THE WORLD BANK GROUP IN KOSOVO Jutta Benzenberg COUNTRY SNAPSHOT April 2015 RECENT POLITICAL, ECONOMIC, AND 5 percent of Kosovo’s po pulation (mostly without SECTORAL DEVELOPMENTS required visa) to the European Union during the “winter of discontent” 2014/15. The migration Political Developments pressure, accompanied by anti-government protests and strikes in the health, education, and mining Kosovo is a potential candidate for European sectors, have reflected widespread pessimism about Union (EU) membership. In recent years, the the rule of law and economic prospects. country has accelerated its integration process into the EU, including through (i) the negotiation of the Economic Developments Stabilisation and Association Agreement (SAA), expected to be signed by year’s end; (ii) deepening coordination From mid-2011 until end-2013, Kosovo’s with the European Commission (EC) on economic economy was managed well, but risks have been policies and governance issues (including through the increasing. Kosovo has been one of only four submission of the Economic Reform Programme); and (iii) countries in Europe that recorded positive growth remaining a constructive partner in the EU- rates in every year of the post-crisis period after 2008. moderated bilateral talks with Serbia on the The average growth of 3.5 percent during 2011–14 normalization of bilateral relations. contrasts favorably to the region but has remained slightly below the global average (figure 1). The Kosovo’s non-membership in the United growth outlook over the medium term remains Nations (UN) remains a key obstacle to political moderately buoyant—with estimates and projections integration and socioeconomic development. As for 2014 and 2015 of being in the 2.5– 3-percent range of end-March 2015, 108 (out of 193) UN member (largely reflecting declining marginal contributions of countries recognized Kosovo’s independence, key engines of past growth such as workers’ including 23 out of 28 EU member states. UN remittances, foreign aid, and public investments). membership seems a remote prospect, however, given that only three of the Figure 1. Solid But Not Spectacular Growth, 2011– 14 five permanent members of the UN Security Council and less than the required two-thirds of UN member states represented in the General Assembly have accepted Kosovo’s statehood. This situation has held back the modernization of key sectors of Kosovo’s economy, including insurance, transport, telecommunication, and energy. At the same time, progress has been made in the normalization of relations with Serbia, but the EU- facilitated bilateral agreement has proven difficult to implement. General elections in mid-2014 led to a protracted politico-constitutional crisis, from New election-related fiscal obligations accepted which a “grand coalition” of the two biggest political during early 2014 have increased risks to the overall parties—the Democratic Party (PDK) and the fiscal outlook. Democratic League (LDK)—plus ethnic minority parties emerged. All parties’ electoral campaigns and Reforms in Kosovo aim at increasing domestic the government’s program (adopted in early March productivity. The resilience that Kosovo’s economy 2015) and national development strategy (in had exhibited during the crisis periods after 2008 preparation) have focused on the creation of reflected (i) its limited integration into the global additional (formal) jobs—a topic that has gained economy; (ii) the success of its diaspora, resulting in urgency after the mass exodus of an estimated a steady influx of remittances; (iii) a pro-growth 2 composition of the budget; and (iv) the steady inflow constitutional and legal stipulations adopted to of donor support. In the absence of fiscal and prevent public debt from rising to unsustainable monetary policy tools, key challenges continue to be levels include (i) a public debt law that sets the reforms aimed at strengthening public administration maximum public debt-to-GDP ratio at 40 percent; (ii) to increase the quality of, Figure 2. Political Uncertainty Raised Cost of Domestic Debt, 2012– 15 and access to, public services, reinforcing the business climate, and upgrading public infrastructure. These reforms, closely embedded in the EU integration process, are key policy instruments to attract direct investments of the scale, scope, and quality to increase productivity in key sectors of the economy, generate “catch up” growth and, ultimately, reduce the high rates of unemployment and poverty. Fiscal Policies Fiscal policies deteriorated in 2014, a constitutional stipulation, according to which following the election-inspired expansion of external borrowing by the Government, including for budgetary expenditures. Within the context of the highly concessional International Development Stand-By Arrangement (2012– 13) supported by the Association (IDA) credits, would require International Monetary Fund (IMF), the parliamentary ratification with a qualified majority; Government had succeeded in addressing the fiscal (iii) a law on public financial management and imbalances resulting from general election promises accountability that requires any supplementary of higher salaries in late 2010. In an attempt to budget to be “deficit neutral”; and (iv) a fiscal rule maintain Kosovo’s long-term fiscal stability, a fiscal aimed at limiting overall budgetary deficits, with few rule was adopted to serve as the Government’s exceptions, to 2 percent of GDP (as agreed with the principal fiscal anchor. However, weaker-than- IMF). With revenue projections contained in the projected revenues and political (election-inspired ) budget inherited from the previous Government decisions to (i) increase public sector wages and being unrealistically optimistic, the mid-term budget pensions by 25 percent; (ii) introduce new social review will not be able to both ensure budget benefits for political prisoners and war veterans; and credibility (especially with respect to budgeted tax and (iii) sign the contract for a budget-financed motorway customs revenues) and stay in line with the deficit construction project (with only limited economic neutrality stipulation and the fiscal rule. viability) reversed the consolidation gains made during the period between mid-2011 to end-2013 and While gradually increasing, the stock of public necessitated a sharp contraction in capital debt remains at an estimated end-2014 level of 11 expenditures to keep the fiscal deficit, at 2.2 percent percent of GDP. This development reflected (i) of GDP, close to the limit defined in the fiscal rule. disbursements by the IMF under the Stand-By Arrangement in 2012 (2013 was treated in a However, Kosovo’s tight constitutional and legal precautionary manner); and (ii) the net emission of framework constraining fiscal policies confronts newly introduced treasury bills of €73 million in 2012 the Government with a policy dilemma. Various (1.5 percent of GDP), €79.2 million in 2013 (1.5 3 percent), and an estimated €104 million in 2014 (1.9 budgetary deficits to 2 percent of GDP, starting with percent). As a result, the stock of public debt the 2014 budget. However, the country’s ability to increased from €284 million at end -2011 (5.6 percent adhere to the fiscal anchor(s) is being questioned due of GDP) to an estimated €588 million at end -2014 to pre-electoral decisions on future spending. To add (11.0 percent). Kosovo has only negligible municipal to the challenges, new benefits to war veterans and debt and no state guarantees. The structure of civilian victims of the war have been introduced, with government borrowing tipped from the complete unspecified costs to the budget. reliance on foreign borrowing (from international financial institutions) in 2011 to a complete reliance The additional spending obligations will crowd on domestic borrowing in 2014. While inexpensive— out alternative expenditures for growth- albeit sensitive to political uncertainty (figure 2)—the stimulating and/or productivity-enhancing domestic debt market is shallow, requiring Kosovo to purposes. In addition, if not properly managed, an reassess its debt strategy over the next few fiscal years. across-the-board salary increase for public servants The political business cycle of 2014 has will (i) affect the implementation of the pay and grading reforms; (ii) risk the accumulation of government arrears to suppliers, which would impact the country’s growth potential; and (iii) put pressure on ministries with particularly high wage bills, such as education and health. At the same time, these decisions unleash similar demands in the private sector for increases in (minimum) wages. The Financial Sector The banking sector has proven resilient to the deterioration in the external environment, reflecting the banks’ conservative conduct and risk-averse lending decisions. The concentrated —largely foreign-owned —banking sector has remained well- capitalized, liquid, and profitable. In February 2015, Kosovars entrusted the banks with close to €2.6 billion in deposits, 6 percent more than a year earlier, with households contributing more than two- compounded fiscal risks. With the adoption of the thirds to the banks’ fiscal rule in 2013, Kosovo has limited overall corresponding liability positions. 