by the European Union, Switzerland, Turkey, and the United States, were formed to supervise the Assembly of Kosovo’s implementation of the Comprehensive Proposal for Kosovo Status Settlement defined by what has become known as the Ahtisaari Plan. Named after former Finland President Martti Ahtisaari who served as U.N. Special Envoy to Kosovo, the Ahtisaari Plan established the targets and measures for good governance, multiethnicity, and rule of law, particularly for provinces with ethnic minorities.

While the EU Rule of Law Mission to Kosovo, or EULEX, and a NATO peacekeeping force will remain in the country until 2013, with the ICO closed, Kosovo’s government is now responsible for the country’s ongoing recovery and longer-term development. There is much at stake. Over the past couple of years, Kosovo Prime Minister Hashim Thaci and his administration have intensified efforts to raise Kosovo’s international profile, attract foreign investors, and pave the way for EU membership. At the same time, Russia, China, Serbia, and even some EU member states stubbornly refuse to recognize Kosovo’s legitimacy and sovereignty.

Both Kosovo and Serbia are seeking EU membership. In an October 2011 report, the European Commission recommended that Serbia be granted candidate status if the country normalizes relations with Kosovo and pursues mutual agreements in good faith. At this stage, the chances of Kosovo membership are more remote due to the country’s poor governance and weak institutions as well as the rigid opposition from existing EU member states.

Despite the ICO’s closure and progress towards self-determination, Kosovo faces severe development challenges. According to World Bank statistics, 45 percent of Kosovo’s population is classified as poor and 17 percent are considered very poor. Poverty is aggravated by an unemployment rate of 45.4 percent and some sources suggest that the youth unemployment rate reaches 70 percent.

Further, many of Kosovo’s poorest citizens are from minority groups already damaged by years of perceived neglect and disenfranchisement. For example, there remain many unresolved questions over the Serbian minority living in the north of Kosovo. Despite the efforts of the International Steering Group to improve relations between Kosovo and Serbia, Kosovo Serbs represent 5.3 percent of Kosovo’s population and continue reject Kosovo government authority, leading to the creation of parallel governance structures and regular clashes.

Organized crime and corruption are rampant and are commonly cited by international aid workers and monitors as the most significant obstacles to sustainable development. In July, EU prosecutors arrested the head of the national anti-corruption task force, a former Kosovar prosecutor and 13 other judicial officials for accepting bribes during the privatization of state-run companies. The European Commission report from last year noted that Kosovo’s 2010 parliamentary elections were “marred by serious shortcomings’ and “much more needs to be done to tackle organized crime and corruption.”

If the political situation can stabilize, analysts say private sector investment could help spark economic growth in Kosovo. Despite Kosovo’s poor ranking in the World Bank’s 2011 “Doing Business” report (the country ranked 117 out of 183 economies assessed); the current administration is branding itself as “decidedly pro-private sector” and is reportedly targeting the 24 percent increase in private investment which is outlined in the government’s Action Plan of the Economic Vision of Kosovo for 2011-14. Specifically, the Kosovo government is trying to attract private investment in natural resources extraction and infrastructure development. Additionally, according to the government, the creation of free economic zones will help increase exports by 10 percent during the 2012-2014 timeframe. Supported by a 2011 Public Private Partnership Law, the government is eyeing an extension of its PPP program in key sectors such as telecommunications, transportation, tourism, and public utilities. The €100 million ($129 million) for the expansion and operation of Pristina International Airport, which was facilitated by the U.S. Agency for International Development in 2010 and is expected to be completed in 2013, has been lauded as a model for future PPPs in Kosovo.

Undoubtedly, Kosovo’s socio-economic development will continue to be tied to foreign aid and assistance. As the focus of donors shifts from post-conflict assistance to capacity building and longer-term governance initiatives, international aid continues to account for about 7.5 percent of GDP. Back in 2008, at a high profile International Donors Conference, donors pledged a total of 1.2 billion euros for the period 2009-2011 and similar aid levels are anticipated for the country in 2012. The following is the Devex assessment of the top donors to Kosovo as the ICO shuts down and the country progresses toward greater autonomy.

European Union

Among the major donors in Kosovo, the European Union plays a special part, not only because it provides the highest level of funding, but also because other donor aid is linked to the long-term prospect of Kosovo’s EU accession. Most analysts agree that as the ICO closes, the EU Special Representative in Kosovo will be more active and critical.

Since 2007, EU financial aid to Kosovo is dispersed under the Instrument for Pre-Accession Assistance (IPA), thereby underpinning the EU’s commitment to Kosovo’s long-term membership ambitions. In 2011, the EU allocated 68.7 million euros; in 2012 that number climbed slightly to 68.8 million euros. For 2013, funding is set to increase to 73.7 million euros.

The European Union currently funds about 280 projects in Kosovo ranging from Efficient Energy Use in Public Buildings and Implementation of Intelligence-Led Policing to those supporting broader development, for example through Technical Assistance for Institution Building Initiatives.

