Economic and Social Reforms for Peace and Reconciliation

Prepared by the World Bank

February 1, 2001

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Kosovo benefits from a rich natural resource base and fertile agricultural land. For the last 20 years, economic activity centered on extractive industries, production of raw materials, and semi-finished products (lead, coal, zinc and textiles), as well as agriculture. The economic policy and regulatory environment was shaped by Yugoslav-style socialism. Heavy industry was largely publicly owned.¹ In contrast, agriculture was almost totally privately held. Significantly, more than 60 percent of the pre-conflict population lived in rural areas.

Kosovo’s economy consists of three basic components: publicly owned enterprises; privately owned enterprises, and the parallel segment. Publicly owned enterprises formerly engaged in all sectors of the economy but predominately in the industrial sector, and generally in poor condition. The population of privately owned enterprises - much larger in number and collective output - engaged mostly in trade and services. The substantial parallel segment consists of gray market activities in trade and services on a small to medium scale. Nevertheless, it should be noted that the dividing line between the formal and informal sector is an obscure one, given the absence of a legal and regulatory framework, the incompleteness of registration of companies, and the strong incentives over the pre-conflict decade on the part of ethnic Albanians to divorce their activities from the formal sector. All sectors exist today in institutionally and economically unfriendly conditions: no industrial production, no banking system, and no regulatory framework.

The sharp decline in the Kosovo GDP over the past decade can be attributed to a dramatic falloff in industrial output in a sector comprised almost entirely of publicly owned enterprises. Virtually all enterprises suffered heavy damage during this decade of disinvestment and neglect," leaving many in a severely deteriorated physical condition. Most enterprises now need significant restart capital to resume even minimal production. Enterprises also suffer from the far more serious problem of having lost their markets. This is because the rest of the Balkan region moved on economically after 1989, with FRY no longer a viable market for most products previously manufactured in Kosovo. As a result of the exclusion of the ethnic Albanians from management and skilled worker positions, the skills of the ethnic Albanian workforce are out of date.

Throughout the decade, the private sector was the major pillar of the formal economy. This was unusual relative to other non-Balkan, Eastern European countries, but resembled the contribution of the private sector in the rest of the SFRY – a legacy of the Markovic era. In fact, the output levels of the privately owned sector have remained more or less stable since 1987. As of 1996, privately owned enterprises contributed 47 percent of the total GDP, and in 1998, the contribution of the private sector to the overall economy rose to 80 percent. In the meantime, the publicly owned sector became stagnant just before the conflict.

As the formal economy collapsed, ethnic Albanians were dismissed from their positions at public companies. While the official unemployment rate over the decade was significant - some pre-war estimates running as high as 70 percent - this was ameliorated by ethnic Albanians participation in the gray (legal) and black (illegal) economy. The program imposed by Belgrade created a new segment of the economy, namely, ethnic Albanians, who lost their jobs and were forced underground by the subsequent legal regime.

• No industrial production. Kosovo’s emerging private sector does not include any significant ongoing industrial production or processing activities. Under the SFRY’s policy and regulatory regime, production primarily was limited to extracting resources. Most processing was conducted in other SRFY regions. The publicly owned industry that existed before the bombing was subject to the "enforced measures." The few private productive enterprises that survived the war suffer from many of the same problems resulting from loss of markets and inadequate financial resources. The investment needs required to (re-)start most productive enterprises appear prohibitive.

• No banking system. The Micro Enterprise Bank Kosovo (MEB Kosovo) is the only bank now operating in Kosovo - although five other banks have received preliminary licensing approval. There is no formal payment system outside of the limited services offered by MEB Kosovo. Lack of payment and banking services combine to restrict private sector activity to areas requiring relatively modest up-front investment. In addition, businesses do not benefit from more advanced cash management or the use of alternative payment methods, such as checks or credit/debit cards. This is almost exclusively a cash economy, with all the inherent limitations and dangers. The near-total absence of financial intermediation is a severely constraining factor to private sector growth.

• No regulatory framework. In theory, the FRY’s legal and regulatory regime applies today to publicly- and privately owned enterprises as well as to the parallel economic segment. With the repeal of Regulation 1, Section 3, and the adoption of Regulation 24, UNMIK has adopted the SFRY commercial legal framework of March 22, 1989, modified and expanded by other UNMIK regulations. In practice few if any of these laws are enforceable, nor are they suited to the type of market-oriented economy UNMIK wants to establish.

