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AgCLIR: Kosovo
Commercial Legal and Institutional Reform
Diagnostic of Kosovo’s Agriculture sector
This publication was produced for review by the United states Agency for International Development by Booz Allen Hamilton under the Business Climate Legal and Institutional Reform (BizCLIR) project.
AgCLIR: Kosovo
Commercial Legal and Institutional Reform Diagnostic
of Kosovo’s Agriculture sector
March 2010
DIsCLAIMER
The views expressed in this publication do not necessarily reflect the views of the United states Agency
for International Development or the United states Government.
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contents
list of acronyms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Kosovo
registering property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
getting credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
protecting investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
trading across borders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
enforcing contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
March 2010 | iii
list of acronyms
Kosovo
ABA American Bar Association
ADR Alternative Dispute Resolution
AKB Alliance of Kosovo Businesses
AMCHAM American Chamber of Commerce of Kosovo
AMIK Association of Microfinance Institutions of Kosovo
BizCLIR Business Climate Legal and Institutional Reform Project
CBK Central Bank of the Republic of Kosovo
CEFTA Central European Free Trade Agreement
CFF Crimson Finance Fund
CIsG UN Convention on Contracts for the International sale of Goods
DCA Development Credit Authority
DTI Department for Trade and Industry
EC European Commission
ECIKs Economic Initiative For Kosovo
EU European Union
FBo Farmer Based organization
FDI Foreign Direct Investment
FIC Foreign Investment Council
FII Foreign Investment Institution
FsMNs Federal-state Market News service
GDP Gross Domestic Product
GoK Government of Kosovo
GTZ Deutsche Gesellschaft für Technische Zusammenarbeit
HACCP Hazard Analysis and Critical Control Point
ICC International Criminal Court
ICsID International Centre for settlement of Investment Disputes
IMF International Monetary Fund
IPAB Investment Promotion Advisory Board
IPAK Investment Promotion Agency of Kosovo
IPH Institute of Public Health
IPo Industrial Property office
IPPC International Plant Protection Convention
March 2010 | 1
JsC Joint stock Company
KBA Kosovo Bankers Association
KCA Kosovo Cadastral Agency
KCA Kosovo Chamber of Advocates
KCC Kosovo Chamber of Commerce
KEPA Kosovo Environmental Protection Agency
KPA Kosovo Property Agency
KTA Kosovo Trust Agency
KvFA Kosovo veterinary and Food Agency
LC Letter of Credit
LDK Democratic League of Kosovo
LLC Limited Liability Company
MAFRD Ministry of Agriculture, Forests and Rural Development
MCo Municipal Cadastral offices
MEsP Ministry of spatial Planning
MFI Microfinance Institution
MoU Memorandum of Understanding
MTEF Medium Term Expenditure Framework
MTI The Ministry of Trade and Industry
NBFI Non-Bank Financial Institution
NGo Non-Governmental organization
NTB Non-Tariff Barrier
NWFP Non-Wood Forest Product
osCE organization for security and Co-operation in Europe
PAK Privatization Agency of Kosovo
PDK Democratic Party of Kosovo
PoF Purchase order Financing
sEE south Eastern Europe
soE socially owned Enterprise
soK statistical office of Kosovo
sPs sanitary and Phytosanitary standards
UN United Nations
UNCITRAL United Nations Commission on International Trade Law
UNMIK Interim Administration Mission in Kosovo
UPFL University of Pristina Faculty of Law
UsAID United states Agency for International Development
vAT value Added Tax
WCo World Customs organization
WTo World Trade organization
2 | AgCLIR: Kosovo
introduction
This report addresses the conditions and opportunities for doing business in
Kosovo’s agricultural sector. Through close examination of the relevant policies,
Kosovo
laws, institutions, and social dynamics, it aims to inform assistance decisions by
the U.S. Agency for International Development (USAID) and other donors in
the area of agricultural development in Kosovo. The insight it provides may also
be useful for government officials, private sector representatives, and others
involved in the Kosovo agricultural sector.
sowing new seeds for not yet congealed into the systemic maturity
economic growth required for substantial commercial progress.
Kosovo is poised between agricultural success This is, to a degree, understandable in a coun
and failure. on the one hand, growth in agricul try that has been both the victim of recent war
tural commodities such as peppers and pota and the subject of subsequent administrative
toes has been steadily improving. There is also and regulatory experimentation by the United
an evident desire in most corners of society, Nations and other international organizations.
government, and the donor community to pur Kosovo is ready to put the lessons of the past
sue agriculture as a means for growth. on the decade to use in building a new economy based
other hand, the growth that has been achieved on both existing and new products, services,
is clearly not enough. As Kosovo’s popula and technologies. The keys to success lie in
tion grows, domestic agricultural production is bringing together the right mix of regulatory
not keeping pace with the population growth, facilitation; support institutions for small-holder
contributing materially to the enormous trade farms and sME Processors/distributors; and
imbalance. stakeholders agree that some parts more sophisticated relationships in all stages of
of the system function poorly, but disagree the value chain.
on the degree of dysfunction. some posit that
The challenges are considerable. To name a
entire value chains have collapsed, while oth
few: unemployment hovers around 40 percent;
ers suggest that Kosovo suffers only from minor
because of political issues no census has been
regulatory failures.
done in more than 20 years; Kosovo’s customs
The good news is that agribusiness is happen stamps are not recognized by many of its neigh
ing, often in spite of barriers caused by political, bors; foreign direct investment hovers near
cultural, regulatory, and capacity issues. Rapid zero; electricity comes and goes with little pre
response to real issues is now the critical chal dictability; and credit is often not meaningfully
lenge. Whether targeted reforms are prioritized available where it needs to be.
1 At the time of publication, Kosovo
is recognized as independent by
and implemented will determine the trajectory
Recent assessments of Kosovo’s economy have
63 countries, including the United of growth for Kosovo’s agricultural sector.
states. While it has gained World been highly critical. officially ranking Kosovo
Bank membership, it remains
unrecognized by the United Nations, After nine years of United Nations interim for the first time, the World Bank Doing Business
is not yet a member of most major administration, countless donor interventions, report2 puts the country at 113 out of 183
organizations, and is not yet in the
World Trade organization accession and two years of independence,1 Kosovo is a countries assessed—slightly better than Bosnia-
process.
hodgepodge of laws, regulations, and initiatives Herzegovina and the Russian Federation; but,
2 Available athttp://www.doingbusi
ness.org/. that provide some solid foundations but have in some critically important areas, such as
March 2010 | 3
Protecting Investors and Enforcing Contracts, Finally, recent municipal elections indicated
Kosovo produced some of the worst scores in some of the national and regional healing pro
the world, placing it with such countries as The cess that has gained energy with each pass
Gambia and Guinea. ing year. Turnout in the minority communities,
typically near zero in the past, was upwards of
similarly, the European Commission’s Kosovo 25 percent in most places. 5 The figures for the
Progress Report for 20093 criticizes almost all minority enclaves still lag behind the rest of
efforts made in the area of economic growth Kosovo, but progress is visible.
except the basic legal framework, pointing out
that the good news of 5.5 percent growth in These and other challenges and opportunities
2008 was based mostly on increased consump will be discussed in detail below through the spe
tion and government procurement expendi cific lens of agribusinesses. Through deep analy
tures. These are in turn fueled by Diaspora sis of five discrete areas, the AgCLIR assessment
remittances and donor contributions. other will afford a good look at the state of agribusi
ness as it is influenced by laws, institutions, and
serious issues raised include the dramatic trade
the practical reality of business in Kosovo. It will
imbalance due to, again, increased consumption
offer prioritized solutions with an eye towards
of imported products and plummeting exports,
holistic rather than narrow solutions.
the high cost of finance, generally weak rule of
law, corruption, and uncertain property rights. This diagnostic is organized so that five compo
nents of a healthy and prosperous environment
on the bright side, there are a number of posi
for agricultural enterprise are considered individ
tive natural characteristics and new develop
ually and in relation to each other where appro
ments in Kosovo that present big opportunities.
priate. Certain issues and dynamics, however,
As suggested above, agribusiness is happening.
are so prevalent across this analytical framework
The traditional supply, distribution, trade routes
that they warrant special mention. some may
and mechanisms are operating, albeit deeply
seem obvious at first glance, but a closer reading
weakened by political issues and donor behavior should lead to some new insights. These cross
that neglects substantial regional interdepen cutting themes include the following:
dence in favor of independent country-specific 1. Corruption
approaches. In any case, these are foundations 2. The lack of information and dialogue
upon which to build. 3. The region’s race to Europe
4. General legal uncertainty
Additionally, Kosovo’s young population4 val
5. Donor dogma
ues education. Nevertheless, the weak struc
ture and the tragic lack of resources put into In the next several pages, AgCLIR Kosovo intro
strengthening education, especially skilled voca duces the reader to the AgCLIR methodology,
tional education, is a tremendous impediment. provides a summary of the findings, and outline
the crosscutting themes.
Ultimately, Kosovo’s success in the highly com
petitive agriculture sector will be hard won
and will come incrementally over time. With a
agclir: a tool for
3 Available athttp://www.euractiv. comprehensive approach tailored to the sector, understanding
de/fileadmin/images/Kosovo_
Fortschritt sbericht_2009_en.pdf.
Kosovo’s competitive advantages should be eas obstacles to start-up
4 Approximately 70% under the age of ier to leverage. Critically, Kosovo’s recent inde and growth of
35, and 50% under 25.
5 The unfortunate exception being the pendence has brought an opportunity and moti agribusiness
minority-dominated northern por
vation for positive change that delivers reform In 2007, incorporating lessons learned from
tion of Kosovo, where turnout was
very poor. in every aspect of agriculture. its first-generation legal, institutional, and
4 | AgCLIR: Kosovo
trade diagnostic tool called CLIR, UsAID costs of the procedures in relation to per-capita
sponsored the redesign of CLIR through its income. Doing Business now gathers data from
Business Climate Legal and Institutional Reform 183 countries and ranks each, thereby demon
(BizCLIR) project.6 The BizCLIR focus areas strating how their respective regulatory envi
were designed to align with the World Bank’s ronments compare to others throughout the
enormously influential Doing Business country world. In the most recent Doing Business report,
reports. Based on the Doing Business analytical issued in september 2009, Kosovo ranked 113
structure, BizCLIR employs a multi-indicator, out of 183 countries surveyed.8
diagnostic process that closely examines 10 dif
ferent topics. At the request of UsAID Kosovo, UsAID’s BizCLIR initiative takes most of the
this report covers 5 of the 10 Doing Business cat Doing Business topics and delves deeper into their
egories: Registering Property, Getting Credit, respective legal frameworks, implementing insti
Protecting Investors, Trading Across Borders, tutions, supporting institutions, and social dynam
and Enforcing Contracts.7 Doing Business is a ics. That is, after Doing Business delivers a key
useful tool for identifying the ease of certain “snapshot” of the conditions for enterprises in
legal and regulatory processes necessary for 183 countries, BizCLIR subjects the same issues
the private sector to engage in the global econ to an expanded analysis of factors feeding in to
omy; it provides vital information for potential these essential findings and then reports on the
investors as well as motivation for the assessed entire, more complex scenario. BizCLIR seeks
country to make important reforms. It does to understand the important contextual differ
not, however, provide a deep analysis of the ences among countries, and identifies strengths
business environment that would lead to a and weaknesses within economies that provide
detailed roadmap to reform. For each of the key opportunities for long-term development. A
topics it covers, Doing Business considers a few summary of the BizCLIR methodology, includ
key indicia of whether and how the environment ing its use of a comprehensive set of indicators, is
for enterprise is “working,” measured by such provided in an appendix to this report.
means as the number of procedures involved in
Recognizing that economic growth in many
achieving a goal (for example, to legally trans
developing countries turns significantly on the
port goods across borders or to enforce a
agricultural sector, this diagnostic shifts the
contract), the number of days it takes, and the
BizCLIR focus on economies generally to the
Kosovo’s ranKings in the world banK specific and critical issues pertaining to agricul
doing business categories ture. The focus on agriculture stems from the
2010 2009 Change assertion in recent years that GDP growth in
Doing Business overall agriculture delivers more than twice the impact 6 Detailed information about BizCLIR
(183 countries surveyed) 113 107 -6 can be found at www.bizclir.com.
in reducing poverty as growth in other sectors.9 7 BizCLIR and AgCLIR both cover the
Yet, while 75 percent of the world’s popula following topics, albeit from different
starting a Business 164 156 -8 perspectives: starting a Business,
Dealing with tion lives in rural areas, most working in agri Dealing with Licenses, Employing
Construction Permits 176 173 -3 cultural-related pursuits, only 4 percent of offi Workers, Registering Property,
Getting Credit, Protecting Investors,
Employing Workers 34 32 -2 cial development assistance goes to agriculture Paying Taxes, Trading Across
Borders, and Enforcing Contracts,
Registering Property 68 60 -8 in developing countries.10 Thus, the goal of this and Closing a Business.
Getting Credit 43 41 -2 diagnostic is to better understand why Kosovo’s 8 World Bank, Doing Business 2010
(2009).
Protecting Investors 172 171 -1 agricultural sector functions as it does; what 9 World Bank, “World Bank Calls
Paying Taxes 50 49 -1 policy, legal, and institutional changes could lead for New Emphasis on Agriculture
for Development” (press release)
Trading Across Borders 132 129 -3 the sector to greater productivity and economic (october 19, 2007) (citing 2008
Enforcing Contracts 157 156 -1 growth; and who among Kosovo’s economic World Bank Development Report:
Agriculture).
Closing a Business 28 28 0
actors can lead or implement change. 10 I b id .
March 2010 | 5
The fieldwork for this diagnostic took place significant improvement can result only from a
over two weeks in November 2009. A team of long term and dedicated continuation of proper
international and local consultants conducted implementation of reforms that have already
interviews throughout Kosovo across the agri been begun; but, some shorter term solu
cultural sector, including with national and local tions to problems clearly nagging the agricul
officials, farmers and their associations, owners ture sector would go a long way in supporting
of agricultural enterprises, business associations, growth. Among these are measures to encour
non-governmental organizations (NGos), the age tenant investment in leased socially owned
financial services community, and many others. Enterprises, better enforcement of land consoli
over 150 people were consulted. The AgCLIR dation principles, beginning with a pilot project,
diagnostic culminated in a roundtable presen and an immediate commitment to the protec
tation and discussion on November 23, 2009, tion of intellectual property rights.
which was attended by more than 70 stakehold
getting credit
ers in Kosovo’s agricultural sector, including the
A number of problems have resulted in an agri
private sector, Civil society, government offi
business sector that is seriously underfinanced.
cials and donors. At the roundtable, team mem
These issues range from a traditional resis
bers introduced their preliminary observations,
tance to credit among Kosovo’s farmers, to the
which were then subjected to feedback and
absence of a use of creative collateral such as
elaboration from the participants. This input future crops and livestock, to banks that remain
helped shape the final conclusions of the team, unmotivated to extend lending beyond the “saf
which are found in this report. est” debtors. Agricultural loans, in fact, repre
sent the lowest amount of lending in Kosovo.
summary of findings
Brief summaries of the findings and recommen Credit is expensive in Kosovo, with interest
dations in the subject-matter areas examined in rates on short term lending typically more than
24% APR, and requiring two times or more
this diagnostic are set forth below.
the value of the loan in collateral coverage.
registering property Moreover, the types of collateral accepted are
Despite a modern set of laws, the environment very limited, with credit usually only extended
for property registration, so vital to agriculture under guarantee of real property.
for purposes of investment incentive and credit, seeds, fertilizer and other agricultural inputs are
suffers under the burdens of inefficient tradi “lent” by processors and distributors to farmers
tional practice, government inertia, a history of in exchange for produce, but because of a lack
unfair practices and conflict, and a poor system of trust and a misunderstanding of how to most
of implementation and enforcement. efficiently make this kind of credit work, the
Land consolidation laws that help define use of practice is limited. Capacity building in proces
sor-farmer credit, and the contracting skills nec
land for agricultural purposes, as well as plans
essary to sustain the practice, will hugely benefit
for privatization of traditionally agricultural land
both levels of the value chain.
go largely unheeded. The Cadastral Agency, the
Property Agency, and the Privatization Agency successful expansion of commercial lending will
have the legal tools with which to work, but likely require a holistic approach that begins
little capacity to implement them. Like the with helping agribusiness understand that com
approach to real property, Kosovo’s system for mercial debt can present far more benefits than
protecting intellectual and industrial property, drawbacks. Introduction of additional micro-
such as seed varieties, remains very weak. lending products, that are well coordinated with
6 | AgCLIR: Kosovo
donor assistance programs will be an important unsustainable point. The vast majority of the
next step, followed by assistance in establishing country’s food needs are imported, and though
a viable credit information system, pledge regis farmers are learning more and more about effi
try, and crop insurance program. cient and safe modern production, exports,
which are necessary for growth in a small coun
Further work in expanding the types of
try, remain weak. This is because of the politi
accepted collateral is critical; these would
cal situation, the loss of old markets as they join
include movable property, purchase orders, and
the European Union, and, most of all, the lack
collateralizing livestock and future crops.
of capacity within the government, civil society,
and private sector to judiciously assert rights
protecting investors
guaranteed by the Central European Free Trade
Kosovo’s government, civil society, and private
Agreement (CEFTA).
sector all clearly recognize the need for invest
ment in agriculture. Despite low levels of invest Trade occurs, but often in spite of weak govern
ment into Kosovo agribusiness, there is signifi ment policies, limited civil society engagement,
cant opportunity for investment from Kosovo’s and poor trade facilitation. Because goods are
diaspora communities, as well as from entrepre exported without full government collabora
neurs living abroad who wish to capitalize on tion, and sometimes illegally for want of simple
Kosovo’s low labor costs and tariff-free access paperwork, little value is added in Kosovo, and
to regional and global markets. But potential most of the potential profits are accrued in
investors must feel their risk is minimized, espe other countries.
cially in a newly independent country with a
weak economy, poor political reputation, and simple progressive steps include the establish
suspect institutions. ment of a regional benchmark pricing infor
mation system that will help the GoK deter
As with other areas discussed in this report, mine which countries are providing illegitimate
significant progress has been made at the legal export subsidies, encouragement of WTo
and regulatory framework level, but the imple consistent behavior, even before the acces
mentation of the laws is weak. This can begin at sion process begins, and the participation, with
least with the immediate transparency achieved attendant capacity building programming, in
with consolidated online publication of relevant UNCITRAL instruments.
rules and regulations. As the first likely point of
contact between an investor and Kosovo, the enforcing contracts
Business Registry must be strengthened and Contracts, or more specifically in this case,
its processes simplified and streamlined. More commercial agreements between businesses,
attention must be paid to well-established prin are the foundation upon which economic suc
ciples of director liability and fiduciary duties. cess is built. The more sophisticated the agree
ments that businesses use, the more protected
To attract investment Kosovo needs to rely they are from the vagaries of the market, natu
far less on providing incentives than on provid ral disaster, and the unpredictability of business
ing investors with information and reasonable relations. And the more protected they are, the
assurances that the risks they are taking are more willing they will be to invest more money
not extraordinary. and effort into their own growth.
trading across borders Kosovo almost completely lacks this culture of
The imbalance between Kosovo’s exports and contract. The courts are broken, the laws are
imports has been widening with increasing not entirely up to date, the legal profession is
speed over the past years, and has reached an weak, trust between farmers and processors
March 2010 | 7
and distributors is absent, and no adequate sys Few really know the true impact of corruption
tems for alternative dispute resolution have in Kosovo, especially as it directly affects agri
been established. business, but a few facts are clear:
• The first type of corruption inhibits invest
The key here is to focus on bottom-up devel ment not only by foreigners with large
opment of new and better contracting systems amounts of capital that could drive the
as well as systems for enforcing agreements. creation of commercial farms, but also by
orders, cheaper credit and even investment small holder farmers who grow reluctant
could come flowing in to the farming commu to put savings into increased production
nity if they could develop a more sophisticated or improvements to the land for fear of
approach to negotiating the allocation of risk in losing it to greedy officials.
their agreements. Likewise, the establishment • The second type of corruption, where
of alternative dispute resolution should be con friends and family are given positions of
centrated at the lower levels of the value chain, mid- and low-level authority instead of
to provide these new contracts with resolution meritorious candidates, weakens govern
and enforcement mechanisms. ment offices, capacity-building sources,
and extension services, resulting in a pri
crosscutting themes vate sector that, especially at the bottom
some issues burdening Kosovo’s agricultural of the value chain, can scarcely break free
economy are so endemic that they are better of the cycle of poverty.
described outside the context of the specific Examples abound of attempted farm privatiza
chapters. Those that are discussed below are not tions made nearly impossible because the soE
only considered broad enough to be called cross managers hold sway over the process and are
cutting, but are of such importance that, despite able to effect a privatization that labels the
their perennial popularity in donor and NGo land for a more valuable use but is against land
reports, we would be remiss in excluding them. use restrictions.
These crosscutting themes are presented from information/dialogue
the perspective of the agriculture private sector. Dialogue among and between various public
Though it is likely that these themes would be and private sector actors, as well as systems
just as relevant in any other sector, the manifes for the distribution of information, needs to
tation, and perhaps the best ways to deal with improve before meaningful economic growth
them, are likely to be different for agribusiness. can advance. There is a burdensome multi-level
communication breakdown in Kosovo—within
corruption the public sector, between the public and pri
Corruption comes in two varieties: the tradi vate sectors, and within the private sector.
tional bribery and graft, and the more insidious More specifically, three areas of information/
type, usually found in small, traditional popula dialogue may be distinguished:
tions in which nepotism and favors of friendship • public-public dialogue . When busi
or family are almost a cultural necessity. The nesses say they are “in every ministry,”
second variety may seem mild by comparison they mean that for different aspects of
but is just as, if not more, crippling upon a close their businesses, different ministries
look. Kosovo suffers significantly from both are relevant. The Ministry of Trade and
types. The first variety produces an economy Industry (MTI) is typically the most rel
that discourages honesty, but the second type evant, but the Ministry of Agriculture,
results additionally in systemic inefficiency. Forests and Rural Development (MAFRD)
8 | AgCLIR: Kosovo
is often responsible for a large part of a will most help them compete, and they cannot
business’ value chain. Fruit juice is a good take advantage of the natural synergies available
example. The MAFRD sets the policy from through cooperation with related firms, both
orchard to bottling, and then the MTI horizontally and vertically. Likewise, government
becomes responsible for setting the policy is unable to create a united front in facilitating
governing the rest of the value chain. In economic growth, and cannot be responsive to
setting and implementing policy, the vari the needs of the private sector. Distrust seems
ous ministries rarely communicate, so pol to be one of the common threads in the failure
icies are often contradictory or inefficient, of dialogue. The private sector distrusts a gov
with substantial gaps left unfilled. ernment that is new and still somewhat infirm,
• private-private dialogue . Private- and government, whether one resulting from
sector firms with similar or related inter the declaration of independence or its prede
ests need to communicate in order to be cessor, shows troubling signs of viewing the pri
efficient. In Kosovo, not only is there a vate sector as a burden to policy development.
lack of communication, there is also signifi The assessment team heard government offi
cant distrust and occasionally even reports cials complain more than once that the private
of sabotage among these private-sector sector simply slows down the policy process.
groups. Evidence exists, for example, that It is also clear that some in government misun
a firm with a large market share might derstand the role of trade-related agencies. It is
form an association that includes all but common, for example, for Customs officials to
perhaps one other large firm in order to see their roles only as enforcers of the law, and
effectively diminish its competitor’s mar not customer-oriented facilitators of trade.
ket share.
• public-private dialogue . Demand- Much of this lack of dialogue is the natural off
driven reform can only come through shoot of an infant government and economy and
institutionalized, transparent dialogue an associated lack of business sophistication.
between business and the government As business begins to realize the importance
functionaries who create and imple of playing a meaningful role in the development
ment the policy. Without communica and reform of relevant policy, and as it begins
tion feedback loops, policy is set from to appreciate the benefit of working together,
the top down only, without any bottom- it will begin to focus not only on the daily man
up response from the groups of people agement and production activities, but also on
meant to benefit from commercial policy. learning the country’s framework of economics,
In Kosovo, virtually every attempt to cre law, and politics.
ate a platform for dialogue has died on
the race to europe
the vine, in large part due to the failure
With all the development of complex, new
of private-private dialogue. The Kosovo
EU-compliant legal frameworks, capacity for
Chamber of Commerce (KCC), the
implementing them remains low. Kosovo and
Alliance of Kosovo Businesses (AKB), and
interested donors have expended considerable
the American Chamber of Commerce of
effort and resources in adopting the new and
Kosovo (AMCHAM) are all likely channels
revised legislation necessary to comply with the
for communication, but so far little prog
EU integration process. EU integration is espe
ress has been made.
cially complex, given the vast numbers of direc
Without these three types of dialogue, private- tives, regulations, and standards that must be
sector firms are like small islands in a fog. They met. The fruit juice industry alone requires the
cannot effectively advocate for the reforms that adoption of more than 10 directives regulating
March 2010 | 9
simply does not get done because in order to
trade abroad, especially in the EU, companies
need to be able to comply with the rules.
Proper implementation requires the addition
and retention of qualified staff in both gov
ernment and non-governmental institutions.
