EVALUATION OF THE 
USAID/KOSOVO 
ECONOMIC 
RECONSTRUCTION 
PROJECT
Prepared for:
USAID/Kosovo
 Prepared by
 Samuel Skogstad, Team Leader
 Thomas Bertone
Art Dimas
Lawrence Long
Joseph Anderson
Checchi and Company 
Consulting/Louis Berger 
Joint Venture 
1899 L Street, NW 
Suite 800
Washington, D.C. 20036
 
 Contract No. AEP-I-823-00-00022-00
 November,2003
TABLE OF CONTENTS
Table of Contents .............................................................................................................. 2
EXECUTIVE SUMMARY .............................................................................................. 1
BACKGROUND ............................................................................................................ 1 
FINDINGS...................................................................................................................... 2
CONCLUSIONS............................................................................................................. 3 
COORDINATION.......................................................................................................... 4 
RECOMMENDATIONS................................................................................................ 4 
MACROECONOMIC OVERVIEW .............................................................................. 6
SCOPE OF THE EVALUATION ................................................................................ 10 
FISCAL REFORM ......................................................................................................... 11
FINDINGS.................................................................................................................... 11 
CONCLUSIONS........................................................................................................... 14 
RECOMMENDATIONS.............................................................................................. 18 
BANKING AND FINANCIAL SECTOR DEVELOPMENT .................................... 22
FINDINGS.................................................................................................................... 22 
CONCLUSIONS........................................................................................................... 27 
RECOMMENDATIONS.............................................................................................. 29 
PENSION REFORM...................................................................................................... 31
FINDINGS.................................................................................................................... 31 
CONCLUSIONS........................................................................................................... 33 
RECOMMENDATIONS.............................................................................................. 36 
INSURANCE SECTOR DEVELOPMENT................................................................. 37
FINDINGS.................................................................................................................... 37 
CONCLUSIONS........................................................................................................... 39 
RECOMMENDATIONS.............................................................................................. 40 
COMMERCIAL LAW................................................................................................... 42
FINDINGS.................................................................................................................... 42 
CONCLUSIONS........................................................................................................... 46 
RECOMMENDATIONS.............................................................................................. 48 
PRIVATIZATION AND COMMERCIALIZATION................................................. 50
FINDINGS.................................................................................................................... 50 
CONCLUSIONS........................................................................................................... 52 
RECOMMENDATIONS.............................................................................................. 56 
SUMMARY AND CONCLUSIONS ............................................................................. 57
COORDINATION........................................................................................................ 57 
RECOMMENDATIONS.............................................................................................. 58 
ANNEX I: PERSONS INTERVIEWED....................................................................... 60
1 
EXECUTIVE SUMMARY
BACKGROUND 
The USAID program of economic support for the reconstruction of Kosovo began almost 
immediately upon the cessation of hostilities in 1999. Extraordinary international 
financial flows and expatriate-staffed institutions of governance gave the economy a 
quick and significant boost as reconstruction got under way. However, USAID 
recognized quickly that the economic gains would be transitory unless a domestic 
economic dynamic developed to take the place of reconstruction-related activity as it 
began its inevitable eventual phase down. 
Under UN leadership pursuant to Security Council Resolution 1244, it was determined 
that the Kosovo economy should be constructed to be compatible with the largely 
market-directed economies of the EU, under EU direction. Yet Kosovo had neither the 
legal framework nor the public institutions that are preconditions to the operation of such 
systems. USAID was the donor agency best able to mobilize quickly to begin the legal 
and institutional development effort required to fill the void. Thus the USAID program 
was launched under extraordinary circumstances that required that legal, financial and 
economic institutions commence operations even as they were being constructed. 
Technical assistance experts thus served in a number of cases not only as advisors but as 
de facto government officials. 
 The Economic Reconstruction Program was wisely designed to create a legal and 
institutional framework that would be visibly hospitable to private foreign and domestic 
investment. After years of neglect followed by wartime destruction, Kosovo’s productive 
capacity was dramatically reduced. Nevertheless, in its capital-starved state, the potential 
returns on early investments in productive facilities could be extraordinarily attractive to 
investors under stable, transparent and reliable economic and political conditions. The 
attraction of private investment was, again, seen as the key to success and sustainability 
in the Kosovo economy. 
 
The USAID program focused on four critical elements of the economic core, as reflected 
in four intermediate objectives of the Mission’s 2001-2003 strategy: Fiscal Operations of 
the government, the Banking and Financial Sector including Pensions and Insurance 
Companies, Commercial Law and, finally, Privatization and Commercialization. Work 
in these areas was conducted under a series of four Task Orders (TO’s), each of which 
built upon the accomplishments of its predecessor. Thus judging a particular TO 
successful implies satisfactory implementation of its predecessors. The work under the 
succession of four TO’s in pursuit of the four IR’s noted above is the subject of this 
evaluation. 
2 
FINDINGS 
Progress 
This evaluation concludes that the USAID strategy was plausible and appropriate. 
Moreover, the design of the institution-building program was meticulous and was tailored 
appropriately to the facts of the Kosovo situation as they were understood at the design 
stage, or as the design was altered in response to changes in conditions. The evaluation 
found close correspondence between the conceptual foundation of the program and the 
legal, regulatory, procedural and administrative documentation prescribing the form of 
the actual institutions and their operations. 
In general, progress to date has been good, particularly considering that he program 
started just four years ago. In each of the four areas of concentration, the legislation 
required to establish the institutions and to initiate their operations has been passed. 
Some specific pieces of legislation have been held up (in the area property taxation, for 
example) but overall, the progress in establishing the legal framework has been 
noteworthy. The institutional development work has also recorded outstanding progress, 
especially in the Ministry of Finance and Economy (MOFE), the Banking and Payments 
Authority of Kosovo (BPK), the newly formed Pension system and the Insurance 
industry. Detailed implementation guidance has been included in each of the four TO’s 
and their benchmarks. Some of the benchmarks in each area have not been reached. In 
some cases they proved to be unattainable due to changing conditions, and in others the 
benchmarks have been adjusted. An ongoing dialogue between USAID and others 
involved in implementation has served effectively to minimize serious problems 
associated with missed benchmarks and output targets. 
While progress in establishing the institutions and legal environment has been strong and 
basically on track, in some areas implementation and sustainability have proved 
somewhat more problematic. The readiness of Kosovar executive-level managers and of 
professional technical experts to take control of the management of their functions does 
not appear to be as close at hand as might have been expected at this stage. Sustainability 
is a question in some areas as it is not clear that the general public fully understands and 
appreciates the conceptual foundations of the unfamiliar institutions and systems that 
have been built. This could weaken the resolve to defend them vigorously once the 
expatriate experts have left. More vigorous prosecution of public information and 
education campaigns in the future could be valuable in addressing this issue. 
Constraints 
Uncertainty about the final political status of Kosovo is almost certain to constrain many 
potential investors and other decision makers. In many, though certainly not all, areas 
sovereignty is a significant issue. Where it resides is not necessarily as important as that 
the issue be definitively resolved. 
3 
Across all four activity areas-government fiscal, financial, legal and privatization￾progress has been constrained by a shortage of personnel with appropriate foundation 
educations. This has impaired efforts to provide training in specialized fields, as well as 
to move Kosovars into positions of executive management. The severity of this 
constraint may not have been fully evident or fully appreciated during program design. 
The complexity of the politics of economic reconstruction has occasionally constrained 
progress. In some cases, the jurisdictional complexity has been a severe obstacle to 
implementation (especially in privatization, for example). In others it has merely resulted 
in a significantly greater lag between the identification of a needed action and its 
implementation. With the deep involvement of USAID, UNMIK, EU and the PISG as 
well as others in the identification, approval and implementation of appropriate actions, 
delays may be unavoidable. As economic reconstruction and political development 
proceed it is to be expected, and hoped, that fewer decision making points will be 
required. 
A final significant constraint is the historical and cultural reality of Kosovo. There is not 
a tradition of free market economic practices, rules and procedures. Many of the 
strictures of a market economy may seem counter-intuitive and puzzling. Nor has 
education in free market economics been available. Thus while Kosovars can be trained 
to follow procedural manuals and perform routine institutional tasks, they do not fully 
appreciate the reasons for them, or the array of “off-manual” actions required in non￾routine situations. 
CONCLUSIONS 
Program Strengths 
The greatest overall strength of the program has been its design. It not only conforms to 
the requirements of a market-directed, transparent and stable economy, but within that 
paradigm was tailored appropriately to the specific situation of Kosovo. However the 
speed with which the resources were mobilized and the program was put in place, set an 
exceptionally high standard. Next in the order of strengths was that the program’s 
emphasis was primarily on establishing the environment for private economic activity 
rather than on trying to out-guess the markets. Finally, the four TO’s used to drive the 
program followed a logical and practical sequence, and were meticulously crafted. 
Program Weaknesses 
The principal weakness of the program has been its limited success to date in preparing 
Kosovars to take over the highest levels of management and the highly specialized 
professional-technical functions such as economic analysis. It has also been less 
successful than would be desired in informing and educating the public and government 
officialdom on the fundamentals of market-driven economic systems, to the extent that 
Kosovars appropriate confidence in and commitment to that kind of economic system. In 
the realm of taxation and public expenditures, in particular, it is to be anticipated that 
4 
after the departure of expatriate experts, intense special-interest lobbying will take place 
and will have the potential to corrupt the impressive market-friendly environment that 
USAID has been helping to create. 
COORDINATION 
Coordination among the donor agencies in which technical expertise primarily resides 
has been as good as a long-time foreign assistance observer can imagine. The IMF and 
the World Bank in particular have recognized the timeliness and appropriateness of the 
USAID program. While occasional disagreements among economic experts on particular 
routes to specific objectives is a certainty, there appears to be broad and deep agreement 
on the objectives and mutual respect for approach. 
Coordination among the various public institutions being developed under the USAID 
program has also been excellent, particularly between the BPK and MOFE, where 
coordination is particularly important. 
Coordination among the key political entities is more difficult if for no other reason, 
because of their sheer numbers. This appears to have been a serious obstacle to 
significant progress in privatization, even though the procedures and other elements of 
“literature” are largely in place. For the next stage of USAID assistance, it would be 
desirable for its program activities to be subject to fewer decision points. 
 
RECOMMENDATIONS 
The full evaluation report identifies priorities for future assistance in each specific area. 
The following is a brief overview of the most important recommendations detailed in the 
report. 
1. Banking and Finance. Most of the remaining work is in Bank Supervision and 
Regulation, although a major, formal training effort is required. TA should 
continue for one year, with emphasis placed on preparing to turn all operations 
over to Kosovars. 
2. Fiscal Reform. This effort has been exceptionally successful in getting the 
MOFE up, running and efficient. Nevertheless, it too is unready for operation by 
Kosovars. A final year of TA should address that problem, and develop a plan 
for dealing with issues raised in the evaluation report especially project 
evaluation in the budget function. 
3. Pensions. The pension work has been highly, and quickly, successful. It is 
important not only as a potential vehicle for mobilization of savings, but for 
providing a much needed element of economic security for Kosovars. It should 
be seen through the next year of its development. 
4. Commercial Law. The basic framework is in place. The EAU is involved and 
might be expected to produce replacement technical assistance, as required. 
5 
5. Privatization. This area could be considered a higher priority if logjams could be 
removed to allow it to proceed. If this happens it should be solidly supported. 
6. Insurance. Some great successes have been realized. One technically expert 
observer considers it the most astounding success of the program, both because of 
its substantive significance and the fact that it was put in place without an 
internationally accepted template. Nevertheless, it is not clear that significant 
further USAID funding is required, and the industry itself should be considered a 
potential source of funding for deepening the sector’s development. 
7. Public Utilities. It appears that a decision has been made, or is about to be made, 
for USAID to remove activity in this sector from the current USAID program. 
That seems appropriate, with two caveats: (1) the Telephony sector is a good 
candidate for privatization and USAID might wish to support that; (2) although 
the power sector is not currently viable, it is such a huge economic sector that, 
should the opportunity arise for USAID to stimulate or undertake planning for a 
rational program of revitalization, it could be a worthwhile effort at modest cost. 
 
 
6 
MACROECONOMIC OVERVIEW
A massive international effort to rebuild the economy of Kosovo began almost 
immediately following the cessation of hostilities in 1999. The situation at that time was 
stark. Destruction of physical productive capacity during the war capped two decades of 
neglect and decay due to underinvestment and mismanagement under the previous 
political regime. The human capital base reportedly had also been depreciated by the 
systematic discrimination against Albanian Kosovars--- in terms of access to formal 
secondary and tertiary education and highly-skilled technical training, and advancement 
to supervisory, management and executive positions, especially in the 1990’s. 
In addition to reduced productive capacity of facilities and of people, Kosovo was left at 
the end of the hostilities with virtually none of the institutions, laws and regulatory 
systems required for an efficiently functioning economy. 
Thus the initial challenge faced by USAID was not the traditional one of reforming and 
reshaping existing economic structures to enable them to perform more effectively. 
Rather it was to assist in the creation and initial operation of the legal and institutional 
structures that are at the core of an economic system. After that first step, the next was to 
begin making the legal and policy institutions user-friendly to the Kosovars who will 
ultimately have to oversee and operate them. This foundation was recognized as 
indispensable to the creation of an attractive and hospitable environment for private 
investment. It is investment alone that ultimately can ignite in Kosovo an economic 
surge onto a sustainable trajectory of economic efficiency, security and equity. 
Under the authority of Resolution 1244 of the U.N. Security Council, the United Nations 
had the lead in the reconstruction of Kosovo. As Kosovo is a part of Europe it was 
deemed appropriate to have the EU take the lead in the economic dimension of 
reconstruction. This required legal and institutional structures that would be compatible 
with the mostly market-directed EU economies. This orientation has informed 
subsequent designs of assistance programs of USAID and of other bilateral and multi￾lateral donors. 
We turn now to a brief review of Kosovo’s economic performance and prospects. The 
focus of the section is on the principal economic magnitudes that the program seeks to 
influence as well as some of the key obstacles to achieving strong and sustainable 
growth. 
Recent Economic Performance and Prospects 
In the first two years following the 1999 hostilities, the economic life of Kosovo took a 
sharp upward turn. Gross disposable national income is estimated to have reached DM 
5.4 billion in 2000 and to have jumped another 20 percent to 6.5 billion in 200l. Real 
GDP growth reached an estimated 11 percent in 2001 and 7 percent in 2002. Per capita 
GDP is now estimated to be in the neighborhood of 850 Euros (US $1,000.) Investment 
7 
outlays played a major role in this as reconstruction spending pushed investment to an 
extraordinary 54 percent of GDP in 2000 and 44 percent in 2001. 
Employment data are very scarce and are imprecise. Nevertheless, there is little doubt 
that the burst of economic activity has created a significant number of jobs. Even so, 
estimates of unemployment continue to range between one-third and one-half or more of 
those seeking work. Moreover, of those who are employed over one-third are employed 
by the government. Since the government is still the beneficiary of substantial foreign 
assistance for reconstruction, and since such assistance is presumably transitory, 
employment may be transitorily inflated. (Offsetting this however, is the fact that much 
of Kosovo’s economic activity occurs in the informal market, a factor which could make 
unemployment appear more severe than it is.) 
Given the large proportion of the post-conflict economic surge that reflects reconstruction 
outlays financed largely by transfers from abroad the external sector is of extraordinary 
importance to recent economic performance. The significance of the inflows is 
underlined by spending estimates for all three of the principal domestic spending groups--
-households (consumption), businesses (investment) and government (both consumption 
and investment.) Consumption spending in 2001 was 20 percent greater than the total 
value of domestic production (GDP); imports alone were 75 percent of GDP and 
investment was over half the value of GDP. Government investment and consumption 
expenditures in the same year were 39 and 18 percent of GDP respectively. Clearly, 
domestic saving made no significant contribution to the financing of investment, and 
consumption spending was far above a long-term sustainable level in the current state of 
the domestic economy. 
Along with the good news of elevated consumption levels (they do reflect increased 
welfare, at least temporarily) the GDP estimates show that the domestic economy alone 
cannot sustain recent income and growth performance. Foreign transfers have been 
necessary to fund investment in both the private and public sectors. The need to attract 
foreign savings will continue for the foreseeable future, as domestic savings cannot 
plausibly be expected to meet investment requirements. 
In medium-term projections for Kosovo an IMF-World Bank team has estimated 
financing requirements for 2003-2005. This scenario is for annual real GDP growth of 
4.5-5.5 percent. These estimates assume continued consumption in excess of GDP, 
investment ranging from one-third of GDP in 2003 to about one-fourth in 2004 and 2005 
and large though declining foreign transfers as foreign assistance drifts downward. The 
required investment for the full three-year period is almost 2 billion euros, of which 
something close to one third (in the neighborhood of 600-700 million euros) will need to 
be private. A significant share of this latter amount will have to represent increased 
interest on the part of domestic and foreign private investors in investing in Kosovo. 
Clearly, whether the outcomes can be realized, and whether good performance becomes 
self-sustaining will depend crucially on the success of the economic program in attracting 
domestic and foreign private savings and investment. Staying the course with respect to 
8 
market-friendly policy and administration is essential. Private investors are not afraid of 
risk when it is calculable. However they generally abhor the random and capricious 
surprises that are typical of policy and institutional environments that are ill-defined, that 
lack transparency and that are seen as lacking in integrity and efficiency. The 4.5 to 5.5 
percent growth scenario is viable only to the extent that those conditions are effectively 
addressed by the Economic Reconstruction Program. Thus continued implementation of 
the program of legal, institutional and policy refinement supported by USAID is 
probably a necessary (though not sufficient) condition for achieving that outcome. The 
broad outlines of the requirements are set forth below. 
Fiscal Reform 
In the development of a robust, market-driven and self-sustaining economy the public 
sector will have to play a major role. Restoration of public infrastructure such as roads, 
provision of a social safety net and public safety and ongoing operation of the policy, 
legal, regulatory and judicial framework are all essential ingredients of a market-driven 
economic environment. In fulfilling its functions, the public sector undertakes a 
significant share of the investment that is required to propel economic activity. Thus the 
public sector must have the ability efficiently to plan, execute and monitor the 
expenditures associated with the provision of public goods and services. It must also be 
able to raise the revenue to pay for these activities primarily through an efficient tax 
system with minimal disincentive effects on aggregate production and distortions to the 
structure of production. And, perhaps most importantly, it must be seen to operate both 
the expenditure and revenue sides with integrity and fairness in order to win substantially 
voluntary compliance of the public with the “rules of the game.” These are the objectives 
of USAID assistance in the fiscal sector. 
Banking and Financial Markets 
Banks are the core institutions of the financial system of Kosovo. As in any economy, 
they have the potential to fill three key roles: providing a fast, reliable and efficient 
payments mechanism, attracting savings and intermediating in financial markets to 
achieve efficient resource allocation. To actually produce these potential boosts to 
efficiency, banks must earn the highest possible degree of confidence of the key 
economic agents, including the household, business, financial and foreign sectors. 
Failing that, depositors will not supply funds, borrowers will not trust banks and 
transactors will find other, less efficient, means of settling accounts. Integrity, 
transparency, efficiency and open competition are the keys to a sound banking system, 
and they are promoted by effective supervision and regulation by the public sector of 
entry into and performance of banking. Kosovo’s financial sector at present consists 
primarily of banks, micro enterprise finance companies, a newly established insurance 
industry and a fledgling pension system. Under the four TO's of the Economic 
Reconstruction project, each of these components has been led by USAID technical 
assistance. 
9 
While only banks provide the economy-wide payments system, the others are potentially 
important agents of financial intermediation. As income grows and domestic savings 
follow, the effectiveness and soundness of the financial institutions will play a 
determining role in the attractiveness of the domestic economy as a destination for both 
domestic and foreign private investment. The objectives set out in the USAID strategy for 
banking and finance are to promote the development of the financial sector’s ability to 
play this facilitating role for economic growth and development. 
Commercial Law and Property Rights 
A market-directed economy can only produce its potential for efficiency and high 
performance if there exists a clear set of laws that set forth the “rules of the game” and 
that establish and define transparent property rights. Transactions of all kinds are 
discouraged if the things or rights conveyed can not be clearly defined and described and 
the agreements enforced. Moreover, markets are made efficient not only by the fact that 
they are private, but by free and open competition among their participants on both the 
buying and selling sides. Among the most important particular laws required in this 
domain are laws dealing with: contracts; companies; foreign investment; customs and 
excise; foreign exchange transactions; collateral; banking; protection of competition; 
registration of property and cadastre. USAID assistance to Kosovo has included each of 
the foregoing as important components. 
Privatization and Enterprise Governance and Management 
Kosovo still has almost 400 enterprises that are wholly or principally owned by the public 
sector. These are divided into two categories, “socially owned enterprises (SOE’s)” and 
“publicly owned enterprises (POEs.)” It is primarily the former that are the subject of the 
privatization program. The latter include some entities, such as the electric utility 
company, that might be classified as “natural monopolies.” If not deemed suitable for 
sale to private owners, these entities must be carefully administered and held accountable 
to the public. 
A particularly important reason for privatizing state-owned enterprises is that they draw 
the attention and the scarce resources of the public sector away from the essential task of 
providing social goods and services. Many of the enterprises represent dormant 
resources that could be put to work doing the essential work of a public sector in a 
market-directed economic system. Their sale to the private sector could also offer some 
level of domestic outlets for investment, and could contribute to the revitalization of 
production and employment. Nevertheless it is important that the privatization or other 
form of commercialization of enterprises owned by the public sector be undertaken in a 
manner that is transparent and that benefits the community as a whole, and not just 
special interest groups. This objective is embraced in the USAID economic assistance 
program. While slow getting under way, and fraught with political as well as legal and 
economic obstacles, the privatization program has made some strong advances, and has 
had some setbacks in the past year. 
10 
The ultimate test of the success of the activities that are the subject of this evaluation, will 
be the economic outcomes that are achieved. Can Kosovo get onto a trajectory to 4.5 to 
5.5 percent growth in the medium-term? It is possible, and indeed plausible as concluded 
earlier in this section. However there are some potential stumbling blocks, and these are 
identified in the body of this evaluation report. It is to the specific evaluation of the four 
intermediate results addressed in this evaluation that we turn next. 
 
