KOSOVO: DRAFT KPC EARLY RETIREMENT LAW: FISCALLY

C O N F I D E N T I A L PRISTINA 000406

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SIPDIS

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C O R R E C T E D C O P Y (CORRECT MCN)

E.O. 12958: DECL: 05/21/2017
TAGS: ECON PGOV PREL YI
SUBJECT: KOSOVO: DRAFT KPC EARLY RETIREMENT LAW: FISCALLY
IRRESPONSIBLE BUT POLITICALLY SENSITIVE

Classified By: Chief of Mission Tina Kaidanow for reasons 1.4 (B) and (
D).


1. (C) Summary. The initial draft Kosovo Protection Corps
(KPC) early retirement law is a fiscally irresponsible,
poorly-written piece of legislation that potentially provides
beneficiaries with life-long pensions and free primary health
all KPC members who would not be eligible to join the Kosovo
Security Force (KSF). PISG officials claim that the direct
costs to implement this legislation are reasonable and not
overly burdensome for the Kosovo Consolidated Budget (KCB),
but they acknowledge that they cannot estimate its indirect
costs, which appear to be significantly higher. This
legislation surfaced immediately after the Provisional
Institutions of Self-Government's (PISG) intense negotiations
with the International Monetary Fund (IMF) on a Letter of
Intent (LOI) regarding Kosovo's post-status fiscal and
economic policies, with particular emphasis on the PISG's
budget-busting laws for social welfare spending. Mid-level
PISG officials acknowledge that the KPC early retirement law
should be more fiscally prudent, but note that it is a
politically sensitive issue with support from senior-level
Kosovo government officials and other interest groups. USOP
will engage with the PISG to take a sensible approach to this
legislation and emphasize that fiscal irresponsibility could
put at risk 2-3 billion euros in donor support for Kosovo.
End Summary.
KPC DRAFT LAW PROVIDES A WORK-FREE LIFE FOR RETIREES


2. (C) On May 17 Econoff met with Eshref Shabani, Permanent
Secretary of the Ministry of Labor and Social Welfare (MLSW),
and Fadil Rracaj, Head of the MLSW Legal Office, to discuss
the KPC early retirement law. Shabani noted that the
Ahtisaari final status proposal requires legislation to
facilitate the demobilization, reintegration and
transformation of the KPC into the new, 2500-member Kosovo
Security Force (KSF). Shabani explained that the purpose of
the early retirement law is to provide monthly pensions and
the following benefits for KPC members not eligible to join
the KSF and their families, including college-age dependents
18-24 years old: free primary medical care; preferential
treatment for hiring in the public sector; preferential
treatment to enter educational institutions and for
scholarships, dormitories and other student facilities;
employment training programs; tax credits for
self-employment; exemptions from property taxes; and allowing
the time spent as a member of the Kosovo Liberation Army to
be counted as professional experience applicable towards
retirement from the KPC or other public sector jobs.


3. (C) Rracaj estimated that 1,500-2,000 KPC members will be
eligible for pensions under the early retirement law. The
two officials said that KPC members must be at least 40 years
old to receive benefits, but listed as additionally eligible
those persons under 40 who were discharged from the KPC, as
well as KPC active members who are unable to obtain
employment based on their professional qualifications. With
regard to monthly pension payments, colonels and lieutenant
colonels would receive 200 percent of their basic salaries;
majors, captains and sergeants would obtain 150 percent of
their basic salaries; and corporals and privates would
receive 100 percent of their basic salaries. Rracaj
indicated that there would be a special provision in the law
for generals to determine their salaries and pensions.
Shabani acknowledged that there are no strict criteria to
receive the pensions and benefits, or sunset provisions which
limit the eligibility time for retirees. Econoff noted that
the eligibility criteria for the law offers no incentive for
retirees to work.


