presented at the Second Donors' Conference for Kosovo in Brussels, November 17, 1999
The World Bank has defined a support strategy for Kosovo over the next 18 months that includes three elements: (i) economic policy advice and technical assistance to UNMIK and, eventually to local governments; (ii) support to the formulation of a framework for reconstruction and recovery program; and (iii) selective financial support for reconstruction and rehabilitation. The overall program is summarized in the World Bank Transitional Support Strategy (Annex 1).
While the World Bank cannot provide regular IBRD or IDA resources to Kosovo due to its non-membership situation, the World Bank has two sources of financial support that can be made available to Kosovo in its particular post-conflict circumstances. The first is funding from a Post-Conflict Facility (under the World Bank’s Development Grant Program), used for support in post-conflict situations throughout the world. A total of US$2 million have been approved to date from this source. The second is a special set-aside of IBRD net income in a trust fund to be used solely for the purpose of support to Kosovo’s reconstruction and recovery effort. The World Bank’s Board of Executive Directors approved the establishment of this special Trust Fund for Kosovo, which is expected to provide US$50-60 million on a grant basis over the course of the next 18 months. An initial tranche of US$25 million has been approved and will be provided during the next six months. A second tranche of US$25-35 million will be sought in mid-2000. The specific projects to be funded under both the Post Conflict Facility and the first tranche of the Trust Fund for Kosovo are set out below, and described in greater detail in the following pages.1 Co-financing is being sought from all interested donors for each of these projects.
Post Conflict Facility:
Estimated Date Funding Required
Community Development Fund Project
1999 Budget Support
Trust Fund for Kosovo:
Agriculture Re-Start Project
Project Preparation TA Facility
2000 Budget Support Operation
Education and Health Finance Project
Credit Facility for SMEs
Water and Wastes Project
Kosovo Community Development Fund
The Kosovo Community Development Fund is being established as a local institution that will respond to community demands for public investment in an efficient, transparent and equitable manner. The Community Fund will channel financing for community infrastructure and services projects. It will complement other infrastructure investments by ensuring that demands expressed by local communities do not fall between the cracks of larger-scale programs. It will differentiate itself from other programs by being locally managed and focusing on building local capacity and initiative. The Fund will work with municipal governments where these have demonstrated good governance. By involving communities in local decision-making, it will aim to foster transparency and public participation at the local government level so helping to develop accountable and democratic local government structures.
To provide rapid, targeted support to assist communities rehabilitate or develop local infrastructure and services, which will also provide employment opportunities and improve standards of living.
To support the development of local government structures that respond to the needs of communities in a transparent, equitable and accountable manner.
The Community Fund will finance small-scale projects identified as priorities by communities themselves up to a maximum of US$75,000. Eligible types of projects include rehabilitation of small-scale public infrastructure (schools, health clinics, roads, water supply systems, recreational and cultural facilities); basic equipment vital for service provision (e.g. equipment for utilities); community services (e.g. programs for the elderly, the disabled, war widows, youth); and business development activities (e.g. vocational or on-the-job training schemes, business services).
The Kosovo Community Development Fund is being established in partnership with the Kosovo Foundation for Open Society (KFOS), the Pristina-based foundation that is part of the philanthropist George Soros' network of non-profit foundations which has been active in Kosovo since 1993. The Community Fund has a Kosovar Director, hired through a competitive hiring process, and will employ 12-18 professional staff. Fund management will be accountable to a Board of Directors comprising representatives from Kosovar society, the KFOS Board, the Soros Foundation network and the World Bank/other donors. The World Bank will provide technical assistance, and will also monitor and evaluate the Fund’s activities and provide financial oversight and control.
Communities, municipalities, and local non-governmental organizations may apply to the Fund for financing according to clear application procedures. Eligible proposals will be subject to a field appraisal. Approved projects will be implemented by local private contractors contracted by competitive bidding in the case of infrastructure projects and local municipal services offices, NGOs or associations in the case of services projects. The typical project cycle will take 2-6 weeks from application to approval, with implementation periods ranging from one to eight months. The Fund will liaise closely with UNMIK regional and municipal administrators who are expected to help generate demand and facilitate relations with local authorities.
Estimated Budget/Financing: US$20 million for the period 1999-2001
US$ 1 million from the World Bank’s Post Conflict Fund approved
Sarah Forster, Project Team Leader, tel: 44 771 423 4823; email: email@example.com
Madalene O’Donnell, Asst. Team Leader, tel: 44 7771 915 094, email: firstname.lastname@example.org
Flaka Surroi, Director Kosovo Community Development Fund, tel: 381 38 549 116
Terrice Bassler, Kosovo Fund for Open Society, tel 36 30 222 2083, email: email@example.com
Kosovo: 1999 and 2000 Budget Support Operations
The interim civil administration in Kosovo, UNMIK, will implement the local cost recurrent budget of Kosovo to finance expenditures related to civil administration (police, judiciary, civil service), education, health and social assistance, operations and maintenance of roads and other infrastructure, some transfers to public utilities for running costs, municipal services, culture, and related activities. These expenditures will be financed in part through local taxation: customs duties, sales and excise taxes, fees, and, over time, business and property taxes, hotel and restaurant taxes. Locally generated revenues will grow as the economy picks up and as tax administration is built up. The UNMIK budget estimates indicate a deficit for the period September-December 1999 and for the year 2000.
This deficit is estimated at DM86 million (US$48 million) for the final months of 1999 and a preliminary DM 142 million (US$80 million) for 2000, excluding security-related spending (the Kosovo Protection Corps). Details on budget estimates are given in the World Bank's report on the economy, Building Peace Through Sustained Growth. Updated comprehensive estimates for 2000 are presented in the written statement by UNMIK.
The budget deficit can be covered only through donor support for the budget. A number of donor governments and the World Bank has pledged such support for 1999 and 2000. Nevertheless, a non-funded gap remains for 1999 of about DM5 million (US$3 million); it is urgent to commit and disburse this amount rapidly to the UNMIK budget. Specific commitments for the 2000 financing requirement are also needed in sufficient amounts to cover the need.
The World Bank’s support for the budget will be undertaken through two operations: first, a grant financed from the Bank’s Post-Conflict Fund for the 1999 Kosovo budget, expected to be disbursed shortly and second, a grant financed from the Bank’s own Trust Fund for Kosovo for the year 2000 Kosovo budget, that is expected to be disbursed towards the end of the year. Donors are invited to provide budget support to Kosovo either by co-financing these Bank operations or through direct disbursements to the off-shore Kosovo budget bank account, details of which are available in the UNMIK document.