4 The average loan-to-deposit ratio in 2014 Growth and External Performance averaged 75 percent, down from 78 percent in 2013 (figure 3), but it has increased to 81 percent in Kosovo’s economic growth has been steady and February 2015. Reflecting the banking sector’s generally at rates above those in neighboring liquidity, credit rates fell from 12.9 percent in countries. The robust growth since independence December 2012 to 9.3 percent in December 2014— was largely attributable to public investments in the first single-digit rates since the war in 1998/99. As infrastructure, donor assistance, and remittances. The summarized in figure 4, the interest differential particular structure of Kosovo’s economy—limited increased, as interest rates on deposits fell from 3.7 financial linkages and a small export base—has percent (December 2012) to 2.4 percent (December implied that, similar to the aftermath of the global 2013) and 0.9 percent (June 2014). crisis in 2008– 09, spillovers from the eurozone crisis have been less severe than in neighboring countries. Although nonperforming loans (NPLs) have In particular, remittances and other non-debt– increased moderately, they remain lower than in creating flows from Kosovo’s (economically neighboring countries. Risk factors emanating successful) diaspora, many of whom are working in from the (principally healthy) financial sector include central and northern Europe, were substantial and are (i) the deleveraging by, and funding difficulties at, expected to remain relatively stable. foreign parent banks; and (ii) the gradual deterioration in asset quality. Between December Kosovo’s current growth model is unsustainable 2011 and December 2013, NPLs rose from 5.9 over the longer term. Growing private sector percent to 8.7 percent of total loans, but loan-loss activities and productivity-increasing investments will provisions against adversely classified loans, at 115.4 (have to) become increasingly more critical as engines percent, remained adequate. At that level, NPLs to growth and, in turn, improve job and income stabilized, having marginally declined to 8.4 percent perspectives. The productive base has remained by February 2015 narrow, despite some progress in recent years. Exports have not reached the level required to Different from previous years, the marginal transform the economy, as foreign direct investment decline in credit growth rates in 2013 affected (FDI), similar to the situation in neighboring companies’ and households’ access to capital, countries, has not reached the level needed to finance while depressing overall bank profitability. The the current account deficit. banks’ profits declined from €35 million in 2011 to €6.6 million in 2013, with a solid rebound in 2014 to For the most part, companies are not yet in a €26.9 million at end -June 2014. position to compete successfully in local, regional, and international markets. Reflecting The Central Bank of the Republic of Kosovo binding public infrastructure and business climate (CBK) has maintained a focus on preserving constraints, domestically produced goods—including banking sector stability. Having adopted the euro in the agriculture sector—have not yet been supplied as sole legal tender, Kosovo does not have access to in the quantity and quality required to compete independent monetary policy instruments. But the successfully in either domestic or foreign markets, monetary and fiscal authorities have pursued an despite some improvements. In 2014, exports rose by important structural reform agenda, in which context 10.5 percent to €325 million, while imports increased (i) €46 million from treasury deposits were earmarked by 3.6 percent to €2.5 billion, widening Kosovo’s for a fund for Emergency Liquidity Assistance; (ii) a already large trade deficit. Deposit Insurance Fund was established; (iii) a new Law on Banking, Microfinance, and Non-Bank Rule of Law and Business Climate Financial Institutions was approved by Parliament; and (iv) a safe and efficient payment system is being To improve its growth outlook, Kosovo will need promoted by Kosovo’s membership in, and the to continue to focus its efforts on strengthening receipt of a user-assigned code from, the Society for the rule of law. An inviting business and investment Worldwide Interbank Financial Telecommunication climate is particularly important for a euroized (SWIFT). In mid-2014, Kosovo was able to introduce economy with limited or no access to fiscal and international bank account numbers (IBANs). monetary policy instruments. Since the second 5 quarter of 2011, Kosovo has made significant through the establishment of one-stop shops that progress on strengthening its basic legal framework have, among other measures, integrated business and institutional structures, with a view to reinforcing registration, value added tax (VAT), and fiscal the necessary foundations for a functioning market numbers into one document. Recently, the economy. These reforms (partially supported by authorities have adopted new fiscal reforms World Bank– financed projects and a multi-donor, comprising the differentiation of the value-added tax World Bank– led budget support operation) have (VAT) from a flat 16 percent to 18 and 8 percent, begun to be reflected in improved rule-of-law and with the reduced rate for a list of “basic” products business climate indicators (figure 13), with Kosovo’s (bread, water, oil, energy and heating). The ranking in the most recent Doing Business survey Government aims at shortening the VAT repayment having improved by 40 positions in two years. period for those companies that pay their Notwithstanding the fact that several features in the contributions regularly. overall business environment compare favorably to those of Kosovo’s neighbors (such as flexible labor Central to private-sector developments are con- markets, an open trade regime, and a healthy banking siderable efforts to (further) develop and prepare sector). However weak institutional capacity, unclear young Kosovars for high-skilled employment. property rights, and a complicated and fragmented Nearly a quarter (23 per cent) of firms state that an licensing and inspection regime continue to create inadequately educated workforce is a “major con- disincentives for formal private sector activities. straint” to their business. This requires more regular, consistent, and strategic consultations with the pri- Fair competition is not necessarily ensured, for vate sector so as to (i) improve job placement pro- several reasons: First, the large informal economy sig- grammes (alignment with market demand); (ii) de- nificantly distorts the market and harms those busi- velop business and management know how; (iii) facil- nesses that comply with laws. Second, unfair compe- itate a more significant transfer of skills and infor- tition results from an inefficient Competition Author- mation, research, and development; and (iv) improve ity that lacks both the expertise to implement its func- the overall access and quality of formal education, tions and suitable premises to do so. And third, re- from early childhood to tertiary education. gional, family, or political connections have an im- portant impact on market outcomes, weakening the Poverty and Unemployment informative powers of the price and quality signals that emanate from the marketplace. With per capita GDP estimates of close to €3,000, Kosovo is one of the poorest countries in Europe. Kosovo needs to maintain a focus on improving Average per capita income is about one-tenth that of the business environment as a policy priority. EU levels, and the incidence of poverty remains high. Although in a number of Doing Business subcategories Standardized poverty lines used by the World Bank— investment climate indicators are better than the defined by a threshold of US$5 per person per day (at averages of relevant comparators, other constraints purchasing power parities)—lead to poverty rates of constitute considerably higher hurdles for businesses. about 80 percent. Using the domestic poverty line of The Government had established a National €1.72 per day (2011 data) as defined by the Kosovo Economic Development Council to coordinate Agency of Statistics, 29.7 percent of its population of corresponding reform efforts, which sponsored 1.8 million are considered poor. Kosovo has a amendments to business organization and internal relatively low Gini index and flat consumption trade laws to reduce registration costs, simplify distribution, with poverty rates declining gradually. procedures, eliminate work permits, and wave charter No significant differences exist between urban and capital requirements for limited liability companies. rural poverty, but there are notable regional The new Government intends to revive the National differences. Extreme poverty is disproportionately Economic Council, which had not be functional for high among children, the elderly, households with the last year, and to utilize it as a forum to facilitate disabled members, female-headed households, and public private dialogue. The Secretariat of this certain ethnic minority households (especially in the Council is foreseen to be administered by the Roma, Ashkali, and Egyptian communities). As in Ministry of Trade and Industry. The Government has many other countries, there is a strong negative also taken measures to speed up business registration correlation between education and poverty. 