Identifier
Created
Classification
Origin
07PRISTINA9
2007-01-05 11:40:00
UNCLASSIFIED
Embassy Pristina
Cable title:  

KOSOVO: KOSOVO 2007 INVESTMENT CLIMATE STATEMENT

Tags:  BEXP BTIO ECON ETRD EINV ELAB KTDB PGOV EFIN 
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VZCZCXYZ0002
RR RUEHWEB

DE RUEHPS #0009/01 0051140
ZNR UUUUU ZZH
R 051140Z JAN 07
FM USOFFICE PRISTINA
TO RUEHC/SECSTATE WASHDC 6893
INFO RUEHRC/DEPT OF AGRICULTURE WASHDC
RUCPDOC/USDOC WASHDC
RUCPCIM/CIMS NTDB WASHDC
UNCLAS PRISTINA 000009 

SIPDIS

SIPDIS

STATE FOR EUR/SCE, EB/IFD/OIA AND EB/CBA-DWINSTEAD
STATE PLEASE PASS TO TREASURY AND COMMERCE DEPARTMENTS
STATE PLEASE ALSO PASS TO USTR

E.O. 12958: N/A
TAGS: BEXP BTIO ECON ETRD EINV ELAB KTDB PGOV EFIN
OPIC, USTR, YI
SUBJECT: KOSOVO: KOSOVO 2007 INVESTMENT CLIMATE STATEMENT

REF: STATE 178303

INTRODUCTION

UNCLAS PRISTINA 000009

SIPDIS

SIPDIS

STATE FOR EUR/SCE, EB/IFD/OIA AND EB/CBA-DWINSTEAD
STATE PLEASE PASS TO TREASURY AND COMMERCE DEPARTMENTS
STATE PLEASE ALSO PASS TO USTR

E.O. 12958: N/A
TAGS: BEXP BTIO ECON ETRD EINV ELAB KTDB PGOV EFIN
OPIC, USTR, YI
SUBJECT: KOSOVO: KOSOVO 2007 INVESTMENT CLIMATE STATEMENT

REF: STATE 178303

INTRODUCTION


1. (U) Kosovo continues to be administered under the civil
authority of the United Nations Interim Administrative
Mission in Kosovo (UNMIK),pursuant to U.N. Security Council
Resolution 1244. UNMIK was established in June 1999,
following the conclusion of the NATO military campaign
against Slobodan Milosevic's forces. Kosovo is entering a
distinctly new phase with 2007 likely to see the resolution
of Kosovo's final status and the implementation of a
settlement that contains new responsibilities for the local
authorities as well as the international community. New
powers and responsibilities will be transferred to Kosovars,
and the executive authority of the United Nations will give
way to a new role for the U.S.-supported international
follow-on mission responsible for overseeing the settlement
implementation.


2. (U) The political situation in Kosovo remained relatively
stable in 2006. However, substantial democratic and
bureaucratic deficiencies, and the lack of professional and
technical capacity within the Kosovo civil service, weakened
the performance of the Provisional Institutions of
Self-Government (PISG).


3. (U) Overall, the rule of law needs to be significantly
strengthened. The administration of justice continues to be
a major problem, as the backlog of cases increases. The
judicial institutions and the law enforcement agencies need
to be substantially improved to be capable of fully enforcing
the rule of law. Corruption is widespread and there is a

lack of cohesive and forceful action against it. The PISG
established the Anti-Corruption Agency in 2005, but it
remains a nascent institution lacking capacity and strong
political support.


4. (U) Kosovo,s administrative capacity remains weak. Its
public administration is inefficient and subject to political
interference. Although a legal basis for the civil service
and for public finance management is in place, there is a
lack of transparency and accountability. Government
coordination must be enhanced and the relationship between
the central and municipal level needs to be further defined.
Improving the provision of basic public services to all
communities is a priority.


5. (U) Under UNMIK Regulation 1999/24, the applicable law in
Kosovo includes UNMIK laws and regulations and those of the
Former Socialist Republic of Yugoslavia in effect in Kosovo
as of March 22, 1989. As a result, businesses in Kosovo
operate under a complex and, in some cases, incomplete set of
legal codes. UNMIK continues to transfer responsibilities to
the (PISG),consistent with UNSC resolution 1244 (1999). The
responsibilities transferred and those reserved for UNMIK are
outlined in the Constitutional Framework.


