KOSOVO: CREATING GOOD GOVERNANCE OF PUBLICLY OWNED

C O N F I D E N T I A L PRISTINA 000099

SIPDIS

SIPDIS

STATE FOR EUR/SCE AND EUR/ACE
STATE PLEASE PASS TO TREASURY FOR BRAD BELL
AID FOR EE/ECA, EE/DGSR, EE/EG
NSC FOR BRAUN

E.O. 12958: DECL: 02/01/2017
TAGS: ECON KPRV KCOR PGOV PREL YI
SUBJECT: KOSOVO: CREATING GOOD GOVERNANCE OF PUBLICLY OWNED
ENTERPRISES IN TRANSITION TO KOSOVAR AUTHORITY

REF: (A) 06 PRISTINA 424 (B) 06 PRISITNA 998 (C) 06

PRISTINA 1055

Classified By: COM Tina Kaidanow for reasons 1.4 (B) and (D).


1. (C) Summary. The final status package proposal presented
to Kosovo on February 2 provides UNMIK the opportunity to
establish corporate governance and oversight structures for
publicly-owned enterprises (POEs) as they transition to
Kosovar authority. Several UNMIK agencies and some PISG
officials have been lobbying for regulations in the KTA
successor law that would provide clear governance and
oversight requirements for POEs as part of the post-status
transition to Kosovar authority. They, including the
International Monetary Fund, do not believe that POEs should
come under the direct authority of ministries in a
post-status environment. UNMIK and some PISG officials want
to establish an independent holding company for the POEs that
would be under the authority of the Kosovo Assembly.
According to UNMIK officials, the World Bank believes that
the ministries should run the POEs to help make the ministers
more accountable for these enterprises. The SRSG's position
on this issue remains unclear. USOP believes that it would
be prudent for UNMIK and the PISG to establish strong,
independent corporate governance structures and proper
oversight for the POEs as they transition to Kosovar
authority, but full privatization post-status should be the
ultimate goal to ensure their managerial and operational
efficiency, lessen the costs to the Kosovo Consolidated
Budget, and implement good public policy. End Summary.

FINAL STATUS PACKAGE PROPOSAL PROVIDES UNMIK THE OPPORTUNITY
TO ADDRESS POST STATUS GOVERNANCE AND OVERSIGHT CONCERNS FOR
POEs


2. (C) Article 1.2 in Annex Seven (Property and Archives) of
the final status package proposal presented by UN Special
Envoy Marti Ahtisaari to the PISG on February 2 requires
competent Kosovo authorities to take appropriate measures to
implement European Union principles of corporate governance
and liberalization of POEs. This language was a welcome
addition for several UNMIK agencies and PISG officials
concerned about the governance and oversight of POEs.
UNMIK's Office of Oversight for POEs (OPOE),The Kosovo Trust
Agency (KTA) -- which is responsible for the administration
and maintenance of publicly-owned enterprises (POEs)-- and
some Provisional Institutions of Self-Government (PISG)
officials have been lobbying for regulations in the KTA
successor law that would provide clear governance and
oversight requirements for public utilities as part of the
post-status transition period from UNMIK to Kosovar
authority.


3. (C) Several UNMIK and PISG officials are concerned about
ensuring good POE governance and do not want POEs under the
direct authority of Kosovo government officials, noting
concerns about corruption, nepotism, and mismanagement.
These officials believe that establishing formal corporate
government structures and rules for good governance will act
as a deterrent against these concerns. According to Chiara
Bronchi, Fiscal Affairs Director in UNMIK's Pillar IV
(responsible for Kosovo's economic policy),the International
Monetary Fund (IMF) also shares these concerns, and its
resident representative for Kosovo has quietly discussed them
with the Special Representative of the Secretary General
(SRSG) Joachim Rucker.

UNMIK SUPPORTS HOLDING COMPANY CONCEPT AND GOOD GOVERNANCE
STRUCTURES FOR POEs...


4. (C) Officials in UNMIK's Office of Legal Affairs (OLA),
OPOE, KTA, Pillar IV, and some PISG officials want to develop
an independent holding company for POEs with corporate
governing structures in accordance with international
principles and standards for good governance. According to
OPOE officials, the Kosovo Assembly would have ownership and
oversight responsibilities for the POEs. The Kosovo Assembly
would appoint a professional, competent board of directors to
oversee the holding company. The board members of the
holding company would then appoint professional, competent
board members to the POE boards. Finally, the POE board
members would appoint the management of the public utilities.
OPOE, OLA, Pillar IV and KTA officials believe that multiple
layers of supervision would strengthen good governance and
ensure accountability at each level. OPOE officials said the
appointment of board members, who could be either Kosovars or

internationals, should be carried through in a structured,
transparent process with clear, stringent selection and
evaluation criteria, as well as an appropriate compensation
package, thus avoiding favoritism, nepotism, conflicts of
interest, and holding board members accountable for their
actions. Bronchi said that Pillar IV and KTA have quietly
formed a working group to develop language in the KTA
successor law that would require POEs to be administered
under an independent holding company.