6 Widespread unemployment and a lack of quality graduates are unemployed, while 35.3 percent of 15– jobs have contributed to poverty and income 24-year-olds are neither employed nor in education or insecurity. With an estimated unemployment rate of training—foreshadowing considerable development above 30.0 percent in 2013 and an employment rate impacts over the medium- to long-term horizon. of only 28.4 percent (figure 5), Kosovo has one of the weakest employment records in Europe. Kosovo’s Education 40.5 percent labor force participation rate is substantially below the 70 percent average estimated Education is an essential part of Kosovo’s efforts for the countries represented in the World Bank’s to boost economic growth, increase productivity Europe and Central Asia (ECA) region. The lack of and wages, and reduce its high unemployment. jobs has direct consequences on income, as Kosovo is a young country, with 38 percent of the households with unemployed heads have the highest population under 19 years of age (2012). This extreme poverty indices. In addition, many youthful structure, if exposed to high-quality households with adult members in precarious or education, provides an opportunity to increase unsteady jobs are below the poverty line, depending tangibly the productivity of the workforce. In recent Figure 5. Unemployment and Employment Rates, 2012– 13 years, wide-ranging reforms have been initiated and progress achieved, including (i) improvements in access to pre-primary and upper secondary education, with enrollment rates in 2012 of 72 percent and 92 percent, respectively; 1 (ii) strengthened financing of education systems to for more equitable distribution of resources across the country; (iii) improved teacher management by setting up a mandatory teacher licensing/certification on small, informal enterprises offering uncertain system and enhancing employment for the majority of their income. teacher training opportunities, as well as increasing teachers’ salaries; (iv) curriculum reform, to make Kosovo’s difficult labor market conditions have curricula more modular and relevant, including been especially severe for youth and women. introducing new approaches to schooling, learner- Estimates suggest that unemployment among 15– 24- centered and outcomes-based teaching year-olds exceeds 55 percent. The generally poor methodologies as well as development of teaching quality of the education system, coupled with limited and learning materials in line with the new social, employment opportunities, makes it difficult for economic, labor market and new technological young people to access and retain jobs; those who do developments; and, (v) improved learning conditions and succeed in finding employment are typically hired school infrastructure by expanding school buildings and into low-skilled, low-productivity positions, often in improving conditions of existing buildings thus the informal sector. According to the 2013 labor eliminating triple shift schools and reducing to 70 force survey, more than 10 percent of even university percent schools operating in two shifts. 1 Impressively, upper secondary education enrollments increased by 50 percent between 2004 and 2012 and remained at high levels for basic education, between 97 and 100 percent. 7 Public spending in education is low relative to lower than in neighboring countries (and 10 years regional and GDP per capita comparators, lower than in the EU). To date, the health sector has indicating the need to prioritize education in not been a public policy priority, and it did not receive public spending. Kosovo spent 4.1 percent of GDP the required support from international development in 2012, less than the average in Europe and Central partners. As a result, the reform and modernization Asia (4.6 percent) or the upper middle income of the health sector has remained in early stages, with country average (5 percent). Total public spending on most health sector indicators remaining poor. Im- education represents about 14 percent of budgetary proving quality of care at all levels, particularly the expenditure, in line with other middle income availability of drugs, is a critical element in reducing countries with similar age profiles. However, because regressive health spending patterns by households of the large number of pupils, Kosovo spends only and poor health outcomes, among the worst in Eu- 13 percent of per capita income per student in both rope. primary and secondary education, which is much less than all countries in Southeastern Europe. Household out-of-pocket (OOP) spending on health in Kosovo is high, impoverishing and cre- Moreover, Kosovo’s quality of education is weak ates financial barriers to access for the poor. and inequitable and does not succeed at Household s’ OOP health spending has accounted for providing students the skills necessary to about 40 percent of total spending on health, which transition to a rapidly changing labor market and has contributed to the 7-percent increase in the pov- economic environment . Although reliable data on erty headcount in 2011. Reflecting the high costs of students’ achievements is poor and there are no using care, the poor have “self-rationed” care. Drugs internationally comparable data, the low passing rate comprise approximately 85 percent of household and achievement levels of students at the national OOP health spending. Matura demonstrate a need for improvements. The initial results of Grade 5 sample-based test, The Ministry of Health has prioritized health undertaken in 2010 as a pre-cursor to Kosovo’s entry sector reforms to improve financial protection in PISA 2015, suggest large differences between girls and access to quality health services. The Health and boys (especially in language test) and rural and Insurance Law, passed in April 2014, provides the le- urban students. Overall results show significant gal basis and framework for a mandatory health in- municipal disparities, calling for action in order to surance scheme funded through general tax contribu- alleviate and mitigate these differences. In Kosovo, tions and mandatory insurance premiums. World inadequate workforce is a major or severe obstacle Bank estimates suggest that health insurance could in- for firms, especially the large and fast-growing ones. crease public health expenditures). These additional About 23 percent of businesses surveyed reported revenues present an opportunity to improve the qual- difficulties in recruiting skilled workers. ity of care, including the availability of drugs, and lower household OOP health spending with a spe- The Government is placing a high priority on cific focus on the poor. strengthening the education system. The Ministry of Education, Science, and Technology (MEST) has Improvements in financial protection and access developed the Kosovo Education Strategic Plan (KESP) to quality care will, however, depend on how ef- and an associated Action Plan for 2011– 16. The fectively health insurance is implemented, in- strategy tackles all levels of education and addresses cluding the coverage of the poor. In practice, given issues of quality, access, management, and the large share of the informal sector in Kosovo’s implementation. Improvements in the quality and economy, the transformative impact of health insur- relevance of the education sector require continued ance will depend on its ability to enroll premium pay- implementation and support in implementing the ers which, in turn, will likely depend on the value it ongoing reforms in a concerted manner. delivers and is seen to deliver in terms of better ser- vices and lower OOP spending. Finally, poverty tar- Health geting systems currently under-cover the poor, and improving poverty targeting mechanisms are a crucial Health outcomes are weak, reflected —inter alia— mediator of potential poverty impact. in Kosovars’ life expectancy being about 5 years 8 Energy and Mining pronged strategy aimed at (i) ensuring adequate and reliable energy supplies; (ii) reducing the need for Businesses regard the unreliable electricity public subsidies to energy; (iii) limiting the supply as a major obstacle to their operations and environmental externalities; and (iv) attracting the a constraint to investment and business private sector for generation and distribution. In expansion. Demand for energy has been growing addition, Kosovo seeks to step up payment rapidly in Kosovo over the past decade, with enforcement, reduce technical and commercial losses (figure 18), adjust tariffs to levels Figure 6. Kosovo’s Energy Sector (Challenges), 2012 consistent with full-cost recovery, and invest in energy efficiency and energy alternatives. Energy efficiency and renewable energy can help to mitigate projected power shortfalls, while enhancing Kosovo’s energy security and environmental sustainability. This is consistent with the Government’s National Energy Efficiency and Renewable Energy Action Plans (NEEAP, NREAP), which call for a cumulative energy savings of 9 percent by 2018 and a 25 percent renewable energy target by 2020, respectively. Such targets are in line with the European Union’s energy acquis communautaire, as considerable variances in hourly and seasonal peak committed under the Energy Community Treaty, in demand . Most of Kosovo’s domestic electricity the areas of climate change and environmental generation comes from two outdated, inefficient, and protection, which will require strengthening the highly polluting thermopower plants (TPPs) (figure existing regulatory frameworks and institutional 6). Additional supply—amounting to 5– 17 percent of capacity in support of energy-efficiency and annual consumption over the past decade—has been renewable energy investments. Recent studies found derived from unreliable (and generally very a very high energy savings potential for public expensive) electricity imports from an energy-starved buildings (of 38– 47 percent in municipal buildings region, especially during the winter months. External and up to 49 percent in central government developments (the floods in the Western Balkans and buildings). There is a considerable potential for the Ukraine crisis) as well as domestic challenges (the biomass (for both heating purposes and as moderate explosion at the Kosovo A power plant in early June potential for power generation) and some potential 2014) have resulted in an even tighter situation, both for using renewable energy from wind and small for imports and domestic generation capacities. In hydro. Kosovo, since June 2014, only two out of five generation blocks were on the grid, with an uncertain Several studies of Kosovo’s energy options have time frame for the reconnection of the three units been conducted over the past decade. Most currently being rehabilitated. recently, the World Bank conducted a study entitled, “Development and Evaluation of Power Supply As a signatory to the Energy Community Treaty, Options for Kosovo,” to assess ways of meeting Kosovo has committed to decommissioning one current and future energy needs and balancing and rehabilitating the