Appropriate incentives must be put in place to
make these positions attractive relative to alter
natives both outside of Kosovo, as well as in the
Kosovo private sector. In addition, significant
additional and ongoing training must be pro
vided to current employees in order to ensure
that they understand and are qualified to carry
out new directives.
An additional problem is that all the countries
in the region are also racing to Europe. As
other countries in southeastern Europe join the
European Union, or achieve pre-accession privi
leges, before Kosovo, Kosovo loses traditional
markets and is further burdened by subsidies and
other support given by the EU to these countries.
general legal risK
Kosovo’s institutions have been operating inde
pendently for less than two years. There was
a long transition period before the summer of
2008, during which United Nations’ government
functions were shadowed by Kosovo ministries
under the banner Provisional Institutions of self-
Government, but as democratic processes ensued
the institutions and the people who staffed them
everything from the way the fruit is processed
changed rather quickly and sometimes dramati
to the way it is transported. But, attendant
cally. Roles that were in one ministry during
to the adoption of the rules, Kosovo needs
the Interim Administration Mission in Kosovo
to be able to implement and enforce them as
(UNMIK) tenure were shuffled carelessly to oth
well. This costs money, and requires the addi
ers without consideration of impact.
tion of trained individuals to government staff.
Kosovo’s difficulty retaining well-educated and Further, laws that were expeditiously promul
well-trained citizens remains a large obstacle gated because of the need to shed the system of
to effective implementation. The net effect is discriminatory laws of the 1990s, and in anticipa
that business is now often bound by the new tion of a more autonomous Kosovo, have been
rules; however, with no facility for implemen poorly implemented and drafted without critical
tation, business cannot comply. In some cases gaps filled. since independence, many additional
this results in complete neglect of compliance laws have been promulgated that seem to have
procedures.. In others, it means that business as their only objective additional responsibility
10 | AgCLIR: Kosovo
for enforcement by the ministry that initiated typically pursue programming that is highly
the process—a regulatory land grab. focused at the national level at the expense of
regional collaboration, traditional interdepen
All this results in a perception, sometimes imag
dence, and potential synergies. Ultimately, one
ined but typically well warranted, that doing
donor may be recommending the pursuit of
business in Kosovo comes with substantial risk
absolute advantages in the same product in all
that the legal system—from regulations to dis
the countries in the region, clearly an approach
pute resolution to enforcement—will not ade
that will result in potential discord.
quately protect businesses of any sort. It is well
known in the international legal community
how this report
that businesses and their attorneys prefer well-
established and time-tested law even to innova
is structured
Each chapter of this report is structured the
tive “new legal ideas” because untested law is
same way. Following an introduction, each has
often unpredictable. Therefore, when business
four substantive sections, which are themselves
is required to comply with “new” Kosovo law, it
followed by recommendations.
is naturally wary.
legal frameworK
donor dogma
The chapters first examine Kosovo’s laws and
one of the more difficult problems to address
regulations that serve as the structural basis for
is that the donors themselves, the organiza
the country’s ability to achieve and sustain mar
tions seeking to help lead Kosovo into a vibrant
ket-based development in the agricultural sec
new economic future, often get bogged down
tor. They discuss the following questions: How
with doctrines that prevent pragmatic, cooper
accessible is the law, not only to elite, well-
ative approaches.
informed groups, but also to less-sophisticated
The vast array of donors and NGos some actors, rural constituencies, or foreign inves
times pursue inconsistent objectives, or the tors? How clear are the laws, and how closely
same objectives in inconsistent ways, leading to do they reflect emerging global standards? How
counterproductive activity. For example, one well does law respond to commercial realities
donor may pursue policy that builds revenue faced by stakeholders in the agricultural sec
for the government through expanded import tor? What inconsistencies or gaps are present in
tariffs. This runs counter to activities done in the legal framework? This section examines key
the private sector that pursue the removal of laws and regulations that apply throughout the
tariffs in order to grow the economy. Donors economy, and additional laws and regulations
also occasionally focus narrowly on the speedy underpinning the agricultural sector specifically.
accomplishment of an objective at the expense
of executing it in a way long accepted in coun implementing institutions
Next, the chapters examine those institutions
tries with a tradition of respecting the rule of
that hold primary responsibility for implemen
law. The example that most harms the private
tation and enforcement of the legal framework.
sector is the donor practice of pushing through
These institutions include government min
legislation without private-sector consulta
istries, authorities, registries, and, in certain
tion because doing so would slow the process
cases, private institutions such as banks and
down—in spite of a well-established recognition
credit bureaus. In addition, courts are examined
that democracy demands private sector involve
with respect to their effectiveness in address
ment in the law-making process.
ing disputes that arise in the agricultural sector.
A related problem occurs at the regional level. Again, the indicators seek to uncover how these
The various branches of individual donors implementing institutions function not merely
March 2010 | 11
with respect to mainstream business interests drawn from the key findings in each chapter
in the capital, but also in rural areas and agricul and reflect current reform capacities, opportu
ture-based communities. nities, and evidence of will to reform. some of
the recommendations within the chapters may
supporting institutions overlap—that is, some may be consolidated into
The chapters then look closely at those organi a single reform initiative covering two or more
zations, individuals, or activities without which topics—and all turn on the priorities and pref
the agricultural sector in Kosovo cannot be erences as enunciated by the Kosovo govern
fully developed. Examples include farmer asso ment itself. The recommendations in this report
ciations, rural banks, professional associations, are intended to serve, among other functions,
agricultural and law faculties, the media, and as a threshold list for donor coordination of
donors. The relative awareness of law and prac immediate initiatives and preparation of scopes
tice on the part of each institution is examined, of work.
along with the specific ways in which institutions
increase public and professional awareness, agclir scores
work to improve the economic performance, With respect to each area of inquiry, this diag
and otherwise serve their constituencies. nostic uses a process of reviewing and scoring
key indicators to develop a thorough analysis.
social dynamics once as much relevant information as possible
As the final point of analysis, the chapters dis is gathered—from written sources, meetings
cuss key issues that impact the environment for and interviews, and consultation among col
growth in the agricultural sector. Roadblocks to leagues—each of the key indicators is scored,
reform, in particular, are considered, including based on the assessor’s best estimate of the
those entities that may be undermining change. issue at hand. To help an assessor determine a
This discussion also identifies significant opportu score, between 3 and 15 supporting questions
nities for bolstering the environment for agricul accompany each key indicator. These questions
tural enterprise—such as champions of reform or themselves are not scored, but are intended to
regional initiatives—as well as matters of access guide the assessor toward a consistent, fact-
to opportunity and formal institutions. social based judgment from which the key indicator
dynamics also concern such important matters as score is then derived.
gender, human capacity, and public health, each
of which may have a significant bearing on how The scores are not intended to serve as a
the business environment truly functions. Indeed, standalone, number-based pronouncement on
often a full understanding of legal and institutional the state of the agricultural sector in Kosovo.
issues cannot be achieved without a nuanced con Rather, they should be read in conjunction with
sideration of a country’s social dynamics. this report’s narrative as a means of under
standing the status of certain key indicators of
recommendations a healthy legal and institutional environment for
Following this four-part analysis, each chapter agricultural enterprise and identifying priorities
sets forth a set of recommendations. These are for reform.
12 | AgCLIR: Kosovo
registering property
In many respects, Kosovo’s laws pertaining to property ownership and transfer
are solid reflections of contemporary legal theory and practice. Yet these laws do
Kosovo
not by themselves simplify the maze of land issues resulting from a mix of archaic
traditions, socialist governance, de facto separation of ethnic groups, armed con
flict, and the confusion that invariably follows such conflict. Slow progress is being
made in rectifying the situation, but in the meantime safe guarding the accuracy
and sanctity of property rights in Kosovo continues to be a challenge. Continued
donor funding in this area remains critical, and patience is warranted.
registering property registering property
Doing Business Ranking 2010 68
5
Doing Business Ranking 2009 60
Procedures (number) 8 4
average score
Duration (days) 88 3
Cost (% of property values) 1.0 2
1
Land in Kosovo has been in private hands for
generations. Before World War II the people 0
Legal Implementing supporting social
of Kosovo traded and inherited land, though Framework Institutions Institutions Dynamics
registering such transactions was considered framework area
an unnecessary formality. During the socialist
years, the tradition of land as an asset continued A little more than half of Kosovo’s 10,887
despite the notion that under Yugoslav law peo square kilometers is deemed agricultural
ple did not own land; they simply used it. This (585,000 hectares (ha)), with another 41 per
led to the creation of possession lists show cent (455,000 ha) considered forest land. of
ing who was using what property. In the late the agricultural land, about half is cultivated
1980s the autonomy of Kosovo under serbia in grains, with another 45 percent in pasture.
changed, and ethnic Albanians found it increas
Nearly 90 percent of farmland is privately
ingly difficult to register land holdings even
“owned,” most of this on holdings of less than
when so inclined. During and following the con
two hectares. The remainder of the agricultural
flict (1998–1999), many of the official records
land is controlled by socially owned enterprises
were destroyed or carted off to serbia. After
(soEs). While small in terms of total hectares,
the conflict, land once again began (legally and
these soEs constitute large individual holdings.
illegally) changing hands, and ownership of tens
By one account nearly 70,000 hectares are con
of thousands of parcels was officially registered
as disputed claims with the Kosovo Property trolled by fewer than 25 soEs.
Agency (KPA). To carry out its task of resolving
disputed claims, the KPA had to deal with lost, legal frameworK
destroyed, or inaccurate land records, and a Kosovo’s legal framework for land use and pri
cadastral system of maps, books, and possession vate property is a labyrinth of former Yugoslav
listings that are inconsistent for a third to half of laws prior to 1989, UNMIK regulations, and
11 Interviews the country.11 the laws promulgated by the Assembly of the
March 2010 | 13
Republic of Kosovo. Until June 2009 private Key laws
property was regulated through the Law on
Basic Property of former Republic of Yugoslavia, • Constitution of the Republic of Kosovo
• Law on Basic Property Relations (1980)
enacted in 1980. The new law on Immovable and
• Law on Immovable Property and Other Real
other Real Properties was enacted in June 2009.
Rights (June 2009)
UNMIK regulations governing the registration • Law on Cadastre
of immovable and movable property are still in • Law on Establishment of an Immovable
Property Rights Registry (2002)
effect until new legislation and secondary legisla
• Law on Agricultural Land
tion are enacted. However, the Kosovo govern
• Law on Irrigation of Agricultural Land
ment is undertaking positive efforts in stream
• Law on Expropriation of Immovable
lining legislation by consolidating new legislation Property
and UNMIK regulations, making it easier for • Law on Kosovo Private Agency
the legal professional and the public to navigate • Regulation on allocation of land assets under
through the laws in effect. the Kosovo Trust Agency to municipal
administrations for public benefits purposes
The legal framework for property and prop • Law on Local Governance, 2008
erty registration in Kosovo is solid and in line
with best international practices, e.g., protect
found in the laws of former Yugoslavia, and
ing private property, enabling owners to encum
UNMIK regulations. The relatively new property
ber it with mortgages and use it as a collateral
law is advanced and complies with international
to secure loans and financing. The challenge
standards, streamlining many different pieces of
remains to develop effective mechanisms to
legislation, thus creating a coherent legal frame
implement the laws, and to successfully encour
work on property issues in Kosovo. The law on
age the emergence of accountable and effective
pledge, mortgage, servitudes, and usufruct are
institutions free of corruption and abuse.
now consolidated in the new law. It contains
The highest legal act is the Constitution of the clear provisions enabling third parties, claimants,
Republic of Kosovo, which came into effect in and the owner to protect their rights, and estab
June 2008, after Kosovo’s declaration of inde lishes who has a priority over a claim, extra judi
pendence. The Constitution guarantees the cial enforcement, etc.
right to private property to all legal and physi
cal persons, be they citizens of Kosovo or for The law requires that any change of owner
eigners. Recognizing the right of foreigners to ship on real and other property, transfer, ter
own property in Kosovo, without any limitation mination, or encumbrance be registered in the
or conditionality, is in line with international appropriate property rights register. The legisla
best practices and different from the practices tion regulating the registry of immovable prop
in the region. For example, many countries that erty is UNMIK regulation 2002/5 and supple
came out of former Yugoslavia allow foreign cit mental legislation from 2003/13. Even though
izens to own property only under a condition the law foresees development of new legislation
of reciprocity. to regulate the immovable property registra
tion, this has not yet been carried out; however,
The new law on property rights, the Law on
the law lays out basic principles and rights for
Immovable Property and Other Real Rights, enacted
registration of immovable property rights.
in June 2009, includes both movable and immov
able property rights. The law is a sound, mod An innovation brought by the law is the require
ern piece of legislation, consolidating all private ment that registries are open to the public for
property right laws, including rights previously at least five hours each business day, allowing
14 | AgCLIR: Kosovo
citizens full access to the records. The old The law also provides for consolidation of agri
bureaucratic and manual system made it very cultural land, to create favorable conditions
difficult and cumbersome for citizens to access for maximum utilization of the land. oversight
and view property rights registries. responsibility for consolidation rests with
the Ministry of Agriculture’s Consolidation
The immovable property rights registry is
Committee. While the law is appropriate, the
regulated by the Law on Establishment of an
secondary legislation and mechanisms are not in
Immovable Property Rights Registry, promul
place to ensure implementation.
gated in 2002. The main implementing agency
is the Kosovo Cadastral Agency (KCA) and water rights
its operational units, the Municipal Cadastral
The law relating to the irrigation of agricultural
offices (MCo). The law puts forward a num
land would appear appropriate for maximizing
ber of procedures and requirements for
the use of available water resources. The law
registering a property right. The different
provides for establishment of water companies
requirements were established in response
to provide irrigation services to agricultural land
to problems arising during the Kosovo con
users. However, the responsibility over water
flict, which compromised the accuracy of the
and other natural resources lies with Ministry of
records—e.g., land transactions going unre
Environment and spatial Planning, creating con
corded, land records removed to serbia, the
fusion among companies as to where to register.
issuance of fake records either by the parallel
Moreover, the law provides for establishment
registries in serbia or elsewhere.
of voluntary water user associations to provide
Thus while the procedures may seem to some irrigation services to their members and non
people excessive, they reflect post-conflict members. Members are privileged with easier
measures in place to protect the rights of own and cheaper access to services. Associations can
ers and potential investors. The law sets dead create federations, providing services to several
lines for registration of property, review of associations. The law provides for creation of
request for registration by a party, justifica many layers of administration that will require
tion of a refusal, as well as legal remedies for time and significant efforts to establish.
refused requests. The laws also provide that
Municipal and Kosovo Cadastral offices should socially and public
maintain manual and legal database of the owned land
immovable land registries. Public property as in other parts of the world is
administered and managed by the municipality
agricultural land and the central government. The socially owned
other legislation regulating agricultural land property is a relic of property rights existing
and its consolidation are well written and gen in former Yugoslavia. The owner of socialist
erally consistent with international best prac property is all citizens, or the so-called work
tices. However, as noted, the main issue is the ers councils representing all society. statistics
mechanisms in place within ministries and other on the size and the volume of socially owned
government agencies to ensure proper imple property vary. There are no clear and accu
mentation. The Law on Agricultural Land, for rate records over the public and socialist prop
example, authorizes municipalities to monitor erty in Kosovo, due to the removal of property
use of land with the express intent of protecting
records to serbia in 1999 after the war and
arable land by prohibiting change in use, except
transfer of this property over the past 10 years.
in rare cases. The mechanism to implement the
law, however, is still inadequate and requires While in the past the socially owned property
additional training and education. was administered by local municipalities, after
March 2010 | 15
the conflict in 1999 the property was under abuse of socially owned property it will require
the authority of the UNMIK administration, a Herculean effort to clarify who the entitled
the Kosovo Trust Agency (KTA). In 2000 with holder is.
the creation of the Department for Trade and
Industry (DTI) this authority was delegated to implementing
the DTI. During the last 10 years no coordi institutions
nated legislative strategy has been developed to
facilitate transition of the socially owned prop Kosovo cadastral agency and
erty and clarify the title holder. municipal cadastral offices
The foundation on which investment in Kosovo’s
The socially owned enterprises and assets that
economic development and re-emergence will
include immovable property (land) were leased
be built necessarily includes a functioning cadas
for a period of 10 years through public tenders
tral system. Kosovo Cadastral Agency (KCA),
by the DTI. This process is known as commer
part of the Ministry of Public services, is the key
cialization versus privatization, whereby the
agency in this regard.
users do not acquire any ownership right over
the property. This initiative provided access to History and traditions have made the task of the
utilization of the property; however, the dura KCA a difficult one. over the decades, land—
tion of the lease was insufficient to justify the especially rural property—was traditionally
investment and costs of the transaction. In handed down from one generation to the next
many cases ownership over the socially owned through inheritance, primarily to the men of the
properties still remains open. While in other family. As part of Yugoslavia, the country’s cul
parts of former Yugoslavia the socially owned tural emphasis of private land ownership dimin
immovable property has either been trans ished with the rise of social ownership.
ferred into private property (slovenia12 ) or into
After the breakup of Yugoslavia and before
state property (serbia,13 Macedonia, Croatia,14
the conflict, calculated acts of discrimination
Montenegro), the concept continues to exist in
were eroding traditional rights in favor of a few.
Kosovo due to the political sensitivity and the
The conflict further complicated what was an
relationship with serbia. Thus, existence of the
already deteriorating land situation, with many
socially owned immovable property is an out
records either destroyed or moved to serbia.
dated concept that does not match the reality
and the civil and commercial development of Whatever the reasons, the cadastre situation
the current day and age. in Kosovo was in catastrophic condition imme
diately following the conflict and is only slowly
The Constitution of Kosovo authorizes the
improving. Even now unregistered parcels con
Kosovo Property Agency as the successor of
tinue to change hands and others have been
the Kosovo Trust Agency to sell, transfer, and
subdivided among heirs, rendering already small
or liquidate socially owned property and enter
plots smaller and further complicating the work
prises. The agency is responsible for identifying
of KCA.
the owners of assets and compensating them.
However, an additional problem with social There are two components to a good cadastre
ist owned property is claims for restitution system. one part is the legal system: the laws
filed with the courts in Kosovo. While many that govern land. In Kosovo these have largely
other former Yugoslav countries have devel have been written or rewritten since 2000.
12 Law on Privatization of Real Estate in
social ownership. oped appropriate legislation to satisfy these The second part of the system is a geographic
13 Law on Construction Land.
claims, such legislation in Kosovo does not aspect: the maps and coordinates that demar
14 Law on Transformation of socially
owned Enterprises. exist. After more than 20 years of misuse and cate parcels of land. In Kosovo, while the law is
16 | AgCLIR: Kosovo
adequate, the various graphical records—cadas The KPA is charged with investigating owner
tral maps, possession lists, aerial maps—do not ship claims and property use rights with respect
match up. to agricultural and commercial private immov
able property. From early April 2006 to early
History and tradition have contributed to a
December 2007, claims were filed with the
cadastre situation that is best summarized by
KPA. In total, more than 40,600 claims were
the picture in Figure 1. The figure shows “vec
filed, of which nearly 90 percent involved agri
torized” data (the red lines) from old cadastral
cultural land. As of october 2009, more than
maps overlaid on aerial photos from 2004. The
22,700 claims have been resolved.
difference is obvious. By one estimate, any
where from a third to half of Kosovo cadastre The KPA and the Kosovo Cadastral Agency
information is in a similar state as that depicted recently signed a memorandum of understand
in the figure—records do not match reality on ing (MoU) that will open the door to the KCA
the ground. sharing information with the KPA with the
intent of increasing efficiency of dispute resolu
tion. With just more than half of the disputes
resolved, this is a welcome exchange to increase
efficiency of the KPA.
environmental protection
agency
Part of the Ministry of Environment and spatial
Planning, the Kosovo Environmental Protection
Agency (KEPA) is charged with, among other
duties, assessing spatial planning and adjustments,
placing it squarely in the center of land classifica
tion. While the KEPA says it does not zone, its
determinations regarding the basic use of land—
agriculture or construction—broadly establishes
Figure 1: Historical cadastre information and actual aerial delineation. the intrinsic opportunity value of land.
The Municipal Cadastre offices are charged Within the KEPA, the Directorate for Planning,
with recording immovable property rights Urbanization and Construction is responsible
under the authority of the KCA. The KCA for broadly defining the nature of land utiliza
has the responsibility for overall administra tion, directly impacting on the availability of land
tion of the official registry. None of the regis for farming. For planning purposes land is cat
tries, municipal or the master KCA registry, are egorized as either “agriculture” land (defined as
as yet accessible online. The development and “the land determined for cultivating of agricul
full implementation of automated land registry tural cultures”) or “construction” land (defined
would facilitate access to records for all inter as “land on which buildings are constructed
ested parties, and streamline the registration according to a spatial plan or . . . foreseen as
and verification procedures. land for the construction of buildings”).
Kosovo property agency one of the KEPA’s roles is to protect the status
The Kosovo Property Agency (KPA) was estab of agricultural land, that is, keep land designated
lished in March 2006 to assist the courts in resolv as agriculture for this purpose and not redefined
ing property disputes resulting from the conflict as construction land. In practice some agri
between February 2, 1998, and June 20, 1999. culture soEs are being chopped up into both
March 2010 | 17
agriculture and construction, diminishing the received in excess of 18,000 applications, most
benefits of scale for farming purposes. In turn, related to trademarks. The IPo does not register
confronted with a fait accompli, courts often plant varieties, and Kosovo is not a signatory of
rule in favor of re-categorizing the land. the International Plant Protection Convention.
privatization agency of Kosovo While it takes only minutes to complete an
Formerly the Kosovo Trust Agency, the application registering an industrial property
Privatization Agency of Kosovo (PAK) works to right (which provides protection immediately),
privatize soEs and publicly owned enterprises the process has to be completed in person.
(utilities, airport, railways, etc.). soEs, many of There is no online application, and, of course,
which are agricultural in nature, are to form new no online searchable database. In addition, the
companies containing the assets but not the lia referenced EC report found that “adminis
bilities of the old soEs, holding the new shares trative capacity to implement intellectual and
in trust. The KPA then sells the new shares industrial property rights insufficient,” enforce
to investors (domestic or foreign). In addition ment weak, and the division of responsibilities
to price, the KPA can consider the activities, among various enforcement bodies dealing not
employment, and investment proposed by new well defined.
investor/bidder in making its selection.
supporting
Until privatized, many soEs are leased by would-
institutions
be bidders and continue in operation, provid
ing jobs and economic growth opportunity. courts
However, current regulation suggests that lease While many of the laws in Kosovo generally
hold improvements made by lessees in soEs reflect contemporary thinking (with many of
may not be recognized in their bids for soEs. them written or rewritten since 2000), the
This has the unintended consequence of sty implementing judicial system is weak.
mieing investment in the facilities that could While the June 2009 Law on Immovable
enhance competitiveness and create more Property and other Real Rights is a sound body
employment. Among the companies interviewed of law, it is yet to be determined to what extent
for this assessment were two processing firms the new law is implemented by the relevant gov
leasing soE property. In one case the company ernment agencies and the courts. In the past
acknowledged that it took a risk investing in in Kosovo, despite the enactment of new laws,
improvements but felt confident it would win a government agencies and courts continue to
privatization bid, and that win or lose its invest apply the old law either due to delayed distribu
ment would be recognized. The other compa tion of laws and training on new legislation or
ny’s decision not to invest in leasehold improve due to delays in drafting secondary regulations
ments until the privatization process was final necessary to implement the law.
reflected a large number of opinions.
Despite this, municipal courts are the first line
industrial property office of adjudication in land disputes. As cadastral
The two-year-old Industrial Property office information is inconsistent across possession
(IPo) is charged with industrial property pro- lists, maps, and registries, ownership is deter
tection—patents, trademarks, and designs. The mined based on the immovable property regis
issue of copyrights is independent and, according try, which requires three pieces of information
15 Commission of the European
Communities, Commission staff to an EC working document, an office of intel to validate a claim: a valid document from com
Working Document: Kosovo under
lectual property as distinct from industrial prop petent authority (administrative or judicial); a
UNsCR 1244/99 2009 Progress
Report, Brussels, 14.10.2009. erty has yet to be established.15 The office has decision of a competent court; and evidence of
18 | AgCLIR: Kosovo
a legal transaction. The system seems somewhat
circular and certainly open to inducements.
A study carried out in March 2009 by the
organization for security and Co-operation
in Europe (osCE) found major faults with
the legal system’s handling of property rights
cases.16 The study noted that courts often
recognize a transfer of ownership without a
written contract, which is required by law.
A second problem is the application of posi
tive prescription, or when ownership is deter
mined through possession over a given period
of time, sometimes called adverse possession.
This is overly applied as a means of circumvent
ing the need for a written contract. However,
in a post-conflict environment such as Kosovo,
it is not uncommon for individuals to be absent However, despite these efforts there is after
for a long period, opening the door to abuse of nine years a general lack of accelerated prog
positive prescription. ress regarding immovable property issues.
Forward movement around land rights is dis
There also appears to be significant procedural cernable (KPA has reduced disputed proper
law violations in decisions on property cases, ties by half for example), but it seems glacial at
suggesting at a minimum a need for training. times. Donors are committed to the effort but,
Finally, courts appoint temporary representatives whether from a lack of coordination or a lack
for absent owners without following procedures. of overarching strategy and pooled financing
to address the cadastre disaster meaningfully,
surveyors
progress is slow.