With the exception of the new customs, sales, and excise tax regime, introduced by UNMIK September 3, 1999, ² plus the Banking Law (Regulation 1999/21), there are currently no other elements of a regulatory framework or for the registration of private businesses. The benefits of this extremely liberal regime are clearly reflected in the robustness of private sector activity. Unfortunately, this is accompanied by troubling reports about the increase in organized crime. In the Bank’s view, the rapid introduction of an appropriately liberal system of business registration and regulation would constitute an important part of a strategy to stem this trend, and move the emerging private sector into the formal economy. While progress has been made in recent months towards the preparation of an adequate legal framework for the private sector, UNMIK should concentrate its efforts in the completion and final approval of a basic package of commercial law dealing with business registration, contracts and enterprise law, competition and foreign investment, and setting laws and mechanisms for settling all kinds of disputes. The Public Enterprise Sector

Ownership. There are reportedly 437 publicly owned enterprises in Kosovo, out of which some 140 medium-sized, and 66 large. These include both industrial enterprises (including agro-industry) and public utilities. Although virtually all these enterprises were under "social ownership" prior to 1989 - the effective date adopted by regulation 24 - there were many changes in the intervening decade that have caused conflicting ownership claims - in addition to the customary claim that social ownership is equivalent to employee ownership. In many cases, enforced measures resulted in Serbian claims to ownership in the form of shareholding or through complete integration of the Kosovar enterprise into a Serbian one (as was the case for Yugobanka). In other cases, the situation is further complicated by commercial contracts or concession arrangements with foreign companies. Generally speaking, the larger the enterprise the higher the degree of complexity in determining ownership. Medium sized companies, such as brick factories and slaughterhouses, are essentially local ventures, while the huge Trepca mining complex presents much more difficult ownership issues. The introduction of Regulation 24 may simplify the situation, as any ownership changes since 1989 would appear to be valid only if they were done pursuant to non-discriminatory laws. There is a sentiment among Kosovar Albanians that all such transactions, in fact, were done under discriminatory laws, or laws applied in a discriminatory manner.

Political Perceptions. The situation described above creates a huge political problem for ethnic Albanians and for UNMIK. Enterprise workers, having been dismissed from their jobs in the early 1990s and forced to take find employment in the parallel system, have returned to enterprises destroyed by years of neglect, war damage, asset stripping, and vandalism. The immediate psychological reaction to this "discovery" is a strong desire to bring the enterprises back to their state during the "golden age" before 1989. In discussions with Kosovars on these issues, there is a very strong sense of entitlement to compensation, and an almost complete denial that many of these enterprises would not have been viable - even if they were in the best possible physical condition. Dialogue with community leaders and specialists on enterprise issues among the local populace should be encouraged, as well as through public education campaigns. Unfortunately, the scope was limited for this type of dialogue between UNMIK and local counterparts during the winter of 1999/2000. Extensive and fundamental discussion about structural reform and enterprise privatization remains an urgent priority.

Social Problems. The social problems associated with the restart of these enterprises are somewhat less severe than in most transition economies. Although many workers have not been employed in these enterprises for 10 years, they managed to survive in the private sector or parallel economy, and through remittances from family members abroad. It would therefore be false to assume that significant social problems will arise if enterprises were not to start up soon. This distinction from the experience in other Balkan countries is important: a careful public education campaign aimed at modifying unrealistic expectations should lead to fewer problems associated with vested interests in dealing with enterprise issues. There is a high premium on honesty in the debate about the viability of these enterprises, as it is important that the Kosovars accept that many of enterprises face overwhelming obstacles in ever operating on a sustainable basis again. Non-viable enterprises will need to be liquidated or abandoned, even though this will create the difficult political problem that some former employees of socially owned enterprises may become re-employed while other will not. The local community will need to acknowledge that even for those enterprises that are potentially viable, a condition for their being so may be that only a small percentage of the previous workforce will be re-employed.

Larger Enterprises--Limited Potential for Contribution. The large enterprises need investment, competent modern management, and access to new markets to be viable again. This can be achieved only by attracting foreign capital for enterprises that depend on exports markets and need sophisticated and expensive capital goods. The lack of clarity in Kosovo’s legal framework and the issues related to ownership will make it nearly impossible to achieve this quickly. This means that few large public enterprises in Kosovo will contribute to economic growth in the short term.