Saumya Mitra, tel: 1 (202) 458 9713; fax: 1 (202) 614 0220; email: firstname.lastname@example.org
Kosovo - Emergency Farm Reconstruction Project
The project aims to help jumpstart agricultural production over the next two cropping seasons and to re-launch the rural economy by investing in key farm assets (cattle and farm mechanization) and agricultural services (veterinary services and policy analysis capacity building). In doing so the project would contribute to preventing economic stagnation; provide on-farm employment, income and food security to rural households of which many are not in a position to rebuild their livelihood without external assistance; limit rural migration and the development of urban slums; and reduce the dependency on food aid. Time is of the essence in reaching project objectives.
1) Support to Re-establishing the National Cattle Herd. To assist in the restoration of food security of vulnerable farm families and in the rebuilding of the national cattle herd, the project would finance the purchase of around 3,500 heads of imported cattle (this compares to a cattle loss of some 200,000 animals).
2) Farm Machinery Repair and Replacement. Roughly 50 percent of tractors have been lost or damaged throughout the province. Under the project, repairs of all lightly damaged tractors (some estimated 6,000), motorcultivators and combine harvesters would be carried out initially in 5 to 8 municipalities.
3) Veterinary Services. To rapidly restore vital animal health services in the province, the project would provide basic kits of veterinary equipment to de facto private veterinarians throughout the province.
4) Capacity Building Support. To support UNMIK in analyzing and formulating a broad range of agriculture policy issues, the project would provide international and national expertise to work within the UNMIK structures. This would also include training to Kosovar professionals.
Project costs are estimated in the order of US$25 million to allow for implementation in 5 to 8 municipalities most highly affected by the recent conflict (the veterinary services component would be implemented province-wide, while the capacity support would be focused at the level of UNMIK HQ). The World Bank is considering to provide a grant of US$5.0 million in support of this operation. Donor support is also required to finalize project preparation.
Project Implementation Arrangements
Beneficiary Selection. A participatory beneficiary selection methodology aiming at minimizing errors of inclusion and exclusion of beneficiaries will be an important feature of this project. The process will involve selection of municipalities, villages, and farm families.
Project Implementation. The World Bank is considering to entrust overall implementation of this operation to FAO’s Emergency Coordination Unit (FAO – ECU) in Prishtina on the basis of procedures fully satisfactory to the World Bank, including (but not limited to) procurement, financial management and disbursements. The Bank is currently exploring with FAO the possibilities of such implementation arrangements. A number of international NGOs currently active in agriculture in the province have been contacted by the Bank and would also play an important role in implementation, farm advisory services, and project M&E.
Mr. Severin Kodderitzsch, tel: 1 (202) 458 2164, fax: 1 (202) 614 0698, email: email@example.com
Kosovo Education and Health Finance Project
The project will provide technical assistance and some material support to help re-build and re-structure the governance, finance, and administration of Kosovo’s education and health systems. Separate implementation units will be established in Kosovo to manage support for each sector.
In Education, the project is likely to include the following activities:
Piloting block grants to municipalities -- Central revenues would be allocated to selected municipalities and/or schools in a lump sum based on a per student funding formula. Once allocated, spending priorities would be determined at the municipality/school level. Support will be provided to design the mechanism and build management capacity at both central, municipality and school level.
Strengthening institutional capacity of the University of Kosovo -- Assistance will be provided to develop a strong university management structure, in line with Western European models, and to develop a capacity for strategic planning and management. Support will be provided to help re-define legislation and to re-orient financial management on the basis of a per student financing model.
Developing education governance and financing policy -- The project may also provide technical assistance and support to develop strategies to improve education governance and financing. The project could include support for the interim DESK Secretariat to be created by UNMIK, as well as for technical working groups (governance and finance) to be created under this secretariat.
In Health, the project is likely to include the following activities:
Restoring the Health Insurance Fund (HIF) – A main priority is to restore the functioning of the HIF. The project will provide technical assistance in the design and implementation of the systems for managing and monitoring revenue collection, budgeting, insuree identification, and provider payment financing system will be established and training provided to staff of the HIF and managers of health institutions. The project could also finance the necessary civil works and equipment for the HIF to begin functioning.
Developing and piloting alternative options for health care financing – In order to supplement public sector financing of health services, the project will develop other options for raising financing such as co-payments and user fees, private insurance, and community insurance.
Rationalizing excess capacity – Technical assistance will be provided to develop options for reducing excess supply and poor distribution of health facilities and personnel.
tel: 1 (202) 473 2848
fax: 1 (202) 477 1996
tel: 1 (202) 458 7580
fax: 1 (202) 477 1996
tel: 1 (202) 473 8715
fax: 1 (202) 477 0564
Kosovo: Line of Credit Program
The absence of a banking system that can provide credit for viable productive activity is probably the most serious constraint to private sector growth in Kosovo. As a consequence, the private sector is limited to activities that require minimal investment, mainly in the services and retail sectors. Filling this void with a credit program based on sound economic and financial principles accompanied with technical assistance is therefore very important to Private and Financial sector development of the Province.
Strategic Goals and Objectives
The strategic goals behind the SME line of credit framework will be to support a range of structural reforms to achieve the following outcomes:
- reverse the loss of confidence in the former banking system so that meaningful resource mobilization and financial intermediation materialize in the new banking/financial system
- establish the conditions needed to build a modern banking system for Kosovo based on a suitable regulatory and institutional framework and incentives for sound management and governance
- provide needed intermediation and related services (via technical assistance and training) specifically to the SME sector so that commercial fundamentals are applied by enterprises and banks in concert with prevailing prudential regulations
- contribute to a meaningful and well-coordinated re-start of the Kosovo economy which supports the long-term goal of developing a viable and competitive private sector in a well-managed and increasingly diversified economy
The SME line of credit project’s primary objective would be to provide needed financing to SMEs according to market-based guidelines in an effort to generate productive employment, and to lay the groundwork for subsequent growth and development in banking and the private sector. Financing would be for needed inputs and repairs to permit SMEs to increase production to meet rising demand. Training and other support would be provided to assist enterprises with the preparation of viable business plans, loan analysts with credit risk evaluation skills and ongoing credit management, and both parties with out-of-court adjudication processes.