SCOPE OF THE EVALUATION 
This evaluation covers the work under Task Order (TO) PCE-I-807-00-00014-00, and the 
three that preceded it, dating back to 1999. All four address the broad objective of 
creating a legal and institutional foundation for an economic system that is compatible 
with EU-style market-directed economies. On such a foundation private markets are 
expected to produce self-sustaining economic growth to move Kosovars steadily closer to 
the realization of their own economic objectives. 
The current TO and its predecessors are wholly compatible with Strategic Objective (SO) 
1.3 in the Mission’s 2001-2003 Strategy Statement, “Establishment of an Economic 
Policy and Institutional Framework.” Under the current TO (the logical successor to the 
previous three) the categories of work to be performed by the contractors correspond to 
the first four of five IR’s under SO1.3: A Sound Fiscal Policy and Administration Regime 
Developed; A Competitive and Well Regulated Financial Sector; A Commercial Law 
Regime Which Effectively Establishes and Protects Property, Contract and Investor 
Rights; and Privatization of State and Socially Owned Enterprises. 
The Task Orders provide guidance to the contractor by identifying specific tasks and 
benchmarks to track implementation. Nevertheless, the Task Orders explicitly recognize 
that the exceptional economic, social, political and bureaucratic circumstances in Kosovo 
can alter the relevance of any particular guidance from one day to the next. Accordingly 
departures from the benchmarks can represent appropriate responses to the changing 
environment. The evaluation team has found that USAID maintains a constructive 
ongoing dialogue with other key elements of the Kosovo reconstruction effort and that 
program benchmarks are adjusted, dropped or added to as circumstances demand. 
We have adopted a correspondingly flexible interpretation of the task and benchmark 
guidance, in consultation with USAID. In sections of the evaluation focused on 
compliance with specific guidance, we have found it useful in this context to group the 
task and benchmark guidance under the following four categories: 
 Promulgation or Implementation of Legislation, Regulations or Policies 
 Institutional Development, Reinforcement or Strengthening 
 Specific Implementation Actions and/or Quantitative Output Targets 
 Public Information and Education 
11 
FISCAL REFORM
Fiscal Reform is concerned with the first Intermediate Result under SO 1.3: “a sound 
fiscal policy and administrative regime developed.” It focuses on the Ministry of Finance 
and Economy (MOFE) and covers nine areas: direct support to the Minister and 
Permanent Secretary; macroeconomic analysis and revenue forecasting; tax policy; tax 
administration, including the property tax; budgeting; intergovernmental fiscal relations, 
including fiscal decentralization and municipal budget preparation; treasury; internal 
audit; and procurement. Direct support to the Minister and Permanent Secretary is 
addressed in the Recommendations Section. 
FINDINGS 
Progress 
Basic Findings on Progress
The objectives of the first three TO’s, as adjusted, were substantially achieved. Most of 
the original benchmarks (29 of 40) for TO 4 will have been met by March 2004. These 
current benchmarks are cumulative in their effects and are intended to be among the last 
steps in key sub-units of the MOFE, which has been a primary focus of all four Task 
Orders issued under this project. Broadly speaking, the current effort has made very 
significant progress. On the other hand, all benchmarks will be complete in only three of 
eight areas; tax policy, intergovernmental fiscal relations, and internal audit. 
Promulgation or Implementation of Legislation, Regulations or Policies. The initial 
legal framework for the revenue structure is in place and, in fact, is in the process of 
being up-graded (e.g. the wage tax would be replaced by a comprehensive income tax 
under legislation proposed by the Ministry of Finance and Economy.) Tax administration 
and procurement are operating under UNMIK regulations and instructions; but legislation 
is currently being drafted for tax administration, and The Law on Public Procurement in 
Kosovo is in the final stages of approval. The property tax seems not yet to have a 
satisfactory legal base: two Administrative Instructions are still to be issued. The Law on 
Public Financial Management and Accountability provides the legal basis for the 
remaining areas. Thus it appears that, by March 2004, a comprehensive and satisfactory 
legal basis will be in place for all areas except, perhaps, the property tax. 
Institutional Development, Reinforcement or Strengthening. Institutional development 
has advanced impressively, although the process will have been completed (as defined by 
the benchmarks) only in internal auditing and tax administration. In all other areas, at 
least one important element will be missing: (e.g. good data in macroeconomic analysis; 
a capable unit director in tax policy; a tested enforcement mechanism and a computerized 
information system in property tax; project evaluation capability in budget; an 
12 
organizational structure in intergovernmental fiscal relations; and a complete 
computerized accounting system in treasury and, for the future, a debt management unit.) 
Absence of these elements means that performance of the institutions could easily fall 
below standard following departure of expatriate experts. 
The Municipal Budget Unit could be considered complete, but it imperfectly meets the 
needs for intergovernmental fiscal relations. In procurement, institutional development 
consistent with the new law has not begun, a significant shortcoming in terms of assuring 
procurement integrity. Moreover, the European Union has assumed responsibility for 
this work. Since the law has been drafted, the essential benchmark has been completed, 
and USAID work is complete. Finally, a public enterprise monitoring unit was to have 
been established in MOFE; but MOFE has determined that, until responsibility for public 
enterprises is transferred to the PISG, it would be inappropriate for MOFE to establish a 
monitoring unit. Therefore, no institution exists. 
Specific Implementation Actions and/or Quantitative Output Targets. This area relates 
to the operation of developed institutions. The basic fact is that institutions are operating 
in each of the eight areas listed. Kosovo does have a functioning government. This is a 
huge accomplishment. However, as identified above, except in internal audit and tax 
administration, institutional development is not complete. In tax administration, operating 
weaknesses remain in tax auditing and appeals and will not meet the performance 
benchmarks. Internal auditing on the other hand is out-performing quantitative targets. 
Therefore, while operations are under way in the fiscal institutions, and have made 
extraordinary progress in only four years, only internal auditing is operating at the level 
of a mature and efficient institution. 
USAID’s strategy papers contemplate development of economic policy institutions that 
are not only fully developed in the law, in regulations and in procedural and operational 
standards, but that also can be managed, administered and operated from top to bottom by 
Kosovars. In the fiscal institutions, this degree of development has not been attained 
except in the internal audit function. Although the current benchmarks will be achieved in 
tax policy and intergovernmental fiscal relations, these areas appear to require the 
continued presence of expatriate heads to operate satisfactorily. All other areas have 
incomplete benchmarks. These conclusions are partially based on interviews with the 
Kosovar heads of all units. (For a fuller discussion of this point, see International Crisis 
Group Report, Two to Tango, pages 23 and 24.) 
Public Information and Education. MOFE does have a Public Information Office, and 
the benchmarks do call for a comprehensive public education program for both 
expenditure and revenue components of Fiscal Reform. Nevertheless, the Office is 
providing only intermittent support to the Fiscal Reform components and on an ad hoc 
basis. It did, for example, launch a public campaign when the payroll tax rates were 
changed. Thus, the benchmark is only partially achieved. Fiscal Reform could benefit 
from a stronger, deliberate campaign to inform and educate the public, and to win the 
confidence and support of the public. Simply publicizing specific events is not sufficient. 
13 
Other Findings on Progress. 
The Strategic Objective-“Establishment of an Economic Policy and Institutional 
Framework”- Will have been substantially achieved by March 2004. Nevertheless, the 
Process of Making These Institutions Fully Operational, without Expatriate Expertise, 
is Incomplete. The Intermediate Result for the period ending March 2004-“A Sound 
Fiscal Policy and Administration Regime Developed”-is to “develop” institutions. The 
corresponding Intermediate Result in the draft Strategic Plan for 2004-2008 is to “fully 
develop and institutionalize” the budget and tax systems. This might be expressed as 
assisting the relevant institutions to achieve maturity—a process that depends on 
operational experience, and hence one that cannot be rushed. (See Strategy for Kosovo 
2001-2003, page 14 and Strategic Plan 2004-2008, page 22.) 
In a formal textbook sense, a minimum of one and a maximum of three of a possible 
eight institutions will be completely “developed” by March 2004. Therefore, formally, 
the Intermediate Result might be considered to have been missed. However considering 
that the IR is a step toward the Strategic Objective, the degree of success over the past 
four years surely merits high praise and justifies the continuation of support needed to 
preserve the gains made to date. 
To Date, the Overall Economic Impact of Fiscal Reform on Output and Growth Is Not 
Quantifiable but Is Almost Certainly Positive. USAID has been the primary international 
organization supporting fiscal reform. Substantial progress has been made in creating 
fiscal institutions. Therefore, the USAID program has had a major impact upon creating 
these fiscal institutions. 
The significance of this development to economic output, employment and growth is that 
potential investors are deeply interested in the implications of taxes for the viability of 
potential investments. In addition, a fiscal reform program should be designed to: (1) 
foster a secure and predictable environment; (2) produce a tax structure that minimizes 
obstructions to private sector economic activity; and (3) fund public infrastructure that 
supports economic development. The implemented program does all three: (1) the new 
fiscal institutions add a degree of security and predictability that did not exist in 1999; (2) 
the tax structure uses relatively low rates and taxes that minimize distortion of economic 
activity, particularly the VAT, and generally are levied on those who can pay; and (3) the 
integrated budget includes a Public Investment Program that funds infrastructure projects 
that support economic development. Finally, it is hard to imagine circumstances under 
which efficiency and integrity of fiscal institutions would not have a positive overall 
economic impact. 
Constraints 
14 
A Major Constraint upon Accomplishment in The 2004-2008 Period May Be the 
Educational Backgrounds of the Existing Generation of Analysts. A comparison of 
areas where institutionalization has progressed with areas in which institutionalization 
has not progressed, suggests the following. 
• For jobs that are procedural and managerial in nature, it may be possible to train 
employed local staff satisfactorily. Local staff for operations and/or managerial 
positions seem to be progressing well in the Internal Audit, Tax Administration, 
Property Tax, and Treasury Units. 
• For jobs that are deeply analytical in nature, satisfactory training of existing 
employees may not be possible. After four years there are no local employees that 
are satisfactorily trained for the senior analytical positions in the Macroeconomic, 
Budget, Tax Policy, or Intergovernmental Fiscal Relations Units, and there are no 
local employees who are professionally prepared to lead these operations. 
In planning for the 2004-2008 period, USAID should consider the difficulty of staffing 
policy units with adequately prepared local staff, and should recognize that on-the-job 
training may not be an adequate vehicle for resolving this problem. The low 
compensation package is part of the problem, but long-term training (preferably in￾country) is essential as well. 
CONCLUSIONS 
This section identifies strategic issues in the USAID program with the intention of 
offering considerations for planning the next phase of technical assistance. It focuses 
primarily on problems, as those are the areas in which corrections can be most 
productive. However, the problems do not in our view overshadow the high level of 
accomplishments. Our overall judgment remains that much has been accomplished, just 
not everything in an ambitious program.
Program Strengths 
The Content of the USAID Program for Fiscal Reform Was Appropriate and Adapted 
to the Circumstances. The USAID program of fiscal reform was designed with care and 
precision. The program’s appropriateness is underlined by the high regard expressed for 
it by the IMF, the World Bank and other informed observers. 
 