Smaller Public Enterprises: Good Opportunities for the Domestic Market. There is strong potential for growth in provision of services (especially to the very large international community present in Kosovo), as well as in agriculture and agroprocessing and construction. While the service and construction sectors are already overwhelmingly private, this is not the case for agroprocessing and the production of construction materials. Most enterprises in these two sub-sectors appear only slightly better off than the large enterprises, but their services appear to be much in demand. They generally are technologically simple operations of relatively modest size, and are likely to be easy to re-start drawing on domestic resources. These types of enterprises appear to be essentially local operations, with a much smaller degree of complexity in their ownership structure.

Promise of Retail and Service Sector. The rapid return of refugees in June and July of 1999 was immediately followed by a remarkable level of activity in the private sector. New shops, restaurants, and small trading "companies" began operating literally within days of the arrival of KFOR and the rest of the large international community in Kosovo. Very quickly, these operations became more sophisticated, as goods began to flow into Kosovo and owners responded to a rapidly increasing demand for services. In early September, most major towns had a strong retail and services sector offering a remarkably diverse supply of goods and services. Even during the difficult winter months, this sector continued to expand.

Given the nature of the parallel market, its current size and characteristics are difficult to ascertain. But the parallel economy could give a tremendous boost to the official economy if it sheds its gray status - with the growth push likely occurring in the trade and services sectors. This will not occur without the effort by UNMIK to develop policies designed to encourage this sector and provide incentives for it to move into the official economy.

Opportunities for short-term growth. The success of the program of economic development and reconstruction of Kosovo hinges to a large extent on the degree to which the private sector can be empowered quickly to generate growth. While the difficult political and legal issues in Kosovo are being addressed, the existing private sector will need to provide stimulus for economic growth. In addition to the rapidly growing retail and services areas, short-term growth can be expected to come largely from agriculture, agro-processing, construction, and the production of construction materials. Primary agriculture and construction, which are mostly private, should be encouraged to follow the lead of the impressive development of small and medium-sized enterprises (SMEs) in the retail and services sector.

To develop the private sector, Kosovo will need to pursue three strategic paths concurrently. First, promote the growth and development of privately owned enterprises already in the formal economy. Second, embrace the parallel economy and bring it into the formal economy through a combination of incentives and requirements. And third, expand the private sector’s composition by transferring the potentially viable public enterprises to private ownership or divest productive assets from public enterprises to private hands.

Legal and Regulatory Framework. To support private sector development, UNMIK must assign top priority to the introduction of a regulatory environment that makes the cost of operating illegally significantly greater than operating legally. In addition, the legal framework needs to provide and promote the availability of credit by protecting private property rights and permitting collateral to secure loans. Further, the framework needs to be flexible enough to promote financing mechanisms for private productive activity, such as venture capital.

The current regulatory framework in Kosovo is ambiguous and incomplete. On the one hand, UNMIK has issued few regulations in this area; on the other, UNMIK Regulation 24/99 states that, unless otherwise provided by UNMIK, pre-1989 laws are still in effect. This creates a situation of considerable ambiguity, in which there is only one logical response for the emerging private sector: remain underground. This creates a breeding ground for organized crime. UNMIK will need to establish a minimal structure to deal with the limited number of potentially viable enterprises quickly, and which least involves the privatization institution in protracted administration.

The regulatory framework should be: (i) simple, understandable, and enforceable; (ii) facilitate compliance; (iii) allow as little discretionary authority as possible to minimize scope for corruption; (iv) eliminate any duplication of existing FRY regulations; and (v) remove all discriminatory aspects of the existing FRY system.

The framework also should include the following elements:

• An effective and simple business registration system;

• An enterprise regulation;

• An appropriate property rights legal framework, including collateral and bankruptcy legislation;

• Basic business law and contractual rights legal framework supportive of private business formation and operation;

• A practical legal mechanism for resolving property disputes;

• A competition law framework that severely limits the scope for public intervention in industries that are not natural monopolies;

• A law for the privatization of socially- and state-owned property;

• A law covering concessions of state owned real property and natural resources;

• A law on labor relations and workplace rights and obligations;

• A foreign investment law which enshrines the basic principles of any sound foreign investment climate: protection of investors’ rights, non-discriminatory treatment for foreigners and locals, and access to fair arbitration; and
• A comprehensive accounting legal and regulatory framework that promotes the application of International Accounting Standards for financial and tax accounting purposes.