A key secondary objective would be to lay the groundwork for more ambitious reforms to be pursued over the long term in support of a sound institutional framework for banking and financial services and private sector development.
Donor support would be required for this program, both for technical assistance in project preparation and for institution building and training needs, and to finance the core credit line.
Mr. Onno Ruhl, Principal Guarantee Officer, tel: 1 (202) 458 9119, email: Oruhl@worldbank.org
Kosovo Energy Project
Objectives and Project Components
The short-term objectives for the energy sector in Kosovo are the provision of acceptable levels of service (supply of electricity and, where applicable, of district heating) during the coming winter and initiation of measures linked to cost recovery and institution building. Action on these measures is already being taken. In the medium-term, the objectives have to be expanded to include full reconstruction and sustainable development of the energy sector. To achieve this, it will be necessary to collect all required data and analyze available options before developing the detailed measures to be implemented to achieve these objectives. Wide-ranging studies to define the future physical investment needs of the power sub-sector will be required. Other studies related to the future structure of the Kosovo energy sector also have to be undertaken. As these studies are considered an essential prerequisite for meeting the objective of full reconstruction and sustainable development of the energy sector, it is proposed that these studies be undertaken as Phase I of an Energy Sector Recovery Program, (called here Energy Sector Project). This phase would be co-financed by the Bank and other donors, and be supervised by the Bank. Phase II would deal with the implementation of the measures identified in Phase I.
The proposed project would consist of the following components:
- a least-cost generation expansion study and a master-planning study of the transmission and distribution networks;
feasibility study for the upgrading of the dispatch center and establishment of a SCADA system;
- an operational audit of the coal mines to identify potential organizational and management improvements, review adequacy of existing equipment to meet projected production targets, and identify additional investment needs;
- aerial mapping of the mines;
- establishment of computerized financial management systems according to International Accounting Standards for the power utility and the coal mines;
- an environmental audit of the power plants and coal mines;
- a feasibility study of the future district heating needs for Pristina, of the various options to provide this service, and of future investment needs in combination with (a) above;
- a study of the optimal future structure of the Kosovo energy sector and related regulatory issues; and
- a technical assistance component for required advisory services and training.
Estimated Budget/Financing: The total cost is estimated at US $13 million.
It is anticipated that, in the initial stages, project implementation would be closely coordinated with EC and UNMIK, with significant participation of the Kosovo Electricity Corporation.
Iftikhar Khalil, Program Team Leader, tel: 1 (202) 458 4171, fax: 1 (202) 477 1351, email: firstname.lastname@example.org
1) Note that descriptions are not included for all projects listed. Further information on those projects not yet shown is forthcoming shortly, and will be available on the World Bank-European Commission SEE Region website (www.seerecon.org) or by contacting Ms. Eileen Monnin-Kirby (email@example.com; 1 (202) 473 3090) or Ms. Janet Dooley (firstname.lastname@example.org; 32 (2) 504 0990)
Annex I: World Bank Group Transitional Support Strategy for Kosovo
The United Nations (UN) Security Council Resolution that brought an end to the recent conflict has called for a coordinated international effort to support Kosovo’s post-conflict reconstruction and recovery.1 It is in response to this request that Bank2 assistance is proposed. Kosovo is a province of the Republic of Serbia, one of the two constituent republics of the Federal Republic of Yugoslavia (FRY). The former Yugoslavia (Socialist Federal Republic of Yugoslavia) ceased to be a member of the World Bank Group in February 1993 and FRY has not succeeded to the membership of the SFRY in the Bank Group organizations.3 Nevertheless, the use of Bank resources and facilities in the form of assistance to Kosovo proposed in this memorandum would benefit members as a whole by contributing to a more peaceful and prosperous economic future for the Southeastern Europe (SEE) region. Moreover, in the context of the Bank’s role as co-chair of the SEE High Level Steering Group of international donors, Bank support to Kosovo is also likely to be a catalytic factor in raising additional support in a broad international donor effort.
This memorandum sets out a Transitional Support Strategy (TSS) for Bank assistance to Kosovo over the next 18 months to enable the Bank to respond to this call to the international community. This memorandum adds to the earlier paper outlining a framework for emergency assistance to Kosovo by setting out the legal status and governance structure of the province which were not yet fully defined in early July, as well as details on damage from the conflict, also not available at that time.4
The Spring 1999 Crisis in Kosovo. While tension between the majority Albanian and minority Serb populations in Kosovo has a long history, the recent conflict was the result of increasing hostility between the FRY authorities and an emerging Kosovo Liberation Army (KLA) in 1996-97. Sporadic fighting during 1998 ended in truce and peace talks in early 1999. These talks were inconclusive, however.5 Conflict resumed, with damage and the flight of many Kosovars. With renewed hostilities, NATO threatened to use force to bring the parties to agreement, and, when this failed to end the conflict, on March 24, 1999, began bombing FRY. The subsequent two and a half months saw a massive exodus of Kosovars from their homes along with further destruction. Finally, internationally-brokered peace principles were agreed between the FRY authorities and the Kosovar Albanians in early June. On June 10, 1999, the UN Security Council (SC) approved Resolution 1244 which brought a formal end to the hostilities and authorized deployment of an international security force (KFOR). The Resolution also established a UN-managed civilian administration, the UN Mission in Kosovo (UNMIK), as the transitional administration of the province. As of end August of this year, some 90 percent of the Albanian Kosovars who had fled the province in early 1999 were estimated to have returned – an unprecedented pace of return that demonstrates a strong commitment to restarting normal life. However, it is also estimated that on the order of 180,000 Serb Kosovars – the vast majority of those living in Kosovo before the conflict – have now left the province.
The International Response. The UNSC Resolution also called for a rapid international response to support economic reconstruction and recovery in Kosovo, and this response has been swift. Humanitarian assistance to returning refugees, coordinated by the UN High Commissioner for Refugees (UNHCR) and supported by many other agencies and donors, has been organized and underway in Kosovo since mid-June. A first donors’ meeting, held July 28, 1999, and co-chaired by the European Commission (EC) and the Bank, raised some US$2 billion from over twenty bilateral and multilateral donors for humanitarian aid, early reconstruction efforts and urgent budget support. Damage assessments have been prepared, and a medium-term Reconstruction and Recovery Program – that will set out priority financing needs for both the near and medium term – is being completed and will be presented at a second donors’ meeting in mid November 1999.