The program implemented by USAID is characterized by simplicity of administration. 
The taxes are relatively flat, and the expenditure planning and management process, at 
least in design, imposes a discipline on Ministries that requires them to strive for cost 
control. 
The Greatest Accomplishments in Achieving Benchmarks Appear to Be in Local 
Implementation of a Property Tax and in Central Tax Administration. The local 
property tax has been introduced into Kosovo. To date 27 of 30 municipalities have been 
certified as having financial systems strong enough to implement and operate a property 
15 
tax. Implementation is in its second year and fourteen municipalities are already 
collecting revenue. (The collection rate is low, only 11 of tax due after eight months.) 
Given the length of time that it usually takes to implement a property tax in developing 
countries, the progress in Kosovo is impressive. 
Central tax administration is also an area of success. Eight of eleven final benchmarks 
will be completed by March 2004. It seems highly probable that the remaining three 
benchmarks would be achieved in the near or medium-term future. 
Program Weaknesses 
The Most Widely Internationally Accepted Institutional Development Procedure Has 
Not Been Followed Faithfully. This procedure contains five steps.: (1) create the 
institution using expatriate personnel; (2) operate the institution initially using expatriate 
personnel; (3) prepare local personnel to manage and operate the institution; (4) turn 
management and operation of the institution over to local personnel and place expatriate 
personnel in coaching roles; and (5) support local managers and operators with short-term 
assistance, as required.
This model was not used in Kosovo. The exigency of starting from nothing pressured 
implementers to combine the first three steps and to execute all simultaneously. In doing 
so, they have discovered that they did not have sufficient resources to do an equally good 
job on all three steps. Faced with a choice, they have consistently (and necessarily, in our 
view) given priority to creating and operating a rudimentary institution and producing 
outputs. It is less clear that attempting to add the fourth (in some cases) was wise. 
For planning purposes, it would not be unusual to assign a year to each of the first four 
steps. This timing would correspond reasonably well to the tenure of USAID technical 
assistance in Kosovo. Nevertheless, the situation in Kosovo was unique, and so would 
not have offered a perfect fit with the usual accepted sequence of institutionalization 
steps. That all desired results might not be achieved by the end of the strategic period 
seems acceptable, given the challenges of the environment. 
USAID Underestimated Two Factors that Should Be Considered in Planning the Next 
Increment of Technical Assistance. 
1) The requirements of institutional development were underestimated. For an institution 
to be created and then to operate effectively, eight items are required: policies;
organization structure; staffing; budget; facilities, equipment, and supplies; data; 
systems and procedures; and technical assistance. If any of these items is not 
adequately provided, the institution will be defective. 
It was not necessary for USAID to provide all of these items in every area. PSIG or 
other donors could provide many of them. But, for effective institutions to be 
planned, created, and operated, explicit consideration and provision of them is 
16 
necessary. It appears that explicit consideration and provision of each item in each 
area has not been consistent during implementation. Examples of deficiencies are data 
for the Macroeconomic Unit, staffing (leadership) for the Tax Policy Unit, training 
for the Budget Unit, and organization for the intergovernmental fiscal relations area. 
In planning the next phase of technical assistance, USAID should adopt a 
methodology that will ensure explicit and continuing consideration and provision of 
each of the eight items. 
2) The eventual complexity of the governing environment was not anticipated. The 
difficulties of working in an environment composed of UNMIK, PISG, and the 
Economic and Fiscal Council are well known now, but were not anticipated when the 
USAID program was planned. In planning for the 2004-2008 phase, USAID should 
recognize the time-cost of this coordination in estimating time required for specific 
results. 
The Greatest Failures in Achieving Benchmarks Appear to Be in the Priority Areas of 
Macroeconomic Planning and Management and Public Investment Planning. Two 
areas of high priority for USAID have been creation of a sound fiscal policy framework 
and management system, and development of sound public investment planning 
capability and systems. Yet, important benchmarks for these two have not been fully 
implemented, and key institutional elements will still be missing by March 2004. For 
macroeconomic analysis, timely and accurate data, absolutely critical to the successful 
operation, are not available. In addition qualified economic analysts and forecasters are 
not included on the local staff. For investment planning, cost/benefit training will not 
begin until February 2004. The training for Central Budget staff will consist of only one 
day and for municipal budget staff one-half day in four locations. Such training is not 
sufficient. Without cost/benefit analysis or other forms of formal project evaluation (e.g. 
analysis of internal rates of return) the Ministry has no rigorous way of discriminating 
among competing investment projects. Consequently, this element of the minimum 
program has not been implemented. 
Coordination of Assistance 
Strong Coordination Among Fiscal Experts in the Donor Community has 
Characterized this Work. Key international development institutions and officials in 
Kosovo, including International Monetary Fund (IMF) and World Bank representatives, 
report unusually good coordination of the fiscal reform program. Nevertheless, there 
have been some implementation problems and delays related to disputes between PISG 
and UNMIK over the locus of decision making authority. Whether this reflects deficient 
coordination or simply political/bureaucratic jurisdictional quarreling is not clear.
Issues and Sustainability 
Given that Institutionalization Is Incomplete, Several Opportunities Exist for 
Continuing Technical Assistance. Technical assistance could continue to support the 
institutionalization effort in the following areas: 
17 
• Macroeconomic Unit. Ensure that data needed for macroeconomic analysis and 
projections are available. This should be relatively inexpensive for USAID since 
it is likely that another agency would finance the technical assistance needed to 
provide the data. This is a sine qua non of useable macroeconomic analysis. 
• Central and Municipal Budget Offices. Implement formal project evaluation 
training for budget staff. It may be necessary to upgrade the preparation activity 
from training to education.
• Treasury Unit. Continue technical assistance to complete implementation of the 
Free Balance system, fiscal reporting, a debt management unit, and a training 
program to support all of the foregoing. 
• Tax Administration Unit. Continue technical assistance to complete 
implementation of the auditing and appeals procedures and the training program 
to support them. 
• Property Tax Unit. Continue technical assistance to strengthen the enforcement 
mechanism. 
• Intergovernmental fiscal relations area. Continued technical assistance to create a 
unit capable of dealing with issues related to the assignment of revenue and 
expenditure responsibilities and development of formulae. 
Opportunities Exist For Further Strengthening of the Ministry of Finance and 
Economy. In the course of interviews, two additional opportunities that go beyond the 
planned USAID program were identified. 
• A unit for strategic management issues. Every government has issues that cut 
across the many and various ministries. Civil service reform and reform of the 
civil service pay scale are examples. The PSIG/MOFE does not have a unit that 
deals with such issues but would benefit from having one. Such a unit could be 
located appropriately in either the Prime Minister’ Office or in the MOFE. 
• Training for the MOFE Public Information Office. The unit already supports the 
outputs of the Ministry, but seems to do so on an ad hoc basis. The unit does not 
appear to be routinely notified of pending Ministry outputs in advance so that a 
strategic program aimed at developing public understanding can be developed. It 
would seem that an active and strategic program of public information could bring 
great benefits to the fiscal reform effort. USAID could consider funding a training 
program for the staff of the MOFE public information staff. 
It Is Likely that Kosovar Financial Executives and Legislators Have an Incomplete 
Understanding of Their Tax Structure. The complexity of tax decision-making in any 
jurisdiction and the absence of what appears to be in-depth participation of local officials 
in tax decision-making in Kosovo, suggests that the tax structure has been approved with 
little understanding on the part of the people to whom it applies. In preparing for the next 
round of technical assistance, USAID should address the risk of corruptions of the tax 
structure that would undermine efficiency and/or equity objectives.
Lesson Learned: the Minister of Finance And Economy Will Draw Assigned Advisors 
into Political Disputes with UNMIK and SRSG. To the extent that such disputes are 
18 
based on interpretations of fiscal/economic realities, this may be a productive use of 
advisors. Nevertheless, USAID should seek to satisfy itself that technical expert advisors 
are used exclusively in areas of their technical expertise. 
The Accomplishments in Internal Auditing Are Sustainable. Only the Internal Audit 
Unit is fully developed. Thus it appears that its state of development is fully sustainable. 
Nevertheless, it is our judgment that even the partial development of each of the fiscal 
system units can be sustained, but only if indispensable additional technical assistance is 
forthcoming. (For additional discussion of the preparedness of local staffs to assume the 
full burden of administration, see pages 23 and 24 of the International Crisis Group 
report: Two to Tango.) 
RECOMMENDATIONS 
1. Graduate Internal Auditing. The Internal Audit Unit can execute financial and 
compliance audits without continuing expatriate involvement. These audits provide 
assurance that policies and finances are being appropriately controlled. Therefore, by 
the end of March 2004, discontinue technical assistance. 
2. Schedule Four MOFE Units for Completion of Institutionalization by Continuing 
Technical Assistance for up to One Year. The four are:
• The Budget Office; 
• The Treasury; 
• The Tax Administration Unit; and 
• The Property Tax Unit. 
2.1 Retain Consultants as Coaches to Kosovar Managers for at least One Year.
Responsibility for running the four above institutions should be turned completely over to 
Kosovar managers at the beginning of April 2004. Resident USAID expatriate 
counterpart advisors/coaches to these managers should continue in place for at least one 
year. Short-term advisors, if any, could suffice thereafter. 
In the Budget Office, no advisor should be retained for municipal budgeting exclusively. 
One advisor to the local head of the central Budget Office should be sufficient. If 
municipal budgeting should need coaching, the advisor to the head of the central Budget 
office should be able to fill the need. 
2.2 Require Each Kosovar Manager to Prepare an Institutional Development Plan, 
with Coaching from His or Her Advisors. When each manager assumes 
responsibility for his/her institution, he or she might be required to prepare a plan for 
developing his/her institution that ensures provision of each of the eight elements of 
institutional development. The counterpart coach of each local manager would coach 
on the preparation of the plans. The time schedule for executing the plans should 
permit unit operations and institutional development to proceed simultaneously. 
19 
2.3 Establish an Institutional Development Unit within the Ministry to Consolidate, 
Coordinate, and Manage Implementation of the Plans. A unit should be established 
to plan and supervise the continuing institutional development of the MOFE. As an 
institution, MOFE is not yet fully developed. In the first year, this unit should collect 
the institutional development plans from the four units scheduled for 
institutionalization (and the three policy units), and any other MOFE unit that 
develops one, and consolidate them into a Ministry-wide development plan. In 
following years, the unit should provide guidance to MOFE units to prepare plans and 
submit them to the unit for consolidation. The unit should supervise execution of the 
plans. 
2.4 If These Plans Are to Be Funded, Rely upon Kosovar Money. The Consolidated 
Budget has accumulated a sizeable surplus. That money is available to fund 
development projects (but not recurring costs that result from development projects). 
Aside from expatriate coaches, the costs of MOFE institutional development should 
be funded from this surplus. The MOFE institutional development unit should ensure 
that money to fund the approved institutional development plans is included in the 
Consolidated Budget. 
2.5 Let USAID Provide Short-Term Assistance, as Required. During the coaching 
period and perhaps through the 2004-2008 period, MOFE may require short-term 
technical assistance. This should be determined by each local manager in preparing 
his/her institutional development plan. To the extent that such assistance is required, 
continuity would suggest that it be provided through USAID. If USAID could require 
reimbursement from MOFE, it could discourage excessive use of this tool. 
2.6 Provide an Advisor to the MOFE Institutional Development Unit, and Continue 
Him/Her for a Second Year. The MOFE Institutional Development Until will require 
assistance to establish itself. An advisor should be assigned to provide that assistance. 
The advisor should spend the first year assisting the local head of the unit to establish 
the institution. S/he should spend a second year coaching the local head in the 
performance of his/her duties. During this second year, s/he should be the only 
advisor assigned to MOFE and should assist throughout the Ministry to the extent that 
s/he has time to do so. After the second year, USAID advisory assistance to MOFE 
should cease, except, perhaps, for the policy units. 
3. Schedule Policy analysis Institutions for Long-Term Development. Development of 
the three policy analysis institutions---Macroeconomic Unit, Tax Policy Unit and 
Intergovernmental Fiscal Relations Unit--- is constrained by the lack of local policy 
analysts. Countering the lack of local policy analysts may not be something that can 
be accomplished in the short-term. USAID should ensure that each of these functions 
is headed by an expatriate advisor, and should advocate combining Macroeconomic 
and Policy Analysis. Currently, there is no expatriate leading Tax Policy or 
Intergovernmental Fiscal Relations.
• Require each expatriate leader to prepare an institutional development plan 
covering each of the eight elements of institutional development identified in 
20 
the Conclusion Section. The time schedules for executing the plans should 
recognize that unit operations and institutional development are proceeding 
simultaneously and that the complexities of the governing environment must 
be accommodated. 
• Make the expatriate heads responsible for execution of the plans. 
• USAID should undertake an effort to identify for recruitment local candidates 
with educational and experience backgrounds that are appropriate for serving 
as policy analysts. The effort could include an intensive advertising campaign 
within Kosovo and the Diaspora. Appropriate steps to provide adequate 
salaries must be included if the approach is to succeed. 
• Support the educational foundation described on page 19 of the draft Strategic 
Plan 2004-2008. 
4. Prepare a Development Plan for Strategic Ministry Management. MOFE as an 
institution does not appear to be fully developed at strategic levels. During the first 
year, the Permanent Secretary, with USAID technical assistance, should prepare a 
development plan that addresses strategic issues. 
• The plan should provide a Ministry decision and control system that specifies 
clearly the different responsibilities of the Minister and Permanent Secretary, 
and the Principal International Officer. 
• The plan should address issues identified by this evaluation. . 
ƒ The new Institutional Development Unit should be accommodated 
ƒ A unit for strategic management issues, as described in the Findings 
Section should be accommodated. 
ƒ A central MOFE unit for applying rigorous cost/benefit analysis to 
investment projects should be considered. Cost/benefit analysts are scarce, 
and Kosovo may not have a large number of projects as donor funding 
declines. Placing the analysts in a central unit rather than in each ministry 
may be a more efficient use of a scarce resource, at least in the early years. 
ƒ A procedure to use the MOFE Public Information Office strategically 
should be considered. USAID could consider providing training for the 
office if such a procedure were to be adopted. 
ƒ Consideration should be given to creating a separate Intergovernmental 
Fiscal Relations unit. 
ƒ Consideration should be given to removing the Municipal Budgeting Unit 
from the central Budget Office, combining it with the Property Tax Unit, 
and creating a unit to monitor municipal finances and to advise on 
improvement to municipal financial offices. 
5. Prepare for Special Interest Attacks on the Tax Structure. Institutionalization will 
protect most reforms. Protection of the tax structure will require special effort. A 
training and education program for legislators (and the Minister) should be 
considered. However, the Assembly is still young, and identifying target legislators 
may be difficult. Including all legislators as targets may be an effective alternative. 
21 
6. Provide a Clear Statement to MOFE and the Advisors on the Role that They Are to 
Play in MOFE Disputes with UNMIK and SRSG. This would help to assure that the 
technical experts focus their efforts sharply in the areas of their technical expertise, 
and make it less difficult for them to resist being deployed on more political missions. 
7. Establish the Following Priorities for Technical Assistance. 
1) Prepare for special interest pressure for preferential tax treatment that would 
represent distortions of the tax structure. Successful attacks can be very 
expensive. The activities to defend against the attacks may not be very 
effective, but their costs are not high. 
2) Schedule the Macroeconomic Unit for long-term development. Success in this 
area could have a significant positive impact on economic development. The 
Tax Policy analysis function should be included as part of this unit, as the 
main expertise required is economic analysis. Policy analysis capability will 
be essential in warding off special interest corruptions of tax structure. 
3) Develop a sound public investment planning and evaluation capability and 
systems. This is one of USAID's highest priorities. It should be addressed in a 
broader context than just short-term cost/benefit training for budget analysts. 
A separate unit may be necessary. 
4) Schedule four MOFE units (Budget, Treasury, Tax Administration, Property 
Tax) for comprehensive institutionalization. All four offer a high probability 
of success and significant benefits if successful. In Treasury, do not provide 
assistance for cash management or debt management. Cash management is 
not an immediate concern, and debt management is usually treated as a 
separate technical assistance activity. Allow other donors to deal with debt 
management. 
5) Schedule Intergovernmental Fiscal Relations (IGFR) for long-term 
development. Acceptable work on intergovernmental fiscal relations has been 
done, so the benefits of success may not be high. Alternatively, IGFR could 
be one specialized focus of the Policy Analysis unit. 
6) Graduate The Ministry of Finance and Economy’s Internal Auditing Unit. This 
would free some USAID resources, and it constitutes a success. 
7) Provide a clear statement to MOFE and the advisors on the role that the 
advisors are to play in MOFE disputes with UNMIK and the SRSG. 
8) Prepare a development plan for strategic MOFE management. A plan is 
needed, but it is not clear that this is a high priority for the Minister. 
22 
BANKING AND FINANCIAL SECTOR DEVELOPMENT
The current (fourth) task order builds on the foundation established in the first three. The 
project as a whole is the subject of this evaluation. The latest TOs objectives might be 
characterized as a continued strengthening of the financial sector’s foundational 
institutions and policies. Had the first three TOs not been executed effectively, the 
actions called for in the current TO would have been different. Our judgment is that the 
first three were effectively implemented, and that those successes made it appropriate in 
the fourth to focus on earning the confidence of the community in the institutions’ 
durability, efficiency and integrity. Without the work of the current TO the 
accomplishments of the first three would be in serious jeopardy. Accordingly, 
considerable emphasis is placed on the current TO. 
FINDINGS 
With respect to the banking sector alone, the charge repeated in the successive TOs is to 
advance toward achievement of the IR primarily (though not exclusively) by deepening 
the institutional development of the Banking Supervision and Licensing Department in 
BPK. Other parts of the financial sector receive attention as well, but the emphasis for 
the past year has been (appropriately) on banking supervision and regulation. (Pension 
and Insurance Companies are the subject of separate sections of this report.) The current 
TO charges specifically: “---the bank supervision unit shall be further professionalized in 
a manner which will facilitate Kosovarization of top management positions of the unit; 
and which will ensure rigorous and transparent oversight of an expanding commercial 
banking system.” 
Progress 
Progress Pursuant to Specific Guidance in the Current TO
Promulgation or Implementation of Legislation, Regulations and Policy. The two 
actions called for in this category were: 
• Implementation of a new anti-money laundering law; and 
• Legal preparation for establishing a market for BPK securities. 
 