Both public and private surveyors operate in
Kosovo. Private surveyors were licensed for the
first time in 2009, and there are now about 50
social dynamics
licensed surveyors in Kosovo. The KCA is the rural attitudes towards land
agency charged with accrediting surveyors for Traditionally, land was an asset handed down
the purpose of performing official cadastral sur through the generations without need of reg
veys. The KCA is also responsible for licensing istering title, while conveniently avoiding the
surveying companies as competent to perform time and expense of registration. As it passed
cadastral surveys. from one head of household to the next, most
often among the males of the family, land would
donor projects
become further fragmented and divided.
The issue of land and property rights is one
that has received a fair amount of attention Many land transactions remain unrecorded. If
from donors. The World Bank and the EU Kosovo is to have a functioning land system, one
are among those that have assisted the KCA. in which titles are clean and can be mortgaged,
others include UNHabitat, the swiss Agency the old ways will need to give way to formal and
for Development and Cooperation, the swedish legal land registration, even if acquired through 16 Litigating ownership of Immovable
Property in Kosovo, organization for
International Development Agency, and the inheritance. Properly recorded land should
security and Co-operation in Europe
Norwegian Ministry of Foreign Affairs. increase in value due to clarity of ownership Mission in Kosovo, March 2009.
March 2010 | 19
(limited threat of ownership being disputed) and gender and land ownership
the ability to collateralize the land. Moreover, Kosovo remains an agrarian society domi
registering property properly should have a pos nated by smallholders. More than 15 percent
itive impact on women ownership. of households are headed by women. In a
strongly patriarchal society, these women-
fragmentation of headed households are at risk without clear
agricultural land property rights.
Fragmentation of agricultural land further erodes
opportunities for economies of scale. Already The current law begins to remedy the situation
more than half of agriculture land is used to plant with respect to property acquired after mar
cereals that are inefficiently produced on small riage. The Kosovo Family Law is based on equal
parcels. The breaking up of agricultural soEs is ity between spouses in which property acquired
especially unfortunate as these enterprises are of is regarded as common property. However,
the scale to be efficient producers of more basic property that is brought to the marriage how
staples. When soEs are subdivided, farm-based ever acquired (inheritance, gift, purchase) is
enterprise options are reduced. considered separate property.
20 | AgCLIR: Kosovo
recommendations
several land issues impact on the productive use of agricultural land, including land fragmentation, farm land being taken out of
agriculture due to illegal construction or other misuse, poor cadastral information, misapplication of soE privatization principles,
application of procedural law, and lack of coordination among stakeholders around land law, management, and the reinstatement
of a functioning cadastre system.
Following are a few focused, manageable recommendations that should contribute to improving on some of the issues mentioned.
The recommendations are divided between near- and longer-term actions.
recommendation: stay the course with respect to focus on land issues .
General: With respect to land issues, slow and steady will eventually win out. There is no silver bullet here. The untangling of
the Gordian Knot of traditional practices, socialist governance, ethnic separation, armed conflict, and contemporary post-con
flict property law will not be solved with one bold stroke but rather a steady and patent unraveling in a manner. In this regard,
a catalogue of donor actions taken to date, results, and next steps would contribute to coordinated efforts and likely increased
rate of progress.
short Term Long Term
Encourage investment in rented SOE premises by acknowl
•
• Remain focused on land issues as a foundational necessity
edging the value of improvements made upon privatization to investment in Kosovo. From cadastral system to dispute
and compensating the renting business accordingly. To do so resolution to application of the law to securing the return
requires a rather simple (by comparison to other actions) of missing property registries, donors would do well to
change in the law. A change that any landlord (in this case support what appears to be this fundamental initiative in
the GoK) should welcome as it encourages tenants to main a coordinated manner. An important step to coordinating
tain the property, and could open new export markets as efforts then would be the cataloguing of previous and current
the result of investments in premises that upgrade facilities efforts by any government or donor program from writing or
to comply with market standards. rewriting laws to equipping government services to training
public and private implementers.
Enforce the letter and spirit of the existing law regarding
•
maintaining agricultural land for agriculture, encouraging Provide training for judges in the proper application of law in
•
economies of scale that for some commodities require sig regards to adjudication of land disputes. If such training has
nificant continuous tracts of land. A public awareness cam been carried out (see above regarding need for catalogue of
paign is one approach, which would be more effective if the immovable property actions), repeat new training. As what
GoK appealed a few previous court decisions that allowed gets measured gets accomplished, develop a system for scor
for the break-up of agricultural land. ing performance of judges in the proper application of the
law. Those falling below a certain level would receive addi
Establish a more efficient system for industrial and intellec
• tional training, or be let go.
tual property protection. A recommendation that came out
of a roundtable discussion of property rights reflects con Change existing attitude towards women ownership of land.
•
cern among private sector regarding safety of such rights. This action could start with a study to quantify and qualify
one first important step would be making the systems the issues and opportunities to improving women’s access to
online and real time. land title.
Invariably, increasing women ownership also requires chang
•
ing attitudes. This might start with promoting the benefits
of spousal ownership of immovable property and application
of law in this regard. Also consider changing the law to favor
the wife with regards to the status of pre-marriage assets.
This could be remedied simply by requiring that the husband
must take action to separate by law any assets brought to the
marriage rather than the passive acceptance in the current
law that such assets are separate.
March 2010 | 21
getting credit
Whether from a lack of collateral, a limited understanding of agribusiness (lead
ing to higher perceptions of risk), a predominantly small-farmer agricultural sec
Kosovo
tor, a nascent financial sector still growing into the market, or a lack of business
savvy on the part of many agribusiness operators, or most likely a combination
of all these factors, Kosovo’s agricultural sector is underfinanced. Some exciting
services are emerging that may open the doors to increased financing options
for agriculture, but in the near to medium term, agriculture is likely to remain
underserved in an economy dominated by the trading sector where loans are
secured by developed urban immovable collateral.
getting credit getting credit
Doing Business Ranking 2010 43
5
Doing Business Ranking 2009 41
strength of legal rights index ( 0–10) 8 4
average score
Depth of credit information (0–6) 3 3
Public registry coverage (% of adults) 18.9 2
Private bureau coverage (% of adults) 0.0
1
As in other emerging economies the lack of 0
Legal Implementing supporting social
affordable credit is often singled out as “the” Framework Institutions Institutions Dynamics
most pressing concern for agriculture-based framework area
businesses, whether farming, processing, or
trading. This concern is followed by a wring tions lend weight to the general rule, though,
ing of hands over the financial industry’s fail that agriculture is woefully underfinanced.
ure to understand agriculture’s “unique” needs.
In 2008, banking assets represented 80 percent
Kosovo is no different. of total financial sector assets of €2.3 billion.
on the other hand, agribusinesses often focus Pension funds represented11.4 percent, micro-
finance institutions (MFIs) 5 percent, and insur
on the “agri” side while minimizing the “busi
ance companies 3.4 percent. While loans to
ness” side of agribusiness. While 14 percent
agriculture increased nearly 30 percent in 2008
interest, as found in many commercial banks,
over 2007, they still accounted for only about 4
is steep for many businesses, there are sound
percent of total loans made, against a contribu
opportunities that can support this rate of
tion to GDP of 20 percent.17
interest (which for preferred customers can be
under 10 percent). Within the banking community, more than 75
percent of loans went to enterprises and most
For small farmers, production credit and longer- of the remaining 25 percent to households.
term credit, say, for the purchase of machinery Nearly half of all loans went to trading activi
and implements or irrigation equipment, is lim ties, followed by, in decreasing order, other
ited to a few microfinance institutions and more services, construction, industry, mining, and
17 2008 Central Bank of Kosovo Annual
Report, June 2009. adventurous commercial banks. These excep finally agriculture.
22 | AgCLIR: Kosovo
Kosovo is quite dependent on the interna risks other than through collateral (e.g., there
tional community and diaspora. It is estimated is no credit bureau, the existing pledge registry
that together these two constituent groups lacks efficiency, crop insurance is non-existent,
account for 30 percent of GDP, roughly 15 per and contract enforcement is considered by
cent each. In 2008 official remittances reached many to be non-existent).
nearly €540 million, more than 2.5 times the
value of exports.18 legal frameworK
The legal framework for regulation of financial
Kosovo weathered the financial crises better
institutions in Kosovo is new, developed after
than some countries in 2008. However, remit
1999. Unlike some of its neighbors that had
tances increased at a significantly lower rate in
to reform existing outdated laws and regula
2008 than 2007, 2.7 percent vs. 11.7 percent,
tions, often times a more painful and laborious
respectively, given the impact of the crisis in
process, Kosovo had the advantage of starting
countries of remittance origin.19 A similar slow
from scratch. As a result, the legal framework
down in growth is likely in 2009. This is relevant
regulating financial institutions is limited, coher
to the extent that many households and (agri-)
ent, and in line with international best prac
businesses seem to depend on remittances for
tices. The financial legal framework consists
financing living and working capital needs.
of the Law on Central Bank of the Republic of
It seems that there is liquidity in the system, Kosovo, which contains chapters on bank rules,
with, for example, one bank reporting well over non-financial institutions, microfinance insti
€200 million in what it termed excess liquid tutions, insurance companies, and the Credit
ity. Rates hovering around 14 percent are con Registry Authority, and a body of secondary
sidered high by borrowers in Kosovo when legislation in the form of rules and administra
they compare them to rates in other European tive directions governing the above-mentioned
countries. Needless to say, interest rates are areas to facilitate implementation.
based on a number of factors that are difficult
According to the EC progress report, the
to compare across regions (inflation; 20 operating
legal system for the financial sector in Kosovo
costs—marketing, operations, taxes/licenses;
reflects contemporary thinking in line with
cost of funds; risk—borrower, sector, country;
international best practices. Enforcement of
and, of course, profit). In light of a deflationary
contracts, however, remains one of the main
environment as suggested by IMF figures (refer
obstacles to accessing credit and, concomitantly,
ence below), the current rate of 14 percent (9
to business growth. High interest rates for loans
percent for some preferred corporate clients)
and ineffective enforcement of creditor’s rights
does suggest that the perception of sector risks
and inefficiencies in operation are keeping rates Key laws
higher for Kosovo where much of the borrow
ing market is comprised of small and medium • Central Bank of Kosovo Law
(even micro-) enterprises. • UNMIK Regulation 1999/21 on Bank
Licensing, supervision and Regulation
In the current environment the challenges • UNMIK Regulation 2004/2 On the
to agri-lending are numerous but address Deterrence of Money Laundering and
18 Ibid.
able. Part of the problem is that companies Related Criminal offences 19 Havolu, sokol, CBK Working Paper
and farmers do not fully understand their own • Banking rules No.3, Determinants of Remittances:
The Case of Kosovo, 2009.
• Rules on Licensing and Supervision of Micro
costs and fixate on products that are not com 20 The World Bank 2009 Country Brief
Finance institutions notes that inflation in 2008 was
petitive. Transactions tend to be costly, espe 0.5%, with deflation January 2009 of
• Law on Immovable Property and other -0.5% and May 2009 of -1.2%. The
cially for small farmers. on the other side of Real Rights IMF has forecasted an average annual
the coin, it is difficult for lenders to mitigate deflation of -2.1% for 2009.
March 2010 | 23
and of contracts result in high costs and risks policies in Kosovo by advising the government in
for financial institutions. the above areas. The capital of the CBK is set at
30 million Euros.
The range, scale, and scope of the existing finan
cial sources and products available to commer The CBK legal framework regulates banks, non-
cial and agribusinesses are relatively limited and bank financial institutions, investment compa
not appropriate for normal operational activi nies, and microfinance institutions. The bank
ties. Foreign investments in the banking sector ing rules establish minimum requirements for
are likely to increase competition and improve bank capital, which comprises Tier I and Tier
conditions for private-sector businesses but high 2 capital. Tier 1 includes common equity, pre
interest rates are still problematic and obstacles ferred shares, but not distributed earnings. Tier
for many small businesses and individual borrow 2 capital includes reserves for loan losses up to
ers. In terms of support for agriculture, the EC a maximum of 1.25 percent of its risk, ordinary
progress report highlights that agriculture loans preferred shares, and term preferred shares.
account only for 4 percent from the overall value The law requires that Tier 2 capital will be
of the loan distributed in 2009.21 reduced by 20 percent of their original amounts
at the beginning of each of the last five years of
central banK of Kosovo law the instrument’s life. The CBK has introduced
The law on the Central Bank of the Republic reasonable policies to limit credit risk expo
of Kosovo (CBK) promulgated in June 2008, sures of the banks to individuals and aggregated
transforming the former interim administra groups of individuals, limiting the total value of
tion Banking and Payment Authority of Kosovo the loan up to 10 percent of the Tier 1 capital.
to the Central Bank of Kosovo, establishes the In addition, except with permission from the
CBK as a central authority in Kosovo to license, CBK, the law prohibits banks from acquiring or
supervise, and regulate all financial institutions maintaining land or other fixed assets (e.g., land,
in the territory of Kosovo. Financial institutions building, leasehold, fixture, furniture), the aggre
under supervision of the CBK include commer gate value of which at any time exceeds 50 per
cial banks, non-financial institutions, insurance cent of the bank’s Tier 1 capital.
companies, microfinance institutions, and pen
sion funds. In addition the CBK has established In April 2006 the Kosovo government promul
a Central Credit Registry. gated a law on foreign investment, whereby
all foreign investors are to be governed by the
As an independent agency, the CBK has the
principle of national treatment. This means that
power to issue and revoke licenses; monitor,
foreign investors will be treated equally with the
audit, and regulate domestic and foreign banks
domestic enterprises, including foreign-owned
and financial and non-financial institutions; issue
banks. As such, the bank rules foresee reason
rules, orders, and guidelines to regulate their
able requirements for licensing foreign banks in
operations; and audit the financial institutions to
Kosovo and verifying their capital levels, asset
ensure their affairs are in compliance with the
quality, and liquidity ratios. General rules on
law. The number and variety of financial institu
bank governance apply equally to domestic and
tions are growing in Kosovo, with 8 registered
foreign banks.
commercial banks, 10 savings and credit asso
ciations, 15 microfinance institutions, 8 non- As a response to last year’s world financial cri
banking financial institutions, and 10 insurance ses, the CBK introduced new measures to mon
companies. The principal role of the CBK is to itor bank liquidity and credit risk exposures:
21 Commission of the European
Communities, Commission staff develop a sound and efficient, functioning and the CBK developed higher standards to review
Working Document: Kosovo under
stable financial market with safe financial instru policies and procedures used by the banks in
UNsCR 1244/99 2009 Progress
Report, Brussels, 14.10.2009. ments, as well as support general economic monitoring credit risk exposure and requiring
24 | AgCLIR: Kosovo
a minimum of quarterly review and reporting. Registered MFIs can give loans, obtain funds by
This effort was acknowledged as a positive step grants, place funds in the market, and provide
in the EC progress report for Kosovo for 2009. technical assistance to borrowers. In addition,
licensed MFIs can accept deposit savings, buy and
The CBK has adopted rules to prevent money-
sell foreign exchange, and extend credit facilities
laundering activities. For example, all credit-
such as letters of credit, bonds, and guarantors.
granting institutions are prohibited from disburs
While banks give loans to larger businesses, the
ing loans in cash greater than 10,000 Euros, or to
MFIs are set up to provide credits to low-income
structure loans in such a way to avoid this rule.
households and small and medium enterprises.
The CBK requires that all credit-granting insti Minimum capital requirements for MFIs are
tutions maintain full transparency towards their 2,500,000 Euros and/or common equity shares,
customers in disclosing information on interest statutory and general reserves, donations, and
rates, products, and service fees to allow bor capital equivalency deposit.
rowers to compare interest rates and other
real property and mortgages
charges among different banks on loans and
Real and immovable property are the domi
deposits. However, the rules do not contain any
nant forms of security in Kosovo. Most financial
penalty if the credit institution fails to do so.
institutions distribute loans using immovable
The CBK has established a central credit regis property as the main source of collateral. The
try system. All credit-granting agencies, banks, legal framework for mortgages is solid, and is in
and microfinance and non-bank institutions are compliance with EU legislation and international
required to provide accurate data on borrow best standards, providing sufficient legal reme
ers. The purpose is to make credit reporting dies and protection for both the debtor and the
mandatory for all credit providers in accordance creditor. It provides judicial and extra-judicial
with the CBK. In return, the credit providers protection to secure creditors’ claims, and pro
will have access to credit reports on borrow vides sufficient legal remedies and protection
ers: credit worthiness, credit standing, credit for both the debtor and the creditor.
capacity, and character or general reputation.
However, implementation of a “best practices”
Information connected to a credit transac
mortgage law remains a crippling problem. The
tion can be obtained by paying a nominal fee.
biggest challenge for creditors is identifying
According to the World Bank Doing Business
the property title holder, due to inaccuracies
2010 report for Kosovo, the credit registry cov
in immovable property registries. Many of the
ers 18.9 percent of the adult population.
property registries were transferred to serbia
Commercial banks and microfinance institu after the conflict in 1999, with many properties
tions have different capital requirements, and changing hands since then, thus complicating a
can be engaged in different types of activities. proper updating of the cadastre system and call
Banks are authorized to engage in the following ing in question the integrity of the registries.
activities: receive deposits, give loans, buy and Existence of parallel registries enables multiple
sell securities, foreign exchange, financial leas sales of the same property, gives rise to cor
ing, and other activities as determined by law. ruption, and creates chaos in land registry and
Microfinance institutions (MFIs) are authorized administration in Kosovo. This confusion pushes
to give small loans in value of 5,000 to 15,000 banks to increase interest rates and apply high-
Euros to low-income households and individuals, risk premiums for loans. Another problem faced
and 15,000 to 75,000 Euros to small enterprises. by the financial institutions in securing their
The law on the Central Bank of Kosovo differ claims is contract enforcement through the
entiates between registered and licensed MFIs. local courts.
March 2010 | 25
Pledges are also used to secure creditors’ claims available banKing services/products
for debt repayment. Provisions on pledges
in the legal framework state that any mov • Individual guarantee
able property right that can be transferred to • Bank guarantees
• Import letters of credit
another owner can be used to secure a claim,
• Cheque clearing
if specified in the agreement, including future
• Pre-export financing
products. The provisions do not contain further
• Salary accounts
clarification as to whether the future products
• Export letter of credit
can be used as collateral; however, legal provi • Internet banking
sions are vague enough to allow parties to a • Corporate guarantee
contract to determine what movable possession • ATMs
or rights can be used as collateral. • Bridge loans
• Leasing
implementing • Term loans
institutions • Bid bonds
• Letter of counter guarantee
central banK of Kosovo • Advance payment guarantees
The Central Bank of the Republic of Kosovo • Cash services
(CBK) is generally well respected and consid • Performance bond
ered to be well managed. one of its important • Deposits
• Facility guarantee
objectives is the development and moderniza
• Purchase order finance
tion of the financial sector. As it has matured,
• Remittances
it has moved from rules-based to risk-based
• Overdraft facilities
supervision, following Basel Core Principles and
Pillar 2 of Basel II.22 The CBK is responsible for
providing most central bank functions except significant or majority foreign ownership. While
lending or providing temporary liquidity, as it is somewhat diverse, commercial bank lending is
not an issuing bank. heavily concentrated in just two banks—Raiff
iesen and ProCredit—accounting for approxi
The CBK operates a credit registry. Regulations mately 80 percent of total loans. The maturity
require all banks, MFIs, and non-bank financial of term loans varies, with nearly a third for
institutions (NBFIs) to enter loan data into the two years. However, over time, as confidence
registry within 24 hours of extending a loan.
returned, loan maturity has lengthened. In 2005
The registry is available online for registered
less then 45 percent of loans had a maturity of
lenders. The information collected includes
more than two years. In 2008, 68 percent did.24
disbursement date, amount, term, collateral,
loan rating (A, B, C, or D), and whether there As confidence grows, commercial banks tend
are any late payments or delinquencies. By all to increase the services offered. In Kosovo,
22 Basel I primarily focused on credit
risk. Assets of banks were classi accounts, the system works well, and is timely many of the most basic banking services/prod
fied and grouped in five categories and easy enough to use. ucts are available.
according to credit risk. The
purpose of Basel II is to create an
international standard that banking commercial banKs While services and products are expanding,
regulators can use when determining
how much capital banks should put on paper, the economy of Kosovo is fairly agriculture remains underserved by commer
aside to guard against the types of well served by eight commercial banks, which cial banks. The factors for this are varied and
financial and operational risks banks
face.. together have nearly 300 branches and sub include the following:
23 see http://www.bqk-kos.org/.
branches combined.23 of the eight commer • Systemic risk such as weather, plant dis
24 2008 Central Bank of Kosovo Annual
Report, June 2009. cial banks recognized by the CBK, six have ease, etc.
26 | AgCLIR: Kosovo
• Seasonal and cyclical market risks sharing the risK
• Credit risk
To familiarize commercial banks with
• Small-farmer agriculture inefficiencies
agriculture and to mitigate the need for
• Limited collateral-appropriate assets
collateral, the UsAID introduced a
• Slow returns on investment
Development Credit Authority (DCA)
• Poor infrastructure guarantee scheme to eligible banks.
• Threat of political interference Eventually Raiffeisen Bank signed up. The
• Regulatory risks program extended a partial loan portfolio
• Low technical awareness on farm and busi guarantee for agribusinesses, a sector
ness acumen, and lack of capacity among previously underserved by the bank.
sector support bodies (associations, pro
UsAID/Kosovo linked the DCA to technical
ducer groups, chambers, etc.)
assistance to borrowers and supply con
To cope with the risks of agriculture, banks gen tracts—distributors to farmers to proces
erally have tended to shy away from agricultural sors/traders. Backed by the partial guaran
tee, the technical assistance, and the
lending, use short maturities, provide no grace
contracts, Raiffeisen lent with greater
period, and apply rates of interest commen
confidence to a segment of the economy it
surate with the perceived risks. Commercial
previously would not have considered—small
banks also apply two coping strategies that agribusinesses and farmers.
work against agriculture and agribusiness lend
ing in Kosovo: reliance on collateral and empha The facility has now run its course, with the
sis on historical performance. full $10 million ceiling lent. This exposure to
a previously lightly regarded segment of the
collateral is King loan market and the linking of borrowers to
Commercial banks in Kosovo tend to rely signif buyers provides an important precedent to
icantly on (developed) real estate as collateral. come back to (see recommendations).
This largely limits valued collateral to urban
areas and excludes much of the rural popula Many agribusinesses are bereft of sufficient real
tion. In addition, there is a tendency to under estate collateral to adequately finance growth.
value the real estate and over collateralize a In Kosovo (and elsewhere) houses and other
loan. By some accounts, collateralization tends personal assets are tied up as collateral to cover
to be one and half to even three times the value a mix of financial needs—working capital, equip
of the loan. ment, buildings, transport. Not all of these
Commercial banks, no matter where they are needs are long term in nature, yet long-term
located, are not the highest-order risk takers. assets are pledged as collateral against short-
They lend confidently based on what they know term needs. This puts many agribusinesses on
or understand. In the case of Kosovo, like many a treadmill to nowhere. They may be able to
emerging economies, commercial banks do not maintain but can not grow.
understand agriculture/agribusiness as well as
other industries, especially the industry of sim the rearview mirror
ple trading. In agriculture, information is spotty Historical financial performance is an important
and, in banks’ eyes, possibly unreliable. Risk is element of any loan consideration. Dependence
hard to determine and often nearly impossible on the rearview mirror, though, means com
to offset (i.e., insurance, hedges). In such an mercial banks miss opportunities to lend. In
environment the fall back is to collateralize sig fairness, many agribusinesses do not help them
nificantly based on what is better understood— selves in this regard as their financial records are
urban or peri-urban developed real estate. often poorly presented. However, banks could
March 2010 | 27
do more cashflow-based lending. This requires Key microfinance institutions
greater confidence in the borrower’s record
keeping and ability to manage the business • Agency for Finance in Kosovo (AFK)
(whether farming, processing, or trading), as well • Atlantic Capital Partners (ACP)
as a better understanding of the markets. It also • Balcanactie
• Beselidhja
requires that a borrower demonstrate a higher
• Qelim Kosove
level of business acumen and that commercial
• Cordaid
banks employ a greater capacity for financial ana
• FINCA
lytics and understanding of the business.
• KEP Trust
Two recent services seek to tackle both of • Kosovo Grameen Missione Acrobaleno
these obstacles—a credit guarantee program • KosInvest (World Vision)
and purchase order financing. see the text • Kosovo Aid and Development
boxes Sharing the Risk and Banking on Cash Flow. • Kreditimi Rural i Kosoves (KRK)
• Meshtekna
microfinance institutions • Perspektiva 4
Mircofinance has significant representation • Start
in Kosovo, with 15 microfinance institutions
(MFIs) listed in the CBK’s 2008 annual report. loan and methodology of the MFI. some lend
MFIs play an important role in reaching a part based on references from a village lending com
of the economy that commercial banks find dif mittee, others lend based on group guarantee,
ficult to service—small and micro-businesses, and still others lending hinges on the guaran
farm households, and agribusiness, as well as tee of a single person or multiple individuals. In
disenfranchised or underserved borrowers such some cases movable and immovable property
as women and minorities. and salary pledges are required. The philosophy
The Association of Microfinance Institutions of and lending practices of MFIs in Kosovo are as
Kosovo (AMIK) has nine members (highlighted varied as the number of MFIs.
in the box below) that had approximately €94.8 By law MFIs, which are considered NGos, can
million outstanding to nearly 54,000 borrowers not accept deposits. This will soon change,
in september 2009 (about €1,800/borrower). when, by early 2010, MFIs will be able to tran
Competition among MFIs in urban and peri sition to deposit-taking entities. Those MFIs
urban settings is fairly strong. There is less highlighted in blue (above) are among those that
choice the farther the borrower is from a city may make the transition. The general impact of
or town. In this regard, even the CBK has transitioning to a deposit-taking entity will be to
remarked that it would like to see MFIs extend reduce the cost of capital. Depending on how
their coverage to include more rural households. many transition, there may be competitive pres
sure upwards on saving rates at well, which earn
There is a wide range of services offered by around 4–4.5 percent currently.