Developments in the Southeast Europe Region
The Effects of Longer-Term Crisis. The 1990s has been a difficult decade for Albania, Bosnia and Herzegovina, Bulgaria, Croatia, FRY, the Former Yugoslav Republic of Macedonia (FYROM), and Romania – the current seven non-European Union (EU) countries of the SEE region. Recent events in Kosovo are part of a longer-term crisis that began in the late 1980s with the economic decline and break-up of the SFRY, during which four of its former republics gained independence largely through armed conflict. While the decade also saw most of the countries in the region initiate or undergo transition reforms – and incur the consequences of related economic policy choices – the effects of SFRY’s break-up made more painful and difficult the adjustment process for many countries. The human losses and negative economic impact of conflict itself have been particularly harsh in Croatia and Bosnia and Herzegovina, while countries of the region suffered to varying degrees from the effects of international economic sanctions on FRY. The decade of the 1990s left many of the region’s inhabitants worse off economically than they were at the end of the 1980s.
The Impact of the Recent Conflict. The Spring 1999 conflict in Kosovo had a significant impact on these neighboring countries. Hundreds of thousands of refugees put a strain on social and economic infrastructure, in particular in Albania and FYROM. The conflict disrupted trade, transport and tourism, and affected the confidence of foreign investors in much of the region. Budgetary gaps increased with lost fiscal revenues as a result of lower incomes, and from disruption of customs collection and expenditures related to refugees. Lost export earnings, trade diversions, and higher debt service costs widened balance of payments gaps.. Economic growth is expected to slow significantly in 1999 in these countries.6 7 Meanwhile, FRY has suffered massive economic contraction and faces severe hardship this winter.
The "Stability Pact" for Southeast Europe. To address the more medium- to long-term needs for lasting peace and economic recovery in the region, an EU-proposed "Stability Pact" was endorsed by over forty nations and organizations on July 30, 1999. The Stability Pact provides a broad political framework for the Balkan countries to accelerate their integration into the Euro-Atlantic structures, and envisions these countries successfully making the transition to market-based economies.8 FRY is seen as a critical partner, eligible to join the Pact once political conditions there allow. The Stability Pact establishes a political coordination mechanism that includes the creation of a Southeastern Europe Regional Table and the appointment of a Special Coordinator. Under the Regional Table, three Working Tables have been established: (i) Democratization and Human Rights; (ii) Economic Reconstruction, Development and Cooperation; and (iii) Security.
The High-Level Steering Group. The EC and the Bank have been given a special mandate for "coordination of matters related to the economic recovery, reform and reconstruction of the SEE Region," including (i) economic analysis, estimation of needs, and assessment of priorities for external financing; (ii) harmonization of criteria and conditions for external support; and (iii) review of implementation of donor support programs.9 A High Level Steering Group (HLSG) – and an expert-level working group with which the Bank and the EC deal on an ongoing basis – oversees this mandate. The HLSG is currently focussing on the priorities and next steps for reconstruction in Kosovo, but also has reviewed the impact of the crisis on neighboring countries and the international community’s response, and has discussed the longer-term aspects of development of the region. The HLSG will interact with the Stability Pact – and in particular with the Working Table on Economic Reconstruction, Development and Cooperation – on the development and financing of regional initiatives. To this end, work programs are being formulated under which international financial institutions and others will develop, according to their comparative advantage, proposals in areas such as regional trade, infrastructure, and private sector development, as well as longer term economic integration. The aid coordination work of the EC and the Bank in Kosovo is an important element of the Bank’s proposed strategy.
III. Kosovo’s Political and Economic Context
Pre-Conflict Governance. Kosovo is a small mountainous province of about 11,000 square kilometers (the size of Jamaica), with a population on the order of two million before the recent conflict. As one of the Republic of Serbia’s two autonomous provinces, Kosovo had in practice many of the rights and obligations of the six SFRY republics. Under SFRY’s 1974 constitution, Kosovo had its own judiciary, police, and education and health policies. Governance was further decentralized, with many responsibilities for service delivery in the hands of the municipalities (or "communes.") Following 1989-90 constitutional changes, however, Kosovo’s autonomy was significantly restricted: Serbia assumed control over Kosovo’s police and economic policies; ethnic Serbs replaced ethnic Albanians in many public sector jobs; and Albanian-owned companies were taken over in joint ventures with Serb-owned companies. The predominant response to these so-called "enforced measures" among Kosovar Albanians was to support parallel institutions. In 1992, an assembly of the "Kosovo Republic" was informally voted in, and the head of the Democratic League of Kosovo (LDK) elected its "President." A parallel network of services, in particular education and health, grew and became relatively well developed. Administration was funded by informal levies on diaspora remittances and domestic economic activity.
Current Legal Status and Interim Arrangements. Under UNSC Resolution 1244, Kosovo remains a province of Serbia, but is to have "substantial autonomy and meaningful self-administration" while the "sovereignty and territorial integrity of the FRY" continue to be recognized. The Resolution establishes UNMIK as the transitional administration. The powers vested in UNMIK – and its head, the Special Representative of the Secretary General (SRSG) – include "all legislative and executive authority … including the administration of the judiciary."10 UNMIK has four "pillars" or areas of accountability: (i) humanitarian issues; (ii) civil administration; (iii) democracy building and elections; and (iv) reconstruction, recovery and economic development. Although the precise division of responsibilities is still being clarified, most economic matters will be handled between pillars (ii) and (iv). The latter will have most of the functions of a finance ministry, including budget execution and implementation of economic policies, while the responsibilities of the former include implementation of sectoral programs. These pillars have been established and staffed largely by international agencies. The UN has requested assistance of the Bretton Woods Institutions to advise in the development of pillars (ii) and (iv). This support has been underway since July, and is a key element of the Bank’s strategy in Kosovo.