The new anti-money laundering law has not been passed. Moreover when it is, its 
implementation and enforcement will be undertaken by the UNMIK’s Pillar I 
organization (police.) This benchmark has therefore been overtaken by events. 
Nevertheless, BPK has issued regulations to the banks advising them of techniques for 
maintaining vigilance, and requiring immediate reporting when certain potential 
laundering situations present themselves. 
The second item in this category was dropped by mutual agreement of BPK and USAID 
on the grounds that it is inappropriate at this stage of the financial system’s development. 
23 
Institutional Development, Reinforcement or Strengthening. Building again on the 
previous TOs the fourth in the series called for outputs as follows: 
• Strengthening the regulatory supervisory capacity of Bank Supervision and 
Licensing Department of BPK 
• Overseeing installation and operation of BPK Accounting System 
• Establishing a market and operational guidelines for BPK securities 
• Further refinement of the interbank payments and clearance system in BPK 
• Institutionalizing a formal training function in BPK 
• Establishing BPK as a lender of last resort 
Four of the six actions in this category relate to various elements of BPK operations, 
including Bank Supervision and Licensing, the BPK Accounting System, Interbank 
Payments and Claims, and Training. The first addressed both routine organization 
matters (e.g. position descriptions, training plans) and the fundamental issue of making 
the unit transferable to full Kosovar management and supervision. The routine matters 
were accomplished, but there is a serious question as to whether the transferability has 
been accomplished. 
In the next three items, institution strengthening actions were called for through 
installation of a new electronic accounting system, quality control of the payments and 
claims system and the institutionalization in BPK of a formal training system. The first 
two of these was accomplished and the third was not, as resources to do so were not 
available. Nevertheless, several potential sources of financial and technical assistance for 
institutionalizing the training function are being explored at present. 
The final two actions were to have prepared the rules, regulations and procedures for 
BPK to serve as a lender of last resort, and to establish the institutional architecture for a 
market in BPK securities. Both activities were dropped as it became evident that they 
were inappropriate at this stage of Kosovo's development or in the medium-term future. 
Specific Implementation Actions or Quantitative Output Targets. 
The two quantitative targets were to perform 12 on-site examinations of banks and 7 on￾site examinations of micro-finance institutions. All but one of the bank examinations has 
taken place. It will be done before years end. Eleven micro-finance institutions have 
been examined so far, thereby surpassing the target. These targets accustom the local 
staff of BPK to a rigorous, timed schedule of examinations and give them the experience 
they need to gain confidence, judgment and effectiveness. 
Public Information and Education. The current Task Order anticipated support for a 
major public information and education thrust by BPK. This suggested a major program 
aimed at bankers, public officials and the general public in the hope that they would gain 
a solid understanding of the changes occurring in the financial sector, and the 
improvements the changes could bring to economic efficiency and to the lives of the 
24 
members of the community. The BPK has hired a Public Information Officer, but no 
sharp and focused campaign has been launched. 
Progress: The Broad View
The foregoing are valid categories into which to classify all of the actions that USAID 
has sponsored in the chain of four TOs supporting the overall economic reconstruction 
program. Thus while the current TO focuses sharply on developing BPK and its sub￾units, it must be remembered that the program virtually created the banking and financial 
sector, institution by institution, law by law, rule by rule, task by task and policy by 
policy. A too-exclusive focus on the tasks and benchmarks of just one TO would obscure 
that most important broader vision. 
The banking and financial sector program has been broadly successful. With two 
apparently sound international banks, five locally-owned banks and fifteen micro-finance 
institutions, all of which have been carefully screened and licensed, there is a developing 
competitiveness. However, the competitiveness of the system cannot be assured by the 
BPK and its policies alone. Anti-monopoly legislation is in process now. When 
promulgated, it will be implemented by the Pillar I (police) administration, not by 
USAID. Moreover as will be argued, too much competition can be as problematic as too 
little. 
An evolving insurance industry and Kosovo pension funds are potential sources of 
longer-term finance for productive domestic investment. However, at this stage of 
Kosovo’s reconstruction there does not appear to be a sizable menu of solid long-term 
productive investment projects seeking financing. Consequently a large proportion of 
financial resources owned in Kosovo are lodged in external accounts. This is inevitable 
in a new economy with significant economic, political and social uncertainty. On the 
positive side, the lodging of savings in safe, liquid international assets will help to rebuild 
confidence in savings instruments and associated institutions. This in turn should support 
the development of a culture of saving that will be indispensable as confidence in the 
longer-term future of Kosovo emerges. A more exhaustive treatment of the progress of 
the Pension and Insurance funds and companies is presented in separate sections of this 
report. 
The banking and micro finance components of the financial sector appear to be “well 
regulated” by the Banking Supervision and Licensing Department of BPK. That unit has 
appropriate and well understood operating procedures, rules and regulations. Its 
examiners and supervisors have received good training in each of the major technical 
skill areas. Local employees now head examination teams conducting on-site 
examinations, as well as the less demanding off-site examinations. All banks and MFI’s 
have been examined at least once in the past year, and all are subject to monthly off-site 
examinations. There have been no bank failures, and by year-end all banks will be 
capitalized at or above the internationally recognized Basel standard. Loan loss 
experience for the system as a whole and for most of its members is at a very low level. 
25 
Thus as of this writing, the system appears to be “well regulated” as well as reasonably 
competitive. 
There are indirect indications as well that the banking system is gaining the confidence of 
the community. For example, it has attracted deposits of almost one-half billion euros. 
About half of these are time deposits, and so far the aggregate deposit level has remained 
quite stable. It is still too early to break out the confetti, but up to this point, this young 
system has progressed along a stable growth path. It is unlikely that there is an example 
in modern history of an infant banking system in a newly emerging economy that has 
progressed more rapidly or more soundly than this one in its first three years of life. This 
is not to say that there is no reason for exceptional vigilance. There is, and the reasons 
need careful attention to be sure that all that has been built up is not jeopardized. 
However there is no obvious failing of the USAID program to which concerns should be 
attributed. The concerns that do exist are discussed below under the “constraints” 
heading. 
Progress: Final Statement
Kosovo has made remarkable progress in just four years, toward the establishment 
of a “competitive and well regulated financial sector,” (Intermediate Result 2 in USAID’s 
2001-2003 Strategy.) This progress is especially noteworthy considering that in 1999 
there was essentially no banking system at all, and there were few people with experience 
in the uses or operation of privately-owned banking or other financial institutions in a 
market-directed economy. 
USAID’s strategy in this sector was right on the mark from the beginning. The initial 
economic restructuring Task Order correctly identified establishment of a basic banking 
system (including both commercial banks and a central bank-like entity to regulate and 
supervise the commercial banks and to anchor the payments mechanism) as the 
appropriate starting point. The three subsequent task orders added micro-finance 
institutions, insurance companies and two “tiers” of the three-tier pension system to the 
array of financial institutions under the supervisory purview of the Kosovo Banking and 
Payments Authority (BPK). 
The importance of the banking and financial sector to broader economic performance 
cannot be exaggerated. It arises from its three principal functions: providing a fast, 
economical and reliable payments mechanism, attracting savings and allocating credit to 
its best uses. None of these can be performed effectively if the system does not enjoy the 
confidence of the economy’s principal agents in the integrity and transparency of its 
operations. While we identify some remaining gaps between the system as it is today and 
an attainable “ideal” system, we believe that the over-all financial sector 
accomplishments under this program are highly noteworthy and perhaps unique. 
26 
Constraints 
As suggested above there are constraints that have prevented the program from being an 
unqualified success. Three particular manifestations of these constraints merit attention. 
First, while the institutions have been put in place, ready to support an efficient system of 
payments and of financial intermediation, the economic agents have not yet availed 
themselves fully of the available financial services. (The table is set, but many guests 
have not yet appeared.) Second, some observers believe the banks’ relatively good 
scores on ratios usually used to judge portfolio quality may mask problems that could 
occur in the medium term. Seven banks, with five holding only a little over a quarter of 
all deposits, might render competition for a small share of all banking business excessive 
in a small jurisdiction such as Kosovo. Steady vigilance will be in order as the expatriate 
presence and extraordinary external financial support begin to dwindle. Finally, many 
senior commercial bankers, many BPK officials and many Kosovar bank regulators 
themselves doubt that Kosovars are fully ready to take over the management and 
executive functions of bank regulation and supervision. 
The foregoing reflect constraints that get in the way of declaring the program 
unreservedly to have achieved all of its objectives. Each of them raises questions about 
the sustainability of the excellent systems that have been put in place. None of them, it 
should be observed, reflects a failure of USAID’s program design, implementation or 
management. Nevertheless, they carry information that may be significant for the design 
of future USAID assistance. The main constraints are as follows: 
A severe shortage of personnel in Kosovo with the combination of education, 
experience and background to make sound analytical, managerial and executive 
decisions without the benefit of all the “facts” that would make decisions easy. 
A severe shortage of personnel, with the skills cited above, in the bank regulatory 
agency. This is due to the related conditions of high turnover and low compensation 
relative to the private banking sector, as well as a general shortage of such skilled 
personnel in Kosovo. 
Historical-cultural factors related to the history of discriminatory treatment of 
Albanian-Kosovars with respect to formal education and training as well as to 
learning-by-experience opportunities in highly-skilled, managerial and executive 
positions. Historical-cultural factors also contribute to the reluctance of Kosovars to use 
banks either as custodians of funds or as guardians of the kind of information included in 
loan applications. Trust cannot be decreed but must be a natural response to sustained 
experience. 
Weak demand by high quality borrowers for funding for long-term productive 
investment. In Kosovo’s circumstances, there is much greater uncertainty than in other 
available investment environments, about the future political and economic conditions 
that can influence the expected value of long-term investments. The final status of 
27 
Kosovo is one of these uncertainties, but not the only one. This constraint undoubtedly 
contributes to the limited availability of attractive abodes for domestic or foreign savings 
in Kosovo. 
Kosovo is still substantially a cash economy. Historical experience, concern for privacy, 
lack of confidence in impersonal institutions, fear of discovery of illegal transactions, and 
fear of the tax collector may all contribute to Kosovars’ disdain for banks. Strong 
evidence suggests that the constraint is abating, but it is far from dead. 
The expected eventual departure of the international community and its thousands of 
expatriates, and the phasing down of exceptional financial transfers from abroad 
contribute to uncertainty about the economic future of Kosovo. Will the domestic 
economy gain strength soon enough to compensate for this phase-down when it occurs? 
Does the economic boost from the international community include a positive influence 
that will remain after the expatriates leave? As the currently brisk economy slows or 
undergoes significant structural change, will all banks be capable of adjusting with 
sufficient speed and appropriate strategic adjustments? The answers of potential 
investors to these and other related questions can have a significant influence on pro 
forma estimates of the value of long-term investments. So far, a surge of private investor 
confidence in the future is not in evidence. 
CONCLUSIONS 
Program Strengths 
In the view of the evaluation team the strengths of the program far outweigh the 
weaknesses that have turned up. The following lists the most significant strengths of the 
program itself (as opposed to its outcomes.) 
The decision of USAID to focus its attention on the legal, policy and institutional 
foundation of a market-directed economy was wise from both a political and an 
economic perspective. 
The meticulous design of the work to be carried out to create a working and workable 
central bank-like entity and to promote creation of a solid commercial banking 
presence was well considered. The importance of a regulatory authority and regulation 
and supervision of the conduct of banks in a private market-directed economy is not 
always appreciated. Fortunately, in this program it was.
Having given a high early priority to bank supervision and regulation, it was 
appropriate that the enabling legislation and regulations for the banking system were 
made highly compatible with free-market, competitive principles. 
The program found, or came close to finding, an optimal mix of emphases on 
perfecting the institutions and their systems on one hand, and meeting the immediate 
need for a banking system to be up and running. 
28 
Program Weaknesses 
Lack of capacity of local personnel to take over the managerial and executive level 
functions of BPK. The need for development of the kind of skills necessary to function 
at those levels in a market-type economy, may have been underestimated. (These 
executives need to be able to “get inside the heads” of private bank directors, for 
example, to anticipate the strategic direction in which they may be heading, and to 
analyze the implications for the future. In this fledgling economy, it is not sufficient to 
know what to do about a failed bank. It is essential to prevent each bank from getting 
into a situation in which the outcome is failure, most particularly in the system’s infancy.)
Lack of Kosovar appreciation of, and appropriation of, the conceptual foundation of 
the design of the systems, institutions and policies that have been put in place. These 
are the systems of mature, internationally competitive, market-directed economies. Many 
of their strictures are counter-intuitive (e.g. to strengthen the domestic banking system, 
welcome foreign competitors; welcome foreign investors and treat them as well as local 
investors.) Even in the mature industrial economies constant vigilance is necessary to 
prevent anti-free-market changes in laws and regulations in favor of particular interests. 
The risk of reversion to more self-interested policies, rules and regulations is greater 
because of unfamiliarity with and modest local "buy-in" to the private market system. 
Coordination of Assistance 
Coordination of assistance in Kosovo has had positive and negative elements. At the 
technical economic level, the expertise has been concentrated in USAID, the IMF and to 
a lesser extent the World Bank. Coordination among the three appears to have been 
exceptionally good. The IMF officials with responsibility for Kosovo both in 
Washington and in-country, and the World Bank’s Country Manager in the field have the 
highest praise for USAID’s work and for the collaborative and collegial posture USAID 
has maintained with others working in the sector. We believe this is because the three are 
experienced interlocutors who are deep in expertise (either in-house or through 
contractors), that they are in considerable agreement on the appropriate paradigm for 
Kosovo, and are skilled in getting the work of economic restructuring done. 
Due to the unusual political situation in Kosovo coordination at a more political level is 
also important. In this realm it appears that the dialogue among the extraordinary variety 
of entities, and hence coordination, is somewhat less harmonious. It appears that the top 
two levels of authority over economic restructuring actions---the UN and the EU---are 
not the levels that are able to deliver promptly, the high-level of expertise required for 
economic institution building and for hands-on operation of the institutions. Moreover, 
since the election of a Kosovar government (PISG) (albeit with limited independent 
power) there is a third center of authority, which seems to have moments of tension with 
the UN/EU authorities. Under the circumstances, when there is a conflict of opinions, the 
receptivity of each group to the views of one or more of the others can be tepid or worse. 
The tension appears to have impeded the implementation of some components of the 
economic program, such as the comprehensive income tax and privatization. 
29 
Nevertheless, governance authority over the banking and financial sector remains 
unambiguously in the hands of the UN authorities at this time. 
Issues and Sustainability 
The mechanics of institutional development in the banking and financial sector have been 
well crafted for the present stage of Kosovo’s economic development, and for some time 
into the future. Nevertheless, we are convinced that sustainability is the most important 
concern about the sector. Whether the framework that has been put in place can be 
sustained depends on the issues below. 
Implications of the transition from an international donor-impelled economy to one 
that is dependent on its own mobilization of economic activity. The economy and many 
of its agents are relatively ebullient at present. Ideally the timing and pattern of 
withdrawal of extraordinary external inflows will match the ability of the domestic 
economy to replace them without major dislocations. There is no assurance however that 
the transition will be that smooth. If there is initially an economic downturn of 
significance, then the quality of loan portfolios that are excellent today can be poor 
tomorrow. Especially in banking supervision and regulation, it is essential for top 
executives to be able to anticipate such changes in direction and to devise strategies to 
deal with them. 
Finding the optimal number and size of banks. The present banking structure features 
two relatively large international banks and five small local banks. In the present 
circumstances the system as a whole appears adequately capitalized and loan-loss 
experience is good. What happens when the explosive expansion of the past four years is 
over? One possibility is that the current size structure will be found unsustainable. 
Planning for such a plausible eventuality should already be underway, but there is no 
evidence that it is. This is highly specialized work that falls under the heading of “bank 
market structure and competition.” USAID has experience in this specialty. It could be 
the subject of significant assistance to BPK. 
Final status. Many aspects of international banking and finance involve issues of 
sovereignty, including settlements among central banks, sovereign debt and credit 
card operations. An early determination of Kosovo’s status would remove a significant 
element of uncertainty to potential investors. 
 