MFIs—agricultural loans, group loans, small
medium-sized enterprise loans, loans for hous non-banK financial
ing, trading, and starting a business among oth institutions (nbfis)
ers. MFI services generally are priced on a NBFIs include leasing companies, lending firms,
monthly declining basis, with annual rates, while payment facilitators, and financial advisors.
varying among MFIs, running around 24 percent Those recognized by the CBK are listed below.
and up. Terms range widely from a few months The intriguing NBFIs, from an agricultural–finan
to 60 months, depending on the type of loan. cial services perspective, are those that intro
Collateral requirements also vary depending on duce new lending products/services. Two “new”
28 | AgCLIR: Kosovo
services are of interest—leasing and purchase banKing on cash flow
order financing.
As explained by the CFF, purchase order
The leasing law is modern and appropriate, but financing (PoF) is a transaction-based form
little leasing is done outside vehicles. Leasing of working capital financing. When a business
is a nascent financial service in Kosovo and as receives an order from a buyer, the CFF
such what leasing that occurs gravitates to the advances a loan for the company to cover all
the steps necessary (production, purchasing,
known such as vehicle leases.
processing, packaging, etc.) to ship the order.
Building on the success of the DCA credit guar What PoF covers is important as many
antee, leasing could be a good fit for a simi existing services such as LCs cover only a
lar guarantee program that encourages leasing short period of time, usually shipping. LCs
largely assume that the product to ship is
firms, and there are but two in Kosovo—
available or that the seller can finance the
Raiffeisen Leasing and Factor Leasing—to
costs necessary to fill an order. PoF allows
extend their services to agribusiness.25
for a longer horizon that includes production
The agricultural market would seem to be sig of the commodity to be shipped. In PoF, the
purchase order (the contract between the
nificant for leasing. For example, the 2007 agri
seller and buyer) becomes the collateral for
cultural household survey shows that there are
the loan. The accounts receivable is trans
nearly 27,000 tractors (>40HP) and more than
ferred to the lending institution and becomes
50,000 tractors (<40HP) used by small farmers. the source of loan repayment. The financial
Many of these tractors may have been given institution collects payment for the loan plus
interest and fees from the buyer once the
away since the conflict to help restart agri
product has been delivered.
cultural production. That means much of this
equipment is seven to nine years old, and per
haps ready for replacement. Moreover, farmers purchase order financing allows for a longer
generally have been exposed to the advantages lending window then typical letters of credit
of mechanization and use of proper equipment, (LC) (see text box).
which makes them a realistic market for leasing. The CFF’s relatively small initial capital is now
Based on interviews, there does seem to be a fully lent, and new loans are revolving from
somewhat negative attitude towards leasing by repayments on existing loans. The opportunity
the less informed. The feeling is, why lease and for PoF to work for agribusinesses would seem
pay interest if at the end of the day the equipment to be significant, especially as the collateral is
is not mine. of course leasing is not appropriate the contract to purchase. PoF also addresses
in every situation but it does minimize the need the historical performance issue as it recog
nizes that future performance requires new
for collateral, as the equipment remains in the
purchase contracts and that these contracts
name of the lessor. There are tax implications as
serve to mitigate the risk of a loan, despite his
lease payments are deductible as operating costs,
torical performance.
and at the end of the lease the asset being leased
can often be purchased at a nominal cost.
supporting
Among the NBFIs, Crimson Finance Fund institutions
(CFF), a relatively new and interesting insti
tution, is a mix of private and donor capital credit bureau
(Norse Aid and UsAID), and I relatively small No credit bureau or other credit-rating agency 25 CFF will move into equipment leas
ing for businesses and specifically
($1.5M) and cutting edge in Kosovo). The CFF exists in Kosovo, and there is a need. A prop
equipment leasing for agriculture and
is offering financing based on purchase orders. erly functioning credit bureau service should food processing in 2010.
March 2010 | 29
1) Prove the utility of information collected
2) Refine the business case/offering, including
pricing of services
3) Prove demand
pledge registry
The Pledge Registry, which is embedded in the
Ministry of Trade and Industry, receives mixed
reviews by users. A pledge can be registered in
person or remotely, but not online. To regis
ter remotely, the user must sign an MoU with
the registrar. With the MoU the user receives
a database file that allows the user to upload
information regarding the pledge, which is then
e-mailed to the registrar. Upon receipt, the
registrar exports the information into its data
base. once a week, users deliver hard copies
of the pledges sent to the registrar by e-mail.
While perhaps marginally tolerable for those in
Pristina, interviewees reported that it is a defi
nitely onerous system for those outside Pristina.
During interviews with the pledge registry it was
mentioned that the World Bank had agreed to
finance upgrades to the registry to, among other
things, make it online and real time. Regrettably,
for whatever reasons, the money has not been
forthcoming.26 Interviewees strongly suggested
that the registry can be an invaluable tool, but to
date its potential has been woefully unrealized.
result in lower interest for creditworthy
insurance
individuals/businesses.
At the end of 2008 there were 10 insurance
If there was agreement, the current well-func companies in Kosovo, 7 of which were foreign
tioning credit registry maintained by the CBK owned, managing more than 70 percent of the
could serve as a transitional credit bureau by assets in the insurance sector. vehicle insur
collecting a few additional pieces of data on ance is the dominant activity of the industry,
such things as tax payments (individual and with both policy and claims growing in 2008
company), vAT payments, utility payments, and over 2007. As life insurance was just introduced
credit card payments. in 2008, it is no surprise that there is no crop
insurance available as yet in Kosovo.
While providing a credit bureau service is not
usually the job of the central bank, in a country legal/notaries
the size of Kosovo involving the CBK in a transi There are approximately 550 licensed lawyers
tional way could prove beneficial to the eventual in Kosovo or 1 lawyer for approximately every
establishment of private, public, or private-pub 4,100 (compared to 1 lawyer for roughly every
26 Follow up with the World Bank for
lic credit bureau. The CBK’s role could help in 600 Germans and 1 for every 265 Americans).
confirmation and status update was
not possible. several ways: While some countries may have a plethora of
30 | AgCLIR: Kosovo
lawyers, Kosovo appears to be quite under- The private sector (processors/traders who
served by the legal profession. Many of these seek the commodity and input dealers who seek
do not practice commercial law, and nearly half to sell inputs) plays an important role in exten
reportedly work in the environs of Pristina. sion. The quality of this private extension is not
With bar exams organized sporadically, it is not clear and likely varies. one barometer of the
likely that a great many commercial lawyers will lack of proper extension is yields, which for
suddenly enter the market. many of the commodities produced in Kosovo
significantly lag average yields across Europe.
Notary services are limited in Kosovo. There
is a project underway through the swiss Associations and agricultural-related group
Cooperation office to train and certify nota ings generally lack sound organization manage
ries. out of about 200 trainees, approximately ment. There are exceptions, but they tend to
50 will be certified and of these, it is estimated prove the overall need for better group man
that 20 or so will be in and around Pristina. agement. Few such organizations are assertive
in advocating improved financial services for
accountants/booKKeepers agriculture. Fewer still educate members on
Kosovo has adopted a simplified version of the matters related to improved financial manage
International Accounting standards. The Kosovo ment and other activities that would enhance
Association of Accountants offers training and their bankability.
certification for accountants. Generally those
who value the work of accountants and auditors
social dynamics
find the profession in Kosovo to be well served,
especially in Pristina. As might be expected, in mistrust
more rural areas, one finds far fewer qualified With the passage of time since the major politi
accountants/auditors and more bookkeepers, cal and social disruptions of the 1990s, bank use
trained to varying degrees. is increasing. Average deposit size per person
increased from roughly €200/person in 2001 to
The challenge lies not in the qualifications of
€690 in 2008, and loans increased 130 percent
accountants and auditors but in the ability of
between 2005 and 2008, €514M to €1,183M,
agribusinesses (whether processing, trading,
respectively. Interviewees suggested that with
or commercial farming) to access the services.
agribusinesses there is a lingering mistrust of
In addition, there is a decided lack of interest
banks and a reluctance to seek out loans. The
by many agribusinesses in the professional ser
preference is to rely significantly on extended
vices of accountants and auditors. Mistaken or
family or own revenue for financing.
not, cost is perceived as high, access is seen as
difficult, and rationale for the expense is not While reliance on personal funds to start up a
well understood. business is not uncommon, reliance on them
to grow a business is less desirable. one 2008
associations/extension services
study found that more than 80 percent of small
severe budget constraints limit the Ministry of
and medium enterprises (of which most agri
Agriculture, Forestry and Rural Development’s
businesses would be a subset) financed invest
(MAFRD) effectiveness as a provider of exten
ments from own financial resources.
sion services. The ministry received assis
tance in 2003 to establish its Advisory service Is it a preference for personal funds? Unlikely.
section, which assists farmers to adopt best Rather it is probably a combination of things:
practices; however, among the many inter a lingering preferences to stay liquid in case of
27 While in Kosovo for this assessment,
viewed, not one talked of receiving assistance emergency (read insecurity), the need for cash
the ministry announced an input
from the ministry.27 to operate in the gray economy, and the low subsidy program for small farmers.
March 2010 | 31
opportunity cost of holding on to cash (sav preference for ownership
ings pay little more than 4 percent), a poor Leasing should be a useful financial service in
understanding of financial leverage, and a belief Kosovo and the market would appear to be sig
that lending rates are simply too high. It may nificant for farm implements. However, there
also reflect simple reality that many agribusi is generally an attitude that it is better to own
nesses are not bankable under current lending than to lease. This suggests a need to educate
practices given the poor state of their finan the farming marketplace as to the advantages of
cial records and lack of acceptable collateral. leasing versus owning.
Whatever the reasons, unwillingness to estab
This education program (otherwise known
lish relationships with lenders retards the
as marketing) should really be undertaken by
growth of some promising agribusinesses.
the private leasing companies. To give them a
limited business acumen push may be appropriate. such a push could be
Lack of business management skills in agribusi through market research that is shared broadly
ness sectors affects how well a business is run with the financial services industry, perhaps
and, by extension, the ease with which an agri carried out under the auspices of the Kosovo
business can get credit, as well as the rate of Bankers Association (KBA) and AMIK and
interest. Poor understanding of leverage was funded by any number of public groups.
frequently made clear and is a critical factor in
access to credit for all
the low financial services penetration.
Given the difficulty women have tradition
Banks, with reason, tend to place a good ally experienced in accessing property rights, it
deal of emphasis on historical performance. stands to reason that reliance on real estate as
Unfortunately, very little attention is paid to collateral in lending is necessarily biased against
future cashflow projections. Lack of business women borrowers. Moreover, there are few
acumen means agribusinesses are not always women-led businesses in Kosovo that have suf
putting the best foot forward. The case for ficient business assets to collateralize. Even at the
those seeking financing is further eroded by micro-enterprise level one MFI noted that it had
the limited availability of quality accounting/ to insist certain business loans be made only to
bookkeeping services, especially in rural areas, women, as men were applying for loans for busi
which means that financial statements are nesses that tend to be operated by women—arts
poorly presented. and crafts, household gardening, and poultry.
32 | AgCLIR: Kosovo
recommendations
There is an emerging interest in agriculture by banks and MFIs alike. However, limited understanding of agriculture and the asso
ciated risks sharpens the perception that agriculture is riskier than it really is. The following recommendations revolve generally
around the theme of reducing risks.
recommendation: lower the perception of agriculture as risKy business .
General: Improve ability of agribusiness and creditors to talk with each other, while introducing risk-mitigation measures.
short Term Long Term
Reduce perception of risk. There is an emerging interest
• Strengthen agricultural-related associations’ ability to
•
in agriculture by banks and MFIs alike. However, limited improve members’ business acumen. The MAFRD exten
understanding of agriculture and the risks sharpens the per sion service in principle is to train farmers in the commer
ception of risk in agriculture being higher than what it might cial operation of their small farms. This is not happening.
truly be. Associations and producer groups are another way to reach
farmers with training in farming as a business.
Lowering the perception of risk can happen in several ways:
train lenders in agricultural lending, improve how agribusi Use
• the credit registry to transition to a credit bureau. A
nesses (whether farming or processing) are managed, and credit bureau is needed if banks are to have increased con
introduce risk management tools (e.g., credit bureau, crop fidence in borrowers. With increased confidence will come
insurance, leasing). The first can happen through the KBA, lower collateral requirements.
which already regularly organizes on a for-fee basis training
for member banks. The first steps to establishing a credit bureau are building a
public and private consensus on the need for such and build
Use
• business opportunity plans. For those subsectors that ing a system that collects both negative and positive informa
look particularly competitive for small-farmer-based pro tion on borrowers. Consensus largely exists already.
duction consider developing “canned” business plans. This
off-the-shelf approach has worked well in other countries The underpinning of a system is also significantly in place.
for targeted investment opportunities (e.g., flower pro The success of the CBK’s credit registry provides the foun
duction in Uganda or coffee-washing stations in Rwanda). dation to establish a credit bureau. This can be accom
Professionally done, the plans provide a clear road map for plished by adding information, e.g., individual and company
investors (small farmers, processors, traders) to follow and tax payments, vAT and utility payments, credit card pay
for banks to clearly judge the risks. ments, to that which is already collected by the CBK’s credit
registry. With more extensive information, CBK can house
Expand cash flow lending by leveraging success of purchase
• a separate credit bureau as a transitional step to an indepen
order financing. The success to date of the CFF and its use dent operation.
of PoF strongly suggests that others should be educated
and introduced to this lending technique. Many of the busi
• Consider establishing a crop insurance scheme based on the
nesses interviewed for this assessment operate at less than rehabilitation of irrigation infrastructure.
50 percent capacity. In such circumstances, working capital In the 1980s irrigation potential was estimated at around
is the constraint to growth, not long-term investment capi 200,000 ha, roughly 18 percent of Kosovo’s area. Maximum
tal—the very need that PoF addresses. developed irrigation infrastructure reached at one point
If there is adequate liquidity in the system as suggested by a slightly more than 70,000 ha, with about three-quarters of
few banks, then there should not be a need to actually fund this (52,000 ha) actually farmed under irrigation. A post-war
PoF lenders but rather entice them into this lending seg assessment of infrastructure estimated that under 20,000
ment. In this regard then, it may be beneficial to undertake ha of irrigation was operational, and in 2003 only 10,700 ha
a proper assessment of PoF market size through the KBA were actually farmed under irrigation due to cracked and
and/or AMIK, with results to be shared broadly with mem leaking canals, silted pipes, and destroyed pump stations. By
bers of both associations. 2007 the Agriculture Household survey reported more than
39,000 ha of irrigated land, or just more than half of devel
oped irrigated infrastructure and one-fifth of total potential
irrigated land.
March 2010 | 33
short Term (cont’d) Long Term (cont’d)
Encourage growth of leasing. Leasing in the agricultural
• Weather is the one uncontrollable risk in considering crop
arena seems to hold promise. The 2007 Agricultural insurance. Diseases and other such factors of crop loss,
Household survey suggests significant market possibilities while requiring proper crop husbandry and access to inputs,
for agricultural equipment and implements, including irriga are manageable and controllable. The (re)development of
tion equipment. one possibility to opening up this market is irrigation would provide a critical risk mitigation factor for
to carry out a rigorous market survey that covers scale and the establishment of crop insurance. In turn, crop insurance
attitude. The survey performed jointly with banks, MFIs, mitigates the lenders’ risk and should increase the flow of
and NBFIs would be shared broadly. funds for basic production.
Establish small-farmer lending programs that bring together
• Consider another DCA facility. The Raiffeisen DCA facility •
appears to have been successful. Based on this, and assum MFIs, processors, and small farmers by building on what each
ing that there are other qualified institutions in Kosovo, does well. MFIs know how to lend, farmers how to produce,
extending another DCA for the purposes of agribusiness and processors how to add value to a commodity. Allow
lending should meet with equal success. each to do what they do well through a targeted lending
program.
An alternative to agribusiness lending would be to use a
DCA facility to encourage leasing companies to expand their For example, a processor guarantees to purchase from a
services to include agricultural equipment and implements. select group of farmers. The MFI, following all of its lending
principles and with the guarantee of market from the pro
cessor, lends to participating small farmers for the purchase
of inputs. At harvest, the farmers sell to the processor who
pays the MFI, which deducts loan principal and interest, pay
ing the remainder to the small farmer.
There are variations of this scheme as well that have the MFI
lending to the processor who provides inputs to farmers.
Another variant could be created around rehabilitating irriga
tion infrastructure. As before, the processor/trader guaran
tees a market to the participating farmers and MFI. The MFI
lends to farmers to rehabilitate irrigation, which also reduces
crop failure risks, and the farmers sell to the processor/
trader the harvest, with proceeds paid to the small farmer
through the MFI after deducting loan and interest repayment.
34 | AgCLIR: Kosovo
protecting investors
Agricultural enterprises have a number of options for raising capital to pay for
their inputs, equipment, and other costs of growing a business, most of which
Kosovo
are appropriate instead of—or in addition to—seeking a loan from a bank or
other lender. Of course, each option carries not only the promise of economic
gain, but also the risk of loss. The more investors feel that they are protected
against loss—particularly that which can be prevented through better infor
mation, more thorough scrutiny of an enterprise’s financial history, and faster
access to prompt and fair dispute resolution—the greater the possibility that
they will invest. AgCLIR Protecting Investors looks at the tension an economy
experiences between investment protection and investment promotion. This
chapter discusses some of the most relevant risks and opportunities to agricul
tural investment in Kosovo, and recommends a road to reform that encourages
investment across large and small agribusinesses alike.
protecting investors protecting investors
Doing Business Ranking 2010 172
5
Doing Business Ranking 2009 171
Extent of disclosure index (0–10) 3 4
average score
Extent of director liability index (0–10) 2 3
Ease of shareholder suits index (0–10) 3 2
strength of investor protection index (0–10) 2.7
1
Most agribusinesses in Kosovo are unsophisti- 0
Legal Implementing supporting social
cated family operations, selling their small surplus Framework Institutions Institutions Dynamics
products from family production to the market. framework area
However, not all agribusinesses fit this charac
terization: over the last 10 years, a number of The government of Kosovo has made substan
Kosovo entrepreneurs have grown their busi tial progress in building institutions and stabiliz
nesses to meet wide market demand. over the ing the macroeconomic environment since the
course of the two-week assessment, the team end of the conflict. These are the precursors
found a small number of firms, large and small, to future investment-led economic growth in
that are dependent on external investment to the country—and their continued presence is
finance their business needs. While most firms imperative for future growth. There are numer
in Kosovo’s agricultural sector are too small to ous concerns, however. The low level of govern
attract foreign direct investment, other classes of ment expenditures dedicated to the sector, the
investment, including family, friends and suppliers, high level of agricultural imports as a percentage
are all realistic options for typical agribusiness in of overall agricultural economy, and the slow
the economy. There are also a small but growing rate of reform all contribute substantially to
number of firms able to absorb investments large the slow pace of turnaround across the sector.
enough to attract international interest. Moreover, the rate of recovery is considered
March 2010 | 35
the doing business ranKing factors for attracting and retaining investment,
Kosovo has a mixed record.
With a Doing Business ranking of 172 out of
183 countries for Protecting Investors,
Kosovo undoubtedly has room for improve legal frameworK
ment. However, the Doing Business ranking The legal framework for the protection of inves
does not necessarily reflect the true situation tors in Kosovo is still a work in progress, but
in Kosovo’s agricultural sector relative to one that has made great strides over a relatively
global comparators. The World Bank’s short period of time. To attract foreign and
indicators place heavy emphasis on the local investment, the legal framework needs to
accountability of directors and the ability of guarantee the protection of investors’ rights. To
shareholders to bring suits, something attract foreign investment in particular, foreign
important to institutions supporting Kosovo’s and local investors should be treated equally.
agribusiness sector (e.g., banks, utility But most important, legislation needs to be
companies) but much less so to most agri
transparent, predictable, clearly defined, and
business in their current forms. At this stage
stable—investors abhor unpredictable, hard to
in Kosovo’s agricultural development, the
interpret, or constantly changing legal regimes.
importance of improving the Doing Business
score is as much about branding Kosovo as a While the legal framework for investor protec
good place to do business as it is improving tion is generally sound and in line with inter
the environment for investment in Kosovo’s
national standards, with a modern and inter
agricultural sector. It is important either way.
nationally acceptable company law, investment
statute, and modern legal mechanisms for dis
too lethargic to meet the needs of the popu pute resolution, supporting regulatory uncer
lation. Numerous interviewees suggested this tainty is considered a foundational problem for
failure to meet expectations, and continued Kosovo. stakeholders knowledgeable about the
lack of economic development despite the par legal and regulatory regime supporting the agri
tial resolution to the greater political question cultural sector cited uncertainty regarding the
of Kosovo, is likely to have a continued nega procedures and mandate across Government
tive effect on the country’s political stability ministries for drafting new laws, and the abil
and could further dampen economic growth. ity of ministries to draft effective regulation.
Declining foreign assistance and private remit Despite the modern legal framework, Kosovo
tances make it difficult to achieve this target. is rated 172 out of 183 countries in the World
The resources internal to the population of Bank index of protecting investors, indicating
Kosovo are insufficient to finance the required clear problems in investors’ protection.
investment for reconstruction and growth due
access to laws
to low levels of domestic savings. A transparent,
Access to laws and regulations relevant to
predictable, and business-friendly policy envi
investors or potential investors in Kosovo is
ronment matched by strong institutional sup
generally adequate. Improvements still need
port is the fundamental precursor to investment to be made to clarify the maze of Yugoslav and
necessary for development.
political risK
Investment in agriculture has the potential
to transform Kosovo’s economy. one local Perception of political risk was the most
economist estimates that more than 150,000 frequent response to a recent Economic
Initiative for Kosovo (ECIKs) survey of
28 This statistic could not be confirmed jobs could be created through agriculture in
independently, but was considered
potential investors in Kosovo regarding the
Kosovo28 —representing nearly half of the coun
“reasonable” by other economists weaknesses in Kosovo’s investment climate.
knowledgeable about the sector. try’s unemployed population. Regarding the
36 | AgCLIR: Kosovo
Key laws to compensate such an investor for the
property based on its fair market value.
• Law on Business Organizations, 02/L-123 The government is then required to make
• Investment Law- 02/L-33 prompt payment and pay interest fee for
• Law on Economic Zones 03/L-129
any delay in completion of payment.
• Law on Cooperatives
• Investors can own immovable and mov
able property, are allowed to transfer the
post-Yugoslav laws and regulations. All the laws, profit out of the country in the currency
as well as a substantial portion of the regula of choice without any interference by the
tions, are accessible online, either through government, and employ and repatriate
the Kosovo Assembly website, 29 respective foreign citizens without interference from
Ministries, official gazette website, and older the government.
legislation is available on the UNMIK website. • The foreign investor can choose the
Determining the most recent law or regula appropriate mechanism and jurisdiction
tion can be somewhat more difficult. All laws for dispute resolution. While Kosovo is
and regulations are supposed to be available in not a member of the International Centre
Albanian, serbian, and English in order to make for Investment Disputes (ICsID), it can
them accessible to both domestic and foreign express consent to be a party to a case.
investors. Examples of laws that are not read The case can be either resolved by rules
ily available either online or in the above-men promulgated by ICsID, the United Nations
tioned languages include the Cooperative Law Commission on International Trade
and the seed Law, respectively. Law (UNCITRAL), or the International
Chamber of Commerce (ICC) rules of
investment law
procedure.
Kosovo’s investment law and laws concerning
• The law establishes a structure to gov
movement of capital are liberal and provide a
ern and monitor the implementation of
good foundation for future investment growth
the foreign investment law. A new agency
in the agricultural sector. The Kosovo Assembly
under the auspices of the Ministry of
enacted the Law on Foreign Investment in 2005.
Trade and Industry called the Foreign
The law on foreign investment is generally
Investment Institution (FII) was established
sound, covering the important areas of invest
with the purpose of assisting foreign inves
ment. The main objective of this law is to guar
tors as well as advising the Kosovo gov
antee investment security and assure domes
ernment in developing foreign investment
tic and international investors the protections
policies. Further, the agency is guided by
offered against any changes in the legal frame
the Investment Promotion Advisory Board
work taking place after their investment was
(IPAB), whereby members of the board
made. The law has a number of key features:
are ministers. The law also established the
• It spells out a number of cases when for
Foreign Investment Council (FIC) at the
eign investors are entitled to compensa
level of the Prime Minister’s office.
tion from the government for damages and
lost profit, if the damage is caused because The Law on Foreign Investment seeks to guar
of inaction or any action done by the gov antee a degree of consistency for foreign inves
ernment, in case of war or civil unrest. tors. For instance, according to the existing law,
• It prohibits nationalization of foreign if any changes to the law occur after an investor
investors’ property without remedy. invests in Kosovo, and are less favorable to that
Expropriation is allowed only in certain investor, the changed law cannot affect their
29 see http://www.assembly-kosova.
circumstances, obligating the government interests. In cases where the law is amended org/?cid=2,1.
