Thanks to international donors and their response to the reconstruction needs mapped out by UNMIK, the major elements of physical reconstruction in Kosovo are now largely complete. Houses are rebuilt, water and electricity flow, roads and bridges are repaired. The EU, heading up UNMIK's Economic and Reconstruction Pillar, has been responsible for guiding and managing the process.

In the current transition from basic reconstruction to economic growth more banks are opening, businesses are attracting investment and the general economic trends are upwards. A stable budget, now two-thirds financed by locally-generated revenue, pays for Kosovo's public services. The regulatory and legislative foundations are in place, enabling this progress to continue beyond, the November elections.

Kosovo's ties with Europe are ever strengthening-not only will Kosovo have the euro next year, but the new laws and legislation that the EU is helping to introduce, such as the new value added tax, are all in line with current EU legislation. What we are seeing, thanks to the policies being implemented by UNMIK, is the creation of EU standards.

The EU is committed through UNMIK because Kosovo is part of South- Eastern Europe, and thus plays a key role in the EU's overall strategy for the region. The EU's Stabilization and Association Process and the Stability Pact seek to strengthen economic growth and stability in the region as a whole-through intra-regional co-operation, both economically and politically. The aim is eventually to integrate the region as a whole into the EU.

Reconstruction coordination

In terms of physical reconstruction, rehabilitation of basic infrastructure in the year 2000 saw an excellent start. The 1999 and 2000 housing programmes together enabled basic rehabilitation of some 28,000 homes for Kosovo's most vulnerable families, surpassing the Economic Reconstruction Pillar's targets.

Nevertheless, substantial public investment is still needed before all Kosovars are adequately housed. This year's programme aims to rebuild 8,000 to 10,000 additional homes. By May, some 72 per cent (DM 136 million) has already been committed. A further DM 53 million was still being sought from donors.

UNMIK's post-war reconstruction efforts first rebuilt Kosovo's war-damaged infrastructure (Photo: UNMIK DPI)

Other reconstruction outlays during the emergency and stabilization phase of the mission, totalling some DM 2 billion, went to restore vital public utilities, and to rehabilitate hundreds of schools, clinics, primary health centres and other public buildings. It also restarted the post and telephone services, repaired and rehabilitated transport networks and kick-started rural and industrial development.

As a consequence, electricity generation became more stable, over 300 km of main roads and bridges were rehabilitated. In the social sectors too there was a promising start, but emphasis had to shift towards training and quality. In public administration, justice, law enforcement the needs in both physical reconstruction and human resource investment remain considerable.

Having managed and coordinated all the donor programmes that financed UNMIK's early spending, the Economic Reconstruction Pillar also recognized the need to inform donors of the 2001 Public Reconstruction and Investment needs of Kosovo much earlier than occurred with the 2000 programme. Thus, since May 2000, all public reconstruction programmes have been guided by the Department of Reconstruction's strategic Kosovo Public Reconstruction and Investment Programmes.

This early highlighting of the requirement resulted in a strong, prompt response from donors. Data for the first (March) quarter 2001 showed DM 381 million of the required funding already committed (over 50 per cent), and over DM 451 million of new contracts by the end of the quarter were let, partly against funds committed in 2000. Pleasingly, the time-critical key activities of agriculture, public utilities, housing and mine-action represented the majority of the contracting. Early support was also evident for civil society through justice and other sectors, including DM 35 million in support of democratization and media.

But the first quarter data also revealed the urgent need for additional donor support to two crucial sectors: health and education. A DM 33.5 million deficit for health-sector programmes endangers the already-initiated reforms. Education faces similar, if smaller, underfunding problems.

Kosovo's ongoing need for substantial capital assistance was acknowledged in the successful donor conference held jointly in February 2001 by the European Commission, the Economic Reconstruction Pillar and the World Bank. Capital expenditure of DM 1.35 billion is expected this year and a similar amount for 2002 and 2003. Of this, private sector development will have highest priority for ensuring future economic development of Kosovo. Investment in the agricultural sector will be vital both for poverty alleviation as well as for rural economy revitalization. Investment in youth, education and health were similarly identified as high priorities together with a sound basic infrastructure.