Plans for Transition to Self-Government. UNSC Resolution 1244 also provides that UNMIK is to be replaced over time with democratic self-governing local institutions. These would be, in the first instance, "provisional institutions," and in time, under a final stage, UNMIK would oversee transfer of authority from these provisional structures to more permanent arrangements under an eventual political settlement for the province. The SRSG has announced the intention to hold local elections by mid-2000 to establish the provisional institutions. In order to help prepare for this first phase of self-governance, a Kosovo Transition Council has been established including representatives of Kosovo’s Albanian, Serb and other ethnic groups. The Transition Council is designed to be Kosovo’s highest political consultative body, providing the main parties with a forum for direct input into the decisions of UNMIK. In addition, Joint Civil Commissions have been established comprised of both Serb and Albanian Kosovars in the areas of health, education, justice, family care, public utilities, economy and finance and media and are formulating plans for eventual transition to local government in these areas. Local transition councils are also to be established at the district level, and in each of Kosovo’s 29 communes. However, there is little clarity on the ground as to the precise path of transition from the internationally-led interim administration to the provisional structures, and beyond this to permanent local governance.
Pre-Conflict Economy. Kosovo has a rich mineral and natural resource base, and fertile agricultural land. Over the last two decades, economic activity has centered on the extractive industries and production of raw materials and semi-finished products (lead, coal, zinc and some textiles), and agriculture. The policy and regulatory environment was based on Yugoslav-style socialism and heavy industry was largely state and socially-owned. More than 60 percent of the pre-conflict population lived in rural areas, and agriculture was nearly universally privately held. However, despite its economic potential, Kosovo has traditionally been SFRY’s poorest province. During the 1970s-80s, Kosovo’s development became a priority for the SFRY government. The province received significant investment resources from SFRY’s Federal Fund for Development of Less-Developed Regions (as well as significant assistance from IBRD, either directly or as part of larger loans to SFRY). This financing largely benefited the capital intensive extractive industries and infrastructure. Nevertheless, Kosovo’s GDP remained far behind the SFRY average due to the lack of value-added activities in the province, and apparent poor management of economic assets. Over the five years following imposition of the enforced measures in 1989-90, GDP contracted by 50 percent, falling to less than $400 per capita by 1995, according to official statistics. In that year industry and agriculture were each responsible for about one-third of GDP, with trade and commercial activities accounting for the remainder. Unemployment was already high before the recent conflict due both to the impact on the predominantly Albanian population of the 1989-90 measures, as well as to the longer-term impacts of regional crisis.
Economic Impact of the Conflict. The economic consequences of the Spring 1999 conflict were severe, in a province already deep in economic decline and social stress. Industrial output collapsed and agriculture production plummeted, with herds lost or killed and the planting season missed. Actual conflict-related damage is concentrated on private housing – both urban and rural, in particular in the west of the province – and some infrastructure. The private homes that were used to provide parallel health and education services were also badly damaged. Among the most significant impacts of the recent conflict, however, was the massive flight of people from their homes and the dislocation that this caused. Of the province’s estimated near two million pre-conflict population (80-90 percent Albanian), it is thought that over 800,000 Kosovar Albanians fled to neighboring Albania, FYROM, Bosnia and Herzegovina and parts of the FRY (plus tens of thousands to other countries) during the course of the conflict. More than 500,000 were internally displaced, and over 10,000 killed. Over 100,000 Serbs had also fled Kosovo by the end of the hostilities.11 With this exodus, many institutions lost their staffing and management. While by late August most Albanian refugees had returned, Serb Kosovars have now fled in even larger numbers. Unemployment remains extremely high and official per capita incomes low. A large flow of remittances from the Albanian diaspora mainly in Western Europe, and earnings from a growing informal sector, provide additional incomes for many.
A Complex Post-Conflict Task. The task ahead is to rebuild an economy that can provide peace and prosperity for its citizens, regardless of the terms of an eventual political settlement. The lessons of other post conflict situations indicate that this will not be easily or quickly done. The capacity to absorb donor technical and financial support will need to be carefully monitored. The unclear nature of a future political settlement creates an environment of uncertainty. Kosovo’s recovery will involve discrete challenges that need to be addressed in large part simultaneously – leading the UN to characterize it as a "new type of complex emergency" that requires a well-coordinated effort. Among these challenges are:
Meeting Near-Term Needs. Over the next three to six months the key issue will be to survive the winter, with sufficient humanitarian food aid, shelter, heat and power, as well as employment opportunities and near-term social assistance. Urgent priorities will require quick financing from donors. Over time, the transition from relief to reconstruction will call for effective aid coordination.
Putting in Place Effective Public Institutions and Policies. The challenge of moving from a temporary international administration to new local structures will be great. Moreover, for the past decade, the majority ethnic Albanian population has been largely absent from official government institutions. Over this period, there has been both substantial erosion of human capital as well as emigration of many qualified personnel. Public institutions and policies must be recreated, both to meet short term needs – including staffing of public sector institutions and funding recurrent expenditures – as well as to begin the important longer-term process of institution strengthening.
Repairing the Damage of Conflict. Conflict-related damage to community, social and network infrastructure sectors will need to be quickly repaired. But physical damage goes much beyond such direct destruction. Many areas of the economy suffered from a decade of neglect of basic maintenance and inability to provide for proper operational expenditures. Ensuring physical rebuilding is effectively and efficiently implemented will require sound priority-setting and close coordination among donors and between donors and the authorities. Damage from the conflict also has a significant human dimension, and these scars are not likely to be mended quickly.
Restarting Economic Activity and Beginning Transition. There is evidence that many Kosovars would like to move quickly beyond relief to restarting economic activity, especially Kosovo’s many farms and small private trade and services firms. The latter are likely to be an important catalyst for economic restart and employment. To be successful, the recovery program will have to be accompanied by reforms that will bring increased private sector opportunity. Improved economic links with its neighbors in the region will also be key to Kosovo’s future prosperity. However, it is clear that long-run economically sustainable growth will also depend critically on restoration of growth in FRY.
IV. A Reconstruction and Recovery Program for Kosovo
The Bank and the EC are working with UNMIK, local representatives, and other donors to prepare a four- to five-year Reconstruction and Recovery Program, which will build on recently-completed damage assessments and on the humanitarian activities currently underway. The broad outlines of the Program, based on field work done over the past several months, are likely to focus on four areas:
Building Government Institutions and Policies
Strengthening existing institutions and setting up new institutions and policies for economic management are urgent near term tasks. Building the economic and sectoral management capacity of UNMIK is already underway with the help of donors. Public revenues have until recently been virtually non-existent and their future level will depend on an appropriate tax regime and the ability of the government to enforce and collect taxes, among other factors. In the meantime, a portion of essential public services will have to be externally financed for an interim period. A fiscal management agency is being created to ensure that appropriate budgets are formulated and financed. The payments system, which was interrupted by the conflict, must be restarted quickly and made more efficient to ensure processing of financial transactions. Technical assistance, training and provision for salary support for local staff to operate and manage public utilities is another near term priority. Building the judiciary and courts, a local policing capacity and the framework for elections will also be important. Over time, strengthening institutional capacity throughout the public sector will be an essential goal, and will increasingly need to focus such groups as the transition councils, joint civil commissions and others to help ensure a effective transition from international to local civil administration.