March 2010 | 37
subject Albania serbia Montenegro Macedonia Kosovo
Tax Holidays 10 years, if 10 years if €7 N/A 3 years (in free No
promoted Mill invested, 100 zones 10 years)
activity (5y no jobs created
CIT +5y only
50% of CIT
Employment N/A 100% of gross N/A N/A No
Incentives salaries; €2
10,000 for each
job created,
dependent on
sector
Undeveloped For tourism 5 years tax free 3 years tax free 50% of tax base No
Regions development = value invested
Customs Tourism 100% N/A New equipment Equipment, spare Agriculture
vAT credit for 0%, raw parts, if 20% of machinery and
machinery and materials -50% company belongs inputs
equipment to a foreign
investor
Concessions N/A 5 years tax-free N/A N/A No
if concession-
related investment
Carrying N/A 10 years N/A 3 years 5 years
Forward
Losses
Double Yes N/A Yes N/A Yes
Taxation
special Yes Yes Yes Yes Yes
Allowances
and is less favorable to the investors, they are an overall attractive tax regime. They are com
entitled to compensation from the government. monly used by governments to promote for
However, in practice this is not the case. stories eign firms’ entry into new markets in an effort
abound that after foreign investors made invest to generate employment and economic growth.
ments in Kosovo, the government adopted less- They may also take various forms, from govern
favorable rules and enforced them against inves ment concessions or contracts to tax advan
tors. Examples include increased license fees for tages or availability of infrastructure. In Kosovo,
businesses and increased excise duties. In prin investment incentives are spartan compared to
ciple, this is in violation of the law. Interviewees regional economies. Table XXX below com
reported frequent and similar inconsistencies pares Kosovo’s investment incentive regime
in the law. This will not promote foreign invest with that of its neighbors. Areas for future con
ment in the agribusiness sector in Kosovo, or sideration include tax holidays, employment
other sectors for that matter. incentives, and concessions. To compete with
regional economies, many interviewees sug
investment incentives gested the importance of a more robust invest
Investment incentives are used to achieve a vari ment incentive regime. The empirical literature
ety of policy objectives. However, many regional is mixed on investment incentives’ net effect
economies and all of the EU economies are de- to economies. one thing is clear: such incen
emphasizing investment incentives in favor of tives are only as good as the investors who take
38 | AgCLIR: Kosovo
advantage of them. Publicity is an essential piece openness to investment
of the investment incentive system that is cur
Kosovo is open for investment. The GoK
rently lacking—a responsibility that falls to IPAK
and the Ministry of Trade and Industry
and potentially other ministries in contact with
actively promote foreign investment in
foreign investors.
Kosovo, albeit ineffectually, according to
most interviewees in the AgCLIR assess
law on economic zones
ment. The Foreign Investment Law stipulates
The purpose of the law is to encourage foreign investors select from one of multiple, well
investment in Kosovo by developing adequate regarded dispute resolution conventions for
and necessary infrastructure for businesses investment dispute arbitration. To encourage
including agribusiness. Foreign investors enjoy investment, businesses importing capital
equal treatment and rights in developing busi goods and are granted a six-month vAT
ness activities within the free economic zones. payment deferment. Agricultural inputs are
Property issues must be clarified, approval imported duty free and vAT is not meant to
needs to be obtained from the Ministry of Trade be paid on these inputs. However, a few
and Industry, and a business plan needs to be interviewees noted that they do pay vAT on
agricultural inputs to avoid the “hassle” of
submitted for an economic zone to be estab
declaring exemptions
lished. once permission has been received, the
developer is required to complete building and
development of the economic zone within two the laws or lack thereof. Institutional effective
years, or permission may be revoked. ness and deterrence of corruption will not be
attained by increasing bureaucratic layers but
The initiative for establishment of the free eco through better governance.
nomic zone can be undertaken by any minis
try, municipality, business, or public- private law on business organizations
partnership. They can be created on private or The purpose of company law such as the Law
public property. When zones are developed on on Business organizations is to set forth basic
public property, eminent domain is not permit principles of corporate governance—that is,
ted and the property will be given on lease for the rules that outline the division of roles and
99 years. overall responsibility for develop responsibilities between company management,
ment and monitoring of the free economic zone boards of directors and supervisory boards,
lies with the MTI, through the Department for investors or shareholders, employees, and out
Economic Zones. side stakeholders. Corporate governance entails
disclosure and transparency requirements
While the law provides the framework for
regarding the type of information that compa
establishment of economic zones and this is a
nies must report to their investors, and, in many
good start to attract investment, the law does
cases, to the public. Corporate governance
not clarify the responsibility to provide the basic
practices provide proper incentives for com
infrastructure in Kosovo. similarly it fails to clar
pany boards and management to pursue objec
ify responsibility for ensuring proper functioning
tives that are in the interests of the company
and maintenance of the economic zones. This is
and shareholders and should facilitate effective
a critical issue, given Kosovo’s unreliable basic
monitoring, thereby encouraging firms to use
resources such as water and power, both crucial
resources more efficiently.30 The Doing Business
for agribusiness.
Report measures “Protecting Investors” by rat
The most significant challenge to investor pro ing corporate governance. While most agri
tection in Kosovo is not the legal framework, businesses in Kosovo are far from the point of
but the implementation and enforcement of worrying about corporate governance, many 30 Definition at www.bizclir.com.
March 2010 | 39
firms that support agribusinesses do need to similar to the BizCLIR team’s findings in 2007,
worry about aspects of corporate governance this team found the law to be generally ade
such as shareholder rights and director liabil quate for the attraction of investment in agri
ity, including financial service providers, energy businesses, given the economic conditions and
companies, and transportation companies. In the level of business organizations in Kosovo.
this regard, Kosovo needs substantial reform,
There are amendments to the Law on
as noted by the low score in the Doing Business
organization of Businesses under discus
ranking—disclosure and liability rules are weak,
sion within the MTI. The view of international
and the strength of shareholders’ rights within
experts and stakeholders interviewed for this
a court setting to resolve corporate grievances
activity noted that the changes in question
are particularly weak compared to regional and
are unnecessary and do not improve the legal
global benchmarks.
framework for investor or shareholder protec
Until 2007, business organizations and com tion. The risk is that by making certain changes,
panies were regulated by UNMIK Regulation the provisions will further weaken protection of
2001/6. In 2007, the Kosovo Assembly enacted shareholders, increase bureaucratic processes
the new Law on organization of Businesses. In for businesses, and discourage foreign investors.
2007, the BizCLIR assessment team, under the The MTI would be well served by considering
auspices of UsAID, evaluated the law and found the Doing Business report prior to making any
it to be adequate for conditions at that time. It changes or reviews of the Law on organization
was clearly drafted and included the essential of Businesses. Brand Kosovo is at stake.
elements of a good company law, e.g., a state
ment of duties of care and loyalty of company implementing
directors, guaranteed basic shareholders rights institutions
(meetings, shareholder information), and dis Kosovo’s institutions are relatively young
tinct competencies between the sharehold and exhibit unevenness in implementation.
ers and the board of directors. The new law Ministries including the Ministry of Agriculture,
lays out a foundation allowing both foreign and Forestry and Rural Development (MAFRD),
domestic agribusinesses to commence activities the Ministry of Trade and Industry, the Ministry
relatively quickly. It does not contain limitations of Justice, and the courts together implement
on activities in which foreign businesses can be the country’s legal framework. The MAFRD
engaged. Presentation of an original certificate has the preeminent role in agricultural develop
of incorporation to Kosovo authorities may ment. Responsibility for investment lies within
be a challenge for foreign investors; however, the Ministry of Trade and Industry’s Investment
a notarized certificate of incorporation should Promotion Agency. The government of Kosovo’s
suffice for this purpose. The Law on Business expenditures toward agriculture are limited,
organizations sets forth types of business orga
Key implementing institutions
nization in Kosovo and the structure, rights, and
obligations of the owners, managers, directors, • Investment Promotion Agency of Kosovo
legal representatives, and third parties. The law (Ministry of Trade and Industry)
allows for a wide range of business structures, • Ministry of Agriculture, Forestry and Rural
including personal enterprise, general and lim Development
ited partnership, a limited liability company, and • Courts
a joint stock company. The new law on business • Food and Veterinary Agency (within Prime
Minister’s office)
organization was initially drafted by domestic
• Anti-Corruption Agency Office of the
legal experts, and reviewed and commented Prime Minister
upon by European and international experts.
40 | AgCLIR: Kosovo
fdi inquiries by sector
Manufactoring/Processing Logistics and Transport Technology
services sector Manufactoring/Processing Construction
Construction Metal Processing Financial
General General Lotary
Trade Build, operate, Transfer Partner Profiling
Textiles Paper Production Pharmacy (Medicine)
Food Processing Energy sector Portfolio
Industry Finance Promotions
Plastics Multiplier Wood Processing
equaling less than 3 percent of the total national an economic development strategy; this report
budget of €7 million in 2008. Investment pro takes the view that the enabling environment for
motion expenditures are much smaller still. agriculture has to be sufficient to jump start rural
growth and revive what was traditionally a large
investment promotion portion of Kosovo’s economy. In 2010 the IPAK
agency of Kosovo will develop its first Foreign Direct Investment
The Investment Promotion Agency of Kosovo strategy, a move that should be lauded. Despite
(IPAK) is situated within the Ministry of Trade this strategy, there is still very little clarity on
and Industry (MTI). The IPAK has a €250,000
how it will integrate with the government’s larger
annual budget and 13 employees. Investment
policy to promote key sectors of the economy.
promotion services are rated as poor by users
And, unfortunately, the constraints to the sound
interviewed for this report. The IPAK’s strat
implementation of such a strategy remain high.
egy is considered insufficient and not focused at
The unit is not adequately funded to meet its
all on agribusiness. The agency is cash strapped
objectives and its physical facilities are located in
and unable to help foreign investors. Foreign
an inconspicuous and hard-to-find location within
languages are not widely spoken at the agency.
the Ministry of Trade and Industry. There are
Private sector representatives interviewed for
no obvious places to meet with potential inves
this report noted the “disorganized” and “unso
tors. The IPAK does not go through any known
phisticated” nature of the IPAK. Many of those
performance review processes, and there are no
interviewed said that the human and financial
known uses of objective monitoring indicators.
resources within the IPAK are simply ill suited for
Likewise, the IPAK collects very limited invest
the job of investment promotion and investment
ment data such as registration, levels of invest
“capture.” Particular issues noted by interviewees
ment, employment, liquidation, or other statistics
included production of materials not useful for an
of interest to policy makers and the private sec
audience of potential international investors (e.g.,
tor. That the total number of potential foreign
lack of editing and absence of any real strategy),
lack of standardized data collection or dissemi investors showing interest in agriculture in 2009
nation for investment purposes, and a near total was only five speaks volumes about the chal
absence of communication with other key minis lenges faced by the IPAK.
tries, including the Ministry of Agriculture. There
ministry of agriculture,
is no one with agricultural expertise to assist
forestry and rural
potential agricultural investors in the IPAK.
development (mafrd)
The IPAK has yet to make a substantial contribu The stated policy purpose of the MAFRD is
tion to investment in Kosovo, especially to agri to “boost agricultural farm incomes through
business investment. some analysts note that increased productivity of farming.” The minis
perhaps agriculture should not be emphasized as try also has a role in formulating policy for rural
March 2010 | 41
sources of foreign direct investment inquiry
Turkey Croatia (local name: Hrvatska) Korea, D.P.R.o.
Greece Netherlands Belgium
slovenia Albania Bosna and Herzegowina
Macedonia switzerland Finland
Germany Bulgaria saudi Arabia
Kosovo Italy serbia and Montenegro
United Kingdom France
Austria swaziland
development outside of the agricultural sphere. to transfer knowledge and information to agri
But more important, the government needs to businesses. Information such as market prices,
reconsider its focus on productivity in light of demand, regulation, and opportunities are all
the larger systemic-enabling environment issues roles well suited to a ministry, and tend to con
raised in this report. The MAFRD is a rela centrate the ministry’s resources so that it has
tively large and top-heavy public agency with a fighting chance of achieving successful out
35 senior managers and 487 non-managers, the comes. Data collection needs to start with an
vast majority of whom work for the forestry agricultural census, something that has not been
agency. Interviewees familiar with the MAFRD carried out for over 20 years.
noted a low level of morale within the ministry,
based at least in part on the poor remuneration, The MAFRD, like other ministries, affects
a system that does not recognize seniority in investment through at least two channels. First,
pay scale, and a total lack of career development the ministry’s regulatory function provides the
opportunities. There is also a sense of increased “rules of the game,” which, if followed, pro
politicization with the MAFRD since the Prime duce a predictable and transparent system—
Minister’s office took over the Kosovo Food the essential building blocks for encouraging
and veterinary Agency. organizationally, the increased investment. such a role would be
MAFRD mixes regulatory roles with service conducive to a system whereby the MAFRD
delivery functions (e.g., extension services with no longer feels one of its key functions is the
regulation of service providers). This has the need to “advocate for lower interest rates on
potential to create conflicts of interest by being loans,” instead opting to address the root cause
both the “player and referee,” and generally dis of high interest rates: high risk and high trans
tracts the government from its core achievable action costs. By focusing on the reduction of
function of providing public goods—in this case transaction costs and risk in agricultural value
sound regulation, market data, analysis, coordi chains, the MAFRD may actually be able to
nation, grant administration—and other func cause lower interest rates. second, the minis
tions generally reserved for the government or try is in a unique position to collect and pro
most likely provided by it. vide useful data on the sector. Data necessary
for analysis is difficult to obtain or not available
The MAFRD is characterized by a top-down or
at all. The current state of agriculture-related
supply-driven approach to policy making. In line
data in Kosovo could be greatly improved with
with its policy priority of increased productiv
a streamlined focus on essential data including
ity, focusing on what, when, and how to pro
commodity market reports, agricultural trade
duce various agricultural products, the ministry
statistics, and local and regional crop prices.
would be well served to instill a more market-
oriented approach, starting with information The widespread and deep weaknesses in the
about consumer markets and moving backward statistical systems do not allow for meaningful
42 | AgCLIR: Kosovo
Key impediments to investing in the agricultural sector
value chain risk . The low level of cooperation, communication, collaboration, and overall
knowledge across most local value chains present substantial risk to agricultural investments.
Moreover, investments along most agricultural value chains in Kosovo face risks associated with
the following challenges:
Environmental
• Lack of wastewater treatment and waste disposal issues leaving many rivers near urban cen
ters unsuitable for irrigation
Market Infrastructure
• Wholesale markets and collection centers: Little effort going into proper storage, handling,
sorting, grading, or merchandising of product to distinguish one seller from another
• Storage facilities: Both dry and cold storage facilities are rare and often in too poor of a con
dition to serve their purpose
• Packaging: A lack of packaging options, substantial risk specific to particular value chains exist
or trustworthy assessments of the current eco far more limited range of commodities, markets,
nomic situation in Kosovo by potential investors and shipping points, would cost only a fraction
or public policy makers. Private agribusinesses of the FsMNs annual budget. The Agricultural
repeatedly noted their disbelief of official sta Marketing service is generally quite generous
tistics. For instance, the data on national invest with its proprietary technology and would likely
ment figures tends to be old and fragmented, be favorably disposed to work with Kosovo in
and very time-consuming to collect. The prin the development of such a system there.
cipal source for data is the statistical office of
Kosovo (soK). Large discrepancies in official courts
data are reported, and tend to result from the The courts are widely considered to be an
utilization of different data sources and the con impediment to doing business in Kosovo and no
sistent recirculation of outdated information. less so for agribusiness. They are poorly orga
The only known source of agricultural data is nized for the types of cases most often handled
the annual Household survey managed by the in agribusiness, and endowed with insufficient
soK, which covers a limited range of topics. resources to fulfill their mandate. They are
widely seen as inefficient and lacking sufficient
A good example of how agriculture ministries
information technology to handle larger vol
can offer real value to the agricultural sec
tor is the Federal-state Market News service umes, and more important, to ensure that case
(FsMNs) of the U.s. Department of Agricultural distribution is done randomly. This is of seri
Marketing service. on a daily basis, this service ous concern to both the private sector and the
gathers price data pertaining to 300 different legal profession. The commercial court has too
fresh fruit and vegetable commodities in 31 mar many cases on its docket that fall outside of its
kets in North America and Europe, from 181 mandate, and many others that relate to small
different shipping points. This data is then com dollar-value electricity cases. There is no priori
piled at each of the 15 FsMNs offices across the tization based on value of the case. Interviewees
country, aggregated at the Washington, DC, knowledgeable about the subject noted that
headquarters, and published online. Access to the Commercial Court is generally viewed as
the information is free of charge. The budget for more efficient and with more specialized knowl
this service is $7 million annually. A similar sys edge of commercial matters than other courts,
tem in Kosovo, with Kosovo labor rates and a and is still the preferred location. Despite this,
March 2010 | 43
made in its implementation. The law requires
that arbitration decisions be validated by the
court. However, if a decision made by an inde
pendent arbitrator needs to be confirmed by
the court, there is the potential to jeopardize
the neutrality of the arbitration process and the
need to have an impartial arbitration.
supporting
institutions
The health of an investment environment can
be gauged to a significant degree by the avail
ability and quality of information and profes
sional services in a given community. Among the
key supporting actors that increase investment
potential and reduce risk to investors are the
institutions discussed below.
universities
In 1999, the serbian faculty of the University of
and without significant change since the 2005 Pristina took up new premises in Mitrovica. The
BizCLIR report update, “the courts remain ethnic Albanian faculty stayed on the premises
under-funded and under-staffed, while judges in Pristina, and remain there still. Both institu
and court officials are often under-trained and tions maintain agricultural programs.
under-paid. Given this, it is not surprising that
The faculty in Mitrovica considers itself part of
courts do not have the public’s confidence and
are not viewed as institutions capable of defend the serbian educational system, follows serbian
ing contract rights. Parties see no reason to curriculum, and receives funds from the serbian
defend their rights because of the extended time authorities for all educational costs. Both cam
commitment and unpredictable outcome. This, puses offer courses in basic agricultural stud
coupled with the lack of a tradition of using writ ies, but only the University of Pristina offers a
ten contract documents, means that Kosovo course on agribusiness. The faculty in Mitrovica
has a ways to go before contract law takes its does not offer classes in agribusiness because
rightful place at the core of commercial relation of a lack of resources. Neither university offers
ships,31 including agribusiness relationships. extension services. The University of Pristina
has expressed interest in offering such services
The competent court for any dispute arising as but cannot because the law prohibits it from
a result of breach of fiduciary duty or director doing so. similar to the University of Pristina’s
liability is the municipal court, where cases are responsibility for training in-country seed and
adjudicated by judges with very limited experi plant-health inspectors, the university could
ence in deciding complex cases arising from the
offer a valuable option to the government as a
company law. The best solution, according to
provider of extension services. This is similar
international legal experts working in Kosovo, is
to successful models elsewhere in the world,
to create special arbitrage courts that will han
including the United states.
dle complex disputes involving foreign and local
investors. Even though the arbitration law was Both agricultural faculties need substantial
31 BizCLIR 2005. www.bizclir.com. passed last year, very little progress has been attention before they are able to contribute
44 | AgCLIR: Kosovo
fully to Kosovo’s agricultural sector. First, both a full-scale transformation in Kosovo before it
faculties’ total attention to on-farm activity contributes substantially to the country’s devel
comes at the expense of perhaps the single opment. specific roadblocks to growth of coop
most important impediment to agricultural eratives and associations include the history
growth in Kosovo—robust agricultural mar of treating cooperatives like cash cows, insuf
keting to consumer markets. second, both uni ficient levels of trust among members of such
versities are reported to have weak linkages organizations, poor management capacity, and
with players in the agricultural sector, including inconsistent treatment of agricultural contracts
trade associations, cooperatives, model firms, between members and non-members. That is,
and donors. Third, members of the research small agribusinesses that are members of coop
community noted the poor research and sci eratives or associations are not well protected
entific infrastructure, including labs, buildings, from the vagaries of agriculture that such enti
and other equipment within both universi ties were meant to reduce, thus representing a
ties. Fourth, and certainly a key element of the risk to personal investments.
above-mentioned issues, both faculties report
financial positions scarcely able to support marKet information systems
broader academic initiatives. There is very little formality in the sharing of
agricultural-related prices in Kosovo. Most pri
farmer-based organizations vate sector actors we spoke with described
Farmers in Kosovo tend to be too small to sup their reliance on mobile phones and personal
ply major buyers. This creates a strong demand networks to receive their price information.
for pooling of resources in cooperative-like LIT-M, a small NGo, formerly part of an EU
arrangements. Agro-combines, or industrial project, is now the only formal provider of mar
cooperatives, were part and parcel of Kosovo’s ket information for agricultural products aside
agricultural sector until 1991, when they col from weekly price updates in local newspapers.
lapsed along with much of the state apparatus. A glaring hole in each of these sources is the
The collapse left a vacuum that the small and lack of analysis about what, where, and when to
fragmented agricultural sector has yet to fill— market agricultural products. simply put, price
no longer able to rely on agro-combine produc reporting is not sufficient information to be
tion centers, market information, or supply of useful to the market. There needs to be a sys
agriculture inputs. The sector currently is char tem for analysis of the domestic and regional
acterized by small farms, fragmented input sup markets. In addition, prices change too quickly
ply chains and market access issues due to a lack for weekly price reporting. There also tends to
of market organization and economies of scale. be little to no information available relating to
The government, donors, and private sector farm-gate prices, only retail.
need to understand that without more effec
the legal profession
tive organization, the competitiveness gap with
A vibrant legal profession is essential to the
regional competitors will only grow wider.
growth of any sector of the economy, and agri
Few companies in the agricultural sector of culture is no exception. The culture of con
Kosovo are yet at the scale necessary to attract tracts is weak in Kosovo, especially in rural areas
investment. The most likely route to such and among and between agribusinesses. This
scale is through the cooperative or association increases the risk to any given transaction and
model, at each level of the value chain from farm substantially limits financing options for agri
gate to marketing of the product. This model business. According to interviewees during this
holds enormous potential for domestic agri assessment, and to the BizCLIR 2004/2005/2007
cultural enterprises, but needs to go through reports, the legal profession has contributed
March 2010 | 45
very little to the reform of the business environ breadth of planned programs. various inter
ment. Lawyers, businesspeople, and government viewees gave examples of donor duplication,
officials reported that few lawyers have been donors working at cross-purpose, and donors
sufficiently trained to provide usable services, working towards the same end across each
including legal drafting, to create a functional sys country in the Balkans—a prospect that could
tem of contracting. BizCLIR 2004 reported, and mean disaster for producers of any particular
confirmed through interviews with members of commodity supported by those donors. There
the legal profession, that: is little justification for this. It is an imperative,
supported by the Paris Declaration of 2005,
Judges, through incompetence or cor
that donors coordinate to avoid duplication and
ruption, prevent the courts from being
to maximize value for resources spent.
viewed as an institution that protects
contract rights and thus encouraging In 2005, the BizCLIR team recommended the
the greater use of contracts. Both law adoption of a model used in serbia and else
yers and judges suffer from a lack of legal where, where there is a monthly donors’ meet
research resources and training in con ing with a rotating chair which is open only to
tract law. 32 donors working in a given thematic area. The
purpose of such meetings is to share program
As BizCLIR 2004 reported, and as a number of
meetings with private agribusinesses over the matic information, experiences, best practices,
course of this assessment made clear, there is and how to avoid redundancies. Meetings tend
an increasing demand for these services from to run two to four hours, depending on the
foreign investors and businesspeople who want objective. The meetings increase efficiency and
to invest or trade in Kosovo, but there are sim lead to greater familiarity between donors,
ply not enough qualified lawyers to meet this something that tends to result in more synergis
demand. To date, the law schools do not offer tic programs and fewer redundancies.
courses in rural property, water rights, or agri
the private sector
cultural contracts that would prepare lawyers
Agriculture often starts with the farm, and in
to specialize in agricultural law. In general, reli
Kosovo the farm is most often comprised of
able and knowledgeable legal assistance for agri
the family unit. These mostly family farmers
cultural actors is rare or non-existent across all
consider farming a way of life more than a busi
levels and types of value chains in Kosovo.
ness. so much of the agricultural community
donors is still quite rural and set apart. other levels
Donor involvement in Kosovo is substan of agricultural value chain, including traders,
tial. Donors, including UsAID, GTZ, World transporters, and processors, also tend to be
Bank, Mercy Corps, the EU, and swiss quite poorly organized and unaware of exist
Intercooperation, are all actively involved in the ing, supporting initiatives, be they government
agricultural sector and independently working or donor. For instance, of the agribusinesses
to increase investment along numerous value this team met with during the assessment, few
chains. It is estimated that these donors collec were aware of the investment incentives avail
tively provide €15–18M/year to the agricultural able to them. similarly, the agribusiness and
sector in Kosovo. However, donor coordina agricultural-related trade associations reported
tion in the agricultural sector was reported by a general sense of exclusion from the policy-
almost all stakeholders as poor or non-existent. making process and seemed to be infrequently
A couple of donors noted that recent, some consulted for either policy proposals or the
what ad hoc gatherings of donors were quite design of donor interventions. To date, much
32 BizCLIR 2004, www.bizCLIR.com. useful in terms of information sharing regarding of the donor involvement in the country is said
46 | AgCLIR: Kosovo
to focus on government-to-government inter
Rank obstacle Intensity (1–100)
action. There is a strong need to continue to
1 Power supply 82.8
invigorate private-sector voices and to assist the
2 Informal Economy 75.9
private sector in its engagement and awareness
3 Public services 74.0
of government.