RECOMMENDATIONS 
 1. Provide for One Year of Continued Expatriate Guidance and Direction for the 
Banking Supervision and Licensing Department of BPK. This department is the single 
most important institutional component for imposing rigorous prudential management of 
the banks’ lending practices. It has been brought close to the stage of readiness for full 
managerial and executive control by the senior Kosovo officials, but is not quite there 
yet. An additional year of expatriate expertise, if supplemented by appropriate 
preparation of the relevant Kosovar executives to manage, can probably suffice. It seems 
30 
plausible that a single individual could serve the same purpose for both banking and 
insurance, and possibly for the Tier Two and Three pension funds. Significant additional 
institution building activities---aside from senior managerial level and analytical training 
and data gathering and analysis--- are no longer high priorities for scarce donor funds. 
While there is room for improvements in BPK, most of them are within the reach of 
Kosovars to identify and implement. 
2. Identify a Means of Providing Training for High-Level Financial Officers to 
Acquire the Analytical Decision Making Capacity to Become Effective Managers; 
Examine Means of Establishing Premium Compensation and Reducing Turnover. 
BPK is not the only local institution in need of such training. However, it might help 
BPK to add to its prestige, and might add to the prestige of the training, to institutionalize 
the training in something like The BPK Financial Officers Academy. Association with 
the academy might also be an appropriate part of the assignment of an expatriate expert 
in the Banking Supervision and Licensing Department, as that Department’s management 
devolves increasingly to Kosovars. The Ministry of Finance and Economy and various 
other elements of both the government and the private sector should be rich sources of 
candidates for such high level training. A premium pay scheme for graduates should be 
explored as a means of attracting exceptional personnel and reducing turnover in their 
ranks. 
3. Develop an Elite Statistical Gathering and Analysis Institutional Capability in BPK. 
A severe lack of quality data is a major problem in Kosovo. BPK should be one of the 
principal users of the output of such an institution. While BPK is not necessarily the only 
rational location for such a unit the current lack of a large volume of high quality 
statistics adversely affects all institutions concerned with micro and macro economic 
analysis. BPK would be a logical locus for a high-level economic analysis function. 
4. Focus Future Training (i.e.,. for the Next Five Years) in the Banking Supervision 
and Regulation Area, on Banking Systems in Jurisdictions with Maximum 
Comparability to Kosovo. As one observer has put it, “there’s nothing to be gained by 
sending bank examiners to New York to learn about derivatives.” Of course that is an 
extreme example, but is a useful caricature of the kind of training not needed in the near 
future in Kosovo. The real challenge in Kosovo is valuing exceptionally simple financial 
instruments. The data are not available to rely exclusively on objective “facts” so 
subjective judgements play a major role along with careful and skilled analysis. 
31 
PENSION REFORM
FINDINGS 
The overall impact of USAID technical assistance to the pension reform in Kosovo has 
been profound and very positive. The Kosovo pension system is essentially a USAID 
creation. It is well designed, draws on a “best practices” model that is appropriate for the 
current economic environment in Kosovo, has a well-developed legal and regulatory 
framework, and has thus far been implemented satisfactorily in a very short time. The 
simplicity of the tier one basic pension and the tier two contribution rules increases the 
likelihood that Kosovo will be able to maintain and sustain the system. Nevertheless, 
implementation and operation of the pension system makes demands on the human 
capacities of Kosovo that are currently beyond its ability to meet. For this reason, expert 
advisory assistance will be required for an additional period in the future, and training 
should be enhanced for local personnel at all levels. It is also important to increase 
efforts to educate the public about responsibilities and opportunities provided by the new 
pension system. 
Progress 
The design and implementation of a comprehensive, modern pension system for Kosovo 
is an outstanding achievement of the USAID technical assistance program. From 1999 
through 2001 there was no pension system for Kosovar Albanians. UNMIK faced strong 
political and economic pressure to establish a pension system. Reintroduction of the old 
FRY system was not a viable solution for both administrative and equity reasons. 
Records from the previous system were incomplete, many having been lost or destroyed. 
Through the 1990’s, most Albanian Kosovars did not have jobs covered by the pension 
system and did not qualify for adequate pensions. 
USAID technical assistance advisors adopted a model with widely accepted features that 
had been supported elsewhere by USAID and other international donors. A three-tier 
system was designed. The first tier is a modest, indexed, flat benefit ( for 2003, 35 euros, 
the estimated cost of a basic food basket for one person) payable to every registered 
resident age 65 or older. The benefit is financed from general government revenues. The 
second tier is a mandatory defined contribution that funds an individual account, the 
proceeds of which will be used to purchase an annuity at age 65 or will be available to the 
contributor’s dependents if he/she dies before age 65. The third tier establishes a legal 
and regulatory framework for voluntary supplementary employer or individually 
provided pensions. 
A comprehensive pension law (Regulation No. 2001/35, “On Pensions in Kosovo”) was 
drafted and promulgated in December 2001. Payment of the first tier basic benefit began 
in July 2002. The basic benefit system is administered by the Pension Administration of 
the Ministry of Labor and Social Welfare. A USAID advisor to the Ministry played a 
substantial role in the establishment and implementation of the system. Payment is made 
through commercial banks. Everyone registering for the basic pension is given a bank 
32 
account. Coverage is close to 100 percent. In October 2003, of about 109,000 persons 
registered, about 107,000 pensions were paid. All ethnic groups participate in the system 
and registration of minority groups has been widespread. (In October 2003 Serbs, Roma, 
and other non-Albanian Kosovars represented almost 18 percent of active registered 
pensioners, a greater proportion than in the population as a whole. This reflects the age 
structure of the Serbian and minority populations of Kosovo.) 
Tier two is being implemented in two stages. In the first stage, collection of mandatory 
payroll tax contributions from government agencies and Socially Owned Enterprises 
(SOEs) began in August 2002. A contribution of five percent of the worker’s gross wage 
is paid monthly by the employer, and five percent is paid by the employee, withheld by 
the employer. Aggregate contributions are deposited in a commercial bank, which 
transfers them to the Pension Trust account at the BPK. After some start-up delays and 
confusion, compliance was reported to be high. The second stage, which began in 
August 2003, requires all employees and the self-employed to contribute – five percent 
each for the employee and the employer and ten percent for the self-employed. 
Information on compliance in the second was not available in October 2003. 
The Kosovo Pension Savings Trust (KPST) was established as an independent not-for￾profit organization to set up and maintain contribution accounts, process contribution and 
account information, and supervise investment of the funds collected. KPST was 
essentially established by USAID advisors. During the period after the pension law was 
promulgated, USAID advisors developed a staffing plan, hired staff, made presentations 
to the public explaining the new system, and set up the collection mechanisms. A 
USAID advisor served as acting director until the Director was hired in March 2003. The 
KPST has a staff of 21, plus two USAID advisors. A Board of Governors of the KPST 
sets investment policy, hired two international investment management firms, and hired 
the Director. The Board is currently comprised of four international experts and two 
local representatives of workers and employers, respectively, and an ex officio member, 
who is an expatriate. 
The Pension Trust had collected about 26 million Euros through August 2003. Except 
for small balances held in the BPK, almost the entire amount is held in a short-term 
money market fund administered by ABM AMRO, a Netherlands financial services firm. 
The tier three legal and regulatory framework for voluntary employer and individual 
pension plans is implemented through the Department of Pension Supervision at the 
BPK. The Department has a Director and staff of two. It has licensed six pension plans, 
four in Socially Owned Enterprises (SOEs), and one each for the Micro Enterprise Bank 
and the BPK. 
Several have attempted to provide pensions to their workers and retirees, similar to those 
provided under the former system, without adequate funding. These pensions are often 
arbitrary, uneven, and unsustainable. The third tier regulations require that these 
pensions meet the new standards for funding and eligibility.
33 
Constraints 
Delays in reconciling tier two contribution data and sending statements. KPST and the 
Tax Administration have had problems and delays in reconciling pension contribution 
information. Delay resulted because the Tax Administration relies on voluntary filing of 
a form by workers, many of which have not been filed. Furthermore, the IT system 
contracted for by KPST in August 2002, to be delivered in March 2003, was not 
operational in October 2003. As a result, statements to contributors could not have been 
sent even if they had been reconciled. The expectation is that the statements will be sent 
nine months after end of the contribution period to be reported. (The current law calls for 
statements to be sent 45 days after the end of the reporting period. This is generally 
acknowledged to be unrealistic.) It is vital that contributors have confidence in the new 
pension system, which is not well understood by the public. Support of contributors is 
crucial for the long-run maintenance of independence of the KPST. Receipt of a 
statement verifying that the contributor has an account with funds that belong to him or 
her is considered to be key to building confidence and support. The Pension Supervision 
Department at BPK and the Board of Governors of KPST have expressed concern about 
the delay. 
An overarching constraint is the weakness of the IT and data processing capabilities of 
KPST. The IT system is new and may become more robust as staff gain experience in its 
use. However, it may be difficult to retain good IT staff because of limitations on the 
compensation they are offered in public and quasi-public agencies, relative to that of the 
private sector. 
Limited capability of the pension supervision staff of BPK. The staff of the Pension 
Supervision Department has a director and staff of only two. This compares with a staff 
of 13 in the Insurance Supervision Department. It is not obvious that the responsibilities 
of the two departments differ to that degree. The evaluation team was told that staff 
personnel have little knowledge of pensions operations, investments, accounting, or 
management. The BPK pension department provides little oversight or assistance to 
KPST. 
CONCLUSIONS 
The pension reform program can be judged a major success. Appropriate laws and 
regulations have been developed, promulgated by the SRSG, and endorsed by the 
Parliament. The required first tier benefit payment institutions and second tier 
contribution collection and investment management institutions have been established. 
Starting from scratch, all three tiers began operations within eight months of 
promulgation of the basic regulation. A Director and staff of the KPST have been hired 
and are being trained. A qualified Board of Governors of KPST has been appointed and 
has developed investment management policies and hired management firms. The 
benchmarks on the whole have been met. 
34 
Program Strengths 
A major strength is that the USAID advisors involved in the pension design, legal 
development, and implementation at both the KPST and the Ministry of Labor and Social 
Welfare appear to have been capable, providing expertise encompassing policy, law, 
organization, and information technology. The international experts on the KPST Board 
of Governors are highly qualified. The investment policy is well considered. 
Tier one and tier two appear to be working well, with the exception of the tier two 
reconciliation process. Use of the commercial banking system for tier one benefit 
payment and for tier two collections is reported to be working well. This widespread use 
of the commercial banking system by both employers and pension benefit recipients, 
many of whom did not previously have bank accounts, should serve to increase 
confidence in and use of the banking system. 
A key strength of the pension system is its simplicity. Both tier one and tier two require a 
minimal administrative apparatus, especially at the local level where administrative 
capability is weakest. By paying a flat, universal benefit through the banking system, the 
tier one basic pension avoided the necessity of developing mechanisms and offices to 
determine eligibility and deliver benefit payments. The tax administration collects 
payroll tax contributions through the banking system, piggybacking on the wage tax, 
requiring no additional collection and enforcement system (although the KPST does have 
and employer relations department that has some enforcement functions). 
Program Weaknesses 
Information technology and reconciliation problems have delayed delivery of 
contribution account statements to participants in the tier two defined contribution 
system. Statements may be delivered nine months after the end of the March 2003 
reporting period. The KPST IT system was not operational as of October 2003, but 
testing was scheduled to begin at that time. It is important for participants to receive 
statements in a timely fashion, especially during the first years of the new system. 
Limited capacity of the pension regulatory department of the BPK. The capacity of the 
pension department appears to be limited to checking eligibility of individual 
beneficiaries of the existing tier three pension plans and relatively straightforward 
violations of rules. Financial, accounting, and investment assessment capabilities appear 
to be very limited. The BPK regulatory office does not play an important role in 
assisting the KPST at this time. 
Coordination of Assistance 
No other donors are actively involved in pension reform in Kosovo. Consequently, there 
has been little or no coordination of assistance. Resources are limited and the USAID 
budget is becoming increasingly constrained. The mission and the Kosovo counterparts 
35 
may wish to consider seeking additional assistance from other sources, especially in the 
areas of training and public education. 
Issues and Sustainability 
Human capacity. A major issue concerning sustainability is the capacity of local 
personnel to operate and maintain the systems that are being created. Information 
technology, organization, and management requirements are considerable and may 
exceed the human capacity that currently exists. It appears that KPST will require two 
full time international advisors for at least one more year, particularly to oversee the 
expansion of the contribution collection universe to include all employers and the self￾employed, and to test and implement the information and data processing system. KPST 
appears to be developing capable staff that will sustain the organization, after an 
additional period of training and experience. This will require more formal and informal 
training. 
The personnel at the BPK pension department also lack the capacities to fully supervise 
and advise the pension plans they have licensed and the KPST. The USAID mission and 
BPK management may want to examine the needs of the pension department, both for 
more local staff and for additional advisory assistance. More formal training of local 
staff will be required. 
Public education. Public understanding and support is vital for the successful operation 
of the pension system and its sustainability. Public education regarding both the tier one 
basic pension and the tier two mandatory contribution pension should be expanded. A 
comprehensive public education and public relations campaign should be developed. 
Political sustainability. Perhaps the greatest vulnerability of the new pension system in 
the long-run is the political sustainability of its basic design and features, in particular the 
independence of the KPST from the government and the independence and prudence 
standards of its investment policies. It has been reported to the evaluation team that most 
Kosovar politicians believe that the KPST should be under the control of the Kosovo 
government and that the assets of the pension trust should be invested in Kosovo. Both 
the Minister of Economy and Finance and the Minister of Labor and Social Welfare 
expressed these views to the evaluation team. Ultimately, full control of Kosovar 
institutions, including the KPST, will be transferred to Kosovar hands. If the KPST is to 
remain independent of political influence on its policies, and if the assets are to continue 
to be invested prudently and exclusively for the benefit of the contributors, it must foster 
strong political support for its independence from the participants – contributors who own 
the assets entrusted to the pension trust. For this reason, timely and clear reporting, as 
well as comprehensive public education are vital. It is also vital, for this reason, for the 
fund assets to show a positive return during the early years of its existence. 
 