other TPP by 2017. To corresponding economic, financial, and address the energy supply and corresponding environmental costs. The study found that the environmental challenges, Kosovo—in close lowest-cost reliable energy supply that would meet collaboration with the World Bank and other Kosovo’s base load and peak demand was a mix of development partners—has developed a multi- thermal and renewable sources of energy. The 9 Government of Kosovo has requested a World Bank respiratory diseases, particularly in children. During partial risk guarantee (PRG) for attracting private 2012– 14, Kosovo’s energy corporation (i) replaced investors to build a new, efficient 600 megawatt the open system of ash transport with a closed (MW) coal-fired TPP. The bidding process for the hydraulic system; and (ii) installed electrostatic new power plant is expected to be concluded in 2015. precipitators (or dust filters) in all three units of the oldest power plant. Both investments have resulted in Kosovo is very rich in mineral deposits, although a noticeable reduction in local pollutants. Three air their potential has been left largely untapped. In monitoring stations in the most affected areas near addition to 10.9 billion tons of proven, exploitable the power stations are currently monitoring the air lignite reserves, the country has abundant deposits of quality on a continuous basis. ferronickel, lead, zinc, magnetite, and other ores that—if developed —could make a major Kosovo has limited water resources that are contribution to employment and exports. Prior to ex- divided into four main water basins. Water Yugoslavia’s dissolution, the mining sector had been resources in Kosovo are restricted, insufficient, an important growth engine for Kosovo’s economy, and —in light of rising demand for water (reflecting but capacity has suffered due to neglect during the urban, industrial, and agricultural development)— 1990s, the damages caused by the war, and the soon expected to represent a limiting factor for political fragilities in the four Serb-majority socioeconomic development. Data from the Institute municipalities in northern Kosovo. of Public Health show that bacterial (rather than chemical) contamination affects the quality of Environment and Water drinking water. Much of this bacterial (fecal) contamination occurs in the water supply systems of Air pollution is a significant problem, especially small cities and rural areas, where a large proportion in Kosovo’s urban areas. Principal sources of of wells and springs are thought to be contaminated. contaminants are sulfur dioxide (SO 2), nitrogen oxide There are no wastewater treatment plants in (NOx), ozone (O3), lead (Pb), carbon dioxide (CO 2), operation in Kosovo, adding to the challenges of suspended particles (fine dust), and dioxin. Urban water contamination. ambient air quality is particularly poor in and around Prishtina, Obiliq, Drenas, and Mitrovica. The The lack of adequate environmental protection principal sources of pollution include (i) energy and measures has resulted in serious environmental mining production activities; (ii) the burning of wood impacts from former mining and mineral and lignite for household heating purposes; (iii) processing activities. Historical and current smoke and emissions from large industrial industrial waste has remained over long periods of complexes; (iv) landfills for urban and industrial time within production sites, storage areas, and waste; and (v) vehicular emissions. The recent Country industrial hot spots. Mining and industry activities Environmental Analysis has sought to quantify the generate about 1.3 million tons of (commercial, economic costs of pollution in Kosovo. hazardous, and non-hazardous) waste per year, with municipal solid waste adding another 0.4 million tons. Key health impacts from air pollution are related At present, there is no proper waste management for to the high levels of particulate matter (PM). any type of waste—whether domestic, industrial, or During 2010– 11, the monthly average PM (bio-) hazardous. This applies to both current and concentration in Prishtina fluctuated between 40 and historic waste. Current “waste management” 130 micrograms per cubic meter (µg/m 3), i.e., almost practices, if left unchanged, will lead to high levels of always above the 40 µg/m 3 average concentration air and groundwater pollution, including through deemed acceptable by the EU and consistent with methane or landfill gas, dioxins, and fine particles human health. The key sources of fine particle (when burned). emissions in Prishtina and neighboring communities are the antiquated power plants and the household The Ministry of Environment and Spatial use of wood and coal heating during winter. High PM Planning (MESP) has prepared an update of the levels are responsible for increases in Kosovo Environmental Strategy (KES) and an cardiopulmonary and lung cancer mortality (in cases associated National Environment Action Plan of long-term exposure), chronic bronchitis, and (NEAP) for 2011– 15. The NEAP defines 10 environmental objectives in order to be able to meet abundant and underutilized labor, Kosovo has EU requirements. In the short term, the focus will be competitive potential in the horticulture sector (i.e., on the implementation of existing legislation and the production of fruits and vegetables) as well as in continued efforts to modify legislation and the livestock subsector. Domestic demand for institutions. In this context, the MESP aims to horticulture and livestock products is expected to integrate acquis communautaire– related requirements grow as purchasing power increases. Over the past into sectoral development policies in the relevant line decade, the demand for high-value horticulture ministries. In the longer term, the KES/NEAP will products has surged more than any other food define goals and/or strategies to (i) reduce pollution category. However, though there is great potential for and mitigate environmental degradation; (ii) prohibit the growth and expansion of productivity in economic activities that would cause harm to human agriculture, the sector faces several challenges that are health or the environment; (iii) promote biodiversity reducing the quantity and quality of agricultural protection and preserve the ecological balance; (iv) production and hence, competitiveness in local and use rationally and sustainably natural resources, foreign markets. The difficulties are largely due to including agricultural land; and (v) protect valuable unfavorable farm structures, outdated farm natural landscapes. In addition, the NEAP identifies, technologies and farm management practices, the costs, and prioritizes the needed investments in suboptimal use of inputs, weak rural infrastructure, a water, air quality, waste (including chemical waste) rudimentary rural advisory system, and the limited management, biodiversity preservation, and access to credit and investment capital. Moreover, environmental policy development. agricultural imports from Kosovo’s trading partners, which receive production and export subsidies, place Rural Development Kosovo’s farmers at a competitive disadvantage. Kosovo is endowed with high-quality The World Bank supports the Government ’s agricultural land. Agriculture has always been a key strategy to promote growth and competitiveness sector in Kosovo’s economy, but it declined in the agriculture sector, with a view to overcoming precipitously during and after the conflict. With the identified bottlenecks that hold back sustainable rural decline in agriculture output, Kosovo’s agro -food development. Through the support provided by the trade deficit has been widening. On a per capita basis, World Bank and other development partners, the Kosovo is one of the largest importers of food in Government has sought to align Kosovo’s rural Europe. Given the country’s ample supply of sector with the four axes of the Instrument for Pre- agricultural labor, proximity and free market access to Accession for Rural Development (IPARD). The the EU, and relatively good climate, Kosovo should Government is undertaking several significant and have a comparative advantage in the production of strategic initiatives in this direction, including by high-value horticultural and dairy products. Average establishing institutional structures consistent with agricultural land per person is around 0.15– 0.18 EU accession requirements. hectares, which is less than half the EU average. The fragmentation and small size of the agricultural THE WORLD BANK PROGRAM parcels are a problem for sustaining adequate agricultural outputs and lead to lower agricultural Since 1999, the World Bank has provided and/or production and subsequent economic losses. This is managed roughly US$400 million to Kosovo further aggravated by the constant conversion of through more than 30 operations, including designated agricultural land into residential or Trust Funds. As of March 25, 2015, there were industrial plots. seven active lending operations with commitments totaling US$129 million. These operations provide The agriculture sector remains a highly support in a wide array of sectors, including energy, “informal” sector. The last census in 2011 registered education, public sector reform, cadastre, agriculture, only 15,000 people working “formally” in social inclusion, and financial sector strengthening. agriculture—i.e., 3– 4 percent of the population. Since Kosovo joined the World Bank Group as a full However, recent studies from the Kosovo Agency of member only in June 2009, all previous Bank- Statistics indicate that some 140,000– 150,000 people supported projects had been financed through grants are employed in agriculture. With its relatively from a variety of sources, principally the Bank’s net 11 income, the Trust Fund for Kosovo, the Post- integration process. These include (i) the Energy Conflict Fund, and IDA. Efficiency and