It will take time to complete this framework and even longer to create the institutional capacity to implement it. Thus, it will be crucial to set priorities according to a critical path analysis that focuses on removing the biggest obstacles first. Drafts of an enterprise regulation, bankruptcy regulation, contract regulation, foreign investment regulation, pledges and a concession regulation have been completed and await confirmation. A regulation on ownership of non-residential ownership has also been drafted, yet it is still subject to the completion of a better defined and comprehensive enterprise development strategy.³ The other essential basic regulations are also being drafted.

Trade Regime Linkages. Careful attention should be given to the cumulative effect of the various fees and taxes on private business as the recently introduced trade and taxation regime is refined. Currently, customs fees, sales, and excise taxes are being charged at only about half the border checkpoints of Kosovo. As taxation inside Kosovo is introduced, careful attention should be given to the overall tax burden on enterprises, especially given the high sales taxes levied at the border. In addition, the trade regime will need to be refined with respect to taxes that could constrain private sector growth in Kosovo. For example, a rebate system needs to be introduced in the medium term to stimulate processing, subcontracting and consignment arrangements, which will be important to allow Kosovo to exploit its abundance of labor. Also, it is clearly not in the interest of Kosovo’s economic development to tax imported capital goods - even in the short term.

Credit for Private Enterprises. The lack of short and long term credit for viable productive activity has been identified in a recent survey of Kosovo SMEs as a major constraint to growth. Lack of credit limits the private sector to activities that require minimal investment - mainly in the services and retail sectors. Establishing a credit program based on sound economic and financial principles will be critical. Currently, a number of donors are trying to support the private sector by providing grants to small businesses but without any form of financial intermediation. Anecdotal evidence suggests that these grant programs are not being coordinated, leading to the same enterprises receiving support from different donors. UNMIK should tackle this problem by setting up a donor coordination forum for enterprise support.

SME Credit Program. UNMIK has agreed with the Bank and other donors that the following basic principles would be followed for an SME Credit Program for Kosovo:⁴

• SME lending activities must be conducted within the newly established banking supervisory regime;

• Credit should be extended through the Program for private enterprises only, based on sound credit analysis;

• Credit should be extended to enterprises in the parallel sector only after their conversion to the official economy (the lack of a functioning enterprise law or registry means that interim procedures will have to be adopted if the credit line if to be disbursed expeditiously);

• Borrowing terms extended to enterprises should not distort competition with commercial credit;

• The Program should be conducted so that it supports the medium-term institution building needs for the banking sector;

• Donor financed SME credit should be viewed only as a transitional measure until a healthy banking system is developed;

• Donor coordination must be maximized and perhaps overseen by UNMIK itself; and

• Similar principles should be applied to the extension of micro- and agricultural credit.

In conclusion, it is worth reiterating that the development and enforcement of a legal and regulatory environment of the kind described above remains vital if private enterprise growth is to be encouraged. This emphasis on establishing a conducive business environment is of the first importance – far more germane than plans to concession or privatize public enterprises. A number of such enabling laws have been drafted (enterprise law, law on secured transactions, bankruptcy laws) with regulations to support the registration of companies, but none of these laws have yet been issued in the form of regulations. Delays in promulgating these regulations will be costly as opportunities will be lost for a rapid stimulation of private sector led growth.

Revitalizing the Socially Owned Enterprise Sector. In planning for privatization, Kosovo’s socially-owned enterprises can be organized into the following categories: (i) large enterprises, such as the Trepca mining complex; (ii) utilities; (iii) enterprises of potential interest to foreign investors; (iv) other viable and potentially viable enterprises; and (v) non-viable enterprises. Following a decade of neglect and enforced measures, many enterprises may not be viable, and thus will need to be liquidated.

Appropriate privatization methods may include: (i) asset sales/liquidation of the non-viable enterprises; (ii) public auctions or tenders for assets or shares for the majority of viable enterprises; and (iii) concessions or management contracts for special cases, such as Trepca. Asset sales would be the simplest to organize and the most attractive for potential investors.

Progress on privatization requires resolution of several key issues, including ownership of social property, treatment of workers, and treatment of claims. These issues can be resolved quickly but will require detailed procedures for enterprise preparation and privatization transactions, in addition to public support. As noted, earlier this year UNMIK prepared a policy paper and conducted an extensive policy dialogue with local as well foreign parties on this set of issues; this section contains a summary of the main UNMIK proposals and an assessment of them.