36 
RECOMMENDATIONS 
1. Attention should be focused on implementation and improvement of the information 
technology capabilities of the KPST and the information flow and reconciliation between 
the Tax Administration, the Central Processing Center, and the KPST. 
2. Clear and understandable account statements should be delivered to contributors to the 
tier two pension fund in a timely manner. 
3. Public education concerning both tier one basic pension and tier two pension accounts 
should be increased 
4. Training of KPST and BPK pension department staff should be increased. Both 
formal and informal training at all staff levels should be increased. The mission may 
wish to investigate the many training resources and opportunities available from other 
donors and sources, including the World Bank, pension plan advisory firms in advanced 
market economies, and financial services firms in advanced economies. 
5. Continue two permanent full-time advisors for an additional year, while stage two of 
the tier two plan is being implemented and the IT system is being brought on line. The 
mission should investigate the appropriate type and level of advisory support required to 
enhance the capabilities of the pension supervisory staff at BPK. Merger of the Pension 
and Insurance units should be considered. 
6. Senior mission personnel and the Director of the KPST should take every opportunity 
to communicate to the public and especially to KPST officialdom, and to political 
leaders, the philosophy, purposes and economics of the pension system, in particular the 
need for independence of the KPST and prudent management of the assets of the trust for 
the benefit of the contributors 
 7. The mission, and others in the donor community, should support planning for the 
eventual facilitation of prudent investment of part of the assets of the KPST in Kosovo. 
Investment of part of the assets of the trust in Kosovo may alleviate political pressure for 
more government control of KPST and could provide much needed capital for sound 
local investment. (One approach might be to explore qualified IFIs the possibility of 
supporting establishment of a Kosovo development bank whose securities could be 
guaranteed by an international financial institution and whose investments could benefit 
from the technical assistance and oversight that could be provided by the guarantor 
institution.) 
37 
INSURANCE SECTOR DEVELOPMENT
FINDINGS 
Progress 
Considerable progress has been made in promoting the development of a private 
insurance sector in Kosovo. There were no insurance companies in 2000 and no legal or 
regulatory basis for an insurance sector. Institution building concentrated on 
establishment of a legal and regulatory framework for private insurance companies, 
development of regulatory institutions, strengthening the private insurance sector, and 
establishment of an insurance industry association. 
Promulgation and Implementation of Legislation, Regulations, Rules and Policies. A 
legal framework, developed with significant input from a USAID advisor, was adopted in 
October 2001 (Regulation No. 2001/25, “On Licensing, Supervision and Regulation of 
Insurance Companies and Insurance Intermediaries”). Implementing rules were 
promulgated by the Banking and Payments Authority of Kosovo (BPK) in March and 
April 2002. Rules have been reviewed, amended, and augmented in 2002 and 2003. 
Institutional Development, Reinforcement or Strengthening. The insurance regulation 
mandates the BPK to license and regulate insurance companies. A Department of 
Insurance Supervision and Licensing was established at BPK. The department currently 
has a Kosovar director and staff of 13. It actively conducts on-site examinations and 
audits and off-site analysis of existing Kosovo insurance companies. One company has 
been put in receivership. 
Currently eight insurance companies are licensed to write automobile third party liability 
(TPL) insurance, which is mandatory in Kosovo. Two of the companies are Kosovo 
branches of Serbian companies, which primarily write automobile liability insurance in 
Serbian enclave areas. In 2001 about 180,000 TPL policies were sold (by four 
companies), and in 2002 about 175,000 policies were sold (by seven companies). 
Premiums in 2001 were about 31 million Euros, and in 2002 premiums were about 27 
million Euros. Through August 2003, 136,200 policies had been sold, of which 98 
percent were TPL or TPL Plus policies. 
An Insurance Association of Kosovo (IAK) has been established and began operating 
effectively in March 2003. It has the active participation of all Kosovo companies, 
including the Serbian-owned companies. The active participation of the Serbian 
companies in the Kosovo association is considered a major achievement. The association 
has expanded to form a regional association with insurance companies in Albania. Under 
the auspices of the IAK an Insurance Institute has been organized, which is developing 
and conducting training programs for members’ employees. Members also participate in 
programs offered by the Malta International Banking and Insurance Center. The IAK 
also carries out programs of public education concerning insurance and has established a 
complaint system for policyholders and an arbitration panel for claims disputes. 
38 
Capacity Building. Diversification of products. BPK rules require licensed insurance 
companies to diversify the classes of insurance they offer by specifying that no more than 
75 percent of premium revenue of any company be from any single class of insurance. 
BPK is moving to enforce this rule in 2003. Six additional classes of insurance other 
than automobile TPL have been licensed for three companies, and four of the six classes 
for three other companies. (Task order benchmarks call for 11 new classes by September 
2003.) Through August 2003 only two percent of premiums and 4.5 percent of total 
premium revenue were from classes other than TPL. Two applications for life insurance 
have been submitted to BPK, but no life insurance provider has been licensed. 
Development of life insurance is important for the pension reform as well as insurance 
reform. The pension law requires that all distributions from the tier two mandatory 
accounts be done in the form of annuities sold by a life insurance company licensed by 
the BPK. (It will be about nine years before significant numbers of retirement benefits 
are paid from the tier two funds.) 
Training. BPK, with USAID assistance, provides numerous training programs and 
opportunities for the director and staff of the Insurance Supervision and Licensing 
Department, concerning insurance principles, rules and regulations, compliance, audit 
and inspections, accounting, claims activity, and other aspects of insurance. The regional 
Insurance Institute sponsors training programs provided by the Malta International 
Banking and Insurance Training Center and the Financial Volunteer Services 
Corporation. 
Other initiatives. A Kosovo Reinsurance company has been approved by the BPK. A 
Guarantee Fund to protect the Kosovo population against uninsured motorists has been 
established by the BPK. A common administrative system and an on-line 
communication platform, linking private insurance companies branch offices, BPK, the 
IAK, police departments, vehicle registration centers, the Ministry of Public Services, the 
Department of Justice, the Ministry of Transportation and Communication, and the 
Center for Technical Services, are being developed. The on-line communication 
platform will help reduce a significant problem of fraud in sales of automobile liability 
policies. BPK has established Memoranda of Understanding (MOU) with Albania and 
with Macedonia to provide automobile liability border insurance, which permits 
motorists to drive between Kosovo and these two countries without needing to purchase 
additional insurance for each country. Discussions are ongoing with Serbia and 
Montenegro, Bosnia, Croatia, Bulgaria, and Turkey to establish similar MOU. 
Constraints 
Limited capability of the insurance supervision staff of BPK. Before 2002, Kosovo 
offered no educational programs or formal training in insurance or actuarial science, and 
very little training in accounting, business management, finance, or other skills required 
to develop and supervise insurance products. There was no experience or familiarity with 
insurance. Albanian-Kosovars had little management experience in government or 
business during the decade before 1999. There is limited expertise in information 
39 
technology. The University of Pristina has begun to offer a course in the economics of 
insurance, and the new American University offers basic business courses. It will take 
time to convey these important and complex skills and, perhaps more importantly, for 
people to gain experience and judgment in how to apply them. 
Limited and rudimentary financial markets and institutions. The very limited financial 
instruments available in Kosovo severely limit the ability of Kosovo insurance com￾panies to invest domestically. There are no domestic government or corporate bonds and 
no publicly traded stocks. Insurance companies are permitted to hold 100 percent of their 
investments in the BPK, but no more than 10 percent in any single commercial bank, and 
no more than 30 percent in all commercial banks. Companies may hold 100 percent of 
their assets in approved non-Kosovo government bonds. 
CONCLUSIONS 
Achievements 
The USAID insurance sector technical assistance has been appropriate and successful. 
About 80 percent of the task order benchmarks have been completed as of October 2003. 
Major achievements are development of an adequate legal and regulatory framework and 
set of institutions, licensing of eight insurance companies, including two Serbian 
companies, development of an active market for one class of insurance, establishment of 
an insurance industry association, and provision of training courses to the regulatory staff 
and to insurance industry participants through the industry association. All required legal 
and regulatory mechanisms for a viable insurance industry are in place. Local, private 
sector participants, including Serbian companies, were reported to be participating 
enthusiastically in the association and in development of insurance market institutions. 
Significant capacity, particularly human capacity, remains to be developed. 
Program Strengths 
The USAID advisors are highly professional, experienced both in insurance institutions 
and regulation and in providing technical assistance and are pro-active. They appear to 
work well with their Kosovar counterparts. Good communication, coordination and 
cooperation among advisors in numerous areas (e.g. insurance, pensions, BPK 
examiners) that must interact with one another has facilitated the development of 
mutually beneficial working relationships and cooperation. 
A sound legal and regulatory framework has been established. Establishment of the 
Insurance Supervision and Licensing Department within the BPK is likely to enhance the 
ability to maintain its independence. The BPK is a reserved power and has considerable 
independence at present. 
Program Weaknesses 
40 
The greatest constraint to the successful development of a viable insurance sector in 
Kosovo is the lack of human capacity to operate, regulate, and enhance the insurance 
sector without the active participation of international advisors. Training programs and 
on-the-job experience address this need. It was reported to the evaluation team that there 
is a lack of training materials and books on topics related to insurance. There is no 
insurance library at the BPK. It is unlikely that there is a sufficiently complete range of 
books and material concerning insurance in the Albanian language. There is considerable 
literature and material available in Serbo-Croatian and in English. At relatively low cost, 
such materials could be provided to BPK and to the Insurance Association of Kosovo and 
made available to the public. It would not be unreasonable to expect the private 
insurance association to bear the cost. 
Coordination of Assistance 
No other donors are actively involved in insurance reform in Kosovo. The World Bank 
has shown some interest, releasing a Technical Assistance Identification Paper in March 
2003, but has provided very little input of resources or technical assistance. 
Consequently, there has been little or no coordination of assistance specifically to the 
insurance industry. 
Issues and Sustainability 
Political and Insurance Sector Support. It was reported to the evaluation team that there 
is considerable political support and support from insurance companies for the reforms 
and institutions created. It is recognized that the objective of the reforms is to enhance 
the marketability of insurance and the viability of the insurance sector. Companies are 
reported to be willing to maintain and finance the insurance association and institutions 
being created. 
RECOMMENDATIONS 
1. Provide One Additional Year (in multiple short-term visits possibly) of Expatriate 
Guidance for the Insurance Supervision and Licensing Department of BPK. 
Impressive progress has been made in development of the insurance sector and the 
Insurance Supervision and Licensing Department of BPK in the two years since 
Regulation 2001/25 was promulgated. Nevertheless, it is clear that a significant advisory 
presence will be required for an additional year. The director of the Insurance 
Supervision and Licensing Department has been in office only since April 2003. While 
six new classes of insurance have been approved, the number of policies sold in the first 
eight months of 2003 is relatively small. USAID should set as a goal preparing the 
insurance sector and the staff of the BPK Insurance Supervision and Licensing 
Department to operate with limited advisory input after CY2004. Merger of the pension 
and insurance units of BPK should be given support by USAID. It would not be 
unreasonable for the industry itself to take over responsibility for financing such 
assistance after the end of the work of the current TO. 
41 
2. Continue to provide intensive formal training and on-the-job training.. Training and 
experience are key to the sustainability of the Kosovo insurance sector. USAID and BPK 
should continue to avail themselves of all training opportunities, including training 
offered by the resident advisor, programs provided by the Malta International Banking 
and Insurance Training Center and the Financial Volunteer Services Corporation, and 
training provided by other local and international experts. An insurance library at the 
BPK and at the IAK should be established and provided with adequate books and 
materials provided with insurance industry funding. 
3. USAID should consider sending a qualified individual for actuarial training 
(abroad if necessary.). The objective of the training should be a level of proficiency 
equivalent to an Associate of the Society of Actuaries (ASA). This level of competence 
would ordinarily require about two years of full-time study for an individual with a 
bachelors degree in mathematics. The individual should be committed to remain in (or 
return to) Kosovo to establish and head a government actuarial department and to train 
other Kosovar actuaries. Skills in actuarial science will be required to establish and 
evaluate viable life insurance products, as well as other insurance products, defined 
benefit pension schemes, and annuities. The government actuarial department would 
serve the needs of several agencies other than the Insurance Supervision and Licensing 
Department, including the BPK Department of Pension Supervision, the Kosovo Pension 
Savings Trust, and private insurance companies. The BPK would be an appropriate place 
for the government actuarial department to be located, but this would not be necessary. 
The actuarial department should maintain international standards and be protected from 
political or other outside influence. 
 
42 
COMMERCIAL LAW
USAID assistance in Commercial Law seeks to develop and implement the legal regime 
required to support a market-oriented economy. 
FINDINGS 
The Commercial Law activity, which includes drafting of commercial legislation, 
provides assistance to the Office of Legal Services Support (OLSS) in the Office of the 
Prime Minister and support to the Assembly to facilitate enactment of commercial 
legislation. 
Progress 
Impressive achievements have been made in the development of a commercial legal 
regime that effectively establishes and protects property, contract, and investor rights. 
The following discussion focuses on the implementation and institutionalization of the 
legal regime. 
Promulgation or Implementation of Legislation, Regulations or Policies-Commercial 
Law Framework. The main categories of laws addressed are: property rights registry law, 
the law on mortgages, bankruptcy law, law against restraints on competition, the external 
trade law, law on administrative procedures, law on geology and mining, copyright and 
trademark law, and procurement law. Establishment of a pledge filing office and the 
transformation of the right to use socially owned immovable property were the subject of 
legislation and regulation, respectively, and are also addressed.
The property rights registry law was promulgated by SRSG and supplemented by 
additional legislation addressing minority rights. A final draft of administrative 
guidelines for implementing the law is complete and has been submitted to the 
Government for approval. It contains instructions on how to establish the immovable 
property rights registry in all municipal cadastre offices. The Kosovo Cadastre Agency 
will carry out implementation, and the Commercial Law Team (CLT) will help with 
training. 
An implementation plan for the new property rights registry has been developed; a pilot 
program will be established in two municipalities in December 2003. This system will 
serve as the mechanism for the registration of mortgages and the transfer of land 
ownership. It will also be linked to the already established and functioning property tax 
database. The implementation of the program in all 23 municipalities might be delayed 
due to concerns about the supplemental legislation required by SRSG. 
The Law on Mortgages was drafted by the CLT and promulgated by SRSG. Its 
foreclosure process provides for extra-judicial enforcement, which was deemed 
appropriate, taking into account the current court system in Kosovo. 
43 
A comprehensive Bankruptcy Law was adopted by the Assembly in March and 
promulgated by SRSG without change in April. Implementation instructions were 
adopted in June. The CLT is currently preparing five modules to provide training support 
for the effective implementation of the new law by judges, trustees, and lawyers. 
The Law against Restraints on Competition has been drafted by CLT and, after review by 
the Ministry of Trade and Industry, will be approved by the Government and transmitted 
to the Assembly. The law and the implementing instructions and procedures define and 
limit the market intervention role of the Government and disallow exclusive licensing, 
except under limited circumstances. The competition law facilitates the entry of firms, 
existing or potential, into existing markets. It promotes the creation of a competitive 
environment through enforcement actions to reduce the abuse of market power by 
dominant (or noncompetitive) firms. It provides for the establishment of the Kosovo 
Competition Commission to ensure that dominant enterprises do not abuse their 
positions. 
The External Trade Law was also drafted by CLT. The draft was EU-consistent and 
ensured that administrative measures directed at regulating cross-border trade in goods 
would not be discriminatory or unduly restrictive. The Assembly adopted an amended 
version, and the new law was promulgated by SRSG in May. This law is consistent with 
international best practices and the requirements of WTO and EU. It sets out rules and 
regulations affecting trade and commerce between Kosovo and other areas. The law 
contemplates detailed implementing instructions in a broad range of areas, including 
export and import licenses and lists, sanitary requirements, product standards, 
antidumping duties, countervailing duties, and protection of intellectual property. CLT 
expects that the administrative instruction on sanitary measures will be adopted by the 
Government before March 2004. 
Legislation on Administrative Procedures is in the drafting process. In order for the 
legislation to be EU compatible, USAID advisors in OLSS will take the lead in 
developing a Law on Sub-Normative Acts that will regulate the process of rule-making; 
and EAR advisors will take the lead on drafting the law on administrative adjudication. 
A Law on Geology and Mining has been drafted and is under review at the Ministry of 
Trade and Industry. The CLT is working with UNMIK and the PISG to ensure that the 
draft law promotes transparency, competition, and compliance with EU legislation. 
The first draft of the Copyright Law is near completion and is expected to be submitted to 
Government by 31 October. The Trademark Law is under development and is expected 
to be submitted to the Government by 30 November. 
Laws for a securities market were correctly considered premature, given the current stage 
of economic development in Kosovo, and were deleted from the present benchmarks. 
The CTL has worked on other laws that were not included in the original benchmarks but 
were later determined to be priorities by USAID, i.e., laws on public management and 
44 
accountability, the property tax, the comprehensive personal income tax, and tax 
administration and procedures. 
A comprehensive Procurement Law was passed by the Assembly and is currently before 
SRSG. The CTL is working together with the Kosovo Institute for Public Administration 
to provide training to a core group of procurement experts. 
The Pledge Filing Office is fully institutionalized as a separate and self-sustainable 
administrative unit. There are several thousand pledges filed with the office. The 
Municipal Court of Pristina has more than 20 claims on pledges filed with it. 
The Regulation on the Transformation of the Right to Use Socially Owned Immovable 
Property was developed jointly by USAID consultants and UNMIK with input by PISG. 
This regulation transforms into a leasehold any right to use property registered in the 
name of a socially-owned enterprise. Implementing procedures have been adopted. 
Institutional Development, Reinforcement or Strengthening-Training. USAID has 
provided assistance to the Prime Minister’s Office through a commercial law unit, the 
CLT, since March 2002. The unit has become a vital part of the Office of Legal Support 
Services (OLSS), the Government lawyers responsible for the final drafts of all 
Government laws. Technical assistance has been provided to the Assembly of Kosovo, 
through a commercial law unit since May 2002. This unit has provided legislative 
assistance to the chairpersons, members, and staff of the four Committees in the 
Assembly (Budget Committee, Committee on Trade and Industry, Committee on Finance 
and Economy, and Committee on Transport and Telecommunications). 
USAID identified a need to provide general, background training on corporations, 
contracts, property, investments, and trade before providing training about the new laws 
regulating these areas. Follow-on law-related training programs, designed to provide 
lawyers and judges with an understanding of the rationale behind and the content of the 
new commercial law framework, were then given. 
Explanations of (commentaries) and teaching materials on the following regulations and 
laws have been developed and used in training for judges, attorneys, bankers, students 
and others: the Regulation on Business Organization, the Regulation on the Sales of 
Goods, the Pledge Regulation, the Foreign Investment Regulation, and the Mortgage 
Law. The commentary on External Trade Law is under preparation. 
To provide the training, seminars were held in the main cities of Kosovo. At least nine 
seminars were given: five seminars on business organizations and the business registry 
and four seminars on the regulation of the sale of goods. Over 200 judges, lawyers, 
bankers, and business people received training. 
In addition to the seminars, a course on foreign investment regulation was presented to 
attendees of the University of Pristina summer school in 2002 and to law and business 
students from February to May 2003. Based on a Memorandum of Understanding 
45 
between USAID and the University of Pristina, commercial law-related programs in the 
Law and Business Faculties have become a permanent and official component of the 
educational curricula. 
The following items are still being prepared: 
• The Law on Sub-Normative Acts (a part of the legal regime for the administrative 
process); 
• The Copyright Law and Trademark Law (near completion); 
• Implementing instructions for the External Trade Law; and 
• Training materials in the area of bankruptcy. 
Constraints 
As discussed above, great progress has been made in the enactment of a commercial law 
regime. However, implementation and enforcement of this regime are critical for 
realizing economic growth. There are, as explained below, a number of constraints upon 
implementation and enforcement. 
The Role of Government Agencies in Implementation of Law. Government agencies 
will play an important role in implementation and enforcement. The new laws in 
administrative procedures will ensure that public authorities (ministries and agencies) are 
required to exercise their authority in a manner that is increasingly transparent, 
nondiscriminatory, and narrowly consistent with the legislation. 
Insufficient Knowledge of Business Practices and Concepts. Judges lack an adequate 
understanding of such matters as finance and valuation principles. They will not be able 
to apply legal standards to factual circumstances of the cases before them if they lack an 
understanding of relevant business practices and concepts. The World Bank is currently 
providing training to judges in this area. 
Insufficient Knowledge of Laws. Judges, lawyers, and business persons lack knowledge 
and understanding of the legal regime. There is a need for materials and training that will 
supply required levels of knowledge and understanding of the new laws. 
Public Access to Justice. A large gap exists between institutional reform and public 
access to justice. An overarching theme that emerges from this assessment is that the 
public needs to be aware of and benefit from the new legislation. 
Unclear Division between UNMIK and PISG. Division between UNMIK and PISG 
under the Constitutional Framework lacks clarity in some areas, and this has been a 
detriment to the CLT's efforts. Final authority in interpreting the Framework rests with 
SRSG. Chapter 5 and 8 of the Framework deal with reserved and transferred powers. 
OLA interpretations suggest that any area that is not specifically transferred is reserved. 
Differences are gradually being resolved; continuing good faith will be required to 
resolve outstanding issues and to expedite the passing of new legislation. 
46 
The Risk of Corruption. Judges we met do not believe that corruption within the 
judiciary is a major problem. Nevertheless, existing conditions, such as low salaries and 
limited judicial administration, leave the possibility open. Corrupt practices, if allowed 
to develop, would threaten Kosovo’s economic growth. 
CONCLUSIONS 
Strengths 
Assistance to the Assembly. The Assembly operates with transparency and openness. 
Assembly members have been trained to develop, analyze, and review laws as well as to 
research laws and related areas.
Capacity Building. USAID advisors have worked closely with their counterparts at the 
PM's Office and the Assembly to train lawyers on how to review and amend the laws. It 
has been a hands-on approach by actively involving the locals in the work and showing 
step by step how laws are drafted. Members of the Assembly have been trained to 
analyze, research, and review laws. 
Establishment of a Commercial Law Regime. USAID advisors have drafted over 30 
laws and regulations to assist in establishing a commercial law regime that effectively 
establishes and protects property, contract, and investor rights. 
Weaknesses 
Implementation. A gap between legality and reality characterizes much of Kosovo’s 
legal framework. Hundreds of new laws and regulations have been promulgated, but 
implementation and compliance are still poor. In some cases, the judges do not have 
copies of the new laws and regulations that have been passed. 
Drafting of Legislation. At present, the Assembly does not write legislation (except the 
law “On Gender Inequalities”). Ministries prepare the draft laws; and they tend to 
present the views of the Minister, raising the concern that Ministries may tend to over￾regulate and oppress economic growth. 
Limited Local Role. The role played by UNMIK and the international community in 
drafting the legal framework has meant that Kosovars have had little say. Local impact 
of the new laws and regulations is as yet undetermined. In future work, it will be very 
important to take the time to include local personnel in the substance and the process of 
development of the framework of commercial law. 
47 
Coordination 
Donor coordination is always important but is especially important now in the legal area 
in Kosovo in order to leverage the resources from each donor. There is good 
coordination between USAID and other donors in the commercial law area. 
On development of legislation in the executive branch, the CLT works closely and 
cooperates with the Office of Legal Support Services (OLSS) and with the EAR/GTZ 
advisors at the Prime Minister’s Office. The advisors of OLSS hold biweekly meetings 
to coordinate all OLSS activity, to review progress, and to make the most use of the 
expertise of various legal advisors. 
The Assembly Support Initiative group holds biweekly meetings with stakeholders in the 
legislative process to review progress and coordinate support to the Assembly. 
Outreaching coordination is necessary between USAID experts and UNMIK to clarify in 
advance issues related to reserved powers. As an example of failed coordination, a law 
on the trade of petroleum was drafted by USAID advisors; but UNMIK reversed its 
earlier decision and determined that SRSG retains the authority to legislate in this area. 
Issues and Sustainability 
Justice Sector. Practically all aspects of development, management, and oversight of the 
justice sector are reserved powers (Pillar I). Although UNMIK's retained control of the 
sector promotes gradual development of judicial institutions, retained control has 
consequences for sustainability because there is limited local involvement. 
Checks and Balances. While the legislative work of the Assembly has increased, it still 
does not operate as an efficient check on the executive branch. Oversight and control of 
the Government is still limited. As UNMIK transfers more powers to Kosovars, it will be 
crucial that a sound legal framework that ensures checks and balances exists. 
Furthermore, ministers need to appear before the Assembly, and MPs need to know their 
own rights and responsibilities. 
Judicial Training. Judicial training represents a priority need and is difficult to address. 
Training is needed in practically all substantive areas of law and judicial skills, especially 
in legal drafting. These problems exist in Pristina and are, perhaps, more severe outside 
Pristina. Long-term sustainability of judicial training requires two key conditions: 
competent trainers and funding from donors. Coordinating with other donors, USAID 
could consider fulfilling the need for training in select areas. The World Bank, for 
example, is providing training to judges. 
Information. Judges and Assembly members interviewed spoke of the need for copies of 
laws and commentaries on the laws. UNMIK has promulgated approximately 188 
regulations and 105 administrative directions since 1999, with numerous amendments. 
Thus, there is much information to be distributed and absorbed by the legal community. 
48 
Furthermore, the new laws introduce a market economy, and judges need commentaries 
to familiarize themselves with these new concepts. The lack of information poses a 
problem for all legal professionals. 
RECOMMENDATIONS 
1. Continue with Completion and Refinement of the Legal Framework.
1) A comprehensive Company Law is under development by EAR. USAID 
advisors will need to comment on the draft. 
2) Basic Property Law is under development by EAR. USAID advisors will need 
to comment on the draft. 
3) A Finance Leasing Law may be needed. PISG has not yet demonstrated 
interest in legislation governing financing leases. However, assistance may be 
appropriate if particular products likely to be provided under finance leasing 
are identified. SME activity may create a demand for additional legislation in 
this area, including provision of the statutory framework for financing leases. 
4) Coordinate with UNMIK and EAR to respond to needs for new economic 
laws or for amendments to existing laws. 
2. Assist Government Agencies with the Implementation Process. The Sub-Normative 
Act under development will put in place procedures that will ensure transparency and 
non-discrimination. As mentioned above, this is a priority for the CLT. EAR and 
USAID advisors should work to develop two laws on administrative procedures. 
3. Assist the Assembly to Draft Legislation. Continued support to the Assembly is 
necessary to improve its capacity to debate and act on draft legislation. Such assistance 
will be even more important if the Assembly starts to draft its own bills. Therefore, legal 
drafting assistance should continue. Other areas where continued assistance would be 
helpful are monitoring the progress of legislation and assisting committee members to 
review and amend laws. Another helpful assist would be to introduce the right of 
interpolation to assembly committees, so that Ministers and other senior civil servants 
cannot refuse to testify. (This should be costless.)
4. Assist the Assembly to Conduct Oversight over the Executive Branch. A great need 
exists for increased oversight of the Executive by the Assembly. During the short period 
of time that the Assembly has been in existence, it has been so occupied enacting new 
laws that it has not had sufficient time or accumulated the experience required to conduct 
oversight of the executive branch. However, if the laws are not implemented and 
enforced, parliament should know why and take action to remedy the situation. 
5. Assist in Building Public Awareness, Especially in the Business Community. The 
public, and businesses in particular, needs to understand commercial laws, including the 
rights and obligations that they impose. Public outreach efforts to businesses regarding 
reforms should contain practical and specific information regarding commercial laws and 
emphasize expected benefits to business from the reforms. 
49 
6. Address the Implementation Gap and Training. More than good laws are needed to 
stimulate economic growth. The important activities lying ahead are implementation and 
training. Training for lawyers on commercial laws and related procedures is critical. 
The commentaries on several laws seem to have helped judges and legal professionals to 
understand the laws and obtain guidance regarding their application. It will be advisable 
to continue support for the preparation, publication, and distribution of commentaries. 
50 
PRIVATIZATION AND COMMERCIALIZATION
FINDINGS 
Progress 
Promulgation or Implementation of Legislation, Regulations or Policies--Privatization 
Framework: The Kosovo Trust Agency (KTA) is fully operational, and the requisite 
administrative and tendering policies and procedures are substantially in place. A notable 
exception is the liquidation procedure, which is before the KTA Board. Additionally, 
finalization of the liquidation mechanism for real property awaits a Land Use Regulation 
amendment now being drafted by the SRSG’s Office of the Legal Advisor (OLA). 
USAID is considering deletion of TO 4 benchmarks relating to liquidation and 
insolvency proceedings. 
Procedures for evaluating ownership claims are still being refined with judges. 
Governance guidelines for privatized “newcos" have been established, but the 
comprehensive governance handbook has not been completed. No work has been done in 
the areas of securities law and securities market development, and deletion of these 
benchmarks is also being considered by USAID. A substantial database has been 
created, but no summary valuations of SOE’s have been done, nor has the valuation unit 
been established. Deletion of valuation benchmarks has been proposed and is being 
considered by USAID. 
Except in the case of a limited number of “special” spin-offs (perhaps 6 of 350) bidders 
need not have demonstrable expertise in the sector in which they are seeking to 
participate, and no commitments are required in terms of employment or investment 
levels. In the case of the one special spin-off reviewed in this Evaluation, KTA requires a 
business plan from each bidder and sets minimum employment and investment 
conditions. An option whereby KTA can retake the SOE in the event of noncompliance 
with the business plan supports the employment and investment conditions, although the 
conditions represent a significant departure from the free-market approach ostensibly 
being pursued in the Economic Reconstruction program of USAID. All prospective 
investors are subject to a background check through the local police, who reportedly have 
some ability to conduct liaison with Interpol. 
 