Renewable Energy Project (already approved by the Board of Directors of the World Bank and The World Bank’s program in Kosovo is ratified by Parliament of Kosovo); (ii) the Partial Risk anchored in its four-year Country Partnership Guarantee supporting the Kosovo Power Project ; (iii) the Strategy (CPS) FY12– 15, following a series of Water Supply Project; and (iv) the Education Improvement Interim Strategy Notes. This document provided the Project. In addition, a Kosovo Health Project to support Word Bank Group and Kosovo with a framework of reforms in the health sector was approved in 2014 by cooperation. In support of Kosovo’s EU integration the World Bank and ratified by Parliament of Kosovo objective, the CPS helped to enable the authorities to in March 2015. The Bank and the International (i) accelerate broad-based economic growth and Finance Corporation (IFC) support the development employment generation; and (ii) improve of other infrastructure services through studies and environmental management. The World Bank Group other advisory services. IFC also seeks to selectively has now begun preparations for a new Country provide financial support to private firms involved in Strategy Framework for Kosovo for the period 2016- infrastructure projects in Kosovo in areas such as 2020. The World Bank– financed projects have water, transport, solid waste disposal, and energy. been designed to strengthen the business climate and improve competitiveness. These include (i) the Financial Sector Figure 6. Commitments by Sector Strengthening and Market Infrastructure Project; (ii) the Public Sector Modernization Project ; (iii) the Real Estate Cadastre and Registration Project; (iv) the Agriculture and Rural Development Project; and (v) the Institutional Development for Education Project. A key obstacle to meeting Kosovo’s so cioeconomic development objectives is the energy sector, a central element of Bank assistance to the country. The active portfolio includes the Energy Sector Clean-Up Project, which addresses the environmental legacy issues related to the open dumping of ashes from Kosovo’s oldest Thermal Power Plant, for which Additional Financing has been approved. The main focus of lending under the closing CPS IFC seeks to selectively provide financial support program is the energy sector, aimed at addressing to private firms involved in infrastructure Kosovo’s energy crisis in a comprehensive way. This projects in Kosovo, in areas such as water, transport, involves seeking to balance energy security and solid waste disposal, and energy. IFC's investment in energy affordability with efforts to minimize socio- Kosovo totals $391 million, including $369 million environmental externalities, so as to mitigate the mobilized from our partners, in 6 projects across a adverse environmental, public health, and economic variety of sectors. Our committed investment impacts on affected citizens. These activities fit into portfolio in Kosovo as of 30 June 2014 is $20.5 broader CPS objectives that seek to support the million. In fiscal year 2014, IFC invested $600,000 in business environment and good governance and Kosovo. IFC invested in the general manufacturing address the issue of skills, while continuing to and financial sectors. IFC’s advisory services in implement reforms in the agriculture sector, financial Kosovo aim to improve the investment climate and sector, and the cadastre. the performance of private sector companies and to attract private sector participation in the development The CPS envisages five new IDA operations of infrastructure projects. designed to support the Government in meeting its overarching objective of accelerating the EU 12 KOSOVO: ENERGY SECTO R CLEANUP AND LAND RECLAMATION PROJECT INCLUDING ADDITIONAL FINANCING (CLRP) Key Dates: Approved: June 13, 2006 Effective: Feb 28, 2007 Closing: June 30, 2015 Financing in million US Dollars*: Financier Financing Disbursed Undisbursed IDA Grant 10.5 10.9 0.1 Additional IDA Credit 4.2 0.6 3.7 Dutch Government 4.3 4.3 0.0 Grant 1.1 0.4 0.8 Additional Dutch Grant Total Project Cost 20.1 15.79 5.1 *Source Client Connection as of September 15, 2014. Note: Disbursements may differ from financing due to exchange rate fluctuations at the time of disbursement. Air pollution, particularly from the dust generated by the power stations and ash dumps near the capital Prishtina, has been a critical problem. Soil and groundwater contamination from the ash dumps create negative environmental impacts but pose less of a direct threat to public health than the direct exposure to airborne dust. The use of outdated mining practices, an industrial infrastructure that ignored environmental impacts, and a non -functioning environmental management system are the main factors behind the high exposure to environmental health risks. The sizable overburden dumps from lignite mining occupy large areas near the mines, sterilizing land for other productive uses, while the former gasification plant consists of numerous structures containing hazardous chemicals in deteriorating and risky conditions. The project seeks to (i) address the environmental legacy problems from the open dumping of ashes on land; (ii) enable the Kosovo Energy Corporation (KEK) to free land for community development purposes currently taken by overburden material and to remediate Kosovo A ash dump; and (iii) support KEK and the Ministry of Environment and Spatial Planning (MESP) to implement continued cleanup operations and environmental good practices in the mining and energy sector. The Additional Financing will further scale up the existing cleanup and land reclamation activities, aiming at fully removing the hazardous chemicals found on the gasification site of KEK, as well as financing a component with MESP to fund additional act ivities associated with an environmental and social impact assessment for the proposed Kosovo Power Project. Results achieved. The depleted mine has been prepared to receive the sanitary disposal of ashes from power plant Kosovo A. The conversion of the current system of dry ash transportation to hydraulic transport has been functioning since November 2013 and was officially inaugurated in March 2014. The p roject contributed €1 million to the system. Currently, 85 percent of the projected remediation of the ash dumps has been completed and more than 650 hectares are available for community development in the overburden dumps, where more than 150,000 plants have been planted. The removal of the highest priority hazardous substances from the storage tanks and other containments at the gasification site (tars, benzene, phenols, methanol, oily compounds) has been implemented. 14,775 tons of Low Level Organic Content (LLOC) liquids were locally treated and 5,109 tons of High Level Organic Content (HLOC) materials have been exported and disposed to licensed disposal facilities. What remains are the additional materials recently discovered in an underground tank and the export of big bags of solid tar. The Additional IDA Credit (AF) finances efforts to (i) rehabilitate the remaining tip of the ash dump (where the dumping of fresh ash has just stopped); (ii) plant more seedlings in the southern overburden dump, which has already taken place; and (iii) remove hazardous waste from the recently discovered underground tan k filled with tar sludge and solvents and repackage, transport, and treat it in a licensed treatment facility abroad, and remove the tar deposits that have been repackaged but not yet removed due to a lack of financing; works are currently ongoing. KEK staff is now fully responsible for cleanup and land reclamation operations in the area of ash and overburden dump rehabilitation, while the job of removing the hazardous waste has yet to be contracted. Regarding the activities under the AF implemented by MESP, progress has been as follows: The Environmental and Social Impact Assessment (ESIA) for the proposed Kosovo Power Project started in January 2014 and public consultations on its findings are planned to be organized by May, 2015. Resettlement monitoring efforts for the Resettlement Action Plan (RAP) for the Shala neighborhood of Hade village, as implemented by MESP, have continued with the support of an internationally recognized resettlement consultancy firm as part of this second Additional Financing. Th e resettlement process is still ongoing . Key Partners: Ministry of Economic Development, KEK, and MESP. Key Development Partners: the Government of the Netherlands, U.S. Agency for International Development, the EU, and the German Development Bank (KfW). 