Rehabilitating Community Services and Repairing Infrastructure
Local community services, in particular housing, were badly damaged during the conflict. Infrastructure networks, on the other hand, suffered relatively little direct damage from the conflict, except for telecommunications. But looting and lack of maintenance in these sectors have been pervasive over the last decade, and mitigating their consequences will require substantial external support. As a common requirement in all sectors, adequate systems should be rapidly set to manage, operate and finance these systems by strengthening institutions (as above) and developing sustainable financing mechanisms. Although mine pollution is not thought to be as severe a problem as it was in Bosnia and Herzegovina, demining and removal of unexploded ordinance will be required in many sectors as a prerequisite to rehabilitation. Setting of precise sectoral priorities is now being discussed with UNMIK and other partners. Among the most important needs:
Housing. It is estimated that about a third of the housing units in rural areas have been destroyed, and another third require major repairs. Many Kosovars have already started rebuilding their homes, and assistance should build on these efforts by providing access to building materials.
Telecommunications. Damage included destruction of two transmission towers and central switching equipment in Pristina, which has made communications extremely limited (GSM functions on a limited basis). A new international link should also be installed to complement the existing one that goes through the Rebublic of Serbia, and switches and connections may have to be restored in some areas. These works are urgently required as a pre-condition for re-establishing economic activity.
Electric Power. Kosovo’s two power plants and associated coal mines suffered acute lack of maintenance over the last decade, rather than direct damage. However an important near-term constraint is lack of adequate staffing and management. Urgent needs include works to safeguard power supplies for the coming winter. More medium-term needs will involve rehabilitation of generation and dispatching, as well as environmental mitigation for the plants and coal mines.
Water and Wastes. These local services suffered unevenly and damage is heaviest in the province’s western region. Poor levels of sewerage and solid waste collection and disposal services – and the attendant implications for public health and the environment – are important concerns.
Transport. Some thirteen highway bridges were destroyed in the conflict. Most of these are likely to be repaired on at least a temporary basis by the international military to facilitate troop movements. Both the rail system and the Pristina airport will require some investment and repair. But most financial needs are related to decades of lack of maintenance, in particular for roads.
Restoring and Upgrading Social Services
Health and Education. Parallel systems of education and health that developed during the 1990s have re-emerged after the conflict. These systems should be built on – by mainstreaming and upgrading – rather than developing new structures. Finanicial assistance will be needed for reconstruction of damaged buildings, but this should be preceeded by an assessment, since fewer larger and better equipped facilities (in particular in the health sector) may be more appropriate. Financial support will also be required, on a decreasing basis, for recurrent costs including salaries and replacement of equipment (medical equipment, school books and supplies, etc.) that was stolen or destroyed. This is critical for ensuring continued delivery of essential services until tax revenues can be raised. Policy reforms over time should aim to enable these sectors to better meet the needs of a market economy.
Social Protection. Social assistance has traditionally rested on pensions (both from FRY and from foreign countries for those who have worked abroad), support from the Albanian diaspora, and traditional extended family structures. In the interim, these formal and informal mechanisms are now complemented by humanitarian aid. This assistance will continue to be needed on a declining basis, while a sustainable program of social protection is needed as humanitarian support phases down. Among the lessons of other post-conflict situations is that this transition must be carefully managed.
Restarting Economic Activity
Agriculture. Agriculture production and agro-processing virtually ceased as a direct consequence of the conflict, dramatically affecting life for a majority of Kosovo’s residents. Many previous rural dwellers have relocated to urban areas, seeking employment until the new planting season. Near-term needs include rapid provision of inputs to farmers (seeds, fertilizer, and fuel) and agro-processing enterprises (spare parts and consumables) to enable the sector to begin to provide food, employment and incomes. Over the more medium term, needs include provision of credit to agro-processing companies, and assistance to ensure proper management of forestry. Policy reforms will be needed to privatize agro-processing, and to ensure the phasing out or monetization of food aid.
Enterprise and Banking Activity. Industry, now at a near standstill, shows a visible pattern of neglect over the last decade, including potential environmental damage from heavy extractive industries. The banking system has collapsed with the conflict. Unemployment is widespread. But returning Kosovars show a great deal of entrepreneurial initiative, and the trading and service sectors (which accounted for more than 90 percent of the province’s pre-conflict private companies) are responding rapidly to the new situation by seizing opportunities created by relief and reconstruction activities. Among the priorities to encourage further private sector activity are developing an adequate policy and regulatory framework that removes obstacles to establishment of new firms and is conducive to private sector development. Rehabilitation of the financial sector, including establishment of a payments system, attraction of foreign banks, and a start to bank supervision are near term needs. Privatization of the large conglomerates is likely to take some time due to the complexity of ownership issues in Kosovo, and private SMEs in the services and trading sectors are likely to lead recovery in the near term.
Coordination with Other Donors. Partnerships among the many donors involved in Kosovo will be essential to a successful reconstruction and recovery effort. The Bank's partnerships in particular with the UN agencies and the EU – both of which are taking leadership roles in Kosovo’s reconstruction – will be critical to ensuring effective implementation of the Bank’s strategy. The special partnership between the World Bank and the EC for aid coordination of donor-supported development activities in the SEE region will be important in Kosovo. A detailed sector-by-sector assessment of donor support will only be possible following the planned mmid-November 1999 donors’ conference. Nevertheless, a general view of current donor programs and plans is important in defining the nature of Bank support.
The Programs of Donor Partners
UN Agencies. The UN has assumed the leadership role in post-conflict efforts to build a peaceful and prosperous Kosovo through its administration of UNMIK, as well as through the humanitarian role which it will implement through UNHCR (which has responsibility for UNMIK’s "pillar (i)," and other UN agencies and affiliated NGOs. UNICEF, WHO, FAO, WFP and others have been involved in assessing sectoral needs and providing food aid, health care, education services, water and sanitation, social assistance and agricultural inputs, among others.