4 Roads and 72.1
Meanwhile, there is a dearth of trade or indus Telecommunication
try associations that can effectively represent 5 Corruption 70.6
the private sector in public debate over updates
and changes in the commercial law. often the government officials that we met with seemed
government exacerbates this issue by consult concerned with the outcome of any ongoing
ing with one or limited sector representatives efforts to reform the sector through legal revi
at a time. Recent effects of narrow rather than sion. Most important, few outlets exist for for
economy-wide (or even sector-wide) consulta mal review of the investment incentives, or for
tions helped one group (dairy farmers) while other similar policy issues affecting investment
harming another (grain farmers). The weakness in Kosovo. The government is open and wel
in such institutions stretches to what intervie coming to private-sector participation, but as
wees reported as a lack of meaningful oppor yet has limited fora for their timely engagement.
tunities in the agricultural sector for network
ing, training, and sharing of best practices. one social dynamics
donor saw an opportunity to help organize a More than 80 percent of Kosovo’s food needs
high-priority value chain by inviting them to all are supplied via imports. This is symptomatic
sit around a table and coordinate—the result of the many challenges facing Kosovo’s agri
was reportedly an all-out blame game between cultural sector. Typically small farmers, infor
actors in that particular chain. In addition, the mal markets, and processors are not equipped
events that do occur are often Pristina-centric, to meet the demands of a highly competitive
largely ignoring northern Kosovo’s minor and evolving retail sector, with high barriers
ity serbian population. As one academic in the to entry. Moreover, the so-called fresh win
north told us, “Your team is the first to visit or dow in Kosovo is short on account of the scar
include our institution.” city of greenhouses and proper cooling facili
There seems to be no knowledge of agribusi ties. Restaurants in Pristina, Prizren, and other
ness by those groups working to improve the major centers in Kosovo rely upon imported
company law, corporate governance, or other processed dairy products, meats, and vegetable
legal framework for protecting investors in items because of these issues and the generally
Kosovo. However, agribusinesses and coopera superior reliability, quality, quantity, and lower
tives tend to know or care little about these transaction costs due to more developed value
same legal frameworks. While trade and indus chains, compared to domestically produced
try associations (including the chambers of com products. Buyers in regional markets must face
merce and niche trade groups) are accustomed the same calculus. substantial investment in the
to advising their membership on matters of rel agricultural sector, both across and within value
evant law and corporate governance, there is chains, is necessary to grow Kosovo’s agricul
little consensus on how the private sector can tural sector to its full potential, creating jobs
make a meaningful impact over time. and reducing poverty in the process.
specific to the issues of the investment incen Kosovo’s social, political, and cultural diver
tives, company law, corporate governance, and sity is still delicate following armed conflict.
investment law considered in this chapter, few Travel between northern and southern Kosovo
March 2010 | 47
remains a special affair, requiring the removal • Lack of basic business skills including finan
or changing of license plates. serbian speak cial management, strategy, and marketing
ers report not being fully comfortable in their conducive to the attraction of investment
native tongue in Albanian-dominated areas. or other suitable external financing
Residents of northern areas of Kosovo inter • Poor organization of agribusinesses within
viewed for this report articulated a clear alle and across value chains
giance to the serbian government and noted
The media play an essential part of informing,
their connection via government revenue and
creating, and moderating the demand for reform
use of government services. In a recent sur
in any country. In Kosovo, the media have had a
vey of the region, the Balkan Monitor reported
that only 17 percent of Kosovo serbs said it “take off” since the end of the conflict. Donors
would be possible to live peacefully with Kosovo and private media operators have financed
Albanians; of the latter, 70 percent felt peace print, radio, and television outlets, each freely
ful coexistence was viable. 33 Clearly, there is a reporting on the content of their own choice.
long way to go before Kosovo will be able to The development of this sector is still in its
catalyze large investments or stand the test of early stages, however, with substantial content
mobile citizenry and the free flow of goods and sourced from press releases and news confer
services. While risk of expropriation is no lon ences. The result of this type of “reporting” is
ger a concern for most agribusinesses, concerns that the news tends to be dominated by poli
of how to return individuals previously engaged ticians—with a general lack of reporting relat
as farmers to their farms is seen as a serious ing to issues or trends of interests to agribusi
challenge. serbian minorities reported major ness. As one interviewee noted, there is plenty
security concerns around returning to Albanian- of information reported, “but using it for [his]
dominated areas to resume agricultural opera business makes no sense.” Investigative report
tions. This problem is compounded by a general ing is rare if not altogether non-existent, which
dearth of information within enclaves about is a serious weakness to combating the corrup
where to sell products (e.g., in which markets tion in courts or elsewhere in the economy.
and when).
supply of reform
demand for reform Government officials interviewed in the course
There is a private-sector sense of urgency about of this assessment showed a mixed level of
the conditions related to reforming the legal, interest in agriculture. some spoke of agricul
regulatory, and institutional environment for ture as a thing of the past, as a poor way for
doing business in the agricultural sector. The Kosovo to progress. others mentioned agri
majority of interviewees for this report focused culture as the country’s greatest economic
on few issues when queried about the “biggest challenge, but seemed daunted by the chal
challenge to Kosovo’s agriculture sector.” The lenges necessary to transform the sector. only
majority of interviewees reported that the big recently has the highest-level political involve
gest challenge to agriculture in Kosovo is for ment become noticeable, sometimes attributed
eign subsidies. This overlooks the substantial, to the food crisis. Most crucial to the govern
and more fundamental, constraints to start-up ment’s “supply” of reforms is its willingness
and growth in the agribusiness sector. Local and to include the private sector while formulat
international experts on agribusiness report ing reforms and in drafting laws germane to
that more fundamental constraints to growth of the agricultural sector. on this level, the gov
Kosovo’s agricultural sector include: ernment receives a mixed review. The recent
• Lack of knowledge of consumer markets example of the dairy industry lobbying for a
33 see 2008 summary of Findings at
www.balkan-monitor-eu. and absent state support in this regard change in vAT policy is a good example. Despite
48 | AgCLIR: Kosovo
evidence showing that dairy products were interviewed as part of this assessment consis
being unfairly taxed (e.g., raw milk was taxed tently told the same story about corrupt pro
when used as an “input,” contrary to existing curement practices, tax collection, and access
legislation), the government reform process was to government-related services. Quid pro quo is
slow to respond, first at the bureaucratic level, the name of the game. Before Kosovo can fully
then at the legislative level. claim the confidence of investors big or small,
the nascent institutions need to establish a
corruption clear track record of credible investigations (as
The legal framework for rooting out corruption opposed to political), prosecutions, and convic
and instilling confidence in an international class tions. While nearly a quarter of Kosovo’s GDP
of investors is still insufficient. There is no law comes from public procurement, 34 the con
on the financing of political parties, control of stancy of cancelled tenders due to non-compli
assets, or conflict of interests. The problem is ance is anathema to building investor confidence
pernicious and pervasive—companies that were in the country.
34 Kosovo Under UNSCR 1244/99 2009
Progress Report, Commission staff
Working Document, october, 2009.
March 2010 | 49
recommendations
recommendation: increase the attractiveness of investing in Kosovo’s agricultural sector to both
domestic and foreign investors .
General: Increase national investment in agricultural systems, including institutions, infrastructure, and incentives.
short Term Long Term
Create a single, online repository of commercial laws and
• Strengthen the IPAK through (a) implementing a robust and
•
relevant implementing regulations. Work to ensure that achievable strategy, agreed to at the highest levels of gov
there is one authoritative source of law online, updated at ernment, (b) increasing its budget allocation to reflect the
least monthly. This should be lead by the Ministry of Justice, importance of the agency’s work, (c) reconsidering its physi
with likely donor support. cal location, and (d) paying substantial attention attracting
dedicated talent.
Engage in a high-level forum, including the government, pri
•
vate sector, donors, and other stakeholders, as a first step
• Support public awareness and training on good business
in determining the level of investment incentive that the practices and basic corporate governance through organiza
government can afford and the most efficient method of tions and programs directed at small businesses and farmer-
achieving policy goals within this budgetary framework. The based organizations (FBos). Create education and train
output of such a forum should be an action plan taken up by ing programs on basic business management, with a special
a newly created inter-ministerial working group focused on emphasis on training rural entrepreneurs.
this topic.
• Invigorate the extension services through (a) revision in the
Clarify the Law on Economic Zones to make clear respon
• legal framework to allow for university- based extension ser
sibility of respective parties in terms of building/operating vices with (b) commensurate investment to support a robust
basic infrastructure. and self- sustaining extension system.
Assist the MAFRD to become more market oriented, clari
•
fying and narrowing its mission while rationalizing any inter
nal conflicts of interest relating to regulator-service pro
vider functions.
Invest in the agriculture faculties at the Universities of
•
Prishtina and Priština to enhance their capacities to educate
the next generation of agribusiness men and women, paying
particular attention to post-farm gate activities, particularly
marketing.
Use
• the substantial donor presence in agriculture as an
example for the larger donor community by forming a the
matic working group with monthly meetings to share infor
mation and address any potential duplication of efforts.
50 | AgCLIR: Kosovo
recommendation: enhance the legal frameworK for investment in Kosovo .
General: Focus on improving both investor protections and investment promotion to attract and retain international and
domestic investment in the agricultural sector.
short Term Long Term
Simplify the business registration process, including filing
•
• Provide assistance to relevant government entities when
charter amendments with the business registry and clari drafting regulations to promote and uphold the principles laid
fying the time when amendments enter into force to cor out in primary legislation to avoid development of compli
respond with the businesses practices in the region. For cated, cumbersome, and bureaucratic procedures.
example the current law on business organizations requires
that foreign investors provide an original certificate of
• In cooperation with the government and other donors,
incorporation to the Business Registry, whereas in most advocate for the promulgation of the Law on Courts. The
countries presentation of the notarized registration certifi new Law on Courts modifies the jurisdiction of the regular
cate is sufficient. courts, authorizing yjr Commercial Court to adjudicate all
commercial cases, and ensuring that cases are heard from
Take advantage of the fact that the law on business organi
• qualified and experienced judges on commercial law.
zations is under legislative review. Use this opportunity to
amend the law to conform with modern corporate prac • Improve incentives in the legal framework, e.g., law on busi
tices. specific focus should be paid to greater flexibility ness organizations, foreign investment, corporate income
over the management structure of the JsC and LLC, by rec tax, to attract foreign investment in Kosovo, including the
ognizing that companies can choose between a one- and development of tax holidays, incentives for job creation, etc.
two- tier management system. The current law allows for • Promote the development of mechanisms that will focus on
one-tier management structure only. Add clarification in the the enforcement and implementation of all enacted laws,
law to include sanctions for directors who have breached including development of sound regulation and mechanisms
the duty of loyalty, the duty of care, and requirement to to facilitate implementation by, for example, strengthening of
disclose a conflict of interest. While the law enables share monitoring mechanisms.
holders to file a complaint with the relevant court, it does
not require directors or members of the board who have
breached these duties to compensate the damages caused
to the company or assign proceeds from such transaction
to the company. Neither does it allow for the board of
directors to file a claim with the court.
Amend the Law on Cooperatives to clarify the nomination
•
and election process of the members of the board, including
their roles and responsibilities.
March 2010 | 51
trading across borders
No country can thrive as an economically self-sustainable island. Though the
Government of Kosovo (GoK) and most donors support some self-sustain
Kosovo
ability through import substitution as a high-priority near-term goal, few doubt
that cross-border trade is key to Kosovo’s medium- and long-term prosperity.
Nonetheless, in 2008, Kosovo’s exports constituted approximately 9 percent
of its total cross-border trade, and amounted to less than €200 million.35
This translates to about €100 per capita in exports, compared to more than
€960 per capita in imports. Aside from émigré remittances, international assis
tance, and foreign direct investment, exports of goods and services can provide
the only source of currency income. In other words, Kosovo needs to dramati
cally develop its ability to export in order to pay for increased imports and to
create savings and growth in GDP.
trading across borders services is almost non-existent. In agribusiness,
the most relevant type of trade is, of course,
5
goods. Kosovo is an importer of agricultural
4
services, such as growing conditions analysis and
average score
3 training, but is too far away from an ability to
2 export such services for it to be relevant to this
1
report.
0 Regarding food imports, the trade balance is
Legal Implementing supporting social
Framework Institutions Institutions Dynamics similarly import heavy, and the trade deficit is
framework area far worse than the overall figures. The 2008
Ministry of Trade and Industry (MTI) trade
The 2010 Doing Business report Trade Across report indicates approximately 151 million
Borders section ranks Kosovo 129 out of 183 Euros in food imports, and only 6.5 million in
countries, in the bottom third. Kosovo ranked exports. This translates into approximately 4.4
percent export cover of imports.
poorly in both time to export and import, and
especially in cost to export, with costs nearly A significant portion of Kosovo’s trade in
50 percent higher than the oECD average, goods is regional (especially Macedonia,
mainly due to inefficient practices and barriers Albania, and serbia), and is, as with other trad
of political origin. ing partners, heavily import-dependent. The
majority of Kosovo’s needs for food, consumer
Trade comes in two varieties: trade in goods, a goods, and construction materials are satisfied
familiar concept for most, and trade in services, by imports, often under unfavorable conditions
which is a less-understood and, at the interna artificially set by trading partners who may be
tional level, far more complex concept. Kosovo more experienced, hail from more sophisti
is in the early, precarious stages of cross-bor- cated (and, usually, much more predictable)
35 Government of Kosovo statistics,
available at http://www.mti-ks.org. der trade in goods, and international trade in regulatory environments, and may therefore
52 | AgCLIR: Kosovo
possess greater bargaining power. Kosovo lacks Key trade and law policies
a coherent policy and framework for level
ing the playing field and for facilitating its own • WTO agreements
role in international commerce, which severely • CEFTA
• Law on Foreign Investment No.2002/L-33
deepens the problem.
• Law on Business Organization (Law No.
The logic is simple: no state can thrive without 2007/02-L-123)
international trade, and no state can effectively • Law on Foreign Trade No. 02/6
facilitate and support trade without integrat • UNMIK Regulation No. 2002/17 regulates
value Added Tax
ing itself into the global trading community. As
• Law 2003/03 L–109 on Customs and
a small country near the end of the queue for
Excise Code
EU entry, Kosovo cannot make demands backed
up by threats embargo, and high import bar
Because of a GoK recognition of this trade real
riers. Kosovo must instead become the most
ity, as well as Kosovo’s recent history as a ward
knowledgeable and activist trader in the region.
of the multinational community, the country’s
Kosovo must be able to deftly apply CEFTA and
policy reflects the rather dramatic liberalization
other principles of trade that, if carefully and
of trade effected in the past ten years. There is
knowledgably applied, benefit not only Kosovo,
but also the whole region. Further, until Kosovo a flat 10% import duty, and almost no obstacles
moves beyond policy that focuses on self-sus to entry into the market, or the territory for
tainability of energy supply and import substitu that matter, by foreign traders.
tion to the exclusion of a comprehensive trade
cefta 2006 and regional trade
policy, any efforts by the business community
The Central European Free Trade Agreement
and investors (especially foreign investors) to
(CEFTA) was established shortly after the eco
engage in cross-border entrepreneurship will
nomic and political upheavals in Eastern Europe
experience much higher risk than necessary.
in the early 1990s as a path to freer trade in
newly independent countries. While the agree
legal frameworK ment began in Hungary, Poland, and slovakia,
Even though Kosovo can boast, on paper, an it expanded to other countries quickly. As the
economy equally open to imports and exports, original members joined the European Union,
it remains an economy that is defacto based they withdrew from the agreement (as required
on imported consumer goods paid for mostly by the rules of accession) and were replaced by
by remittances. Imports have been increas new economies. By 2006, it became necessary
ing steadily in recent years, reaching 1.9 bil
to reestablish the agreement and draft a new
lion Euros by the end of 2008.36 Due to its
preamble. so, though the membership looks
geographical proximity, Kosovo’s main export
nothing like the original, and there is techni
countries are CEFTA members, followed by
cally a new agreement, the content of CEFTA
the EU countries. Even though local produc
remains virtually the same as it did.
tion is increasing relatively steadily, Kosovo is
still forced to import goods and raw materials Kosovo is a member of CEFTA, though
that are not produced by the local market. The it became so through the UN Interim
main imports of commodity goods range from Administration (UNMIK) before it declared
prepared foodstuff, beverages and tobacco, and independence. The concern is whether Kosovo
minerals to machinery and articles of stone. remains a member through the doctrine of suc
Exports in 2008 reached 195.9 million, 37 with an cession despite the non-recognition by some 36 Ministry of Trade and Industry
Trade Report
increasing export to its main trade partners and of the CEFTA membership. serbia, in particu
37 Ministry of Trade and Industry
CEFTA members. lar, which holds the chair of the organization Trade Report.
March 2010 | 53
in 2010, objects to Kosovo membership with schedule in its goal to be part of the global trad
out UNMIK taking the lead role. Kosovo, in ing community.
turn, objects to serbia’s objection, and regularly
Interestingly, in spite of the absence of a num
walks away from working group meetings on
ber of rules that could facilitate trade and con
grounds of principle. Even beyond the political
tribute to growth, Kosovo often continues to
issues, however, CEFTA is plagued in the region
focus on issues that, while important in the
by non-compliance in a setting in which few
long term, should not necessarily be immediate
members take the agreement seriously.
priorities. For example, Kosovo’s Parliament
wto compliance is expected to adopt a law on protecting the
Though Kosovo is not presently in the process domestic market with the aim of protect
of accession to the World Trade organization ing local producers through “safeguard mea
sures” such as anti-dumping; however, there
(WTo), it is at the very early stages of explor
are already issues with the execution of the
ing this possibility.
draft law. Also there is the problem of know
Membership in the WTo, or even the mean ing the nature of these safeguard measures
ingful involvement of a country as an observer or legal remedies applied against unfair trade
nation making significant headway in compli practices abroad. Under the WTo Agreement,
ance with WTo principles and practices, gives a “grey area” measures are prohibited and any
country a number of trading advantages: sort of measure must have a time limit (sunset
• It is a basic indication of an economy’s reg clause). It is still not clear how WTo compliant
ulatory readiness to “do business”; these measures really are, and compliance will
• WTO provides, for members, a mecha depend largely on how they are implemented.
nism for lodging complaints about the
unfair trading practices of others; and, customs regime
Kosovo is an independent customs entity with
• The accession process is a catalyst for the
a liberal trade regime. Custom duties and bor
kinds of general regulatory, policy, and
der taxes are regulated across two layers:
implementation change that is good for
Under Law 2003/03 L–109 on Customs and
trade and growth independent of the ben
Excise Code, a 10 percent flat rate is imposed
efits membership itself provides.
on imports and 0 percent on exports. The typi
Kosovo is not far along the path of compliance cal exceptions exist for imports of raw materi
with WTo requirements. The Ministry of Trade als. second, under Law 2003/03 L–109 there
and Industry has drafted a trade policy that is an excise tax of between 10 percent and
states Kosovo’s ambitions as a trading nation, 50 percent of the value of goods. The excise
but inadequately comprehends the critical need taxes are charged on products, such as mineral
to prepare for that role as a small, landlocked, water and soda, whether they are imported
financially weak nation. or produced domestically. The Customs Code
is based on the EU Customs Code and is fully
Beyond the trade policy, Kosovo is poorly pre compliant with World Customs organization
pared for WTo accession. Kosovo has no (WCo) rules on customs procedures and
road map outlining the considerable long-term the Harmonized Commodity Description and
efforts required to come into compliance. Until Codifying system.
substantial headway is made in implementing
regulatory frameworks in everything from intel law on foreign activities (2002/6)
lectual property protection to sanitary and phy This law aims to promote the development of
tosanitary rules, Kosovo will remain far behind a healthy market economy in Kosovo, while
54 | AgCLIR: Kosovo
securing adherence to regulations that affect the ultimate goal of general compliance with
trade between Kosovo and regions outside of international and WTo best policy practices.
Kosovo to develop and be implemented with
the best European and International standards. sps issues related to trade
This law is very similar to the Law on Foreign of agricultural products
Investments above. The term “sanitary and phytosanitary,” usually
abbreviated to sPs, refers to countries’ rights
the law on business to restrict import of agricultural products that
organizations do not meet scientifically established minimum
similar to common practices in EU countries, standards. While all countries limit imports
only certain types of business can be regis based on sPs standards, the WTo and other
tered in Kosovo. According to this law (Law Nr. organizations encouraging free—or freer—trade
2007/02-L-123) these types are a single person implore countries not to use sPs measures as
enterprise, a general partnership, a limited liabil hidden unnecessary technical barriers to trade.
ity company, a limited partnership, and a joint The legitimate use is a complex, but valid, way to
stock company. protect people from harmful imports.
In accordance with the clauses of the Foreign While a carefully crafted and implemented sPs
Investment Law, foreign companies are per regime is imperative, it is also important for
mitted to engage in any business activity open any country involved in the export of agricul
to domestic business. In addition, there is no tural products to develop a system for compli
restriction regarding the share of capital that ance with its trading partners’ sPs rules. This
foreign entities are allowed to hold. Therefore, requires an internal system for information col
foreign entities may establish subsidiary enter lection and analysis, but it also requires a broad
prises and branches in the same manner and to commitment among public sector bodies to
the same extent as similar domestic business adapt quickly and reasonably to changing rules
organizations. This is welcome news for trade and circumstances.
with foreign investors.
Kosovo is not yet recognized as a state by
Kosovo’s institutions are aware that resolv the United Nations and is, therefore, not yet
ing its wide trade imbalance requires a com a member of UN-related international orga
prehensive economic and political approach in nizations such as the WTo and the Food
order to change the operational environment in and Agriculture organization (FAo), the
Kosovo, for the purposes of improving the com Codex Alimentarius body for FAo food stan
petitiveness position of Kosovo in the world dards, and the World organization for Animal
market. such a commitment has been stated Health (oIE). A formal request has been sent
in the Medium Term Expenditure Framework for re-evaluation to the oIE by the National
(MTEF), a basic governmental document guid veterinary services in Kosovo but has been
ing the economy of Kosovo in 2009–2011. It is refused pending resolution of diplomatic issues.
easy to point the finger at ineffective laws; how Until Kosovo is eligible for membership in the
ever, the topic of trade leads to a spider’s web WTo and sPs bodies (IPPC, oIE, FAo Codex,
of governmental entities, such as the ministry of Cartagena Protocol, Kyoto Protocol, etc.), it
Foreign Affairs, the President’s office, the prime will continue to experience an uphill battle in
Minister’s office, and MAFRD, as well as scores convincing the international community that its
of indirectly related laws and regulations. Legal standards are EU compliant. Despite this, all
and institutional change, therefore, is required import and export documentations are similar
both at MTI and across the other entities with to WTo members.
March 2010 | 55
ministries responsible for food control plants, and food of plant origin are inspected
by the KvFA. The systems of food inspection
• MAFRD
for exported foods consist of a health certifica
• Kosovo Veterinary and Food Agency (KVFA)
tion (veterinary/ phytosanitary); a certificate of
• Department of Plant Protection and
Production (PPD) origin; and, a bill of lading. Whenever required
• Agriculture Border Control by the importing country, a laboratory analysis
• Livestock Department of the goods intended for export is performed.
some regional countries do not accept sPs cer
At the municipality level food control is the tificates issued by Kosovo authorities on the
responsibility of: (a) sanitary inspectorate; (b) vet grounds that Kosovo does not have an accred
erinary inspectorate; (c) agricultural inspection. ited laboratory authorized to certify that goods
for export are safe.
certification requirements
for food imports Kosovo veterinary and
All consignments entering Kosovo need to be food agency (Kvfa)
accompanied by a health certificate issued by The veterinary Law, adopted by the Assembly
the relevant authorities of the exporting coun in July 2004, transforms the former veterinary
try and an import license issued by the relevant services into an executive agency under the
authority of the country for which the export MAFRD, the KvFA. Now, with the adoption
is intended. The health certificate describes of the new Food Law, the KvFA falls directly
minimum health conditions to be fulfilled by the
under the authority of the Prime Minister’s
consignment whereas the testing requirement
office. The law regulates the combat and pre
depends on the country of origin. occasionally,
vention of infectious animal diseases, veterinary
authorities in serbia will refuse to supply the
medical practice, the circulation of products of
necessary documentation for consignments
animal origin, veterinary control of the import,
intended for Kosovo because, according to the
authorities, their trade with Kosovo is still con export and transit of live animals and products
sidered as internal. The same scenario applies of animal origin, and the rights and obligations
to Bosnia. of public and local government institutions, as
well as of individual persons, in this field.