Projects are organized around four program areas: (1) Health and food safety, particularly aimed at reaching EU standards, (2) Infrastructure and environment, (3) Reform of public administration, including technical reforms of Kosovo’s legal and political system, (4) Social inclusion and education. Activities that improve Kosovo’s social and economic infrastructure receive the most funding at 39 million euros, followed by 38 million euros for projects that strengthen the rule of law. Education and employment, including the European Union’s contribution to a multidonor trust fund, is supported with 20 million euros indicating a general trend toward long-term capacity-building.

United States

Ever since President Bill Clinton declared the 1999 NATO invasion to be “just and necessary,” the United States continues to be one of Kosovo’s strongest supporters and is the second largest bilateral donor. Between 2008 and current, USAID activities in the country have helped respond to humanitarian needs, establish a stable government, rebuild infrastructure, and create a framework that would allow the private sector to flourish. The United States’ strategic priorities, as reiterated by U.S. Secretary of State Hillary Clinton during a meeting with Kosovo’s prime minister, are to support “Kosovo’s independence and territorial integrity and… its aspiration to become a full partner in the international community and a member of the European Union.”

U.S. assistance to Kosovo is currently targeting three strategic areas: (1) economic growth, (2) democracy and governance, (3) youth and education. Within those clusters, initiatives focus on creating an enabling environment for business and private sector development, and strengthening the judiciary, the Kosovo Police Service as well as border security, particularly in the area of smuggling and trafficking. Some examples of American programming in Kosovo include: Contract Law Enforcement (CLE) and Programs benefiting Displaced Persons in Serbia and Bosnia and Herzegovina and for Reintegration of Spontaneous or Assisted Returnees in Kosovo.

Despite the closure of the ICO, USAID’s commitment to Kosovo is likely to remain stable as the country moves closer to EU accession. According to the FY2013 Congressional Budget Presentation for Foreign Operations, in fiscal 2011, Kosovo received a total of $85.428 million in U.S. aid. The fiscal 2012 budget is estimated at $67.45 million; while for fiscal 2013 the Obama administration requested $57.669 million.

The Business Enabling Environment Project ($16.9 million) and the New Opportunities for Agriculture program ($15.9 million) both aim to strengthen Kosovo’s private sector. Throughout 2013, USAID, together with the European Union and the World Bank, will continue to assist the Kosovo government with the privatization of the country’s national electricity provider, KEK Electricity Distribution and Supply, thereby opening up the energy market to foreign investors.

The U.S. Department of State and U.S. Department of Defense are also funding and implementing programs in Kosovo. Specifically, the State Department manages the $42.54 Economic Support Fund, $10.67 million from the International Narcotics Control and Law Enforcement account, and $750,000 for Non-Proliferation, Anti-Terrorism, Demining activities. Additional Department of Defense administered funding includes $700,000 in International Military Education and Training and another $3 million in Foreign Military Financing.

Switzerland

A lesser known player in international development, Switzerland is a key partner of the Kosovo government. One reason for its active engagement is Switzerland’s large Kosovar diaspora (8 percent of Kosovo’s population) that contributes substantially to Kosovo’s development through remittances. Switzerland has allocated a total funding of CHF60 million ($64.4 million) under its Cooperation Strategy with Kosovo 2009-2012.

The aim of Swiss cooperation is to support economic growth and sustainable employment; strengthen governance at central and local levels, rule of law and democratic processes; and facilitate access to basic infrastructures and services.The Swiss Cooperation Office is jointly run by the Agency for Development and Cooperation, or SDC, Swiss Federal Department of Foreign Affairs and the State Secretariat for Economic Affairs, or SECO, and the Swiss Federal Department for Economic Affairs. Project funding originates from different ministries depending on project priorities and falls under four areas: (1) economic growth and sustainable employment, (2) central and local governance, rule of law and democratic processes, and (3) access to basic infrastructures and services (4) migration.

The largest projects currently being implemented under the Cooperation Strategy are the Swiss Kosovo Local Governance and Decentralization Support, or LOGOS, the Water Supply in South East Kosovo Project and the construction of Gjilani V Substation, which aims to rehabilitate Kosovo’s energy sector. Other Swiss-funded projects, such as the Democratic Society Fund, seek to strengthen the role of civil society organizations and promote grassroots engagement.

World Bank

In May, the World Bank launched its first Country Partnership Strategy for Kosovo 2012-2015 outlining a funding commitment of $76 million, or $19 million annually, supplemented by about $66 million in grant funds. The strategy stipulates that additional funds of $40 million-50 million will be provided to Kosovo’s private sector through direct financing.

The primary aim of the partnership is to lessen Kosovo’s dependence on foreign aid and prepare the country for financial self-sufficiency through investments in infrastructure, energy, and human capital. Funding is divided between two major program areas (1) economic growth and job creation, particularly for the younger generations, and (2) environmental management. Among the projects currently being implemented are Institutional Development for Education Project in Kosovo: Procurement of IT Equipment  and Agriculture and Rural Development Project in Kosovo, which aims to transform Kosovo’s agricultural sector from subsistence to industrialization. 

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