The EU (and EC). The EU has been involved through its European Commission Humanitarian Office (ECHO) in funding humanitarian support, and has been asked to manage the reconstruction, recovery and economic development arm of UNMIK. The EC is establishing a "Reconstruction Agency" which will be responsible for implementation of its substantial planned financial assistance for reconstruction. (The agency will be functional this fall; in the meantime a Task Force ("TAFKO") has been fielded which is beginning the work of the Agency.)
Other Multilaterals. Both the EBRD and the EIB are actively interested in supporting reconstruction in Kosovo and have formulated support strategies. Both are likely to support infrastructure, and the EBRD is also likely to be interested in support to financial sector (including microcredit) and business promotion. Neither institution may be able to provide regular financial resources until membership can be declared, however, so there may be gaps in some areas in the near term.
The IMF. Kosovo’s non-membership prevent a financial role, however, the Fund is providing policy advice and institutional support in particular in fiscal and monetary spheres, as well as advising the UN on development of economic aspects of the civilian administration.
Bilaterals. Many bilateral donors have made contributions to the humanitarian effort, and have indicated support for urgent reconstruction programs. Programs range from small infrastructure rehabilitation in local communities to support for social services and social protection.
Non Governmental Organizations (NGOs). There are more than two hundred international NGOs and relief agencies providing humanitarian aid, focussing on urgently-needed services, goods and supplies at the community level in Kosovo. Many bilateral and multilateral donors are implementing their emergency support programs through these NGOs.
V. The World Bank’s Transitional Support Strategy for Kosovo
The objective of the TSS is to assist Kosovo’s reconstruction and recovery effort over the next 18 months. In addition to responding to the call for international assistance, the Bank’s role in Kosovo is an important first step towards future involvement in FRY, once conditions there allow. The timeframe for this strategy corresponds to the period from now through shortly after the end of the year 2000, which would encompass planned mid-2000 elections and the subsequent establishment of a local provisional government. It is expected that a new strategic framework would be needed thereafter, and that its formulation should allow for discussion and development with the new provisional government. The scope of the Bank's strategy is also limited, as the special, non-regular financial resources required to support assistance to a non-member are extremely scarce. With this constraint – and in light of the large financing role expected of other donors such as the EC –the Bank can best maximize its impact in Kosovo by using its comparative advantage in policy advice, institution building and aid coordination to help ensure the overall sustainability of the reconstruction and recovery effort. In doing this, the Bank would also seek to build on the lessons learned in other post conflict settings (Box 2). This strategy has been discussed in broad terms with UNMIK and other partners.
Lessons of Post-Conflict from Bosnia and Herzegovina and the West Bank and Gaza
Local Ownership. Implementation of reconstruction programs has been most effective in those sectors where priorities of donor assistance have been established jointly with the authorities. Involvement of local stakeholders (including the private sector, local communities, NGOs, etc.) has improved the efficiency and likely future sustainability of donor-funded investments.
Donor Coordination. Donor coordination is essential to avoid the emergence of gaps or duplication in funding, and inconsistency of policy advice, as well as ensuring sustainable budget expenditure planning. The involvement of the authorities in aid coordination is also essential for improving coordination and local ownership of the reconstruction program.
Sustainability. Institutional and policy reform generally been a secondary priority to physical reconstruction. Future efforts should focus on establishing the strong institutions needed in a market economy as well as on critical transition reforms early on in the reconstruction process. Assistance for training in skills needed in a market economy, such as finance and management, are also important in many post-conflict settings. Emergency programs often fail to take into account the need for sufficient funding for recurrent costs, and these needs should be planned for, in particular in the transition from humanitarian relief to reconstruction. Following reconstruction, governments also need to make funding available to ensure the sustainability of newly rebuilt assets. It has been demonstrated that cost recovery is possible even in a postwar setting, reducing the burden on government budgets, and efforts should be undertaken to restart cost recovery as early as feasible.
Modes of Assistance. Three areas of assistance under the Transition Support Strategy will enable the Bank to assist in ensuring the sustainability of the overall reconstruction and recovery program.
Aid Coordination. In collaboration with the EC, the Bank has begun three sets of activities: (i) preparation of damage assessments and development of the Reconstruction and Recovery Program that would identify priority investments and appropriate sectoral policies ( this task will be a collaborative effort, involving several donor partners, and will build on work already underway by others in the donor community such as EBRD, WHO, UNICEF and others); (ii) planning, preparing and co-hosting donor conferences to mobilize donor support; and (iii) coordination of financial assistance and its monitoring through establishment of a database and coordination with Kosovo’s budget management authorities on expenditure planning and financing.
Policy and Technical Advice. Economic policy advice – to the UN interim government in the first instance and to the local authorities over time – would be a primary area of emphasis. The Bank has developed a coordinated approach to this work with the IMF and others that will ensure complementarity. Development of an economic assessment, now under preparation and to be presented at the October donors’ conference, is an important element of support (covering, inter alia, institutions and policies for fiscal management, banking, structural issues in particular related to privatization and private sector development, and social protection). This work also involves advising UNMIK, and eventually, Kosovo’s local authorities, as appropriate on the design and implementation of economic institutions and policies, including fiscal, banking, trade and other areas.
Limited Financial Support. Project design and implementation is an area where the Bank can contribute to the reconstruction and recovery effort. However, in light of the constraints on non-regular resources, financial support would need to be provided on a highly selective basis. The Bank would seek to maximize the impact of its limited resources by leveraging those of other donors through cofinancing arrangements. Among the selectivity criteria would be a proposed activity’s contribution toward: (i) facilitating a smooth transition from humanitarian to reconstruction assistance; (ii) building effective, accountable and efficient public institutions; (iii) ensuring efficiency in public sector spending; (iv) restarting economic activity and creating jobs; and (v) furthering sound and appropriate policy environment, in particular in fiscal management, private sector development and social protection.
Financing Sources. Financial resources that could underpin the Transitional Support Strategy include:
Net Income Placed in a Special Trust Fund. Special allocations of net income, through a trust fund mechanism, have been used to provide non-regular support in cases of non-membership in Bosnia and Herzegovina and the West Bank and Gaza, among others. While Kosovo’s situation is unique, this mechanism is consistent with the Bank’s guidelines on support to post-conflict regions.