Ownership of social property. Regulation 1999/24 defines the applicable laws as those in force as of March 22, 1989 - except when superseded by UNMIK regulations. It is generally considered that little or no privatization under the 1988 "Markovic" law had occurred by March 22, 1989. Although the majority of enterprises subsequently affected by "enforced measures" were wholly socially owned by March 22, 1989, there currently is no mechanism to establish this as a basis for further action. Recent policy statements by UNMIK propose the establishment of an adjudication panel to rule on the structure of ownership in each enterprise. In the absence of an expropriation mechanism, or the existence of provable claims that could support bankruptcy proceedings, UNMIK cannot otherwise take control of these enterprises unless and until it is determined that an enterprise is majority socially owned. As expropriation is unlikely to be politically acceptable, and there are few records or any bankruptcy structure or institutions, an independent board will need to be established to rule on ownership issues as soon as possible. Otherwise, the process of privatization and revitalization of any of the socially owned enterprises cannot proceed as planned.

It seems appropriate to equate social ownership with state ownership and for the privatization of such property to be administered by UNMIK. In the SFRY, social ownership conferred wide powers on workers to elect their management and otherwise determine how an enterprise would conduct its business; however, workers did not have a share in the capital of the enterprise. Moreover, in the former SFRY republics that recognized social ownership, the transformation of social capital was organized by the state, with the state receiving proceeds from the sale of transformed social capital.

In the interests of speed and efficiency, it is vital to limit restructuring of enterprises to the minimum necessary. It will be important that the only restructuring that takes place before privatization should be the separation of social assets (apartments) and public assets (power plants and irrigation systems) from the economic assets of an enterprise. Allocation of assets and (particularly) workers and liabilities will be difficult and contentious, and inevitably accusations of prejudice and favoritism may arise, especially when some of the new units have to be liquidated. Experience in other countries suggests that the private sector is better able to restructure a business to achieve profitability than is the government. In this sense, the transfer of potentially viable businesses to the private sector will be a more important objective for UNMIK than receiving the maximum price for the assets or net assets.

Institutional Framework for Adjudicating Ownership. As it has been proposed by UNMIK, Launching this process will require setting up a new institution, the Ownership Adjudication Commission (OAC), and the clarification of the effects of the applicable law for the purposes of the ownership adjudication process. The relevant legislation is proposed to be passed soon with the by the end of May, with the OAC established in the summer. The proposed features of each are given below.

The OAC would be empowered to adjudicate ownership of non-residential assets. Any interested party, including UNMIK itself, could request adjudication. In many cases UNMIK intends to initiate adjudication to establish unambiguously that certain businesses are publicly owned. UNMIK would then decide whether to privatize it or to retain it temporarily as part of the public sector and establish firmer control over its management. However, there are few economic grounds to justify UNMIK becoming involved in the rejuvenation of socially owned enterprises prior to their transfer to the public sector; it has neither the specific mandate, nor the necessary skills. Nor would it seem to be required.

The OAC will exist outside the local court system. The issues involved in the adjudication are complex and may involve determining whether the law in force between 1989 and 1999 was discriminatory or applied in a discriminatory manner. A significant number of enterprises are publicly or socially-owned. Since UNMIK has assumed responsibility for administration of public property, it will be directly involved in such adjudication. Moreover, the FRY may have claims to such public property. Progress is being made to re-establish the courts and to build a judiciary capable of dealing with civil and commercial claims but there is still a long way to go. To ensure that ownership questions which need to be resolved urgently are dealt with rapidly and fairly, creation of an ad hoc independent body appears to be the best solution. It is vital that the OAC be set up as a small, technical, efficient body with rules of proceedings that ensure rapid adjudication results.

It is also proposed that once ownership is established, those businesses of which the majority of the stock is publicly owned will be brought under the control of a new Kosovo Enterprise Agency (KEA). The mandate of the KEA would be to corporate the businesses and pay out any compensation according to the findings of the OAC, to take interim control of the enterprises until privatization, and to organize the privatization process, when that becomes appropriate. The KEA will be part of UNMIK, but it will report to an independent Steering Board representing all sections of Kosovar society.