6. (U) UNMIK, the European Union's (EU) Pillar IV and the
PISG foster economic development. While privatization of
socially-owned enterprises (SOEs) is considered an economic
success story in Kosovo, progress in other key structural
reform areas, such as the restructuring of public utilities,
has been more limited. The main development in the area of
structural reforms since 2004 has been a renewed focus on the
privatization of socially-owned enterprises (SOEs) following
changes in the Kosovo Trust Agency's (KTA)
(http://www.kta-kosovo.org/) management in summer 2004.
Privatization resumed in 2004 and achieved significant
progress. By December 2006, the KTA, which is responsible
for the administration and maintenance of SOEs and
publicly-owned enterprises (POEs),tendered 228 out of 500
SOEs, which created 359 new companies. KTA has signed 190
contracts with the new owners and privatization sales have
generated 264,459,831 euros.


7. (U) According to the KTA, approximately 200 out of the 500
SOEs are not viable. The non-viable SOEs are expected to be
liquidated, and in this context preparations have taken place
for the auctioning of their assets. In April 2005, the UN
Special Representative for the Secretary General, the
official administrator of Kosovo, adopted an amendment to the
KTA regulation which introduces an eminent domain, clause
enabling swifter property expropriation and further limits
the risk exposure of the seller. This change facilitated the
privatization of a number of SOEs, notably the 140
agro-industrial firms, which had been delayed.


8. (U) Some progress has been made on the restructuring of
POEs. The major public utilities - Pristina International
Airport, Kosovo Energy Corporation, Post and
Telecommunications of Kosovo, Kosovo Railways, district
heating enterprises, and landfill, water and waste management
companies - were incorporated in 2005 and 2006. KTA's
incorporation program for POEs reorganizes them under a
different corporate governance structure, establishes clearer
financial rules, and creates a new balance sheet to account
for assets, investments and debts. Incorporation clarifies
the legal status and claims against the assets and
liabilities of POEs, establishes proper management and
oversight procedures, and develops a clearer financial record
to help with potentially borrowing money from banks,
international financial institutions, and eventually
privatization.


9. (U) Following the effective transfer of budget
responsibility from UNMIK to the PISG in 2002, continued
improvements in the process of institutional capacity
building took place, notably in the Ministry of Finance and
Economy. A new regulatory environment has been established
for the energy sector, with the adoption of a series of laws
in June 2004, the establishment of the Energy Regulatory
Office that year and the signature of the Energy Community
Treaty establishing a Regional Energy Market in South East
Europe in October 2005.


10. (U) Electricity in Kosovo is produced by two
lignite-fired thermal power plants with 1950s and 1970s
technology known as Kosovo A and Kosovo B, with installed
capacity of about 1500 MW and a small (about 35 MW)
hydropower plant. All five units of Kosovo A are under
different stages of refurbishment. Poor capacity utilization
leads to shortages and outages. Most of the transmission
lines are now in operation following post-conflict repairs,
but the substations are still in bad technical condition.
Electricity demand in 2006 was 1100 megawatts (MW) as opposed
to 720 MW generated. Bill collection is a serious problem
which impedes needed reinvestment in equipment for power
generation and supply as well as foreign investment in the
energy sector. About 50 percent of the electricity supplied
was billed in 2005 (technical and non-technical losses were
50 percent) and only 37 percent of the amount billed was
collected.


11. (U) On August 16, 2006, the Ministry of Energy and
Mining, in accordance with the PISG,s energy policy for
Kosovo and in cooperation with the World Bank, solicited
expressions of interest (EOI) from qualified private
investors in an energy development project that encompasses
the following components:

a) Construction of a new power plant, Kosovo C, with an
estimated installed capacity of up to 2100 MW and associated
transmission capacity;

b) The development of a new coal mine for existing generation
units (Sibovc Southwest) and development of a new mine (the
Sibovc mine) for PPC; and

c) Rehabilitation of certain units of the existing power
plant, Kosovo A.


