KOSOVO: THE WAY FORWARD ON TRANSITION TO KOSOVO'S

C O N F I D E N T I A L SECTION 01 OF 04 PRISTINA 000431

SIPDIS

DEPT FOR EUR, EUR/SCE, DRL, INL, AND S/WCI, NSC FOR
HELGERSON, USUN FOR DREW SCHUFLETOWSKI, USOSCE FOR STEVE
STEGER

E.O. 12958: DECL: 08/19/2018
TAGS: PREL ETRD ECON EAID EAIR ETTC PTER KTFN UNMIK
KV, YI
SUBJECT: KOSOVO: THE WAY FORWARD ON TRANSITION TO KOSOVO'S
OWN PRIVATIZATION AGENCY

Classified By: CHARGE D'AFFAIRES TOM YAZDGERDI FOR REASONS 1.4 (B) AND
(D)


1. (C) SUMMARY: Kosovo's privatization process, once
highlighted as an UNMIK economic success story, has ground to
a halt. Nearly two months after the country's new
Privatization Agency of Kosovo (PAK) was to assume the work
of the Kosovo Trust Agency (KTA),an UNMIK entity, UNMIK
still does not recognize the authority of PAK, and all
privatization work has ceased. KTA employees, many of whom
will work in the PAK, had a detailed transition plan ready,
but the plan was never implemented, and KTA employees left
work on June 30, when UNMIK Pillar IV ceased its activities.
The former KTA premises have been locked, and PAK is unable
to re-start the privatization process without access to the
archives. Investors who have made downpayments on privatized
properties prior to June have not been able to conclude
contracts on these purchases. Thousands of
privatization-related claims are waiting to be reviewed by
the courts and worker
compensation payments stemming from privatized properties are
yet to be disbursed.


2. (C) SUMMARY (cont'd): As the way forward, former UNMIK
Pillar IV head/former KTA Board Chairman Paul Acda (protect)
outlined to us recently a highly-orchestrated plan of action
to allow the PAK Board o/a August 29 to unilaterally assume
privatization responsibilities, thereby releasing UNMIK from
pressure to hand over competencies to what it regards as a
non-status neutral entity. We have also coordinated with the
International Civilian Office (ICO),which plays a key role
on the PAK's Board and which agrees with this course of
action. Acda and UNMIK Senior Legal Adviser Ernst Tschoepke
(protect) have assured us that UNMIK will "look the other
way" when PAK asserts this control, including its takeover of
KTA facilities, since UNMIK "has no interest" in remaining in
the privatization business in Kosovo. Acda also told us that
DPKO will not react, asserting that DPKO European Chief David
Harland told him as much in a recent conversation. At an
August 18 meeting with Charge, SRSG Zannier confirmed the
above, and said that UNMIK has nothing to administer anymore,
since KTA "evaporated" with the June 30 closing of UNMIK
Pillar IV. Given these assurances, we are confident that
this plan will work and in any case see no alternative to
re-start Kosovo's privatization process and allow the PAK to
do its work. END SUMMARY.


3. (SBU) When Kosovo's constitution entered into force on
June 15, two key pieces of legislation were passed by the
Kosovo Assembly to pave the way for KTA to become PAK. The
Law on Public Enterprises transferred administration of
publicly-owned enterprises (POEs),such as Post-Telecom
Kosovo (PTK) and Pristina International Airport, to the
Ministry of Economy and Finance (MEF),with input from
relevant line ministries. The second piece of legislation
authorized establishment of the Privatization Agency of
Kosovo (PAK),and granted it all of the KTA's assets and
liabilities. More than a month after this legislation
passed, the new agency has yet to begin operations and
continue with the privatization of the remaining
socially-owned enterprises (SOEs),because UNMIK has not
recognized its authority.


4. (SBU) When privatization in Kosovo began, it was one of
UNMIK's most challenging issues to tackle due to the legal
complexities involved, including ownership claims from
Serbia, and UNMIK's inexperience with administrating such a
process. KTA was established in 2002, but by 2005, after two
rounds of auctions, just 15 SOEs had been sold. The
privatization process began in earnest in mid-2005, after
UNMIK strengthened KTA's legal authority. The arrival of
then Pillar IV Head Joachim Ruecker also pushed things
forward by taking on a stronger leadership role. One year
after Ruecker's arrival, 140 SOEs had been auctioned; the
year after that, 312 SOEs were tendered.