Better services, modern management

A vital part of the reconstruction effort over the last two years has been the rehabilitation of the public utilities sector: household waste collection, safe and sanitary water supply, district heating supplies, electricity services. Last winter, for example, power generation,was almost double that of the winter before, despite frequent power cuts.

Air pollution and other environmental pressures are high on the international community's list of concerns (Photo: UNMIK DPI)

The policy of the JIAS Department of Public Utilities is to develop reliable utilities services in a market economy. The utilities companies are therefore being strengthened, so that they will be able to work autonomously-ensuring reliable public utility services that meet adequate health, safety and environmental standards. Public Utilities Supervisory Boards are tasked with modernizing the management and operational methods of those companies, to turn them into commercially-viable and sustainable enterprises that are consumer focused.

On the consumer side, the focus has been on collection rates for the services provided. Starting from near zero in early 2000, they reached 25 per cent for electricity and 30 per cent for water and waste by the year end. This year saw further improvements.

Fiscal propriety

Responsible for budget development and management, the Central Fiscal Authority (CFA) put in place an initial budget for 1999 (funded largely by donors) and a Budget for 2000 within three months of its creation.

It went on to coordinate the review of the 2000 budget and the passage in December 2000 of the Kosovo Consolidated Budget for 2001-by then expected to be 70 per cent funded by locally-generated revenue. A comprehensive publication associated with the 2001 budgets set out plans for still greater revenue independence by the end of 2003 - a major contribution to UNMIK's mandate to create a sustainable and autonomous Kosovo.

Simple taxes on imported goods will give way to VAT in 2001 and income tax in 2002

Helped by the Customs Assistance Commission of Kosovo (an EU initiative), the CFA's tax and customs administrations developed a simple tax system that relied initially on taxing imported goods. It is meanwhile following an ambitious plan to introduce value-added tax (VAT) in July 2001 and income tax in 2002-measures that progressively reduce distortions and increase the base to support longer-term viability of the business and public sectors. The VAT, which is EU-compatible, replaces a sales tax and the hotel, food and beverage taxes, and will be an incentive for investment and export. It will be the main tax in Kosovo, providing additional public revenue as donor funding tapers off.

UNMIK intends that, to the extent possible, the tax system will be based on principles of simplicity of structure and administration, fairness and audit principles which encourage compliance rather than avoidance. At the same time, there will be a liberal trade and customs regime that permits both Kosovo 's economic growth and exports within the Balkan region.

CFA also works closely with the JIAS Department of Local Administration to regularize the revenue and expenditure assignment responsibilities between central and municipal administrations. This is supported by further development of a Financial Information System, expansion of which is funded jointly between CIDA and SIDA.

Kosovarization

UNMIK's Customs Service and the Taxation Administration are both staffed largely by Kosovo staff, many occupying positions up to very senior management levels. Each service was created from scratch, with the Customs Service commencing in September 1999, making outstanding contributions to the growth of the revenue generation in Kosovo, despite threats, intimidation and physical violence faced by many officers. Tax Inspectors endure a similar working environment.

In other CFA areas (treasury, procurement, audit, coordination of donor contributions for designated purposes) there is also a solid base of Kosovar staff moving into management-level positions, and advertisements for top-level positions are just about to be published. Corporate services and personnel management responsibilities are now almost entirely Kosovar-managed with only minimal oversight from international staff. Some staff have been sponsored to undertake international training programmes in procurement management and budget.

Sustainable market-based economy

For industry and commerce, UNMIK's objectives are to create the conditions needed for a free market economy. At the level of the Department of Trade and Industry (DTI) this translates into providing a competitive environment in which business can flourish with the minimum of interference from central and local government. In practical terms, this means promoting private sector development and setting up institutional, regulatory and legal frameworks that encourage entrepreneurial initiative and revive traditional economic activity.

Private sector development is being underpinned with a near-completed regulatory framework, a workable body of law to enable the economy to function according to market economy principles. It will comprise business and pledge registration, a pledge law enterprise and contract laws, competition and foreign investment laws, bankruptcy and mortgage laws, and mechanisms for resolving disputes-all essential for attracting domestic and foreign investment while providing increasing disincentives for business to operate illegally. The new laws are being complemented by a comprehensive training programme whereby students, business people and members of the legal community have all been trained to understand, use and implement these new regulations.