12. (U) On December 4, 2006 the Project Steering Committee
(PSC),led by the Minister of Energy and Mining, announced
the acceptance of credentials by companies and consortia
interested in competing for the development of the energy
sector. There is significant American interest in the energy
sector. The credentials of these companies have been
submitted in response to the EOI. The energy sector
development tender is a USD 2-3 billion dollar project. On
December 28, 2006, the PSC shortlisted four companies, three
were American firms, and their consortia. The PSC will
forward a request for proposal to the shortlisted companies
and their consortia to submit bids for the project tender by
the first quarter of 2007.


13. (U) The mining industry was an important sector of the
Kosovo economy, but began to decline in the 1990's due to
lack of investment in equipment, facilities and the
development of new mines. Kosovo is keen to attract foreign
investment to reinvigorate this industry. Kosovo has a
varied geology containing a range of exploitable minerals
such as lead, copper, gold, silver, magnesium and zinc. The
Independent Commission for Mines and Minerals (ICMM)
regulates Kosovo,s minerals sector, issues exploration and
mining licenses, and ensures compliance with legislation in
accordance to international mining, environmental and safety
standards. In 2006, a total of 69 exploration and mining
licenses were granted. ICMM provides key technical
information to prospective bidders. In 2006, a Kazakh-Swiss
consortium, International Mineral Resources AG/Alferon, won
the Ferronikeli nickel mine and smelter complex SOE for 30.5
million euros, the largest foreign investment via
privatization.


A. OPENNESS TO FOREIGN INVESTMENT


14. (U) UNMIK and the Ministry of Trade and Industry (MTI)
actively promote foreign investment in Kosovo. In January
2001, UNMIK adopted Regulation 2001/3 on Foreign Investment
in Kosovo, and the Kosovo Assembly approved the Foreign
Investment Law (FIL) on November 21, 2005, which was
promulgated by UNMIK on April 28, 2006. The law states that
foreign firms operating in Kosovo will receive national
treatment, which means that they will be treated no less
favorably than domestic businesses. The only specific
limitation on foreign investment is a prohibition against
foreign investors holding more than 49 percent ownership in
business organizations that manufacture or distribute
military products (Reg. No. 2001/3, Section 6). However,
local businesses are not allowed to carry arms, which creates
a market for foreign companies specializing in armed guard
services.


15. (U) The registration of businesses in the MTI's official
registry has increased each year since 1999 and points to a
trend of local enterprise development, to the extent it can
be recorded in the formal economy.


16. (U) Kosovo continues to make progress in developing an
economic legislative framework. The basic legislation of a
market-oriented economy is in place. However, the protection
of private agricultural and commercial property and
intellectual property rights, remains a challenge. In
addition, legal uncertainty, weaknesses in law
implementation, contract enforcement, as well as contingent
liabilities, continue to constitute an impediment to economic
activity and in particular to investment. The resolution of
private agricultural and commercial property rights is the
current focus of Kosovo and the international community. The
determination of SOE ownership has raised complex issues, and
leaves room open for litigation, thus arguably reducing the
price which bidders are ready to offer during privatization.
Property registers exist but are often not complete.


17. (U) Particular attention has been given to meeting
European Union standards and Kosovo has drafted new
legislation and revised existing laws to ensure that its
regulations are compatible. A major instrument in this
regard is the Stabilization and Association Process (SAA)
Tracking Mechanism with the European Commission, which held
its first session in Pristina on March 13, 2003. This
technical working group continues to meet in order to support
Kosovo in its EU-compatible structural reforms through policy
advice and guidance.


18. (U) Nearly 70 regulations have been passed for economic
and commercial development. Some of the laws are regulations
on Foreign Investment, Business Organizations, Contracts for
the Sale of Goods, Pledges, Insurance Regulation and
Supervision, Payment Transactions, Essential Labor Law,
Standards for Financial Reporting, Establishment of a Pledge
Filing Office, Law on Mortgages, Law on the Establishment of
an Immovable Property Registry, Law on Liquidation and
Reorganization of Legal Persons in Bankruptcy Transformation,
The Right of Use to Socially-Owned Immovable Property, Law on
External Trade Activity, Law on Telecommunications, Law on
Energy, Law on Anti-Corruption, and the Law on Anti-Money
Laundering. All commercial laws are available for public
access and in English on the UNMIK website:
www.unmikonline.org/regulations. It should be noted that
English is the official language of Kosovo in case of a legal
dispute or translation of documents.