While some traders continue to complain about
problems with exporting agricultural products phytosanitary inspection
to some neighboring countries, no one has filed There are 28 phytosanitary inspectors
a case with the relevant Kosovo authorities. As (Agriculture officers) employed in the Kosovo
a result, MAFRD statistics do not show cases of municipalities. All are graduated agricultural
rejections or detention of food exported from engineers but, as with the sanitary inspectors,
Kosovo. MAFRD reports a number of instances there is no information about the organiza
in which documents are submitted incomplete tion for which they work, the Crop Protection
by traders, and the goods subject to the tempo
Department (CPD). The role of these inspec
rary detention until the missing documentation
tors with regard to food control seems unclear.
is provided.
They do a certain amount of “checking”, which
separate inspection systems apparently includes checking expiry dates of
for exported goods products and visually examining fruit and vegeta
Another issue faced by this sector is the lack of bles, although they do not take samples because
separate inspection systems for exported food. of alleged jurisdictional issues between them
Both food of animal origin, live animals and and the Institute of Public Health (IPH).
56 | AgCLIR: Kosovo
The new laws on seeds, fertilizers, and pesti have been numerous ongoing trainings for gov
cides to some extent formalize the relationship ernment officials as well as local lawyers to
between the MAFRD inspectors and the munici update their understanding of regional trade
pality inspectors. In additional, there is signifi and the importance of CEFTA. However, there
cant cooperation between the two levels with has been a risk of CEFTA paralysis due to dis
periodic joint visits. agreements over the Kosovo status issue,
which is already preventing the adoption of the
constraints in exporting to Protocol on Agricultural Trade Liberalization.
some neighboring countries Protectionist measures, such as removal of
A number of exporters based in Peja and excise tax on domestic products only, leaving
Prizren claimed that it is becoming increas what amounts to an import duty on the same
ingly difficult to export fresh produce into both products produced abroad, will slightly advan
Montenegro and Albania. In particular they tage local producers, but it is unlikely to have
are having problems with satisfying the phyto any major impact. Further, other neighboring
sanitary requirements with the inspectors on countries will retaliate when their advantage is
the Montenegran border who allegedly ignore lost. such action from Kosovo will mean non
the phytosanitary certificates produced by compliance with CEFTA provisions (i.e., Article
the Kosovo authorities and demand their own 8 (1) CEFTA 2006) and a strong reaction from
inspections, which has to be done in Podgorica, other CEFTA members and the EU.
the capital city. Ther eis similar anecdotal evi
adoption and use of
dence of refusals at the Albanian border. This
trade-related conventions
non-acceptance of Kosovo certificates seriously
and model laws
impedes exports because the border inspector
Developing capacity in the legal profession and
is only on duty for two hours each day, and only
entrepreneurial private sector sets the stage for
five days per week. If no inspector is available,
accelerated growth. Adoption of the commer
the exporter must personally take a sample to
cial laws that have been developed through the
Podgorica, leaving the truck at the border. The
consensus of the people actually doing global
exporter is given a certificate to take back to
business gives Kosovo businesses the tools to
the border and the vehicle is then released. The
knowledgably enter agreements abroad and to
sampling and testing of produce in Podgorica
allocate their risks as they desire.
has reportedly never resulted in a rejection.
However, this procedure leads to obvious delays Kosovo should, at a minimum, embrace the fol
in border processing, which in turn can lead lowing two conventions and one model law:
to significant reductions in product quality and • The UN Convention on Contracts for
losses in revenue. the International sale of Goods (CIsG).
Kosovo has technically adopted the
Technical barriers, such as the accredition of
CIsG, under UNMIK, but has yet to fully
laboratories should be resolved without much embrace it
trouble. However, political problems involving • The New York Convention on the
Kosovo’s status with respect to the non-recog Recognition and Enforcement of Foreign
nition of sPs documentation is beyond the con Arbitral Awards (New York Convention)
trol of Kosovo’s authorities and the surrounding • The UNCITRAL Model Law on
competent bodies. International Commercial Arbitration.
cefta compliance There are at least an additional 20 recom
Regional trade rules, procedures, and guaran mended laws/conventions, but these 3 would
tees established by CEFTA are critical. There provide an excellent foundation for growth.
March 2010 | 57
the un convention on Put bluntly, people who do not know and under
contracts for the stand the terms of an agreement have a strong
international sale of tendency to breach contracts.
goods (cisg)
The CIsG was adopted unilaterally by UNMIK, simple default rules
but Kosovo’s status as a member state was lost The simplicity of the CIsG is that if a trans
when it declared independence without full rec action meets a very small set of minimum of
ognition of UN bodies, such as UNCITRAL. requirements, the transaction will, by default,
The use of contracts to define the parameters constitute a contract. This is not always readily
of a business transaction is a nearly universal apparent, or even true, in the case of the use of
phenomenon, and represents an exercise in a country’s national law.
minimization and allocation of risk by the par
reduced transaction costs
ties. It also represents the exercise of autonomy
The efficiencies established by the use of a sim
of the parties; by establishing certain conditions,
ple, neutral set of rules typically result in lower
the parties are agreeing to the rules—law—
transaction costs and, ultimately, lower prices
that will govern their relationship. virtually
for the final consumer.
every step in the trade value chain can be envi
sioned in a contract of sale. The CIsG, which consistency
is now the default law for international sales of The CIsG prevents the application of national
goods in 70 countries, is considered among the domestic law rules by an adjudicatory body
essential international trade treaties because (court or arbitral panel) absent a contrary agree
it is a simple mechanism for creating the foun ment made in advance of a dispute. This means
dational rules underlying, and complementing, that international parties always know in advance
the agreements made by the parties. It also acts what law will be used in a dispute. otherwise,
as a set of default rules even where the parties the law used will depend on where a suit is
have not agreed to specific terms. It provides a brought. As a practical matter, suit can always be
uniform and fair regime that introduces an ele brought wherever there is a nexus to the con
ment of certainty in commercial exchanges, thus tract and where the defendant has assets.
decreasing transaction costs and making the
processes of drafting agreements and settling modernization
disputes more consistent. Adoption of the CIsG has a positive general
effect on a country’s regulatory framework,
More specifically, the advantages accruing with
similar to that motivated by WTo accession. It
use and promotion of the CIsG are the following:
is widely agreed, for example, that China’s adop
reliability tion of the CIsG, and the wave of commercial
Contrary to what might seem natural, foreign reform that followed, helped pave its way to
businesses will prefer to trade with sophisticated WTo membership and its impressive economic
and knowledgeable Kosovo partners. The CIsG development.
introduces a broad new source of easily under
stood legal resources that are designed with implementing
the international community in mind, not just institutions
one labyrinthine and perhaps archaic legal tradi While the legal framework provides a reason
tion. Businesspeople who know and understand ably solid foundation for trade facilitation and,
their contracts of sale tend to abide by contract in theory, a very liberal trade policy, the insti
provisions more than those who rely on their tutions charged with implementing the policy
partners to draft the terms of an agreement. and law are, with the partial exception of the
58 | AgCLIR: Kosovo
Key implementing institutions: • Implementing Institutions as Supporters—
Implementing institutions such as customs
• Ministry of Trade and Industry and ministries of trade and industry that
• Ministry of Economy and Finance
otherwise exist to collect tariffs and other
• Customs Authority
similar revenue, as well as to protect the
• Ministry of Foreign Affairs, Office of Bilateral
public from harmful products, but also
and Multilateral Agreements
• Ministry of Agriculture CEFTA Office take on the function of support and facili
tation. In fact, the most progressive coun
tries and regions in this regard describe
Customs Authority, very weak, overburdened
Customs’ role as primarily trade facilitative
with unnecessary tasks, poorly funded, and
rather than protective; 38 and,
often corrupt.
• Civil Society and private sector institu
Trade policy begins in Kosovo with the Ministry tions that ease the restrictions and barri
of Trade and Industry (MTI). The MTI, as the ers to trade, both imports and exports,
ministry with primary responsibility over trade goods as well as services. These would
promotion, setting policy for internal trade, and include private sector international trade
designing systems for better facilitation of trade associations as well as membership in mul
for Kosovo importers and exporters, has taken tinational organizations, such as the UN
the lead in developing a trade policy and spon Commission on International Trade Law
soring laws and regulations related to interna (UNCITRAL), and The International Trade
tional trade. Kosovo is not unusual in placing the Centre (ITC). They also include private
responsibility for international trade with the sector services such as freight forwarders,
MTI; nonetheless, this method presents some testing labs, customs brokers, and lawyers,
significant disadvantages. accountants and logistics professionals
with trade experience.
supporting While Kosovo has can boast a few freight for
institutions warders and testing labs, they deeply lack capac
Transition countries often focus far more ity, and virtually none of the other institutions
on monitoring and restricting trade across exist, partly because of a lack of motivation on
borders to gain the most economic benefit, the part of the GoK to liberalize trade (because
through tariffs and vAT, than on liberaliz so much revenue is generated from tariffs and
ing and facilitating it to maximize its jobs and vAT, and because controlling trade is an ade
revenue growth potential. This behavior can quate way to protect personal business inter
inhibit countries’ ability to take advantage of ests) and partly because of the uncertainty of
export industries and industry that is led by Kosovo’s status.
raw materials imports. Because of this short
It is worth noting that though there are three
sighted emphasis on what amounts to bur
cross-sector chambers of commerce—The
densome dependence on trade, there is a 38 see, for example, the rules encour
Kosovo Chamber of Commerce, the American aging trade facilitative behavior in
concomitant absence of attention paid to the the Central American Free Trade
Chamber of Commerce of Kosovo, and the
kinds of institutions that support and facilitate Association, available at http://
Alliance of Kosovo Business—they all suffer www.seic.gov.do/baseCono
trade as a long term growth prospect. such is cimiento/TLCEEUU%20DRCAFTA/
from low capacity and/or a misunderstand
the case in Kosovo. Texto%20del%20Tratado%20en%20
ing of their role regarding trade. The American Ingl%C3%A9s/Chapter%2005.%20
Customs%20Administration%20
At least two types of supporting institutions Chamber has, in the past, taken on the role and%20Trade%20Facilitation/
TLC-EEUU%20DR-CAFTA%20
should exist in a country that wants to build its of champion on trade issues, but has recently
Customs%20Administration%20
trading capacity: lost some of its enthusiasm in reaching out on and%20Trade%20Facilitation.pdf
March 2010 | 59
these issues. The other two chambers also lack When looking at economic development
the funding and international experience neces through the lens of international trade, how
sary to become a force in trade, but they also ever, the problems are significantly more com
tend to take a stance against trade that appears plicated, and will require a sea change in the way
overly protectionist of Kosovo businesses. the GoK and donors look at the legal/regula
tory framework.
social dynamics
First, the GoK needs to develop a coherent
the need for a coherent trade policy on its economic relationship with the
policy and comprehensive region and the rest of the world. Though some
reform road map principles—e.g., the need for a liberal tariff
Kosovo is import friendly, but decidedly export and foreign direct investment structure—have
unfriendly. All industries are suffering from the been vaguely articulated in the Medium Term
lack of a trade policy, the immaturity of the Expenditure Framework (MTEF) and else
trade-related regulatory framework, and the where, there is no single document that out
maladministration and non-enforcement of the lines Kosovo’s trade philosophy and objectives.
few components of trade-related framework Questions concerning policies on protective
that do exist. But, most of all, Kosovo suffers treatment of particular industries, state trading
from a lack of a pragmatic approach to trade. issues, treatment of regional partners as com
What little trade exists is severely burdened pared with others, whether the GoK desires a
by the dominance of the politics surrounding free trade in services, goals concerning protec
Kosovo’s position in the region and the world, tion of intellectual property, and a host oth
and the absence of the realization that in order ers need to be answered concurrently with the
to trade effectively Kosovo, as a small poor development of domestic growth and expendi
country, cannot leverage others into fair trade ture policies, not afterwards.
with punitive measures. Kosovo must instead
trade “smarter” than its neighbors. second, the GoK must draft and implement a
legislative and institutional reform agenda, or
The following are examples of how domestic road map, that declares specific goals and a real
industry is adversely affected by the lack of a trade istic timeline for compliance with established
policy and regulatory/institutional framework: international norms for trade. These norms
• Domestic grains and dairy production can are embodied in the WTo agreements. They
not compete against agricultural imports are embodied in these agreements because
that are subsidized by Macedonia, serbia, they are norms rather than because they favor
and the rest of the southeastern Europe one group of trading nations over another. The
(sEE) region. norms facilitate trade for all; therefore, whether
• Domestic crops, such as peppers, meant to Kosovo is assisted in its bid to join the WTo or
be protected to some degree by a customs not, assistance in achieving the norms is critical.
duty charged at the border on imported
goods, even when they are from other Third, the GoK should make every effort to
CEFTA countries, cannot compete when unilaterally (if UN recognition is not imminent)
goods from abroad flow freely through adopt a number of standard international trade/
open or poorly enforced border crossings. commercial conventions and model laws that
• Entire crops run the risk of destruction have been instrumental in simplifying cross-
because imported seeds can carry disease border transactions and dispute resolution, and
that should be intercepted through enforce promote greater control by transacting parties
ment of simple sanitary-phytosanitary rules. over the allocation of their risk.
60 | AgCLIR: Kosovo
Finally, as described in greater detail elsewhere second, it establishes a climate conducive to
in this report, the development of capacity in substantial growth in trade. Participation typi
the legal profession and entrepreneurial private cally promotes the right mix of top-down policy
sector is critical. Though some of the benefits development and bottom-up community practi
of the above recommendations can accrue by cality resulting in a solid foundation for compre
default, most will accrue only if the business and hensive legal reform and trade development.
legal communities take advantage of them.
The benefits of WTo membership (or engage
wto compliance ment) are the gradual but determined establish
Compliance with the principles and basic rules ment of a transparent, predictable, and fair eco
of the WTo acts as a catalyst for economic nomic legal and institutional regime; fair access
reform through policy change, good eco to markets for foreign investors; fair access to
nomic governance, and the establishment of a foreign markets for domestic investors; and the
solid regulatory foundation. Most important, growth of domestic industry through competi
it results in economic development through tiveness rather than protection.
cross-border trade. The WTo begins with the
simple maxim that all countries are in a posi Donor involvement in, and guidance of,
tion to create wealth by identifying and taking Kosovo’s integration/accession process is criti
advantage of their resources and to create pro cal, and achieving these objectives will require a
ductive advantages by cultivating international substantial commitment on the part of the GoK
markets. All countries have production advan and investment into a team of local and interna
tages, either in absolute terms or in compara tional experts that answers directly to one min
tive terms. But since countries’ natural tenden ister, but cooperates fully across all ministries,
cies are towards inefficiencies associated with civil society, and the private sector.
the protection of all industry, the principle only
An international trade team/office would ana
works if the global playing field is level, trans
lyze the regulatory and institutional framework
parent, and predictable.
through the lens of international trade, and
Though WTo membership for Kosovo is the would be responsible for gathering the informa
ideal objective, adoption of WTo principles tion necessary for the GoK to make appropri
and compliance with the basic regulatory frame ate decisions. To effectively develop its trade
work accomplishes two important steps: First, regime, a country must make all legal, regula
it affords Kosovo an expedient accession pro tory, and institutional decisions in lockstep with
cess when membership becomes possible; and, it trade policy and road map.
March 2010 | 61
recommendations
recommendation: build capacity to trade as a meaningful partner in the region and beyond
General: Use trade as a lens through which to look at the entire national framework of laws, regulations and implementation
mechanisms, and establish strengths in global and regional trade best practices.
short Term Medium- and Long-term
Develop a regional benchmark price information system so
• Establish an inter-ministerial or extra-ministerial export
•
the GoK and the Kosovo private sector can better deter council to explore trade policy and trade facilitation issues.
mine whether countries are providing prohibited export This should also include a Rapid Response Team comprising 4
subsidies. This will also afford more measured responses to or 5 key representatives from the GoK, plus one representa
unfair trade practices. tive from the private sector, who will commit to being avail
able whenever important trade issues emerge.
Encourage a more pragmatic approach by the GoK to trade
•
issues that begins to disconnect trade policy from the poli Develop a better system for marshalling the resources of the
•
tics of recognition. donors in the region in a coordinated way.
Establish concentrated programming in trade- capacity
•
building for the GoK, civil society, and private sector.
Encourage observer-status participation in the WTO at
•
a minimum, perhaps accession application as a Customs
Territory.
Support the drafting of a comprehensive WTO accession
•
road map that carefully outlines all of Kosovo’s responsibili
ties over the entire accession process.
Support the enthusiastic participation in UNCITRAL instru
•
ments, including the development of legal and commercial
technical assistance programs to build awareness of interna
tional best practices at the private sector level.
62 | AgCLIR: Kosovo
enforcing contracts
The concept of contracts and their enforcement is considered differently in vari
ous contexts. The World Bank Doing Business rankings view contracts from
Kosovo
their most literal, prosaic perspective—the enforcement perspective—or the
ability to force a business partner to adhere to the terms and spirit of an agree
ment. This typically requires a deep look at the courts and alternative dispute
resolution systems, as well as the systems for enforcement of judgments. The
assumption inherent in this view is that if contracts can be enforced efficiently,
businesspeople will naturally use them and will be more comfortable participat
ing in more sophisticated business relationships—and, this is true to a degree,
but principally for the already more sophisticated levels of commerce.
enforcing contracts enforcing contracts
Doing Business Ranking 2010 157
5
Doing Business Ranking 2009 156
Procedure (number) 53 4
average score
Time (days) 420 3
Cost (% of claim) 3 2
1
AgCLIR, and its parent, BizCLIR, look at con
tract enforcement from a more comprehen 0
Legal Implementing supporting social
sive perspective. In the AgCLIR methodology, Framework Institutions Institutions Dynamics
contracts are the core feature of any business framework area
transaction, and a look at enforcement is incom
plete without an adequate understanding of Kosovo’s very poor score in the Enforcing
the entire contracting climate, especially in the Contracts category of the Doing Business report
lower levels of the value chain where even farm (157 out of 183) tells only part, perhaps the
ers cultivating less than a hectare may benefit happiest part, of the story. While, compared
from using relatively sophisticated arm’s- length to other countries in the region, it does not
contracting. AgCLIR asks fundamental questions take an unusually long time to enforce a claim,
about the relationships businesspeople maintain. it does cost an extraordinary 61.2 percent of
Do businesspeople even enter into contracts?
the value of the claim, putting Kosovo between
How sophisticated are they? Is there societal
Niger and Bangladesh. It is no wonder then,
or economic motivation for adhering to agree
with a costly and drawn-out process for gain
ments? How are contracts and negotiations
ing justice, that Kosovo businesspeople rarely
used? These are some of the questions, in addi
tion to dispute resolution and enforcement, for enter into written contracts in the first place. It
which AgCLIR wants answers. A good look at is not surprising that when they do enter con
the whole contracting environment provides an tracts, they rarely bring a claim for breach in
excellent window into the general level of busi the courts, nor is it surprising that investors and
ness sophistication in an economy. foreign traders stay away.
March 2010 | 63
But the story goes much deeper than this. A Key laws
contract is defined as an offer for the exchange
of something (potatoes) for something else • Law on Obligations—SFRY 29/78 with latest
amendments applied in Kosovo, official
(money) that is accepted by the other party.
Gazette sFRY 29/78
Therefore, according to this definition, where • Law on Contracts for the Sale of Goods—
there is business happening, and at least some UNMIK Regulation 2000/68 on Contracts
is happening in Kosovo, there are contracts. In for the sale of Goods
Kosovo, however, for reasons discussed below, • Law on Public Procurement in Kosovo, Law
the culture of contracting is very weak. Parties No. 2003/17, promulgated by sRsG in
UNMIK Regulation No. 2004/3 dated 9
are not using contracts to create certainty of
February 2004, amended by UNMIK
supply and distribution through allocation and Regulation No. 2004/3 Addendum dated 28
minimization of risk. Lack of trust remains July 2004 (intended to complement the law
a serious issue. Agricultural processors and on obligations and to raise the standard of
exporters are not providing adequate extension contracting in Kosovo)
services to farmers because the farmers do not • Law on Arbitration (02/L-75), 2007
capitulate with in-kind adherence to contracts. • Law on Foreign Investment—No. 02/L-33
Farmers, on the other hand, feel the proces • Law On Chamber of Commerce No. 2004
• Law on Execution Procedure
sors, with their perceived unequal bargaining
power, will necessarily take advantage of them.
At the other end of the value chain the pro contractual environment. The absence of a solid
cessors and exporters are not typically careful contracts legal framework makes contracting
about entering into contracts with their foreign awkward and fraught with risk for the business
trading partners. person. Moreover, because the businessperson
relies heavily on the contracts law in order to
Contracts have been discussed as part of the predict the outcome of unlikely, but potential,
numerous CLIR analyses in Kosovo since 2004, events, and to determine how much detail to
when the first commercial and legal institu include in a contract, the more well established
tional reform assessment was done. 39 Even a and tested a legal framework is the more reas
superficial look at that document paints a bleak suring it is to those relying on it. Kosovo suf
picture of the intervening five years. Little has fers on two counts: First, as a new economy,
changed. The system is still broken. The discus its laws, and more important, how those laws
sion below outlines the problems through the are interpreted by courts, are brand new and
lens of agriculture, and offers some unique and largely untested; and, second, there have been
simple solutions. some fundamental missteps in the development
of the legislation.
legal frameworK
The regulation, formation, operation, and con Kosovo’s most basic legal framework for con
clusion of commercial relationships, and the tract law is embodied in the Law on obligations
associated need to allocate or minimize com and the UNMIK Regulation on Contracts for
mercial risk, are vital to any commercial party. the sale of Goods (Regulation 2000/68).
Businesses are reluctant to enter into agree
the law on obligations
ments that could ultimately become mean
The 1978 law, which is a fairly typical civil-style
ingless, or even counterproductive, upon the
law that governs all obligations, both contractual
development of a dispute.
and tortious, is thought to function reasonably
The legal framework is the most basic ele well by most in the legal community. A com
39 see http://bizclir.com/cs/
bizclir_assessment_kosovo. ment in the infrastructure and mentality of the prehensive replacement Law on obligations,
64 | AgCLIR: Kosovo
drafted and passed by the Kosovo Assembly in acting on his behalf, the validity of a writ
2004,was pending approval of the UNMIK Legal ten merger clause stating that the contract
office when legal authority transferred. The is the entire agreement, and what consti
disposition of the law remains uncertain, though tutes “fundamental” non-performance.
demands for an updated law are growing stron • The law should clarify how terms are to be
ger. The aim of the new draft law was to do interpreted. Preferably, terms should be
away with references to the old socialist socio interpreted in light of the entirety of the
economic system and conform Kosovo contract contract in which they appear.
law to EU directives on private law as well as • The law fails to state the basic objective
to update it to clearly include modern busi of damages—to put the aggrieved party in
ness realities such as electronic signatures. The the position he would have been in had the
Yugoslav law is more than 30 years old and not contract been performed, and is unclear
adequate for a modern commercial environment on a preference for specific performance
that requires more comprehensive commer or monetary damages.
cial contracts legislation. This law, as well as the • The right to specific performance is not
passage of a new Law on Public Procurement, provided for, merely inferred in Art. 512.
should have gone a long way towards rais If provided, it should encompass the usual
ing the standards of contracting and develop limitations on specific performance (i.e.,
ing good contract practices. However, the legal performance is not awarded if it causes
community has complained of macro structural unreasonable effort).
problems with the draft Law on obligations, so • Article 152 of the law states that “con
regardless of the fact that the law was adopted tracting parties may provide that a third
by the Kosovo Assembly (Law 2004/25, Kosovo party shall interpret the contract in case
Law on obligations, passed through the Kosovo of a disagreement concerning the mean
Assembly on July 28, 2004), it is still under ing and scope of terms in the contract.”
active consideration. The draft law aims to This is far too vague to interpret that par
introduce new and modern contracts such as ties may resort to adr resolution of the
timesharing, franchising, and leasing contracts. entire dispute, both facts and law. Linked
Legal commentators worry that such extensive to this, it is not clear whether foreign arbi
revision might lead to unfamiliarity and that the tral awards or court judgments are binding
new legal language in the Albanian version might in Kosovo. Moreover, whether or not the
cause misunderstanding. New York Convention binds Kosovo with
respect to foreign jurisdiction is not stated.
Though the draft Law on obligations, under con
• Because the law on execution
sideration for more than five years, would pro
procedure 1978 is thought of as weak
vide a significant benefit to contracting in general,
regarding the execution of judgments for
a few important flaws should be addressed:
monetary awards, the law should address
• The law would benefit from a section on
the issue of collection of monetary judg
terminology. There is, for example, no
ments specifically.
definition of “reasonableness,” a term that
is typically defined differently among juris Although the new draft is not free of criticism
dictions, and is considered a primary issue and requires tweaking , it is still thought of as
under the standard Principles of European suitable for a commercial environment and in
Contract Law. line with EU directives. The Ministry of Justice
• The law does not define valid notice, the has set up a working group spearheading review
extent of knowledge and intent imputed of the draft and expects to adopt a final version
to a contracting party from someone for approval by early 2010.