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Privatization Work Stopped, Despite Transition Plan


5. (SBU) According to Shkumbim Bicaj, former KTA Deputy
Managing Director of Privatization, approximately 100 SOEs
are still waiting to be privatized. However, as of June 30,
KTA closed its doors and all privatization work ceased.
According to a presentation given by the American Chamber of
Commerce in Kosovo on July 24, contracts for 78 previously
tendered SOEs are still waiting to be finalized, as well as
70 liquidation contracts. These contracts represent anywhere
from 36 to 50 million euros in deposits from investors who
are now waiting in legal limbo to acquire control over their
purchases. There is no one the investors can contact about
their current situation because the KTA offices are closed,
and there is no contact information listed for PAK. The
Kosovo Special Chamber (of the Supreme Court, established
specifically to adjudicate claims related to the
privatization process) and municipal courts are also stalled
on privatization-related claims. According to Bicaj, over
4,000 privatization-related claims are waiting to be reviewed
by the courts, and 55 million euros in former SOE workers,
compensation payments are waiting to be processed and
disbursed.


6. (SBU) In March 2008, KTA employees had already developed a
detailed transition plan in anticipation of the transition to
PAK, said Bicaj. The plan included tracking necessary
legislation to establish PAK as a legal entity, provided an
estimated salary budget for professional and legal staff, and
envisioned closing the doors of KTA on June 30 as part of the
EU Pillar IV closedown, and re-opening as PAK on July 1.
These plans were never implemented. Instead, KTA closed on
June 30 leaving the employees not knowing if they would have
a job the next day, or at any point in the future. The
Managing Director of the KTA departed Kosovo without
providing an explanation of the situation or UNMIK's
position. The KTA premises and archives remain locked and
guarded per UNMIK instruction, and new SRSG Zannier issued an
Executive Directive on July 29 that froze all activities of
the KTA until such as when the organization becomes operative
again.

The Way Forward


7. (C) On August 11, USEP met with former Pillar IV
Head/former KTA Board Chairman Paul Acda (protect) to discuss
possible ways to break through the current KTA-PAK stalemate.
Acda explained that since the Ahtisaari Plan was not agreed
to by the UN Security Council, which would have initiated the
handover process, UNMIK cannot be seen as relinquishing
authority to a non-status neutral entity. However, he did
outline several concrete steps the PAK Board could take to
constitute its authority and unilaterally assume KTA
responsibilities from UNMIK. First, he noted, the PAK Board
Chairman must convene an official meeting in compliance with
the Law on the Privatization Agency of Kosovo as soon as
possible. Although the Board has already met informally,
Acda said that PAK cannot become a fully legal entity until
the Board officially meets, appoints necessary officers, and
legally constitutes itself. Acda then recommended that the
PAK Board Chairman write a letter to the SRSG with a copy to
Acda stating that under Kosovo law, PAK is the legal
successor to the KTA and will access the former KTA records,
buildings, and the privatization trust fund, all in the name
of continuing the economic reconstruction of Kosovo. Acda
pointed out that the equipment within the KTA compound
actually belongs to Pillar IV, but will be donated to PAK as
part of the Pillar IV liquidation process. He noted that
through a grant agreement signed on June 30, this will be a
straight transfer of assets between the EU (former Pillar IV
sponsor) and the EC (current PAK sponsor).


8. (C) Acda continued that since UNMIK would not be in a
position to simply "hand over" these resources, the PAK Board

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Chairman would have to obtain physical access to the KTA
compound on his own. If PAK even went as far as to cut the
lock to the compound in order to access the buildings, Acda
asserted that UNMIK would "look the other way" and instruct
the private security company guarding the premises not to
resist. UNMIK senior legal advisor Ernst Tschoepke (protect)
re-affirmed Acda's suggested steps in a separate conversation
on August 14, and said that the KTA-to-PAK transition really
could not happen any other way. According to Tschoepke,
Kosovo needs to "cut the lock" to the KTA compound and start
working, but even more critically, the PAK Board must
officially convene and begin making executive decisions.