B. CONVERSION AND TRANSFER POLICIES

19.(U) Section 9 of the UNMIK Regulation (1999/24) and
Article 9 of the FIL guarantees unrestricted use of income
from foreign investment. Lawful proceeds, apart from tax and
other liabilities, from foreign investment may be disposed of
in any manner, including repatriation or conversion to
another currency in any domestic or foreign market. Foreign
investors have the right to open bank accounts. There is no
restriction on the currencies in which such accounts may be
opened and operated. Kosovo permits all conversions and
transfers to be effectuated without delay in accordance with
normal and customary banking procedures in general use by the
banking industry in the EU. All conversions are made at a
market rate of exchange.


C. EXPROPRIATIONS AND COMPENSATION


20. (U) Section 7 of the UNMIK Regulation and Article 8 of
the FIL protects foreign investments from expropriation,
guaranteeing due process of law and timely payment of
compensation for valid claims. The U.S. Overseas Private
Investment Corporation (OPIC) operates in Kosovo, which
further protects American investors from political risk. In
April 2005, the Special Representative of Secretary General
(SRSG) adopted an amendment to the KTA regulation which
introduces an eminent domain, clause enabling, if needed,
swift property expropriation and limits risk exposure to the
Kosovo Trust Agency. It is important to note that the
eminent domain clause can be implemented in cases only
pertaining to SOEs.


D. DISPUTE SETTLEMENT


21. (U) Section 17 of the UNMIK Regulation and Chapter 4 of
the FIL assigns jurisdiction for the resolution of business
disputes to the courts; parties to foreign investment,
however, are free to agree upon arbitration or another
alternative dispute resolution procedure, the results of
which are enforceable by local courts. The FIL allows
foreign investor to choose any of the following procedural
rules to govern the arbitration of the investment dispute:

a. The ICSID Convention, if the foreign investor is a citizen
of a foreign country and that country and Kosovo are both
parties to that convention at the time of the submission of
the request for arbitration;

b. the ICSID Additional Facility Rules, if the jurisdictional
requirements &ratione personae of Article 25 of the ICSID
Convention are not fulfilled at the time of the submission of
the request for arbitration;

c. the UNCITRAL Rules, in such case the appointing authority
referred to therein shall be the Secretary General of ICSID;
or

d. the ICC Rules.


22. (U) The commercial court has jurisdiction over disputes
involving shipping, intellectual property rights and unfair
trade practices. The effectiveness of the court is
undermined by lack of enforcement of existing laws, which
remains the primary challenge in dispute settlement cases.
Extremely long delays in the adjudication of commercial court
cases are hampering Kosovo,s economic development and
investment climate. In addition, poor enforcement of laws is
adversely affecting utility bill collections and the recovery
of past due loans.


23. (U) Kosovo has a bankruptcy law and municipal courts
handle bankruptcy procedures for all enterprises except SOEs.
There is also a special bankruptcy division in the Pristina
Municipal court.


24. (U) The Special Chamber of the Supreme Court of Kosovo on
Kosovo Trust Agency Related Matters was established under
Section One of UNMIK Regulation 2002/13. The Special Chamber
deals with disputes and claims related to the privatization
and economic restructuring process currently under way in
Kosovo. The court is composed of three international and two
local judges. The Chamber will have primary jurisdiction to
hear appeals against the decisions of the Kosovo Trust Agency
as well as creditor, ownership and property claims brought
against SOEs and POEs and claims arising out of the
privatization and liquidation of SOEs. The rules of
procedure and directives for claimants wishing to institute
proceedings are contained in Administrative Direction 2003/13
which also establishes the Special Chamber of the Supreme
Court of Kosovo on KTA related matters.