Promulgation or Implementation of Legislation, Regulations or Policies-- Utility 
Commercialization Framework: In the telecommunications sector, a liberalized 
comprehensive regulatory framework is largely in place, including plans for private 
sector participation. The Ministry of Transport and Communications (MTC) plans to hire 
an independent specialist to work on tariffs. Telecommunications Regulatory Authority 
(TRA) is expected to be operational by mid-November. In the water/wastewater/solid 
waste sectors, an Administrative Directive establishing Water and Waste Regulatory 
Office within Central Regulatory Unit (CRU) is before SRSG, and some work appears to 
have been done in the accounting, reporting and licensing areas. However, the Project’s 
progress in these sectors is very difficult to assess due to the complex overlap of 
51 
responsibilities between CRU and KTA, and between USAID technical experts and EU 
secondees. Progress of the Project in the electricity sector is even harder to identify. The 
Legal Affairs Office of UNMIK apparently has not approved development of a regulatory 
framework for the sector. A Project technical expert reportedly acted for a time as 
Secretary of KEK’s Supervisory Board, providing liaison with KTA. Although a full 
regulatory framework is called for in TO 4 for the air/rail transport sectors this Evaluation 
has uncovered no Project work toward that end. 
Institutional Development, Reinforcement or Strengthening--Training: Training of 
KTA staff primarily in the procedural aspects of privatization, and also in its general 
objectives, is complete. Some training has been provided at MTC, but much more will be 
required of specialized TRA staff when it is formally established. While core financial 
and operational oversight training is required by TO 4 in the water/wastewater/solid 
waste sectors, little training has been done due to funding limitations. 
 
Specific Implementation Actions and/or Quantitative Output Targets--Privatization 
Execution: The first two waves of SOE tenders are complete, and 18 winners have been 
selected. Some E22 million in advance payment of full purchase price has been received 
by KTA. Its distribution is pending finalization and implementation of recipient 
identification procedures, as well as completion of contracts of sale and KTA Board 
ratification. The winning bids have ranged in amount from E310,000 to E2,875,000, and 
the bids for most SOE’s have reportedly clustered fairly closely together. These 
executions are significantly short of the TO 4 benchmarks, due to legal delays in 
commencement of the program. 
The 18 winning bidders comprise mostly local investors, some of whom may be 
generally characterized as strategic, including management buyouts. A few foreigners 
from the Albanian Kosovar diaspora have also won tenders, as has at least one local￾diaspora consortium. Approximately 160 SOE’s are in the transaction pipeline, 
representing a potentially wider range of pricing. 
Public Information and Education: Seminars on the privatization process have been 
held for 1,500 SOE and union personnel, and debriefings have been done before high￾level PISG officials. 
Constraints 
Final Status: Uncertainty regarding the final status of Kosovo remains one of the 
principal constraints on the use of privatization and commercialization to promote 
economic expansion. The status issue, and the related indeterminacy of Kosovo’s 
equitable share of the former FRY sovereign debt, have prevented IFI lending for major 
capital projects. While risk-tolerant foreign equity investors might come to Kosovo 
shopping for perceived bargains, international commercial banks and other foreign 
private sector lenders are unlikely to lend significant amounts on a long-term basis into a 
territory with an unclear political, economic and social future. This could effectively 
preclude large transactions of the type that usually require substantial debt-capital. 
52 
Economic Conditions: The privatization and commercialization programs are being 
pursued amidst especially trying local economic circumstances detailed elsewhere in this 
Evaluation Report. One important such circumstance is the limited size of the local, and 
even cross-border Albanian-speaking market. In addition, the recent and current periods 
are rife with uncertainty for international investment most everywhere. It is likely that 
these factors have limited, and may continue to limit investor, and especially foreign non￾diaspora investor interest, in pursuing opportunities in Kosovo. 
Historical Factors: The unique Yugoslav communitarian model of property rights that 
has resulted in the existence of the SOE’s, and the history of multiple expropriations, 
have combined to make privatization in Kosovo a more significant challenge than in 
many other jurisdictions. To begin with, the lack of identifiable owners was deemed to 
require the complex trust structure of KTA, involving a great deal of legal work. Further 
attention is required for the case-by-case SOE determination needed prior to tender. In 
addition, a lengthy publicity campaign was required to explain the process and 
anticipated results to the probable stakeholders. All told, the lag between USAID’s TA 
advice in favor of privatization, and the receipt (and more importantly, release) of 
proceeds, has been longer than anticipated. 
CONCLUSIONS 
Strengths 
Cash Inflow from Privatization: Perhaps the most significant accomplishment of the 
privatization program to date is the successful tender of the first two waves of SOE’s, 
raising almost E22 million, including some international funds. It can reasonably 
expected that when the aggregate purchase price for the first two waves of privatization is 
distributed, especially the approximately E4 million earmarked for the workers, a portion 
will be spent, and a portion invested, in the local economy. If the results of the rest of the 
tenders reflect this experience, there should be a positive impact on the Kosovar 
economy. 
Privatization Program Implications: Another strength is the completion of most of the 
critical institutional and legal framework for the projected 500 privatizations and 
liquidations. Fairly close clustering of the first sets of bids could reflect a desirably 
transparent process both on paper and in practice. Potentially, the privatization process in 
Kosovo could inculcate a sense of property rights and could contribute to the 
development of an entrepreneurial spirit. This could be one positive consequence of the 
planned distribution to an enterprise's workers of 20% of KTA sale proceeds, a scheme 
with little to recommend it on general equity grounds. There already appears to be a 
trading culture in Kosovo, but many current commercial ventures likely are responses to 
the higher- income expatriate presence, slated for reduction over time. Empowering large 
numbers of people with a small sum of investable capital in this way could conceivably 
motivate them to seek out market niches. 
53 
Telecom: The Project’s only success on the utility commercialization side appears to be 
in the telecommunications sector, where a comprehensive independent regulatory 
framework is largely in place to promote new private sector entrants. While analytical 
questions are raised below about the transactional process, the mobile tender may have a 
good chance of success. Due to the relatively large number of modest sized firms 
typically found in this sub-sector, it could represent a significant opportunity for 
attracting some foreign direct investment. 
Weaknesses 
Timing of Activities: Some of the project activities originally planned have proved to be 
premature for Kosovo's needs now or in the immediate future. For example, the USAID 
project provides for significant work in drafting laws and procedures regarding corporate 
governance, securities issuance, and securities market regulation. Yet the facts on the 
ground suggest that most of the firms to be privatized (and those already in the private 
sector) are likely to have very simple capital structures, and will have no need for raising 
funds in a securities market. Moreover, it seems unlikely that an equities market would 
attract significant funds at this early stage. 
 
Another example is in the telecommunications sector. The law drafted by the Project and 
promulgated by SRSG not only provides for regulation of a sector in which private 
participation is encouraged, but actually “embeds” three international tenders. The 
rationale for this provision is not obvious, and appears contrary to what might be 
suggested by a free-market approach. 
Private Investment Conditionality: The special spin-off procedure is not economically 
optimal. The employment requirements should be expected to deter potential bidders. 
Moreover, it simply perpetuates the anti-market habits of the past by using productive 
economic entities to pursue social goals. Further, the required investment commitment 
effectively precludes receipt of precisely the market information that is normally desired 
in a competitive tender for sale. In practice, investors are being asked to bid on a KTA 
deal or an expatriate consultant deal, not an investor deal. Thus, the transaction looks 
less like a privatization sale and more like a concession in which the private sector is 
being asked to bid on the opportunity to undertake operations and investments 
determined in pursuit of non-commercial ends. 
Skills Transfer: It appears that just as the local professional staff of KTA are being 
trained extensively on the tender process, their work is largely limited to procedural 
matters. The strategic analysis involved in privatization, such as the prioritization of the 
firms to be tendered and selection of special spin-offs, seems to be done primarily by 
expatriate consultants. In addition, since valuations are generally not done by KTA, local 
staff are not in a position to learn this valuable skill through on the job training. Some 
local staff do interact extensively with the SOE’s, and some financial work is done, but it 
appears to be more in the nature of fact-gathering than analysis 
54 
Labor Sector Support: BSPK’s President, a KTA Director, has proposed that special 
spin-off procedures be required for all SOE’s with more than 50 employees. His 
proposal would require the investor in a privatized firm to retain 80% of its employees 
for the first two years, and permit 20% reductions every two years thereafter. It is hoped 
that this could be accomplished through attrition. The President estimates some 65% of 
the SOE’s would meet this threshold, many multiples of the number of entities for which 
the KTA Privatization Department is planning special spin-offs. 
The KTA Board does not support this proposal, believing it could deter potential 
investors. The general view at KTA is that the current employment in the SOE sector is 
sufficiently small that privatization will not dislocate an excessive portion of the Kosovar 
workforce. This view is supported by LLA’s August 2002 finding “that well under 
20,000 people, of a population of some 1.9 million, draw a regular income from an SOE.” 
KTA also argues that the 20% payout should allay worker concerns. However, a 
dismissal of the views of a significant labor leader without care and diplomacy could 
weaken political support for privatization. 
Issues and Sustainability 
Immunity: As USAID is already aware, EU-seconded KTA Directors and counsel have 
raised concerns about KTA’s legal mandate for mass SOE privatization and, accordingly, 
as to their potential personal liability for any related claims against KTA. As these 
directors may not have immunity from lawsuits arising from privatization transactions, 
the Deputy SRSG-Reconstruction, ex officio Chairman of KTA, has halted the 
privatization program. The recommendations below that relate to SOE privatization and 
liquidation obviously presupposes that this hurdle is overcome and the program is 
resumed. It should be noted, in addition, that since this matter is already in the public 
domain, a significant delay could damage privatization prospects even if resumption is 
later attempted, and that spillover effects on confidence in other aspects of market reform 
are possible. 
Economic Impact: USAID’s SO 1.3 seeks “recovery and expansion of the private-sector 
led economy.” It is not likely that privatization of all SOE’s will in and of itself lead to 
significant economic growth in Kosovo, perhaps not even enough to offset the negative 
impact of the anticipated phased withdrawal of the international presence. Privatization 
can enhance growth prospects through two major channels: by causing systemic 
improvements in enterprise efficiency, and by attracting productive investment. The 
results of the first two waves of SOE tenders, while admittedly not representative of the 
overall pool, suggest that SOE investors are likely to consist largely of local and diaspora 
investors. 
It may well be that liquidations, apparently not being pursued due to legal and political 
issues, would have a greater economic impact than the planned going concern spin-offs. 
Putting land currently unused or unproductively used back into the economy could be a 
source of job creation. Further, if it is determined that SOE creditors had and have no 
claim against its land, sale proceeds could be used in a variety of socially and 
55 
economically desirable ways (such as in retraining or other dislocation coverage) not 
contemplated under KTA’s current trust structure. Of the 500 or so SOE’s, there is some 
uncertainty as to how many should, as an economic matter, be considered insolvent and 
formally liquidated, and how many sold at least initially as going concerns. 
 