13 KOSOVO: REAL ESTATE CADASTRE AND REGISTRATION PROJECT (RECAP) Key Dates: Approved: February 4, 2010 Effective: June 17, 2011 Closing: July 31, 2015 Financing in million US Dollars*: Financier Financing Disbursed Undisbursed IDA Credit 6.6 5.1 1.5 IDA Grant 5.4 3.2 2.2. Government of Kosovo 1.2 1.1 Total Project Cost 13.4 8.3 4.8 *Source Client Connection as of March 27, 2015. Note: Disbursements may differ from financing due to exchange rate fluctuations at the time of disbursement. In Kosovo, the real estate property market is constrained by its legacy. As a result of the 1999 conflict, thousands of homes were damaged or destroyed, up to 75,000 properties were abandoned, and land records were either destroyed or moved to Serbia, where they remain. Many citizens lost access to their properties, ownership records are incomplete or unreliable, and vacated properties were occupied illegally (about 20,000 claims on property that was illegally occupied as a result of the conflict are still being processed by the Kosovo Property Agency). Real property is now owned privately, socially or by the state, or one of the publicly owned enterprises, primarily public utilities that are also being privatized. In 2006, there were an estimated 600,0 00 buildings of all types, of which 250,000 were in rural areas. There are about 2 million land parcels and an estimated 350,000 property owners. Government institutions are weak; property rights transactions often go unregistered until there is a need f or documentation of a procedure or loan, and then the registered owner may not be available. The Project Development Objective is to help develop Kosovo’s land and property markets and to improve tenure security. The project addresses a range of issues by: (i) supporting improvements in the capacity of the municipal cadastral offices (MCOs) to deliver services by rehabilitating the MCOs and carrying out systematic registration in the Kosovo Cadastre Land Informati on System (KCLIS); (ii) financing the establishment and maintenance of a Continuous Operating Reference Network (CORN) to provide a single source of reference points to surveyors; (iii) supporting institutional reform by upgrading the legal and no rmative framework and promoting the greater financial self-sufficiency of the Kosovo Cadastre Agency (KCA); and (iv) training KCA and MCO managers and staff, the project coordination office, private surveyors, and other key stakeholders in management, planning, legal, technical, and administrative subjects. Results achieved and expected:  The textual component of the Kosovo Cadastre Land Information System (KCLIS) has been installed in all offices and the graphical component is being rolled out.  The Kosovo Positioning System (KOPOS), which receives satellite signals and provides data for GPS equipment, is operational and used by both private and public sector users.  The third round of contracts for cadastre reconstruction (CR) work have been contracted and field work beg an towards the end of 2014.  Mobile gender teams have been introduced into the CR process to ensure women are registered as owners.  The legal analysis for KCA’s sustainability and institutional reform will be completed by June 2015.  20 municipal cadastral offices have been reengineered and four remaining offices are in the process of rehabilitation.  The National Spatial Data Infrastructure Strategy (NSDI) is under development.  If the Bank receives a restructuring request, the project will be extended by 18 months to January 2017. Key Partners: The Bank team works closely with the Ministry of Environment and Spatial Planning, MCOs, other municipal structures, and the KCA. The Government of Norway continues to support the KCA and a new USAID project is providing support for legal reforms and capacity building for land administration activities. GIZ provides support to key municipal cadastral offices. 14 KOSOVO: FINANCIAL SECTOR STRENGTHENING AND MARKET INFRASTRUCTURE PROJECT (FSSMIP) Key Dates: Original Project Approved: December 13 2007 Additional Financing Approved: June 14, 2011 Closing: June 30, 2016 Financing in million US Dollars*: Financier Financing Disbursed Undisbursed IDA Grant 1.8 1.4 0.4 IDA Credit 6.4 3.9 2.1 Total Project Cost 7.8 5.3 2.5 *Source Client Connection as of March 25, 2015. Note: Disbursements may differ from financing due to exchange rate fluctuations at the time of disbursement. Background: A Financial Sector Fiduciary Assessment (FSFA) conducted in May 2006 highlighted the substantial institutional weaknesses in the Central Bank of Kosovo (CBK), which is responsible for the regulation and supervision of banks and other financial institutions. These weaknesses pertained to its institutional and financial sustainability, the banking and non-bank financial institutions (NBFIs), prudential regulation, the supervision and resolution framework, and the financial sector infrastructure. The original project aimed at strengthening (i) the CBK’s institutional capacity and the regulatory and supervisory framework for banks and non-banks; (ii) the microfinance industry to achieve sustainability and expand outreach; and (iii) the capacity of the Kosovo Bankers Association to provide adequate training to local banks. Additional Financing: Following the work under the original project, further weaknesses were identified and an additional finance project was approved by the Board of the World Bank to expand the mandate of the original project. As a result, the original project (called Financial Sector Technical Assistance) was combined with the Additional Financin g and renamed the FSSMIP. The Additional Financing became effective in February 2012 with the aim of further strengthening the infrastructure of the financial sector. The Project Development Objectives are to (i) enhance the stability and development of the financial sector; and (ii) strengthen the financial sector’s underlying market infrastructure. The additional components are: (i) establishment of a Real Time Gross Settlement System; (ii) establishment of a Business Continuity Center; and (iii) provision of seed funding to the Deposit Insurance Fund of Kosovo (a first for a World Bank investment project). Results achieved: The CBK’s institutional strength and sustainability has substantially improved due t o the preparation of a development strategy based on market development trends and a review of the CBK’s funding options, including (i) a functional assessment, and (ii) the development of a medium -term staffing plan and the revision of staff incentives. The project has also supported CBK in (i) revising the banking sector legal and regulatory framework, and (ii) providing assistance to the insurance sector with regard to third-party liability on preparing a legal framework and providing a detailed functional, supervisory, and technical assessment of compulsory third-party liability tariff liberalization. In addition, the project has supported the Banker’s Association and Microfinance Association in strengthening their capacity as well as the capacity of the banking and microfinance industry as a whole. The largest component of the Additional Financing—providing seed capital to the Deposit Insurance Fund of Kosovo (DIFK) in the amount of US$4 million — has been fully disbursed and has successfully achieved its objective. DIFK is now fully operational. The project has recently been extended to June 30, 2016, mainly due to procurement delays related to the Real Time Gross Settlement System and the Business Continuity Center. Key Partners: The Bank team works closely with the U.S. Treasury, the International Monetary Fund (IMF), and the Government of Germany through KfW. 15 KOSOVO: AGRICULTURE AND RURAL DEVELOPMENT PROJECT (ARD) Key Dates: Approved: June 14, 2011 Effective: May 3, 2012 Closing: July 31, 2017 Financing in million US Dollars: Financier Financing Undisbursed* (approx) IDA Credit 20.15 12.0 Government of Kosovo 1.00 Beneficiaries 16.00 Government of Denmark 8.68 3.0 Total Project Cost 43.71 *Source Client Connection as of March 31, 2014. Note: Disbursements may differ from financing due to exchange rate fluctuations at the time of disbursement. The Project Development Objective is to assist the Government of Kosovo in promoting competitiveness and growth in the livestock and horticulture subsectors over the next decade through the implementation of selected measures of its agricultural strategy and institutional development. To this end, the project is supporting the following activities: (i) transferring knowledge to the rural sector; (ii) enhancing investments to promote sustainable rural development; and (iii) improving project management, coordination, monitoring, and evaluation. Under Component 1, training is being provided to farmers, agro-processors, municipal advisors, and national extension staff, as well private advisors to help farmers and agro-processors develop sound business plans for investment support under the project. Under Component 2, the project is assisting in building the capacity of the Managing Authority and Paying Agency to implement the national Agricultural and Rural Development Program in line with EU requirements. The component also supports a Rural Development Grant Program aimed at financing investments to enhance the growth and competitiveness of the livestock and horticulture subsectors. Key Expected Results:  Increased number of farmers and agro-processors trained in the development of viable business plans for improving their operations  Extension staff and municipal advisors trained in relevant agricultural production and processing techniques in the livestock and horticulture subsectors  Increased number of farmers and enterprises applying for rural development grant support to improve their operations  Increased number of farmers and enterprises adopting improved products and/or techniques  Increased capacity of Managing Authority and Paying Agency to implement the Rural Development Grant Program in line with EU requirements Key Partners: In addition to the Additional Financing being provided by the Government of Denmark, the Bank team is closely coordinating its work with other donors in the agriculture and rural development sector, such as the EU and USAID, to ensure complementarity of efforts. 16 KOSOVO: PUBLIC SECTOR MODERNIZATION PROJECT (PSMP) Key Dates: Approved: February 4, 2010 Effective: June 17, 2011 Closing: June 30, 2016 Financing in million US Dollars: Financier Financing Disbursed Undisbursed IDA Grant 3.5 2.9 0.6 IDA Credit 4.5 0.7 3.8 Total Project Cost 8.0 3.6 4.4 *Source Client Connection as of March 31, 2015. Note: Disbursements may differ from financing due to exchange rate fluctuations at the time of disbursement. Despite the considerable progress achieved in recent years, Kosovo still needs to improve public financial management and further utilize information technology to make efficient use of scarce public resources. The capacity of the civil service to attract, motivate, and retain qualified staff is a pressing constraint on the effectiveness of government institutions. The Project Development Objective is to (i) strengthen the performance of key budget organizations in budget formulation, budget execution, and public procurement; (ii) establish the foundations for fiscally sustainable payroll management and effective human resource management in the core civil service; and (iii) create conditions for the further automation of government work processes and for the development of e- government applications. Results Achieved:  The National Data Center was inaugurated on February 17, 2014. This investment will be the cornerstone of the e-government services, enabling citizens and businesses to benefit from faster and cheaper online services.  