25. (U) The Kosovo judicial system has 18.9 judges and
prosecutors per 100,000 inhabitants, and 2.85 courts per
100,000 inhabitants, which is close to European standards.
Despite the high proportion of judges, prosecutors and courts
per the population, there remains a significant backlog of
cases currently pending in local courts, indicating a clear
need to improve the efficiency of the justice system. There
are also 17 international judges and 10 international
prosecutors working in the District and Supreme Courts of
Kosovo and the Office of the Public Prosecutors. They handle
approximately three percent of criminal cases considered as
sensitive. The applicable laws in Kosovo are the 2004 New
Provisional Criminal Code and Provisional Criminal Procedure
Code of Kosovo. The courts are responsible for the
administration of justice in Kosovo in accordance with the
applicable law. The court structure includes the Supreme
Court of Kosovo, District Courts, Municipal Courts and Courts
of Minor Offenses (including a High Court of Minor Offenses).
A Special Chamber of the Supreme Court deals with Kosovo
Trust Agency- related matters.


E. PERFORMANCE REQUIREMENTS/INCENTIVES


26. (U) UNMIK does not impose performance requirements as a
condition for establishing, maintaining or expanding an
investment. UNMIK implemented a 15 percent across-the-board
value added tax (VAT) in July 2001. In order to encourage
investment, UNMIK has granted those businesses that import
capital goods a six-month deferment on VAT payment,
conditioned upon presentation of a bank guarantee. Exports
are zero-rated: suppliers may export goods without collecting
VAT from the foreign buyer. Suppliers may claim credit for
taxes on inputs either by offsetting those taxes against
gross VAT liability or by claiming a refund.


27. (U) In September 2000, the EU amended its General System
of Preferences, eliminating quantitative restrictions and
measures for most industrial products and granting special
preferences to agricultural imports from Kosovo. In June
2002, the EU modified this preferential treatment to include
all imports from Kosovo.


F. RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT


28. (U) UNMIK regulations and the FIL do not interfere with
the establishment, acquisition and disposal of interests in
business enterprises by private entities. Foreign investment
in Kosovo is allowed the rights of ownership, extending
national treatment to foreign investors. Foreign investment
is subject to approval by the authorities only to the extent
that such approval would be required for similar domestic
business organizations. The following rights also apply:

a. foreign investors may transfer property rights, including
permits, to other legally qualified persons in the same
manner and to the same extent as domestic persons;

b. foreign investors have the same right to purchase
residential and non-residential property as domestic business
organizations;

c. foreign investors with less than a majority stake in a
foreign investment shall be protected as domestic minority
shareholders in accordance with the applicable law;

d. foreign investments are not subject to more onerous tax
obligations than similar domestic business organizations; and,

e. foreign investors may establish subsidiary enterprises,
branches and representative offices in the same manner and to
the same extent as similar domestic organizations.


G. PROTECTION OF PROPERTY RIGHTS


29. (U) UNMIK Regulation 2002/22 promulgated the law adopted
by the Kosovo Assembly to establish an immovable property
rights register as a mechanism to protect private land
ownership. The Kosovo Cadastral Agency (KCA) has the
authority for the overall administration of the official
register in compliance with the provisions of the applicable
law. The municipal cadastral offices record immovable
property rights in the register under the authority of the
KCA. Security interests against movable property, accounts,
proceeds, etc. are protected under Regulation 2001/5, which
provides the exclusive means in which pledges are to be
created, become effective against third parties, and are
enforced. This regulation applies to all transactions,
regardless of form, intended to create a pledge. UNMIK
Regulation 2002/21 promulgated the law adopted by Kosovo
Assembly on Mortgages, establishing a uniform system for
securing and registering pledges against immovable property,
and to institute a mortgage and pledge registry. The
resolution of residential and private agricultural and
commercial property remains a serious issue in Kosovo. The
Kosovo Property Agency, formerly known as the Housing and
Property Directorate (HPD),is completing the adjudication of
residential property disputes related to the period from
March 23, 1989 to October 13, 1999, and is currently working
on the resolution of private agricultural and commercial
property claims.