...BUT SOME ARE PRESSING TO INCLUDE MANDATORY INTERNATIONAL
OVERSIGHT AND OTHER OPTIONS


5. (C) OPOE officials and managing directors from the Kosovo
Energy Corporation (KEK) and Post and Telecom of Kosovo (PTK)
have argued that a mandatory international presence is needed
for the independent holding company and POE boards. They
believe that internationals would help ensure that the proper
corporate governance and anti-corruption structures, board
member evaluation and selection criteria, and accountability
standards are clearly established to administer the public
utilities. However, most PISG officials argue that an
international presence is unnecessary. Other PISG officials
want to put POE administration under full ministerial control
with the proper corporate governance structures, but allow
the Kosovo Assembly the authority to impose mandatory
reporting requirements on ministers, as well as remove them
with a two-thirds majority vote of no confidence if they
perform poorly.

WORLD BANK: MINISTERS SHOULD RUN POEs TO ENSURE
RESPONSIBILITY AND ACCOUNTABILITY


6. (C) According to Bronchi and Alexander Borg-Olivier, Head
of UNMIK OLA, the World Bank believes that POEs should be
placed under ministerial authority to ensure that the
ministers take full responsibility and accountability for
them. The World Bank resident representative said the Bank
will soon provide recommendations outlining its views on
governance of POEs. Bronchi said Pillar IV and KTA are
waiting for the recommendations, but added that they want to
negotiate with the Bank to get it to see things their way.


SRSG VIEWS ON THE HOLDING COMPANY REMAIN UNCLEAR


7. (C) The views of SRSG Joachim Rucker remain unclear.
According to Bronchi and Olivier, Rucker was supportive of
the independent holding company and planned to push for this
concept at a November 17, 2006 meeting with the World Bank.
However, when the World Bank advocated for the POEs to be
under the control of the ministries, Rucker decided not to
push the idea. Bronchi believes that Rucker still supports
the independent holding agency concept and noted that PM Agim
Ceku has quietly told the SRSG not to put POEs under the
ministries. But she added that the SRSG wants to be on the
same page with the international community.

PRIVATIZATION SHOULD BE THE ULTIMATE GOAL FOR POEs


8. (C) Full privatization of public utilities post-status is
the best way to ensure their maximum managerial and
operational efficiency, while lessening the costs to the
Kosovo Consolidated Budget (KCB). An independent holding
company is a good concept as long as there are sound,
stringent corporate governance and oversight policies and
structures in place. Post agrees that the POEs should not be
put under the ministries due to concerns about corruption,
political manipulation, mismanagement and the
internationally-accepted public policy practice of separating
the administration of utilities from public policy
implementation.


9. (U) Full privatization of POEs, like PTK and Pristina
International Airport, improve the potential of these
companies to become viable, operationally efficient
businesses (ref A). Full privatization would also help
remove costly expenditures such as KEK from the budget and
release funds for other public needs. The Ministry of
Finance and Economy (MFE) estimates that KEK will continue to
be a drain on the KCB. MFE projections estimate that KEK
could need as much as 100 million euros for its operational
and maintenance costs, as well as electricity imports in
2009-2010, accounting for 13-14 percent of the 2007 KCB of
717.5 million euros (ref B).


10. (C) Comment: There is a need for sound, stringent
corporate governance and oversight structures for POEs as
they transition to Kosovar authority. The concept of an
independent holding company is a practical solution for this
to occur, especially given Kosovo's easily manipulated
political and economic climate. However, an independent
holding company should be the first step in helping Kosovo
fully privatize the POEs. USOP will work with the Kosovo
government to take steps toward this end; USAID already has
opened a dialogue and provided advisers for the purpose of
advancing such a process. The reality of additional
competencies and responsibilities after the resolution of
final status, and the projected decrease in KCB revenues over
the next few years (ref C),has started to attract the
attention of senior-level PISG officials, who realize that
serious policy decisions must be taken regarding POEs if they
want to effectively govern Kosovo during and after the
transition period. End Comment.


11. (SBU) USOP does not/not release this cable to UN
Special Envoy Ahtisaari.
KAIDANOW