The proposal to establish the KEA with the functions described above flies in the face of experience with enterprise revival and privatization in transition economies. It is not advisable to have a government body being responsible for the control and operation of enterprises, even less to have such a body reporting to all sections of society, thereby permitting a conduit for pressures from workers, directors and others to press on with their vested interests. Inaction, deadlock and the preservation of enterprises is likely to result. It appears more efficient to appoint temporary management to such enterprises prior to their eventual sale or liquidation. Indeed, the privatization mandate should have clear and enforceable deadlines for preparation for sale and execution of the sale, with liquidation following on automatically should the enterprise prove to be insolvent or unsaleable.

A new Regulation would confirm the applicable law as defined in Regulation 1999/24. It will make clear that if an ownership interest is declared invalid as a result of the adjudication, the owner shall be the next preceding owner who can establish ownership of the property in 1989. The adjudicating body will be required to substantiate its determinations with detailed findings of fact and conclusions of law. Any relevant precedents would be applied. Efforts would be made to contact owners whose rights are declared invalid so they can be present for the determination of compensation to be paid. In addition, the regulation will include mechanisms for payment of compensation. Rules would be established on how payments should be made; if payments are not made as agreed, ownership determinations could be revoked. Also sale, lease or assignment of property can be done subject to compensation rights once ownership has been established.

Treatment of workers. Notwithstanding the general right of the state to transform and dispose of social property, workers typically believe they have an inherent "interest" in their enterprises. Other ex-SFRY republics have allowed workers to purchase some portion of shares in enterprises on preferential terms. Recent policy discussions have contemplated that some 10 percent of the capital of large enterprises, and 20 percent of small and medium sized be reserved for purchase by the workers. Preferential share sales to workers, however, should not be allowed to interfere with the ability of a strategic investor or dedicated management group to control an enterprise’s operations and carry out necessary restructuring. Terms for preferential share sales should also be kept simple – e.g., cash purchases rather than installment purchases. It will also be necessary to define which workers (e.g., 1989 vs. 1999) are eligible for preferential share purchases.

It is important that consultation with former "workers" should be carefully thought through to ensure that UNMIK does not inadvertently create unrealistic (non-economic) expectations. Under the best of circumstances, it is unlikely that more than half the number of former workers in socially owned enterprises can be re-employed in those enterprises. A labor law which clearly sets out, among other things, the status and rights (if any) of "former workers" must be a high priority for UNMIK in managing expectations as the transformation process moves forward.

Purchasers also should be are free to hire the number of employees they want, rather than having a potential obligation to take on a historic number of employees which bears no relationship to the current environment which the business faces.

Treatment of claims. Claims may include both ownership interests - such as Markovic privatization transactions during the period of enforced measures and concessions granted to foreigners - as well as enterprise liabilities, such as credits from Yugoslav banks. The Ownership Adjudication Commission proposed by UNMIK is a practical, although potentially time consuming, method of resolving ownership interest. However, the question of how minority ownership interests will be recognized will remain. The choices are to recognize a legitimate interest as ongoing minority ownership interests in the newly privatized enterprise, or to compensate the minority shareholders for, in essence, their expropriated interests. Whichever method is chosen, compensation or restitution should be done on the basis of current rather then historic value of the assets or net assets, and that the process of establishing that value be transparent. In practice, this means a simple, clear, and open way of selling assets. Part of the proceeds should be reserved to pay legitimate ownership and creditor claims.

The concept of interim administration by public bodies or local municipalities in consultation with workers, should emphatically not be pursued for several reasons. In fact, it should be noted that many socially owned enterprises are not viable, or may only be viable if historic levels of employment are dramatically reduced. The involvement of local interests very likely will obscure the focus on viability, and shift to an emphasis on re-employment. Interim administration (other than through management contracts and leases) of a loss-making activity where the administrator has no resources to fund losses also poses many potential hazards for UNMIK. For these reasons UNMIK should not consider funding losses from the proceeds of privatization. The potential costs of such a policy clearly far outweigh any possible benefits.

Enterprise preparation. UNMIK should assert its authority over potentially viable socially-owned enterprises by confirming or replacing current enterprise directors; establishing requirements and standards for regular financial reporting (including development of a current balance sheet) and preparations for privatization transactions; limiting the ability of enterprises to dispose of assets outside the ordinary course of business; and establishing director liability and penalties for non-compliance with UNMIK regulations. As noted, the only restructuring that takes place before privatization should be the separation of social assets (apartments) and public assets (power plants and irrigation systems) from the economic assets of an enterprise.