30. (U) Section 10 of Regulation 2001/2 provides for the
protection of intellectual property rights (IPR),authorizing
enforcement of trademark, copyright and patent laws, and any
applicable related international conventions. Intellectual
property rights are also protected under the 1981 Yugoslav
Law on Protection of Inventions, Technical Improvements and
Distinctive Signs, and the 1991 Law on Authors Rights, both
of which are considered applicable law by Kosovo's courts.
However, there is insufficient protection of intellectual,
industrial and commercial property rights in Kosovo.


31. (U) Old Yugoslav laws on IPR are applicable in Kosovo.
Some efforts to develop more stringent property rights
legislation are underway. There have been laws promulgated
to protect intellectual, industrial and commercial property
rights but enforcement remains weak and impedes the
development of a comprehensive IPR regime in Kosovo.
Intellectual property rights are flagrantly and visibly
infringed in Kosovo. A significant number of counterfeit
consumer goods (notably CDs, DVDs, clothing items and
computer software) are available for sale and traded openly.
This situation needs to be remedied by urgent action.


H. TRANSPARENCY OF THE REGULATORY SYSTEM


32. (U) In order to promote fair and open competition for
government tenders and transparency in the procurement and
regulatory systems, the PISG and UNMIK publish the rules,
regulations and procedures on their respective websites:
www.unmikonline.org; www.assembly-kosova.org;
www.pm-ksgov.net. As UNMIK continues to establish regulatory
institutions, procedures for obtaining licenses and permits
vary widely, with a corresponding variance in the degree of
transparency in the process.


33. (U) The Public Procurement Regulatory Agency recently
initiated audits of some of the procurement activities of the
Kosovo ministries and agencies that received funds from the
Kosovo consolidated budget. The Central Procurement Agency
in the Kosovo Ministry of Public Services manages bulk
procurement and the provision of services for the PISG. All
tenders advertised through the Central Procurement Agency are
advertised in English, Albanian and Serbian.


I. EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT


34. (U) UNMIK established the Banking and Payments Authority
of Kosovo (BPK) in November 1999. BPK performs many of the
functions of a central bank, with the exception of issuing
currency and regulating monetary policy. In September 2006,
the Banking and Payments Authority of Kosovo (BPK) was
transformed into the Central Banking Authority of Kosovo
(CBAK). The CBAK is an independent body whose role is to
foster the development of competitive, sound and transparent
banking and financial sectors, and facilitate economic
growth. The CBAK supervises and regulates Kosovo,s banking
sector (six banks with approximately 240 branches),insurance
industry (eight insurance companies),pension funds and other
micro finance institutions, and performs a number of other
tasks normally undertaken by a central bank, including cash
management, transfers, clearing, management of funds
deposited by the Ministry of Finance and Economy or other
public institutions, collection of financial data, and the
management of a credit register. The CBAK is not authorized
to grant any loans, including liquidity, to banks. The
primary focus of its monetary policy is to foster financial
stability.


35. (U) The insurance sector is small but has grown rapidly
in recent years. At the end of 2006, there were ten licensed
insurance companies in Kosovo. The implementation of an
online communications system and premium payments service
through banks was introduced in 2004.


36. (U) Neither the banking system nor the non-financial
enterprises is ready to finance large investment projects in
the private sector. During the last three years, there has
been minimal private investment in Kosovo, outside of real
estate construction and development. About 80 percent of
bank loans are short-term credits with interest rates ranging
from 12-14 percent, which do not support long-term
investments. Most of the deposits are demand (&a vista8)
deposits.


J. POLITICAL VIOLENCE


37. (U) Political violence has dropped dramatically since the
riots of March 2004. In 2006, there were some isolated
incidents of interethnic violence and sporadic political
protests, but none of these events adversely affected
Kosovo's political stability. The U.N.-authorized, NATO-led
peacekeeping &Kosovo Force8 (KFOR),composed of forces from
41 countries (both NATO and non-NATO),maintains internal
security and defense against external threats. KFOR also
assists UNMIK's multinational civilian police corps (U.N.
International Police, or CIVPOL) in its role as uniformed and
criminal police. The UNMIK-run Kosovo Police Academy has
trained more than 7,500 local police officers for the Kosovo
Police Service (KPS). CIVPOL has transferred basic policing
functions to KPS, while continuing to provide oversight and
monitoring. The Kosovo Protection Corps (KPC),a civilian
emergency preparedness service, is trained to respond to
civil and medical emergencies.