9. (C) When asked what the reaction of DPKO might be to such
actions, Tschoepke said there would be none, since UNMIK has
no enforcement authority, just instructions to "react to
events on the ground." Acda told USEP on August 15 that DPKO
Europe Head David Harland, a month ago, said that actions by
PAK to unilaterally assume privatization authorities would be
accepted as a "fait accompli." Acda foresaw no reaction from
the SRSG because the "UN wants this to happen." Acda
admitted there might be some reaction to PAK's request to
access the privatization trust fund, in anticipation of
Belgrade's previously voiced concerns over possible abuse of
these funds. (Note: This 430 million euro privatization
trust fund was frozen per UNMIK Executive Directive on July

14. End Note.). However, Acda noted that the Law on the
Privatization Agency of Kosovo imposes even more restrictive
measures than the previous law on how these funds can be
used, and also empowers the International Civilian Office
(ICO) to ensure the funds are not used for purposes other
than those related to privatization. (Note: The law
specifically requires the signatures of all three
international PAK Board members to disburse funds from this
fund. These funds are critical for continuing the
privatization process, for paying creditors, and ensuring
minorities are receiving appropriate compensation payments
from privatization. A substantial portion of these
remuneration payments will be received by Kosovo Serbs. End
Note.)


10. (C) In an August 18 meeting with Charge, SRSG Zannier
confirmed that he would not react to this course of action,
nor did he believe DPKO would do so. He said that his
authority over KTA "evaporated" when Pillar IV ceased its
operations on June 30. If asked by the media, Zannier said
he would take this line and emphasize that he has no
authority to oppose such an action. (In general, he asserted
that while he could not support the assertion of Kosovar
authority, neither could he oppose it.) The strong
impression coming from Zannier was to quietly move ahead with
the plan.

PAK will access KTA premises/archives on or about August 29


11. (C) In a meeting with ICO on August 14, including one ICO
member who sits on the PAK Board, a tentative plan of action
was outlined per this unofficial guidance received from
UNMIK, as follows:

-- The PAK Board will officially convene on August 26 at ICO,
formally establishing itself as the body's representative
authority, and will appoint key personnel. The Board will
meet again on August 27 to officially adopt PAK policies, as
outlined under Kosovo law.

-- On August 28, the PAK Board Chairman will send a letter to
SRSG Zannier, with a copy to Acda, stating that according to
Kosovo law, UNMIK is being given notice that the PAK will
access the former KTA premises.

-- On a date pre-arranged with UNMIK, most likely on or about
August 29, PAK will access the KTA compound. When the PAK
Board Chairman approaches the compound with a copy of the
letter to the SRSG, the security company will have been

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instructed to call Acda, informing him that PAK is attempting
to access the compound. Acda will then tell the security
company to step aside, avoiding any conflict, and allow PAK
to enter the premises. There is to be no media present. The
PAK Board Chairman will also send a letter to Acda requesting
a donation of the former KTA equipment, as well as access to
the privatization archives. The PAK Board will then issue a
media release the following week, detailing the decisions of
the two PAK Board meetings.


12. (C) COMMENT: Without the ability of UNMIK to recognize
the PAK as the KTA successor agency, all business related to
privatization has come to an abrupt halt. Kosovo has been
left with two non-functioning privatization agencies under
two different authorities, and thousands of individuals await
resolution of their cases. With this plan of action,
endorsed by key UNMIK officials, PAK should be able to
unilaterally assume legal authority to resume privatization
activities. Of course, there is no guarantee that this
sequence of events will come to pass exactly as proposed, nor
do we know for certain the reaction of DPKO or Belgrade.
However, based on consultations with key players, we believe
this approach will succeed without undue risk. No other
stakeholder has been able to identify an alternative that is
even remotely more promising for getting around the current
impasse. Further delay in this process will only damage
Kosovo's continued economic reconstruction, the credibility
of the new privatization agency, and the ability of the
Kosovo government to deliver on its promises to workers and
minority communities.
YAZDGERDI