Viable enterprises should be privatized through asset sales or – if there is a need to allow share sales to workers – through share sales. In cases where there is both worker interest and one or more potential investors concerned about unknown liabilities, consideration should be given to conveying an enterprise’s assets and known liabilities to a new company (NewCo) and privatizing the NewCo through sales of existing shares to workers and sale of new shares to a strategic investor/management group in a recapitalization transaction.

Taking direct control of these enterprises before privatization raises the risk that employment issues - rather than viability issues - will constitute the focus of discussion with the local community. Almost by definition, the socially owned enterprises are loss making. These will have to be financed by someone. If UNMIK directly controls them, the expectation could easily arise that UNMIK would assume responsibility for payroll, etc. This is not feasible; the risk and complications are even bigger for smaller, community-based enterprises. The idea of "interim administration" by local administrations, with input from the workers, should be strongly discouraged. The risks to UNMIK far outweigh the possible benefits. A preferable strategy would be to sell the assets of such enterprises as soon as possible, in order to curtail any debate on the desirability or purpose of "interim administration" for minor enterprises.

An essential part of limiting the resources needed to complete the transformation process would be an early and concerted attempt to identify and liquidate non-viable enterprises. This can be started during the public awareness campaign - even while the transformation institutions are being set up. Non-viable enterprises should be disposed of through asset sales. UNMIK’s involvement after majority socially ownership has been established should be limited to a rapid confirmation of the potential viability or lack thereof, followed by placing the enterprise into liquidation when required.

Privatization transactions. There are a very small number of socially owned enterprises in Kosovo, and the even smaller number of those that are potentially viable. Preliminary estimates suggest there may be fewer than 200 potentially viable socially owned enterprises of all sizes. Simple processes which focus on speed and transparency of the process, rather than revenue generation, or even equity, should be the objective when considering what institutional arrangements are necessary to get the potentially productive assets back to work.

UNMIK will need to develop detailed regulations on the conduct of public auctions of assets and share auctions or tenders; for unique enterprises, like the Trepca mines, and perhaps for utilities, concessions and management contracts should be used. In general, privatization processes should be as open, transparent, simple, and rapid as possible – e.g., auctions instead of tenders; cash payment instead of installment payments; and outright sales instead of concessions or management contracts. UNMIK also may need to regulate protections and rights for employee shareholders, including maintenance of share registries.

UNMIK’s overriding goal should be to revitalize viable enterprises and re-deploy the assets of non-viable enterprises through "clean" privatization transactions, unencumbered by questionable ownership claims or liabilities. While UNMIK needs to provide some satisfaction of legitimate ownership/creditor claims, this goal is distinctly secondary to the revitalization of viable enterprises. A tentative timetable would be for UNMIK to target completion of enterprise privatization within two years of setting up the necessary structure and institutions.

In contrast to what has recently been discussed, , the assets should be sold for cash only. Potential purchasers should not be required to submit an investment or development plan. To attempt to evaluate promises will expose the privatization authority to accusations of lack of transparency, as well as requiring KEA to monitor the promised plan, and even attempt to recover the assets if the promises are not fulfilled. Thus the privatization authority should focus on procedures that allow it to complete its mandate in the shortest possible time.

Development of public support. While UNMIK is developing the authority to manage and dispose of socially owned enterprises, it nonetheless needs to elicit public support for a sensible enterprise privatization program. It is important that Kosovar opinion-makers, workers, and the public develop an appreciation of the realistic prospects for socially owned enterprises and the lessons which can be learned from the ex-SFRY republics during their transformation experiences.

It is important that public discussion and a public education program on enterprise privatization begin as soon as possible after a privatization initiative has been authorized. The public education program needs to cover both the rationale for UNMIK’s privatization program, as well as detailed information to enable potential investors and claimants to participate. Public education efforts should convey the message that Kosovo’s economic future lies not in re-creating the Kosovo of 1989, but in building a new Kosovo based on current economic realities and opportunities. The implications for workers expectations need to be taken into account and explained. For example, the public awareness campaign should also emphasize that the market will decide which enterprises will be rejuvenated, once in the private sector, and that the new owners will determine how many employees will be re-employed.

⁴ The World Bank and the European Agency for Reconstruction have developed a credit line scheme along these principles. Four bilateral donors have expressed an interest in cofinancing this line of credit.