Coordination of Assistance 
US/Kosovo: The cooperation between USAID’s technical assistance program, especially 
in privatization, and Kosovar Albanians at all levels has been quite good. This 
population has very high regard for the United States, possibly even to an extent beyond 
that consistent with USG policy favoring Kosovo’s full integration into Europe. KTA’s 
public outreach campaign appears to have achieved major public buy-in to SOE 
privatization. As implied above, whether this support will last if significant layoffs occur 
is impossible to predict. 
Kosovars in PISG and POE management have the highest regard for the talents and 
result-orientation USAID’s technical experts. While, for example, MTC is very 
appreciative of the Project’s educational efforts, an independent judgement is that there 
may be excessive reliance on the consultants for policy decisions as opposed to advice, a 
sustainability concern. The depth of local gratitude for specifically American assistance 
may also imply relatively uncritical Kosovar evaluations of its relative importance in any 
given area. This in turn hinders the interpretation of their evaluations as this evaluation 
team attempts to assist USAID in prioritizing future TA needs. 
 
US/EU: Generally, EU officials in Kosovo respect the skill set USAID has mobilized, 
and is largely in agreement with USG’s market-oriented agenda. However, the 
relationship between EU secondees in management positions in Pillar IV and those 
implementing the USAID TA program has not always been smooth. 
Privatization is not, of course, hard science, and there is always a degree of subjectivity in 
professional perceptions of the proper approach in particular circumstances. Thus, for 
example, the foregoing concerns may only reflect the dichotomous views of two "camps" 
of privatization experts. Oversimplifying for illustrative purposes, one view holds that 
transactions should proceed quickly, with the market determining the critical economic 
values, while the other favors more painstaking analyses, evaluations, assessments and 
often restructurings, before any transactions take place. The search for the right balance 
of the two approaches has often been contentious in international experience. 
The respective roles of KEK’s donors have not been clear. Both TA and capital projects 
appear to have been undertaken with little coordination among various donors. 
Complicated by high turnover among expatriate experts and seconded management, the 
lack of coordinated donor planning has limited the effectiveness of KEK’s turnaround 
efforts. 
56 
To the extent any lessons can be extracted from the singular experience of Kosovo, it 
should at least be contemplated whether the impacts of USAID’s TA would have been 
greater had it been politically feasible to have had its own, more narrowly focused pillar. 
US/UNMIK: While UNMIK, through Pillar IV, supports in principle the market-oriented 
reform program being assisted by USAID, practical difficulties in obtaining UNMIK 
approvals, especially in the legal area, have substantially delayed necessary 
implementation steps. For example, OLA is still working on the Land Use Regulation, 
which is preventing execution of liquidation transactions. Also, a recent EUMIK change 
in organizational structure reportedly led OLA to turn aside a significant amount of 
Project regulatory work in the energy sector. Whatever is the reason, it does appear that 
OLA-related delays have significantly hampered achievement some of Pillar IV’s and 
USAID’s objectives. 
RECOMMENDATIONS 
1. Liquidations Should be Pursued More Vigorously. As discussed above, the 
liquidations could be more economically significant than the spin-offs. In addition, the 
principle of market entry and exit is important to the further development of the private 
sector-led economy. Thus, rather than simply awaiting action by UNMIK/OLA, it would 
be justifiable to expend further resources in both political and legal aspects of moving 
liquidation forward. Of particular importance is to include outreach at the municipal 
level where the real environment for land acquisition is determined, as well as 
coordination with PISG and the labor sector. 
2. The Spin Off Privatization Program Should Be Completed if Pillar IV Permits. 
Despite its probably limited economic impact, privatization of SOE’s may be a key factor 
in developing a sense of private property rights in Kosovo, and could also further 
development of a viable entrepreneurial culture. The curious notion of “social property” 
is inconsistent with the development of a functioning market economy. 
3. Eliminating Work on Governance and Securities Would Be Justified. As noted 
above, none of corporate governance, securities laws or public securities markets is on 
the critical path of the SOE privatizations and other transactions likely to occur in 
Kosovo over the intermediate term. 
4. TA for the Telecom Sector Should Continue, but with Better Skills Transfer. Since 
the mobile telephony tender is perhaps Kosovo’s best chance for attracting some foreign 
direct investment in the short term, TA would be very useful in implementation of the 
regulatory framework under which the new entrants will operate. However, MTC and 
prospective TRA officials must be given sufficient training so that they will be self￾reliant once the initial transaction(s) close. Continued MTC and TRA dependence on 
expatriate consultants for policy advice in either regulating the market or suggesting new 
tenders may be required for the immediate future, but planning for its phase out should be 
completed at the earliest possible time. This is necessary to avoid a serious sustainability 
concern. 
57 
SUMMARY AND CONCLUSIONS
The design and initial implementation of this four year old program was of exceptionally 
high quality. Its accomplishments are at this stage beyond what might have been 
expected. There are, nevertheless, concerns about the sustainability of the 
accomplishments that are not negative reflections on the programs conception or 
management. Rather they reflect the unique political, social and economic circumstances 
of Kosovo. This evaluation report has sought to keep those circumstances in perspective, 
and to identify areas that require further attention going forward, and to suggest some 
forms that attention might take. 
Program Strengths 
The greatest overall strength of the program has been its design. It not only conforms to 
the requirements of a market-directed, transparent and stable economy, but within that 
paradigm was tailored appropriately the specific situation of Kosovo. However the speed 
with which the resources were mobilized and the program was put in place, set an 
exceptionally high standard. Next in the order of strengths was that the program’s 
emphasis was primarily on establishing the environment for private economic activity 
rather than on trying to out-guess the markets. Finally, the four TO’s used to drive the 
program followed a logical and practical sequence, and were meticulously crafted. 
Program Weaknesses
The principal weakness of the program has been its limited success to date in preparing 
Kosovars to take over the highest levels of management and the highly specialized 
professional-technical functions such as economic analysis. It has also been less 
successful than would be desired in informing and educating the public and government 
officialdom on the fundamentals of market-driven economic systems, to the extent that 
Kosovars appropriate the confidence in and commitment to that kind of economic 
system. In the realm of taxation and public expenditures, in particular, it is to be 
anticipated that after the departure of expatriate experts, intense special-interest lobbying 
will take place and will have the potential to corrupt the impressive market-friendly 
environment that USAID has been helping to create. 
COORDINATION 
Coordination among the donor agencies in which technical expertise primarily resides 
has been as good as a long-time foreign assistance observers can imagine. The IMF and 
the World Bank in particular have recognized the timeliness and appropriateness of the 
USAID program. While occasional disagreements among economic experts on particular 
routes to specific objectives is a certainty, there appears to be broad and deep agreement 
on the objectives and mutual respect for approach. 
58 
Coordination among the various public institutions being developed under the USAID 
program has also been excellent, particularly between the BPK and MOFE, where 
coordination is particularly important. 
Coordination among the key political entities is more difficult if for no other reason, 
because of their sheer numbers. This appears to have been a serious obstacle to 
significant progress in privatization, even though the procedures and other elements of 
“literature are largely in place.” For the next stage of USAID assistance, it would be 
desirable for its program activities to be subject to fewer decision points. 
RECOMMENDATIONS 
The full evaluation report identifies priorities for future assistance in each specific area. 
The following is a brief overview of the most important recommendations, in order of 
priority, detailed in the report. 
1. Banking and Finance. Most of the remaining work is in Bank Supervision and 
Regulation, although a major, formal training effort is required. TA should 
continue for one year, with emphasis placed on preparing to turn all operations 
over to Kosovars. 
2. Fiscal Reform. This effort has been exceptionally successful in getting the 
MOFE up, running and efficient. Nevertheless, it too is unready for operation by 
Kosovars. A final year of TA should address that problem, and develop a plan 
for dealing with issues raised in the evaluation report especially project 
evaluation in the budget function. 
3. Pensions. The pension work has been highly, and quickly, successful. It is 
important not only as a potential vehicle for mobilization of savings, but for 
providing a much needed element of economic security for Kosovars. It should 
be seen through the next year of its development. 
4. Commercial Law. The basic framework is in place. The EAU is involved and 
might be expected to produce replacement technical assistance, as required. 
5. Privatization. This area could be considered a higher priority if logjams could be 
removed to allow it to proceed. If this happens it should be solidly supported. 
6. Insurance. Some great successes have been realized. One technically expert 
observer considers it the most astounding success of the program, both because of 
its substantive significance and the fact that it was put in place without an 
internationally accepted template. Nevertheless, it is not clear that significant 
further USAID funding is required, and the industry itself should be considered a 
potential source of funding for deepening the sector’s development. 
7. Public Utilities. It appears that a decision has been made, or is about to be made, 
for USAID to remove activity in this sector from the current USAID program. 
That seems appropriate, with two caveats: (1) the Telephony sector is a good 
candidate for privatization and USAID might wish to support that; (2) although 
the power sector is not currently viable, it is such a huge economic sector that, 
59 
should the opportunity arise for USAID to stimulate or undertake planning for a 
rational program of revitalization, it could be a worthwhile effort at modest cost. 
 
 
60 
ANNEX I: PERSONS INTERVIEWED
USAID: Washington
Sarah W. Farnsworth, Chief, Balkans Division, Bureau for Europe and Eurasia 
John Chihfield, Economist and Financial Sector Advisor G/EGAD/EM 
Jean R. Lange, Senior Financial Sector Advisor, Bureau for Europe and Eurasia 
USAID: Kosovo 
 Dale Pfeiffer, Director 
 David Leong, Deputy Director 
 Judith Schumacher, Program Officer 
 Courtney Blair, Director, Office of Economic Restructuring 
 Sharon Hester, Economic Policy Advisor 
 Shpresa Arifi, Project Manager, Privatization 
 Luan R. Gashi, Program Economist 
 Besa Ilazi, Program Economist 
 Merita Stublla, Commercial Law Specialist 
 Pranvera Recica, Rule of Law Specialist 
International Monetary Fund: Washington 
 Dmitri G. Demekas, Advisor, Immediate Office, European I 
International Monetary Fund: Kosovo 
 Shehada Hussein, Resident Representative 
The World Bank: Kosovo 
 
 Sidi Boubacar, Country Manager 
 Nand Shani, Consultant 
EBRD: Macedonia 
 Zsuzsanna Hargitai, Head, Skopje Resident Office 
BearingPoint: Washington 
 Darwin Johnson, Managing Director 
 Fernando Ramos, Managing Director, Fiscal 
 Lori A. Bittner, Managing Director, Banking 
 Kenneth R. Cahill, Managing Director, Pensions 
 Richard A. Longstaff, Privatization 
61 
BearingPoint: Kosovo
 Matthew Smith, Chief of Party 
 James H. Wooster, Principal International Officer, Ministry of Finance and 
 Economy 
 John R. Johnson, Director of Privatization 
 David Weatherman, Deputy Managing Director, Banking and Payments 
 Authority of Kosovo (BPK) 
 Oliver Dziggel, Senior Manager, ICT Legal-Regulatory 
 Kris Kauffman, Treasury Director, MOFE 
 Stephen L. Leeds, Budget Policy and Development Advisor 
 Larry Daum, Municipal Budget Advisor 
 Deanna Aubrey, Municipal Budget Advisor 
 Thor Hesla, Public Information and Education Advisor 
 Liz Wickstrom, Legal Advisor, Assembly 
 Bill Klawoon, Legal Advisor, Prime Minister’s Office 
 Dian Johnstone, Property Tax Administration Advisor 
 Sally Powers, Property Tax Valuation Advisor 
 Janusz Szyrmer, Chief Macroeconomist, Macroeconomic Analysis Unit 
 Magdalena Tomczysnka, Macroeconomic Policy Advisor 
 Graham Burnett, Tax Advisor 
 Florjon Mima, Tax Advisor 
 Gary Smith, Internal Audit Advisor, MOFE 
 John F. Ewald, Information Technology Advisor 
Office of the Prime Minister 
 Azem Hajdari, Government Secretary
Ministry of Finance and Economy, Kosovo 
 Ali Sadriu, Minister 
 Kanife Statovci, Treasury Director 
 Hasan Sufaj, Municipal Budget Director 
 Mustafe Hasani, Tax Administration Director 
 Xhemajl Gashi, Macroeconomic Policy Director 
 Agim Krasniqi, Budget Director 
 Nashide Bajrami, Tax Policy Director 
 Fatime Islami, Tax Policy Analyst 
 Fehmi Mehmeti, Internal Audit Director 
 Ali Gashi, Property Tax Director 
 Muharrem Shahini, Spokesman, Information and Public Relations Office, 
 MOFE 
62 
Banking and Payments Authority of Kosovo (BPK) 
 Donat Branger, Managing Director (Supplied by IMF) 
 David Weatherman, Deputy Managing Director (Supplied by USAID) 
 Thomas A. Turula, Insurance Advisor 
 Flamur Keqa, Director of Banking Supervision and Licensing Department 
 Nuredin Krasniqi, Chief Examiner 
 Suzana Dervari, Bank Supervisor 
Raiffeisen Bank 
 Steven Grunerud, Chief Executive Officer 
Micro Enterprise Bank 
 Frieder Wohrmann, General Manager 
Legislative Assembly 
 
 Pirro Rexhepi, Advisor 
 Haki Shatri, Chairman, Budget Committee 
 Bajrush Xhemajli, Chairman, Committee for Trade and Industry 
 Daut Beqiri, Director, Legal Department 
 Franck Boulin, EU Advisor, Acting Secretary to the Assembly 
 Nicolas Maziau, EU Advisory Project, Team Leader 
Courts
 Nuhi Uka, Chairman of the Municipal Court, Pristina 
 Ferit Bishani, Judge, Municipal Court, Pristina 
 Adem Ajvazi, President of Pristina District Commercial Court, Pristina 
Lawyers and Legal Scholars
 Bequr Sadikaj, Dean of Law Faculty 
 Nerxhivane Dauti, Kosovo Law Institute, Member of Assembly 
 Gani Tigani 
 Ram Gashi 
 Lirije Osaj, RZBKO Legal Advisor 
 
Kosovo Institute for Public Administration 
 Vehbi Beqiri, Team Leader 
63 
 Naim Rustemi, Chief Executive Officer 
BSPK (Labor Union) 
 Bahri Shabani, President 
Kosovo Trust Authority (KTA) 
 Kirk Adams, Privatization Transaction Manager 
 Karl Bach, Privatization/Corporate Governance Lawyer 
 Giles Everts, Team Leader, Privatization Department 
 Piet Faling, Energy Division Manager 
 Mamica Gashi, Privatization Transaction Officer 
 Eric W. Haskins, Deputy Manager, Energy Division 
 John R. Johnson, Director of Privatization 
 Sam Rutherford, Divisional Manager, Water Irrigation and Waste 
 Ilir Salihu, Regional Development Economic Officer 
 Ahmet Shala, Deputy Managing Director 
 Szabolcs, Szakers, Deputy Managing Director 
 Teki Shuhu, Local Attorney 
 Henrik Viladsen, Chief of Staff 
Ministry of Transport and Communications (MTC)
 Lulzim Kurtaj, Head, Information Society Policy 
Ministry of Trade and Investment 
 
 Ali Jakupi, Minister 
Central Regulatory Office 
 Jacques Marquis, Operational Expert, Solid Waste 
 Sher G. Singh, Water Operations Specialist 
Ferronikeli (SOE)
 Haxhi Qorri, General Director 
KEK (Electric Company, SOE) 
 
Charles Carron Brown, Chairman, Supervisor Board 
 Ali Hamiti, Director for Operations