K. CORRUPTION


38. (U) Section 15 of Regulation 2001/3 states that foreign
investors shall observe business practices consistent with
the principles of the Convention on Laundering, Search,
Seizure, and Confiscation of the Proceeds of Crime (Council
of Europe, Strasbourg, 8 July 1990); the Convention on
Combating Bribery of Foreign Government Officials in
International Business Transactions (Organization for
Economic Cooperation and Development, Paris, 21 November
1997); and the Criminal Law Convention on Corruption (Council
of Europe, Strasbourg, 27 January 1999). Violation of these
conventions could cause a foreign investor to be disqualified
from conducting business operations in Kosovo.


39. (U) Corruption in Kosovo is widespread at all levels
throughout government and private industry, and adversely
impacts commercial development. The Law on the Suppression
of Corruption was promulgated in May 2005 providing; inter
alia, for the creation of a Kosovo Anti-Corruption Agency.
The law prescribes that an anti-corruption strategy should be
prepared by the anti-corruption agency for the Government to
be approved by the assembly. Since 2003, a financial
investigation unit, staffed by Italian Guardia di Finanza
officers, has the mandate to conduct financial inspections of
public bodies and public enterprises as well as other
organizations receiving public funds and launch criminal
investigations.


40. (U) There are frequent reports about irregularities in
public tendering procedures. The recent revision of the
public procurement law, and a significant increase in public
audits from the Kosovo Office of the Auditor General on
budget and procurement irregularities, are important steps
forward. The public procurement law reflects EU standards in
defining a clear division between the executive and
regulatory functions. Tax evasion is high, and many local
and foreign businesses are deeply concerned about the
professional ethics of government officials who allegedly
take bribes or extort firms in exchange for licenses,
permits, movement of paperwork or routine public services.
Traditional lending and business practices tend to favor
connections and nepotism over creditworthiness. Rumors of
politically-motivated racketeering are common.


L. BILATERAL INVESTMENT AGREEMENTS


41. (U) Under UN Security Council Resolution 1244, Kosovo,s
international relations and negotiations fall under UNMIK
authority. However, the PISG is closely involved with these
initiatives to ensure that the Kosovo government is fully
capable of fulfilling its obligations under the
constitutional framework for self-government. In May 2003,
UNMIK submitted a statement of intent to the Stability Pact,
committing itself to the obligations set out in the
Memorandum of Understanding on Trade Liberalization and
Facilitation. Following a declaration of intent on 29 May
2003 to follow the Stability Pact Memorandum on Trade
Liberalization and Facilitation in Southeast Europe, UNMIK
started to negotiate bilateral Free Trade Agreements (FTAs)
with countries in the region under the umbrella of the
Stability Pact Trade Working Group. For the purpose of
negotiating FTAs, a Trade Policy Working Group was
established comprising members from UNMIK, government
ministries, UNMIK Customs, the Kosovo Chamber of Commerce,
and other stakeholders.


42. (U) Albania was the first country to sign a free trade
agreement (FTA) with Kosovo in 2003. Kosovo concluded an FTA
with Macedonia in 2005. The Kosovo-Macedonia FTA gives Kosovo
full duty free access to the Macedonian market, while
maintaining some duties on imports, particularly in the
agriculture sector. In 2006 Kosovo signed FTAs with Croatia
and Bosnia-Herzegovina. In December 2006, Kosovo became a
signatory to the Central European Free Trade Area CEFTA) and
EU Common Aviation Area. Kosovo participates in the
Stabilization and Association Process (SAP),the EU,s policy
framework towards the Western Balkans, by following the
guidelines of the European Partnership. The SAP steers
Kosovo,s reform process according to EU best practices and
European legislation. The Partnership document outlines the
main priorities that Kosovo needs to fulfill, thereby also
taking into account the rQuirements of the Standards for
Kosovo, which are a series of laws, policies and institutions
that the PISG must create in the areas of rule of law,
property rights, economy, among others, to help develop a
viable, sustainable government. The Stabilization and
Association Process Tracking Mechanism (STM) is the
instrument that guides and monitors Kosovo,s development
with regard to the European Partnership. Important elements
of the STM are the regular political meetings between the
European Commission and the Kosovo authorities at which
progress is discussed and further challenges are identified.