Post Conflict Grants from the Development Grant Facility (DGF). These grants have been successfully used in the Balkan region (Albania and FYROM) in the wake of the current crisis. Their use in Kosovo would be consistent with the guidelines for use of these funds.
Donor Trust Funds. These arrangements, where the Bank could administer the funds of bilateral donors, have also been used successfully in other post-conflict situations, notably the West Bank and Gaza and Bosnia and Herzegovina. Any scenario for mobilizing special grant funds would entail a substantial effort to leverage these funds with additional bilateral donor resources, as has been done in these countries.
The Trust Fund for Kosovo. Supporting a credible presence in Kosovo’s reconstruction and economic recovery effort will require a minimum amount of resources. The Bank's estimate of this minimum is on the order of US$50-60 million over the next 18 months. It is proposed that as part of the allocation of FY99 net income, these funds be placed in a Trust Fund for Kosovo (TFK), administered by IDA, that would be provided on a grant basis in support of emergency reconstruction and recovery assistance to Kosovo. It is foreseen that a second tranche on the order of US$25-35 million from FY00 net income would be proposed for use in FY01, subject to the availability of Bank net income. This proposal would be made in the context of a planned Progress Report to the Board after about nine months of implementation of the TSS.
Proposed Program of Financial Assistance. The Bank has identified a preliminary program of (i) urgent activities; and (ii) emergency reconstruction activities for which Bank funding could be provided. Those of an urgent nature could begin immediately, and are deemed critical to the transition from humanitarian to reconstruction assistance. The Bank has sought funding for a portion of these activities through post-conflict fund resources which are designed for this purpose. Emergency reconstruction activities could be initiated shortly and implemented largely in the coming spring construction season. These activities would be funded through the TFK and through proactive mobilization of donor trust fund financing. It is expected that the program would include on the order of six to seven projects per year.
Urgent Activities. Several urgent activities have been identified and prepared for immediate financing, including: (i) support for recurrent costs in the health and education sector, principally for salaries of teachers and medical personnel in the coming months (part of a unified international effort to fund Kosovo’s 1999 budget, prepared with the close involvement of the Bank and the IMF and to be implemented by UNMIK); and (ii) support of a small pilot community development fund that would provide grants to communes for priority investments on a locally-determined basis (emphasis would be placed on employment opportunities), to be implemented through an international NGO. Others are being identified and may includes support for agriculture, electric power and water, as well as project preparation.
Emergency Reconstruction Activities. In light of the fieldwork currently underway to define reconstruction and recovery priorities there is a need for flexibility in selecting specific reconstruction activities for funding. Among the priority activities, however, are likely to be the following: (i) support for recurrent expenditures for Kosovo’s 2000 budget (as in 1999, to be prepared with the guidance and assistance of the Bank and the IMF), funded on a declining basis as domestic tax revenues begin to be collected; (ii) an agriculture restart program that will enable farmers to begin the 2000 spring season with sufficient inputs to produce incomes and reduce food aid dependence; and (iii) a credit line to help support the dynamic small and medium-sized private enterprises that may help lead Kosovo’s economic recovery. In addition, the Bank would also expect to support specific reconstruction activities in sectors that may be critical to Kosovo’s sustainable economic recovery, and investments and policy reforms that will underpin the needs of an evolving market economy and a sustainable system of social services. Proposed activities in these areas are under preparation, and project proposals will be finalized shortly. (It should be noted that while reconstruction priorities include housing rehabilitation and telecommunications system repairs the Bank believes that there are sufficient donor and other resources likely to be committed to these sectors).
IFC and MIGA. Since development of an active private sector will be essential for lasting economic growth in Kosovo, and more broadly in the region, early involvement of IFC and MIGA will be important, despite Kosovo’s non-membership status.12 Both institutions would capitalize on the regional experience and institutions they have developed.
Field Presence. In order to carry out the proposed strategy it will be essential to maintain a continuous presence in the field as the reconstruction and recovery effort gets underway. While the constraints of operating in the territory of a non-member prevent the establishment of a fully-fledged Bank resident mission in the near term, the Bank intends to establish a permanent field presence that would allow it to ensure adequate implementation of policy advice and project activities supported by the Bank as well as carry out its aid coordination mandate.
1) UN Security Council Resolution 1244, June 10, 1999. (return)
2) The term "Bank," wherever used in this paper, refers collectively to the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). (return)
3) Annex 1 describes the conditions for succession to membership in the World Bank Group which were defined by the Executive Directors in February 1993. (return)
4) Proposed World Bank Response to Post Conflict Reconstruction in Kosovo: General Framework For An Emergency Assistance Strategy (July 1999). (return)
5) A draft peace accord (Interim Agreement for Peace and Self-Government in Kosovo, or the "Rambouillet Accord") was discussed and agreed to in March 1999, by the Kosovar Albanians but was not accepted by the FRY authorities. (return)
6) In the context of a special international meeting during the April 1999 Bank-Fund Spring Meetings an initial assessment of the cost of the crisis was presented; the assessment has been periodically updated, most recently by the IMF as of September, 1999. (return)
7) While the subject of this Memorandum is the Bank’s support strategy for Kosovo, the Bank also has programs in the six neighboring countries of the SEE region which include assistance, as appropriate, to adjust for the impact of the recent crisis. A regional Balkan Group ensures coordination and consistency among these country programs and is tasked with identifying regional initiatives in which Bank involvement might be appropriate. This Group liaises closely with the joint Bank-EC coordination office in Brussels (footnote 10). Finally, through its continuing Balkan Watch Brief, the Bank actively monitors developments in the remainder of FRY. (return)
8) Stability Pact For South Eastern Europe, June 10, 1999, and Sarajevo Summit Declaration, July 30, 1999. (return)
9) To help implement this joint mandate, an EC-Bank joint office for coordination in the SEE Region has been opened in Brussels, and a website providing information on the Balkans launched. (return)
10) Regulation No. 1999/1 "On the Authority of the Interim Administration in Kosovo," July 25, 1999. (return)
11) Based on UNHCR data as of June 1999. (return)
12) Given the non-member status of Kosovo, IFC would require special-purpose grant funds to support micro-finance institutions or industry-specific agency lines of credit (which have been successfully used in neighboring countries).