Improved budget planning, execution, and monitoring will support improvements in public financial management, especially at the budgetary institutions that the PSMP is supporting (i.e., the Ministries of Health, Education, Agriculture, and Justice).  A transparent and coherent pay and grading structure has been introduced into the civil service, supported by improved information and communications technology (ICT) systems, which enables effective fiscal and management controls in payroll administration. Key Partners: The project was prepared in close cooperation with the Ministry of Economy and Finance (public financial management reform) and the Ministry of Public Administration (civil service reform, ICT infrastructure), which will be the key institutions responsible for project implementation. Key Development Partners include the UK Department for International Development (DFID), which has contributed to some of the activities related to project preparation (e.g., support for drafting the civil service legislation and financial impact assessment of civil service pay reform). DFID, the EC, and USAID have also supported the development of the Public Financial Management Reform Action Plan and public procurement reform. 17 KOSOVO: ENERGY EFFICIENCY AND RENEWABLE ENERGY PROJECT (KEEREP) Key Dates: Approved: June 18, 2014 Effective: Pending, ratified by Parliament of Kosovo on March 26, 2015 Closing: August 31, 2020 Financing in million US Dollars*: Financier Financing Disbursed Undisbursed IDA Credit 31.0 31.0 Government of Kosovo 1.5 1.5 Total Project Cost 32.5 32.5 *Source Client Connection as of March 25, 2015. Note: Disbursements may differ from financing due to exchange rate fluctuations at the time of disbursement. Background: Currently, Kosovo’s electricity system cannot meet the demand that is needed to fuel the country’s economic growth. According to the Doing Business 2014, the unreliable electricity supply is among the top constraints to businesses in Kosovo. Frequent power cuts are a major obstacle to day-to-day operations and a constraint to both investment in new equipment and business expansion, in turn affecting job and employment creation and investments. Further, power production relies on two aging, unreliable lignite-fired power plants, one of which is scheduled to be decommissioned in 2017. This, along with the unsustainable heating of buildings, mostly from unmanaged, unregulated firewood and lignite-based electricity, is neither economically nor environmentally sustainable. Energy efficiency and renewable energy can help mitigate these projected power shortfalls, while enhancing Kosovo’s energy security and environmental sustainability. This is consistent with the Government’s National Energy Efficiency and Renewable Energy Action Plans (NEEAP, NREAP), which call for a cumulative energy savings of 9 percent by 2018 and a 25 percent renewable energy target by 2020, respectively. Such targets are in line with the European Union’s energy acquis communautaire, as committed under the Energy Community Treaty, in the areas of climate change and environmental protection, which will require strengthening the existing regulatory frameworks and institutional capacity in support of energy-efficiency and renewable energy investments. Recent studies found a very high energy savings potential for public buildings— 38– 47 percent in municipal buildings and up to 49 percent in central government buildings. The moderate potential for renewable energy also exists in biomass, wind, and small hydro. The Project Development Objectives are to: (a) reduce energy consumption and fossil fuel use in public buildings through energy-efficiency and renewable energy investments; and (b) enhance the policy and regulatory environment for renewable energy and energy efficiency. In order to realize these objectives, three components will be implemented: (i) energy-efficiency and renewable energy investments in public buildings; (ii) policy and regulatory support for renewable energy and energy efficiency; and (iii) project implementation support. Expected Results:  lifetime energy savings from energy-efficiency investments in public buildings (GWh)  increased capacity of approved renewable energy regulatory licenses (MW)  reduced fossil fuel use for heating in public buildings (toe) Key Partners: Ministry of Economic Development, Energy Regulatory Office, Ministry of Environment and Spatial Planning. Key Development Partners: KfW, European Commission, European Bank for Reconstruction and Development (EBRD), United Nations Development Programme (UNDP). 18 KOSOVO HEALTH PROJECT Key Dates: Approved: May 13, 2014 Effective: Pending, ratified by Parliament of Kosovo on March 26, 2015 Closing: October 30, 2019 Financing in million US Dollars*: Financier Financing Disbursed Undisbursed IDA Credit 25.5 0.0 25.5 Total Project Cost 25.5 0.0 25.5 *Source Client Connection as of March 25, 2015. Note: Disbursements may differ from financing due to exchange rate fluctuations at the time of disbursement. At 40 percent of total health spending, household out-of-pocket health expenditures are high and contribute to increasing the poverty headcount—7 percent in 2011—primarily by pulling more households under the poverty line. 85 percent of household out-of-pocket spending on health is on pharmaceuticals. High household out-of-pocket health spending in Kosovo is, at least partially, a consequence of limited public spending on health, which is approximately half the Southeastern Europe and EU average. Kosovo has some of the worst health outcomes in Europe, reflecting both limited public spending on health and the poor quality of care. The project will support health sector reforms to address these concerns. The cornerstone of these Ministry of Health– proposed reforms is a mandatory health insurance scheme to reduce catastrophic health spending, particularly for the poor. The health insurance scheme is also expected to raise additional revenues for the health sector, therefore creating opportunities to improve the quality of care, including in primary care, through performance-based contracting. The Project Development Objective is to contribute to improving financial protection from health spending for the poor and the quality of care for priority maternal and child health and non-communicable disease services. Expected Results:  Improved financial protection and access to health services among the poor via enrollment in mandatory health insurance;  A functioning outpatient drug benefit scheme to reduce out-of-pocket spending on drugs in private pharmacies, which account for 85 percent of all household out-of-pocket health spending; and  The improved quality of primary care services through performance-based contracting between municipalities and the Ministry of Health/Health Insurance Fund. Key Partners: The project was prepared in close cooperation with the Ministry of Health, which will be responsible for project implementation in conjunction with the future Health Insurance Fund and participating municipalities. Key Development Partners: The Swiss Agency for Development and Cooperation (SDC) and Luxemburg Development Cooperation are key health sector partners. SDC Kosovo supported technical assistance and analysis focused on the proposed health sector reforms, therefore facilitating rapid project preparation. An SDC-supported hybrid Trust Fund for US$2 million was established in March 2015 to support complementary health sector reforms, including to improve drug procurement systems and poverty-targeting mechanisms. Luxemburg Development Cooperation is involved in information systems improvements and other reforms that complement the Kosovo Health Project’s areas of focus. 19 KOSOVO: BALKAN RENEWABLE ENERGY PROJECT (BREP) (IFC) Key Dates: Approved: July, 2012 Effective: July, 2012 Closing: June 31, 2016 Financing in million US Dollars: Financier Financing Austrian Ministry of Finance 7.0 Total Project Cost 7.0 The Project Development Objectives are: to enable the creation of a renewable energy (RE) market and support the development and financing of RE initiatives in Western Balkan countries. Through the project, IFC aims to address the market barriers in these countries in order to enable investments in RE projects by working on legislation with developers and through financial intermediaries. This will be achieved through a programmatic staged approach to be carried out through the following objectives: • Objective 1: Regulatory Level: Improve the existing regulatory framework to enable RE sponsors to develop and construct feasible electricity generation capacities. Although the general focus will be at small hydropower plants (SHPPs), in Serbia and Kosovo it will be extended to wind and biomass, respectively. • Objective 2: Sector/Firm Level: Work with renewable energy sponsors to improve their designs and business plans, thus increasin g the bankability of their projects. The program will also merge experienced international companies with local developers. • Objective 3: Sector/Financial Institutions Level: Work with selected banks to improve their internal capacities and knowledge of project financing and renewable energy and assist them in launching sustainable and dedicated renewable energy credit lines. Expected Results: IFC BREP supported the Energy Regulatory Office (ERO) on the preparation of the following documents that will contribute to