4. (C) Shabani said KPC retirees should not receive other
pensions or social welfare services, with the exception of
those who are eligible under the KLA Veterans law and the KLA
War Invalids law. Rracaj calculated that the direct costs to

implement the legislation would be 3.2 million euros and said
the the law would be funded by the KCB and the five percent
contribution paid for by the KPC to the Kosovo Pension and
Savings Trust (KPST) for each of its members. Both MSLW
officials asserted that the direct costs were not an overly
buQ?#.wNQgaERATION OF POSSIBLE BUDGETARY CHALLENGES OR ECONOMIC
GAINS FOR KOSOVO POST-STATUS

5. (C) Econoff told MLSW officials that the law was a
fiscally irresponsible, poorly written piece of legislation
that would negatively impact the KCB. He emphasized that it
was important the PISG come up with an estimate for the
indirect costs so that a full, accurate assessment of the
draft law can be conducted, and highlighted that many
articles required more clarity, particularly the wording on
inspection of pensions, restrictions of early pensions,
suspension of early pensions, integration of early
retirement, and supervision of the implementation of the law.
He also expressed concern that KPC staff who were KLA
members would receive multiple pensions. Econoff noted that
the enforcement provisions were weak and would not provide
strong deterrents to stop possible violations of the law.


6. (C) Econoff reminded the MLSW that the International
Monetary Fund (IMF) had recently visited Kosovo to negotiate
a Letter of Intent (LOI) on economic and fiscal policies for
the post-final status period and noted the IMF's concern that
social welfare spending - general pension law, labor law,
health insurance law, KLA Veterans law - provided overly
generous benefits which created significant, unsustainable
costs for the KCB. ItQK9Qt the expected post-status donors conference,
which is estimated to bring Kosovo 2-3 billion euros, and
encouraged them to consider other economic and fiscal
challenges Kosovo would encounter in the future, including
post-status transition costs, the formation of new ministries
and other government agencies, and the negative economic
consequences of UNMIK's departure.

SUGGESTIONS TO IMPROVE LEGISLATION


7. (Cm`_cTts to control
indirect costs. Econoff proposed that the MLSW redraft the
legislation to provide protection to KPC retirees in
accordance with EU Directive 1998/59/EC on collective
redundancies, which requires that greater protection be
afforded to all workers in the event of collective
redundancies while also taking into account the need for a
balanced economic and social methodology of calculating
redundancy payments. For example, redundancy payments could
be based on length of service and rank. Econoff also
suggested that the PISG create a database of all potential
beneficiaries that would be externally audited and then form
the basis for an independent technical assessment of the
law's fiscal costs and sustainability, which would be similar
to the IMF's idea for the KLA Veterans law during the recent
LOI negotiations.

SENIOR LEVEL PISG OFFICIALS SUPPORTING THIS LEGISLATION


8. (C) Shabani and Rracaj acknowledged that the legislation
needed to be reviewed carefully by the PISG and they were
fully aware of IMF concerns about social welfare spending.
Shabani said that he personally agreed with the Econoff's
concerns about the legislation and liked some of his

suggestions to improve the draft law, but noted that senior
(MkyAQ:t Kosovo Assembly to pass this
legislation and asserted that the international community
will have to persuade the PISG to make it more fiscally
prudent, given the political sensitivities regarding the KPC
transformation to the KSF.


9. (C) Comment: It is no surprise that the draft KPC early
retirement law surfaced immediately after the IMF mission
concluded its negotiations with the PISG and noted its
concerns with social welfare spending, particularly the KLA
Veterans law. For its part, the post-status Kosovo
government is going to have to learn how to be a responsible
steward of scarce resources by doing something it has never
had to do: stand up to loud, popular and potentially
menacing domestic constituencies without the international
community's skirts to hide behind. We believe, however, that
the Kosovars will "reluctantly" back off on many of the
provisions of this law once faced with concerted
international opposition, placing the blame on internationals
for threatening to withhold donor funding. End Comment.
KAIDANOW