43. (U) In 2005, Kosovo became a member of the Athens Process
on Energy for the Southeastern Europe Energy Community
Treaty. This is a significant step for Kosovo in achieving
increased regional cooperation, as well as securing more
sources of energy which is essential for economic and social
development and stability. In June 2004, Kosovo signed the
Memorandum of Understanding (MOU) on the Development of a
South East Europe Core Regional Transport Network. The
signatory countries, the European Commission, the Stability
Pact and international financial institutions are working
jointly to expedite the implementation of the MOU.


M. OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS


44. (U) The U.S. Overseas Private Investment Corporation
(OPIC) has been actively involved in Kosovo since 2000 by
providing financing, political risk insurance and other
investment vehicles to American investors. Through OPIC
assistance, American investors are currently involved with
projects in the energy sector and real estate development.


N. LABOR


45. (U) On October 8 UNMIK approved Regulation 2001/27, the
Essential Labor Law. The law requires that employment
conditions are observed by contractual parties such full time
status is relegated to a 40-hour work week, payment of
overtime, occupational health and safety standards, 90 days
of maternity leave and annual leave, among other provisions.
The labor law does provide for a minimum wage but does not
set an amount. Overtime is limited to 20 hours per week and
40 hours per month. The Ministry of Labor and Social Welfare
created a labor inspectorate to ensure the labor law is
adhered to by employers. Labor and contractual disputes are
adjudicated in local courts.


O. FOREIGN TRADE ZONES/FREE PORTS


46. (U) On January 30, 2004 UNMIK approved a new Customs Code
(Regulation (2004/1),replacing the old Yugoslav Customs Code
and related executive instrument that were applicable in
Kosovo. The Kosovo Customs Code is a business friendly
regulation, compliant with standards of the European Union
and the World Customs Organization. The Code provides
business friendly mechanisms - bonded warehouses, inward and
outward processing, transit of goods, free trade zones, with
the aim of facilitating trade and stimulating exports of
goods. The purpose of bonded warehouses is to enable storage
of goods under Customs supervision. The customs warehouse
procedure allows the storage of non-Kosovo goods, without
such goods being subject to import duties or commercial
policy measures, and Kosovo goods, where legislation
governing specific fields provides that their placement in a
customs warehouse shall attract the application of measures
normally required for the export of such goods. Through the
provision of regulated and monitored inward and outward
processing, individual companies are allowed to bring into
Kosovo, without paying taxes or customs duties, components
for the production of goods destined for export.


47. (U) There are no free trade zones, foreign trade zones
and free ports in Kosovo. However, the Customs Code permits
the establishment of free zones for manufacturing and export.



P. FOREIGN DIRECT INVESTMENT STATISTICS


48. (U) Kosovo's foreign investment statistics are not fully
comprehensive or readily available due to the nascent
development of the Ministry of Trade and Industry's (MTI)
Investment Promotion Agency (IPA),established in 2005.
According to IPA data, foreign direct investment (FDI) was
estimated to be 650 million euros from 2005 to July 2006,
with 250 million euros of this amount coming from the
privatization process, 277 million euros reported as minimal
declared capital in the MTI Business Registration Office, and
133 million euros identified as direct investment and
commercialization. IPA noted that these figures are
estimates and believes that FDI is higher.


49. (U) The IPA reported that the number of registered
businesses in Kosovo is 1,588, of which 22 are American
companies. The other companies come from EU countries (249),
Southeastern Europe (784),Switzerland (36),and Asia and
other countries (497). According to IPA data, most foreign
businesses are involved in trading (63 percent),service
industries (18 percent),production, extraction and
processing industries (11.5 percent),and construction (7.5
percent).



LASKARIS