the improvement of the renewable energy regulatory framework: Standardized Contract Agreement (SCA), Standardized Power Purchase Agreement (SPPA), recommendation for the rule of the support scheme, and recommendation for the rule of the Certificate of Origin. IFC BREP has also developed feed-in tariff methodology for solar power plants and trained the Client’s staff to adopt the methodology for future use. In December 2014, ERO started with the adoption of proposed improvements. The first ERO’s step was to improve the R ulebook on Supporting Scheme for Renewable Energy by adding one more technology in it. Namely, based on the software tool and the report prepared by our team, ERO included subsidies for photo voltaic (PV) technology. Interestingly, ERO started receiving requests for PV plants and planned quota (10MW) is already fulfilled with several requests. Other documents drafted with our technical support (standardized power purchase agreement (PPA), standardized grid connectio n agreement (GCA) and two rules that will support certification of guarantees of origin (GoO)) expected to be adopted in the first half of 2015. Investments in the energy sector are one of the main priorities of the Government. Despite the limited RE potential, a number of RE projects have been identified. The lack of investments in RE projects indicates the need to improve the investment climate in the RE secto r and this is where BREP will contribute to its program objectives. Several RE sponsors and developers in Kosovo have met to discuss the modalities of cooperation on project preparation, environmental and social studies, and the cross-checking of existing designs. Only a few banks in Kosovo are offering project financing and green credit lines, such as Procredit Bank and Raiffeisen, but these are not focused on RE financing. This indicates a market need for technical assistance services to banks to work on the capacity building of the banking sector in order to increase the lending volume for RE projects. BREP organized the workshop “Support to Renewable Energy Sector in Kosovo,” presenting BREP products for supporting the banking sector in Kosovo. The workshop attracted the interest of the local banks, and it is expected that BREP will cooperate those that are interested. The expected impacts of BREP in the region to be achieved one– two years post-completion are: To facilitate at least US$200 million of investment in RE construction (out of which US$20 million to be provided by IFC); to support the construction of RE power plants with total installed capacity of 150 MW; and to directly avoid 0.3 million tons of CO 2 per year. Key Partners: MED, MESP, ERO, KOSTT, Kosovo Chamber of Commerce, KfW, USAID, E U. 20 KOSOVO: INVESTMENT CLIMATE PROJECT (IFC) Key Dates: Approved: January 21, 2013 Closing: March 31, 2016 Financing in million US Dollars: Financier Financing IFC (SECO and the 2.4 Government of Austria) 0.1 Government of Kosovo Total Project Cost 2.5 Note: Disbursements may differ from financing due to exchange rate fluctuations at the time of disbursement. The goal of the Kosovo Investment Climate Project is to improve the country’s investment climate for domestic and foreign investors. The project will link, in a programmatic manner, business regulatory, investment policy, and industry-specific work in agribusiness to maximize impact. It is a targeted intervention building on IFC strengths and addressing government priorities and the needs of the private sector in Kosovo. The objectives are to:  Reduce the administrative burden on businesses and improve the competitiveness of the Kosovo economy  Help increase investment levels and foreign direct investment (FDI) inflows, in particular in employment-intensive sectors Expected Results: Business Regulation activities are aimed at reducing administrative compliance costs for businesses, closing the implementation gap, and improving the competitiveness of the Kosovo. Some of the achievements include:  The projected supported the GoK to draft the Law on Permits and Licenses and the Better Regulation Strategy 2014 - 2020;  At the central level, an e-registry of licenses, permits, approvals, and certifications has been compiled and is ready to be published. This will increase transparency of regulations. As the project continues, it will focus on recommending simplification of regulations in the area of agribusiness.  At the local level, the project is working with the Municipalities of Gjilan, Ferizaj, Gjakova and Prishtina. In all municipalities recommendations have been provided for simplification of administrative procedures. The Municipality of Gjilan has already implemented some of the changes while the project is supporting the rest of the municipalities. E-registers of all administrative procedures will be published and will be open to the public;  A training plan for the introduction of Regulatory Impact Assessment is already in place and will be implemented in the next year. Investment Policy activities aim to provide a sharper focus on the country’s economy -wide investment policy reform and FDI attraction efforts and address key bottlenecks to attracting more and higher-quality FDI. Some of the achievements include:  The project supported the GoK to design the Investment Reform Map, a strategic approach to attracting FDI in Kosovo;  Support was given to draft the Law on Foreign Investment which introduced changes in line with best practices and the team negotiating Bilateral Investment Treaties received a series of trainings to support its capacity building;  An of fiscal and non-fiscal incentives for investors was created thus contributing to increased transparency, improved governance in incentives administration, and the creation of a level playing field for investors;  An Investor Perception Survey was completed and discussed with stakeholders;  The procedures for work permits for foreign employees were simplified and guides were publish to illustrate the new procedure.  The Kosovo Investment and Enterprise Support Agency was supported through capacity building activities especially focusing on creating an aftercare program for existing investors.  Key Partners: Ministry of Trade and Industry, the Prime Minister’s Office, Kosovo Business Registration Agency, Investment Promotion Agency and municipal structures, National Council for Economic Development, and GIZ. 21 KOSOVO: WESTERN BALKANS TRADE LOGISTICS PROJECT (IFC) Key Dates: Approved: September 2011 Effective: February 2012 Closing: April 2015 Financing in million US Dollars: Financier Financing Disbursed Undisbursed European Commission 1.90 1.90 .00 WBG ($255k), Austria, .79 .71 .08 FIAS ($450k), Country contributions ($85k) Total Project Cost 2.69 2.61 .08 Note: Disbursements may differ from financing due to exchange rate fluctuations at the time of disbursement. The Project’s Objective has been to reduce the number of documents and days needed for goods to cross regional borders, through more streamlined export, import, and transit procedures; closer and more harmonized interagency cooperation in country and between countries; and the wider use of electronic systems for data exchange and risk-based controls and trade logistics – related payments. Faster border clearance procedures will enhance the competitiveness of the private sector in the region through more efficien t access to regional and global markets. To date, the project, operating in Albania, Bosnia and Herzegovina, Kosovo, Macedonia, Montenegro, and Serbia, has generated $7m in private sector savings. . Project Achievements: Transit Agreement: The Project provided technical assistance in support of the conclusion of a trade and transit facilitation agree- ment between the Governments of Kosovo and Albania in January 2014. It also helped Albania Customs upgrade its version of Asycuda World to Kosovo’s version for greater ease of co mmunication and data exchange. As a result of these simplifications, a significant reduction in the time needed to transit from one country to the other, from previously up to 2 days to one half h our, is expected. Customs Brokers Reform: Technical Assistance to Kosovo Customs in support of regulating the customs brokers profession in Kosovo. Legal review of draft instruction, comparison of the customs brokers systems in Kosovo, Albania, Slovenia; expert su pport during study visit to Slovenia customs; Roadmap for implementation of customs brokers training, licensing, and continuing educa- tion. Risk Management Improvements: Workshop and hands-on training with the Kosovo Food and Veterinary Agency on the develop- ment of risk criteria and risk profiles to imported products for the application of risk based controls on import; review of, and rec- ommendations for improvement of, Kosovo Customs risk management and post clearance audit procedures Improvement in Trading Across Borders rankings: Between 2012 and 2015, Kosovo achieved reductions in time to export (17-15), time to import (16-15), in the number of documents required to import (8-7), and in the cost to import and export (partial project attribution) Project Regional Initiatives benefitting Kosovo  Mapping of clearance procedures for agribusiness products at major border crossing points in the region;  Analysis of documents required by regional SPS agencies on import of dairy products and benchmarking to them against the EU documents;  Regional Post Clearance Audit Workshop with WCO experts;  Support to CEFTA Working Group on Risk Management;  Establishment of regional forum for customs and SPS agencies to discuss trade facilitation issues. Key partners in Kosovo: Ministry of Trade and Industry, Kosovo Customs, Kosovo Food and Veterinary Agency, Kosovo Chamber of Commerce, AMCHAM 22 How to contact us: The World Bank Country Office in Kosovo Rruga Prishtinë– Fushë Kosovë 10060 Prishtina Republic of Kosovo Tel.: +381 38 224 454 Fax: +381 38 224 452 www.worldbank.org/kosovo 23