Strongly supported by the European Agency for Reconstruction (EAR), the DTI is developing a framework to provide adequate services to the private sector, which in Kosovo consists almost entirely of small and medium enterprises (SMEs). SME development is a key feature to the economic stabilization of the Kosovo economy.

EAR-funded local enterprise agencies (LEAs) in each region provide support to small- and medium-sized enterprises in the form of guidance, training and consultancy services, and help to access new markets. Run in consultation with the local business communities, LEAs will also provide a platform for local businesses to have a direct and consolidated line of communication with the government.

In line with the Mission priority of reviving industry as a major employer as soon as possible, the DTI pursues a two-pronged strategy for attracting investment for Kosovo's socially-owned enterprises (SOEs).

Commercialization of the Sharr Cement factory pioneered leasing of industrial assets of socially-owned enterprises as a means to attract investment and create employment (Photo: Ky Chung)

Under commericalization arrangements, investors lease the assets and employ the labour force under agreed terms for an agreed period, such as ten years. Successful examples of this, such as Sharr Cement at Blace in the south, the Mirusha Construction Company in Klina near Pejë/Pec and Progress Foods in Prizren, have obtained much needed investment immediately, while safeguarding and creating jobs. By mid-2001, five such deals have been concluded, a number of others are pending. This has guaranteed at least 1,725 jobs over a 5 year period and committed a total of DM 61 million in investment, thus ensuring their short-term revitalization and long-term sustainability.

UNMIK's ultimate aim for the SOEs is privatization, an ambition shared by many of Kosovo's businessmen, politicians and economists. Following discussions with the European Commission in April, it is hoped that policies to allow privatization to take place will be implemented in the coming months. The possibility of privatization remains, however, subject to international agreement on wider issues of commercial property ownership.

Modernizing Trepça's eight mines, three concentrators, two smelters and numerous downstream operations will create many new jobs (Photo: UNMIK DPI)

The strategy for Kosovo's erstwhile largest employer, the Trepça mining and metallurgical complex, which came fully under UNMIK administration in August 2000, is to preserve Trepça's assets and mitigate the environmental consequences of decades of its mismanagement. Former workers receive UNMIK stipends in return for clean-up and preservation work. The ultimate goal is to transfer a core set of Trepça's facilities, centred on its primary business of lead and zinc mining and processing, to the private sector. UNMIK is therefore facilitating, as rapidly as possible, the transition of Trepça to an environmentally-, socially-, and economically-sound commercial operation. Local Kosovo Albanian and Kosovo Serb managers are guided in achieving these goals by UNMIK's internationally-managed Trepça Management and Advisory Team and an UNMIK Trepça General Manager.

Both commercialized SOEs and the growing number of already independent SMEs will benefit from DTI's trade and investment promotion activities. A new standards division will draw up regulation and enforcement of all trading standards necessary for consumer protection. A trade and investment department will help them tap into new markets. A marketing scheme will promote the opportunities Kosovo has to offer to foreign investors and guide local enterprises on how to reach and develop foreign markets.

Outlook

With Kosovo effectively reconstructed, and the systems such as tax administration, bank regulation and computerized budgeting in place, Kosovo is ready to move on from reconstruction to sustainable economic development-in other words the creation of jobs.

UNMIK's tasks are to underpin the creation of jobs, to enable people to earn money themselves and to enable the economy of Kosovo to grow and be truly self-sustaining. The Reconstruction and Economic Development Pillar is already working to attract private sector capital from abroad-and despite the known difficulties associated with instability, some investors are willing to take the risk. That is progress. Fair, transparent structures that people know how to deal with are also crucial.

The other goal UNMIK is working toward, regardless of what happens, regardless of the outcome of the elections, is a Kosovo as part of Europe. This is already evident. Everything we do is designed with that in mind. The thinking behind every economic policy and regulation reflects the idea that the future of the Kosovar people is in Europe. Hence the introduction of the value-added tax, the present use of the Deutsche Mark and its forthcoming replacements with the euro. Progress in that direction has been made and, from the perspective of economic development, every hope exists of making more.

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