March 2010 | 65
the law on public procurement Kosovo’s law on arbitration
The Law on Public Procurement has added to
The new arbitration law is in line with many
the creation of a new contract environment in
facets of modern international practice and
Kosovo. As part of its central role in improving
provides, among other things:
public procurement, it will pressure lawyers and
• Any business dispute may be submitted
the business community to face up to the cur
to arbitration.
rent atmosphere of informal, oral contracting and
• A court will not take a case that has pre
move towards the use of written contract docu viously been submitted to arbitration.
ments based on a code of contract law, at least • The parties can choose the arbitra-
for concession contracts with the government. tors or the procedure for choosing
Just like the Law on obligations in the com the arbitrators.
mercial arena, the Law on Public Procurement • The arbitrators can issue preliminary
sets out a specific set of rules for contract for orders enforceable by a court.
mation, negotiations, operation, interpretation, • The parties can agree on procedural
fulfillment, and termination. It is another mecha rules or agree to have the arbitrators
nism in implementing this commercial contract do this.
• Basic rules for evidence, witnesses, use
mentality, further adding value to the Law on
of experts, etc., are specific, but the
obligations and helping stakeholders in the agri
parties can agree to vary these.
cultural sector better face up to the commercial
• The parties can choose which law
realities of a contracting environment. applies (Kosovo law or that of
Unfortunately, the procurement law has come another jurisdiction).
• The award must be written with
under some heavy criticism for being perhaps
stated reasons;
too comprehensive. In an effort to stave off
• The parties can settle the case at any
possible corrupt behavior in procurement activ point before a final decision; and
ities, the law has taken an approach ostensibly • The award can be enforced by a court.
closing off all possible avenues for unethical or
non-transparent practices. This approach has
includes clauses giving an entity like the Kosovo
resulted in a law that some find to be overly
chamber of commerce (law no . 2004 /
complex and unwieldy, and has, ironically,
7) the authority to act as a forum for arbitra
increased the potential for misuse.
tion is a more solid and formal agreement.
alternative dispute resolution in
Given the unfamiliarity of Kosovo lawyers,
contract enforcement . the law on
judges, and businesses with arbitration, it cannot
arbitration (02/l-75) came into force in
be predicted how extensively the new law will
January 26, 2007. However, the number of cases
be used in the short term. However, it is a signif
solved by arbitration is extremely low, with
only around 30 cases having been heard by the icant step forward to have a modern arbitration
Kosovo Chamber of Commerce until now. law and to have expert training on the subject.
Furthermore, with continuous training for arbi
There is a widespread perception that legal trators and mediators, it is hoped these methods
agreements cannot be enforced due to the cur of dispute resolution can be better implemented.
rent political situation in Kosovo. Also, the
immaturity of institutions limits, to a certain law on contracts for
extent, the ability to enforce most contracts. the sale of goods
Nonetheless, the law provides ways for par one legal peculiarity is the use of a slightly
ties thinking ahead to nearly guarantee enforce altered version of the United Nations
ment. For example, a duly signed contract that Convention on Contracts for the International
66 | AgCLIR: Kosovo
sale of Goods for use as a general sale of goods
law in Kosovo. The alteration was accomplished
simply by removing references to “international”
and by removing a provision that made it applica
ble only to sales between merchants. Its use for
domestic consumer sales is odd since the treaty
was designed specifically and exclusively for
international commercial transactions between
businesses. Though it is officially applicable and
is the default law for sales of goods, it is appar
ently rarely, if ever, applied by the courts. The
rationale for its existence is inexplicable, and is a
good example of some of the legislative experi
mentation under which Kosovo has suffered.
law on foreign investment
The Law on Foreign Investment promotes for
eign investment in Kosovo by providing foreign
some effort has gone into building the capacity
investors with certain fundamental and enforce
of the Commercial Court, but largely without
able legal rights and guarantees ensuring that for
success. The civil system for implementing the
eign investors and their investments will be pro
enforcement of contracts is, for all intents and
tected and treated with fairness and respect in
purposes, non-functional. Arbitration, and the
strict accordance with the rule of law and widely
efficient public or private enforcement of awards,
accepted international standards and practice.
should provide a good backup to the courts, but,
Two issues relevant to contracts are raised in for reasons outlined below.
the investment law. First, the rules regarding the
courts
circumstances under which the government may
In the first CLIR assessment in Kosovo, in
expropriate property of foreign investors are
2004,40 some enthusiasm could be seen for the
made clear, protecting the investor’s contractual
Commercial Court. The assessment recognized
rights. And, second, the preference of arbitra
the relative efficiency and knowledge of the
tion of disputes where designated beforehand
judges in the court. CLIR updates in 2005, 2006,
makes for a clear preference for carefully writ
and 2007 recognized that the Commercial Court
ten contracts.
was not progressing as hoped but continued to
law on execution procedure view it as the more well informed judicial option.
The Law on Execution Procedure is archaic, Five years after the original CLIR, the view, how
allowing too many objections and appeals in ever, is depressing. A visit to the Commercial
civil cases, thus extending the period before Court revealed stagnation; there was virtually
enforcement sometimes to absurd lengths. no activity and painfully little energy or enthu
siasm. still, the handful of cases the court hears
can drag on for years without resolution.
implementing
institutions A major problem with the civil judicial system
Tremendous resources have been spent on the is that the Commercial Court lacks jurisdiction
judicial system in Kosovo, most of them expended over the vast majority of farmers. Unlike many
on, understandably, building a solid criminal and countries, including the United states, Kosovo
administrative system founded on the rule of law. does not treat as default businesses those who 40 Ibid.
March 2010 | 67
Key implementing institutions rotated into the positions from the general judi
cial pool. These judges have little practical expe
• Commercial Court—for legal entities rience with enforcement and have few usable
• Municipal courts—for non-legal entities
tools—bailiffs, dedicated police units—at their
• District courts—for non-legal entities
disposal. Kosovo would benefit greatly from the
• Kosovo Chamber of Commerce
Arbitration Center establishment of a group of executors dedicated
to enforcement work.
are undertaking commercial activity, and there Beyond these specific issues, the courts remain
fore acting as businesses, but who have not reg riddled with apathetic, often corrupt, judges;
istered their businesses with the Ministry of poor infrastructure; underpaid and under-
Trade and Industry and the appropriate munici trained staff; rarely used technology such as
pality. The law strips these individuals of their cameras and other recording/stenography
rights as businesses, including the right to access devices; and dockets in the district and munici
the Commercial Court, and instead imposes pal courts bursting with unpaid utility bills and
heavy fines. In the United states, for example, other cases that should be resolved by other
the default business entity is a sole proprietor
means. In sum, growth of a predictable, efficient
ship and requires no act, other than carrying
culture of adjudication of contracts cases is
out business, to be treated as such. All obliga
unlikely in the short and medium term.
tions, including the payment of taxes and com
pliance with business-related regulations, must Kcc arbitration center
be complied with, but at the same time, all privi The only available alternative to the courts, out
leges accruing to a registered business are also side of agreeing to adjudicate or submit to arbi
available to the unregistered sole proprietor. In
tration abroad (which is typically the demand
Kosovo, the neglect of a default-style business
made by foreign trade partners), is the Kosovo
entity virtually cuts small agribusiness out of the
Chamber of Commerce (KCC) which, by
commercial sphere. small farmers are the com
Article 26 of the Law on the Kosovo Chamber
mercial equivalent of untouchables. As such,
of Commerce, has the authority to arbitrate
they must bring claims as individuals in district
cases. The KCC has set up an arbitration unit,
or municipal courts, where they are treated
but the number of cases entertained thus far is
with disdain because they are unregistered,
unclear. The poor capacity of the KCC to arbi
and are put into a docket queue that stretches
trate cases is, however, clear: The legal depart
months or years.
ment, which is responsible for arbitrations, the
Another reason for the paucity of contracts legal matters of the chamber, as well as advice
cases is simply the cost in time and money of and representation in legal matters for the
bringing a claim. Cases are likely to go on for membership of the KCC, consists of only two
years, with multiple appeals and objections. A lawyers; there is no training or support pro
business with money tied up waiting for a claim gram offered to arbitrators; and, there is no
to be resolved will likely suffer irreparable dam supply of legal/procedural resources. When the
age. so many businesses, rather than take risks legal department was asked what arbitration
on the courts, will not enter into contracts at
rules they use, the lawyer in charge referred to
all. This report discusses the disuse of tradi
the Kosovo Arbitration Law, which indeed pro
tional contracts in more detail below.
vides some rules (e.g., number of arbitrators,
Finally, even if a judgment is rendered, enforce contested judgments) but does not relieve the
ment can be difficult. Enforcement of judgments necessity for the adoption of a widely accepted
is the responsibility of enforcement judges, and well-understood set of arbitration rules.
68 | AgCLIR: Kosovo
It is well established that a business climate contracts and commercial
is made more effective, productive, and effi law curriculum
cient if commercial alternative dispute resolu
• Basic Commercial Practice
tion (ADR), especially arbitration, is promoted,
• Risk Allocation Contracting
facilitated, and made available to businesspeople.
• Basic Contractual Terms and Conditions
There are a number of reasons for this, some of • Legal Drafting and Reasoning for Contracts
them perhaps a bit surprising unless commercial • Letters of Credit and Price-Delivery Terms
ADR is thought of as a structure that underlies • Incorporation and Other Business Entities
the entire process of business, from negotiat • International Business Transactions
ing a deal, to drafting an agreement, to the per • Breach of Contract Litigation
formance of the obligations, to the resolution • Enforcement of Contract Terms
of disputes if necessary, and to the long-term, • ADR Clauses
multi-agreement relationship between the par
ties. Through the provision, promotion, and for their value as a positive business incen
facilitation of a system of arbitration, a culture tive. Generally speaking, Kosovo’s supporting
of contract and the allocation of risk—in other institutions regarding contracts are weak but
words, educated contracting—can be developed. improving. Part of this may be a natural effort
This concept of ADR as a structure, or under to build in the private sector protections and
layment, is also why it is considered in this con capacity that can bypass the wretched imple
text as a crosscutting theme. menting institutions. Another part is surely the
The notion of ADR as an after-the-breach recent recognition given by the donor commu
method for referring disputes to an organization nity to building the organizations that support
outside an inefficient judicial system is only the and facilitate business.
tip of the iceberg. The true value of an ADR sys Though agricultural associations are relatively
tem is in its ability, if it is structured properly, to weak in Kosovo, they are providing the broad
provoke the careful preparation of agreements est support in building contractual relation
so disputes are never suffered, and if they are, ships simply by bringing farmers and proces
the burden is minimal. ADR systems promote sors/exporters together. These meetings can
the development of doing business with dispute be tense, with farmers complaining that until
prevention at the fore. the processors pay a fair price they will not
have an incentive to adhere to contracts. The
supporting processors find that they really do not need
institutions to adhere to contracts since courts do not
The widespread use and enforcement of con enforce them. They are happy to sign a con
tracts are unlikely to gain momentum unless tract, but doing so has no particular ramifi
institutions that understand the needs of the cation upon their businesses. This sentiment
business community, from the large vegeta echoes the lack of sophistication and mistrust
ble processor fueled by foreign direct invest that the farmers bring to the meetings. The
ment (FDI) to the smallest contract farmer, concept that there must be some professional
are trusted by their constituency and support (rather than punitive) incentive to use and
more sophisticated business practices. The adhere to contracts has clearly not been intro
implementing institutions are often perceived duced to much of Kosovo’s business commu
to act as a “stick” to incentivize compliance nity, especially at the lower levels, where farm
with contracts through punitive measures for ers and small processors have the most to gain
breach. supporting Institutions, on the other from the certainty of supply and market that
hand, are widely considered to exist expressly good-faith contracting promotes.
March 2010 | 69
legal education and professional education disproportionately high
professional development compared to the demand for vocational edu
An economy that boasts high levels of edu cation because of the associated prestige. But
cational and professional capacity is one that in Kosovo where both professional and blue-
enjoys self-determination and efficiency. Where collar jobs have been slow to develop, students
top-down policy makers (Kosovo has been have tended to choose the programs that are
a thoroughly top-down system for nearly 20 easiest to pass—one of them being legal edu
years) are not balanced by bottom-up private- cation. By making the programs easy, politi
sector demands based on first-hand knowledge cally connected university administrators have
of industry, labor needs, and markets, business increased demand and turned education into
tends to be restricted rather than facilitated.
a low-quality service provider that produces
Well-educated lawyers, accountants, MBAs, and
enough income to keep faculty in jobs but does
engineers infuse industry, as well as civil soci
little to prepare professionals for the rigors of
ety, with the tools and enthusiasm needed to
doing business at home and, especially, abroad.
become voices in setting policy and law.
so education remains cheap but popular and
Kosovo’s legal and judicial community lacks poor. The law faculty still maintains an enroll
commercial legal professional development. ment of approximately 7,000 for a national pop
Emphasis over the past 10 years, with influence ulation of two million.
from the international community, has been on
public law and policy areas such as justice sec Factors that have generally benefited educa
tor restructuring and human rights. The educa tion include the introduction of competition
tional system has been slow to evolve from the in the form of private universities, though not
old socialist system of education that does little yet in legal studies; 41 the hiring of young faculty
more than instill a collection of rules, without educated abroad; investment of resources by
teaching students that their role is to facilitate the donors; and, efforts to improve curricula.
business by supporting dispute prevention and Nonetheless, some of the problems identified
smoothing the road to dispute resolution when in the original CLIR and its updates still plague
business relationships break down. There is the system: public demand for improvements
little practical or clinical training in commercial in quality has been slow to develop; for finan
law at the law faculty, and the Kosovo Chamber cial reasons young faculty are not able to devote
of Advocates (KCA), the bar association, has no all of their efforts to teaching; and entrenched,
commercial law committee or section. tenured faculty are resistant both to change and
to the competition brought by young faculty.
Legal education remains troubled. only one
institution trains lawyers (the University of While some progress has been made in train
Pristina) and it remains mired in politics and ing law students in public and criminal law and
apparent corruption, and is burdened with a human rights areas, more attention must be
huge student body, most of which chooses legal paid to commercial law training. Unfortunately,
education because it is traditionally the easiest donor funding for commercial legal training,
to complete. This analysis is reasonable since
either at the university level or in the practic
few students profess a desire to practice law,
ing community, is not as popular as training
41 Educational competition has been a and there is indeed a very small demand for law
double-edged sword. Though some
in human rights and other public policy. some
yers in the community generally.
facilities, such as RIINvEsT and funding, for commercial moot competitions, for
AUK, have raised the bar, the lack of
oversight and meaningful regulation The demand issue is complicated, but relatively example, has been available, but continuing the
has led to occasional quality issues
easily resolved in the medium term. As in many funding from year to year is difficult, and sus
with some of the less-discerning
private institutions. other places, Kosovo students keep demand for tainability of the programming—and, therefore,
70 | AgCLIR: Kosovo
use of future programming as an incentive to The concept that education does not end with
study commercial law—has not occurred. graduation from a university, and should con
tinue in professional life, is beginning to gain
the legal profession some credence in Kosovo, particularly notice
Many of Kosovo’s core problems lie within the able in the legal profession. A number of law-
sphere of professional capacity. At its simplest, it yers—most, but not all, educated abroad—are
is abundantly clear that if education and profes treating law much more like a business than
sional capacity achieve a level that inspires indi ever before. These lawyers recognize the need
vidual professional growth and the strengthening
for proper management, continuing legal educa
of professional associations, economic growth
tion, professional responsibility, client develop
will follow. The establishment of a well-rounded
ment, and, most of all, a change in professional
and effective educational system and a vibrant,
thinking from the notion of lawyers as prob
activist community of skilled labor and profes
lem solvers to the notion that lawyers can keep
sionals is a long way off; but significant near-term
problems from arising in the first place, and can
progress can multiply the effects of other activi
therefore reduce transaction costs for business
ties by supporting even minor changes in the
and can even contribute to economic growth.
way people learn and function professionally.
The government, civil society, and the donors
Practicing lawyers are nearly as unaccustomed
could do significantly more to help create the
to commercial best practices as their clients.
necessary market demand for lawyers. There
A handful of lawyers do maintain commercial
is still a strong tendency in Kosovo, as is com
practices but because they are so few, they are
mon in formerly socialist countries, to think
focused on foreign clients who pay higher rates.
of the legal profession as one that exists only
of 12 licensed lawyers conducting commer
to serve others, rather than one that exists
cial work recently identified by ABA-CEELI42
in part to make money and facilitate business.
and UsAID-KPEP,43 none had local companies
as transactional clients.44 Because there is little Therefore, the existing regulations make it
demand in the business community for commer difficult to efficiently operate a law practice.
cial lawyers, and because human rights and pub Firms are still technically not permitted; law
lic law practice in a post-conflict society is more yers may be partners but cannot be hired;
popular, few lawyers see an incentive to develop advertising—even informational websites—
commercial practice. Though some program is not permitted; and client development is
ming designed to assist the development of a frowned upon, if not prohibited.
commercial bar has recently been established,45 Few programs have focused, even indirectly,
it is too new to have achieved success.
on contracting or contract negotiation. The
If economic growth cannot survive without American Bar Association (ABA) has long
many of the accepted components of the rule worked on capacity building and training of the
of law, and the rule of law cannot exist with legal community but without a specific focus on
out lawyers, then logic dictates that economic commercial law. The ABA’s work with the KCA
growth demands lawyers. Though Kosovo’s high and the University of Pristina Faculty of Law
42 American Bar Association Central
law faculty enrollment would suggest saturation (UPFL) has nonetheless established a good foun European and Eurasian Law Initiative.
of the market, because demand remains artifi dation for further development of a commercial 43 UsAID Kosovo Private Enterprise
Program.
cially low and very few graduates pursue careers section at the KCA and of UPFL legal clinics and 44 Transactional clients are those with
in law, the number of lawyers entering the mar courses. Twelve licensed lawyers with interest whom the lawyer is engaged in
negotiating and drafting contracts.
ket remains low— and those who do enter the in commercial work have been identified and Transactional work is preventive in
nature.
market are not in any way equipped to provide have attended a law practice management train
45 sEAD, BearingPoint, KPEP, EC
adequate counsel. ing co-sponsored by the ABA and the KPEP. Commercial Law Fellowships.
March 2010 | 71
The UsAID Economic Management for stability social dynamics
and Growth Project developed and delivered
training for judges and the magistrate schools building a culture of contract
on a series of commercial law topics, including A culture of contract exists when business
arbitration, company law, bankruptcy, and intel people rely more heavily on negotiated agree
lectual property. More training is planned in the ments to reduce risk rather than the distance
fall but a more focused and practice-oriented between themselves. Reducing distance can
approach is warranted. effectively minimize risk, but it tends to increase
transaction costs, sometimes dramatically,
notaries for example, when an importer of agricultural
A Law on Notaries (2008/03-L-010) was equipment asks for the delivery of goods on
recently passed, and requires real property con spec from a distant location on the theory that
tracts to be drafted by notaries. This is a fairly seeing the goods before buying reduces his or
typical requirement in civil law systems, and in her risk of receiving non-conforming goods.46
this case the law was adapted, with few changes, In fact, the institution of contracting developed
from the swiss law. Because of the newness of out of traders’ need to seek supply and markets
the notary system and the Chamber of Notaries
ever farther from home. Competition and the
(the body that licenses notaries), and because
discovery of desirable commodities in distant
the law makes no provision for competition
lands meant that traders could no longer rely
among notaries (all the people of a particular
on the old trust and character-based methods
zone must rely on the services of one notary),
for reducing risk. No longer could business be
there have been a number of complaints and
done simply on a handshake between people
accusations of nepotism during the system’s
who had known each other for years. The new
short existence.
risks were significant, though. Differences in
processors, exporters, and language, custom, standards, currency, as well
distributors’ roles as as the risks inherent in shipping goods across
supporting institutions vast distances and the related issue of separat
The level at which basic raw fruits, vegetables, ing payment from delivery in time required the
and herbs undergo the basic next value-added development of legal standards that could be
steps such as processing, sorting and distribu agreed upon by both parties in advance and
tion, or packaging and export seem to have the form the basis for resolving disputes. Traders
most incentive and capacity for growth as an found it not only advantageous to allocate their
institution that supports the farmer and collec risks in this way but also imperative.
tor. Many of these organizations are associa For a number of reasons, Kosovo businesspeo
tions, but most are companies (many are priva ple never truly developed sophistication in arm’s
tized soEs) that extend credit and know-how length contracting. There is clearly a tradition
to the farmers in exchange for promises of sup
of dealing with friends and relatives based on a
ply. Until many of the contractual relationship
handshake, a cultural desire to “see before buy
46 one of the principal risks, broadly problems outlined above and discussed in more
speaking, referred to here is called
ing,” and a relatively long history of trade that
detail below, are solved, however, and farm
“ex post opportunism” by Kenneth limited Kosovo businesses to dealing with public
Dam in his book The Law-Growth ers are more willing adhere to reasonable con
Nexus: The Rule of Law and Economic and socially owned enterprises on terms set by
tracts, the processors’ role as supporter will
Development. Whenever one party the state.
has the opportunity perform later be limited. The processors need to take more
in time than the other, there is a
risk that that party will take the active and pragmatic steps to build trust among Ultimately, a number of issues, including many
opportunity for more advantageous,
their partners, and to create a support founda outlined in other chapters of this report, have
but not contractually contemplated,
performance. tion based more on long-term potential. combined to create a “perfect storm” against
72 | AgCLIR: Kosovo
growth of the agribusiness sector. None of these The lack of a culture of contract was popularly
issues exist in a vacuum—all are interdependent recognized as the “mentality problem” by a
with the others. Without the development of number of AgCLIR interviewees. As some com
a culture of contract in the lowest levels of the mercial lawyers have suggested, it is difficult
value chains, and without a clear understanding to enforce contracts in the agricultural sector
on the part of processors of their role as sup where there lacks real understanding and defi
porting institutions, contract farming and out- nition of the legal entity of the contracting par
grower schemes, so vital to Kosovo’s future ties, i.e., distinction between personal and cor
growth, will never expand. on the other hand, porate entities. For instance, when claimants go
until processors/exporters are able to better to court, disputes typically center on commer
enforce their contracts with farmers, and until cial issues that municipal courts have little expe
farmers are treated as businesses, contract rience with.
ing and support will be very slow to develop.
Commercial litigation is low in Kosovo. The
Whatever the mix and relative weight of the
Commercial Court typically receives about 50
various problems, however, it is abundantly clear
new cases per month. This means judges and lit
that many of the more readily resolved problems
igators have little experience handling commer
are in the relationships and roles between and
cial disputes. At the same time, commercial law
among the farmers and the processors, rather
yers, private businesses, and trade associations
than in the legal framework or in the courts. The
perceive courts negatively. Courts are believed
legal framework is more or less sound, and the
to be inefficient, corrupt, and favoring publicly
courts are years away from being a trusted and
owned companies or individuals at the expense
efficient resource for the business community.
of private businesses. This, combined with the
only by carefully targeting the lower levels of
absence of alternatives to court litigation, has
the value chains will there be substantial reform
limited the growth of domestic business activity
and growth in agribusiness.
and kept foreign businesses from investing. An
Kosovo lags far behind its southeastern Europe effective and reliable provision of commercial
neighbors in commercial growth with exports legal services and a commercial framework that
now representing only about 5 percent of trade. is predictable and transparent would contribute
This is largely due to a lack of sophistication to economic activity.
in the way business is conducted. There is no
Finally, the private sector and the commer
culture of contracts in Kosovo. Commercial
cial legal community remain largely separate.
agreements are typically limited to extended
Kosovo is not geared towards a demand-
families and close circles of known associates.
driven, private sector led, commercial legal
Businesses rarely negotiate terms of agreements
reform structure. Kosovo businesses rarely
at arm’s length before performance. Many
resort to legal assistance before a dispute
agreements remain purely verbal, and, when
arises. Kosovo businesses are reluctant to
written contracts are used, poor drafting results
rely on preventative legal advice because they
in agreements that are difficult to enforce and
either do not understand the importance of a
leads to intractable disputes, most of which
risk-allocating contract or are willing to take
never reach resolution, that impede commer
a chance on whether a dispute will arise. As
cial development and the establishment of a
business activity grows so will the importance
business-friendly environment. Businesspeople
of lawyers as facilitators and voices of reforms
in developed countries always prefer to do busi
demanded by businesses.
ness with sophisticated partners because par
ties that do no understand their contracts often Kosovo abounds with stories of foreign trade
breach those contracts. shows at which Kosovo businesses successfully
March 2010 | 73
promote their products only to be rejected Then the buyer asks to see a pro forma invoice,
in the end for reasons that have little to do inquires about the price-delivery terms, probes
with the products themselves. Buyers are the letter of credit conditions, or wishes to dis
often happy with the sample product, typically cuss dispute resolution clauses. What might
impressed with the service orientation of the have been a successful business relationship dis
producer, and satisfied with the offered price. solves before it even begins.
74 | AgCLIR: Kosovo
recommendations
recommendation: increase the liKelihood that contracts will be used and enforced by paying more
attention to the contractual relationships and incentives at all levels of the value chain .
General: Improve dialogue, capacity, and business sophistication in the relationships between farmers and processors, and
between processors and customers.
short Term Long-term
Focus on building the contractual relationships between
• Establish Commercial Benches with specialized judges in the
•
farmers and processors/exporters through risk allocation municipal and district courts and transfer commercial case
seminars and dialogue. jurisdiction from the Commercial Court.
Follow the “culture of contract” skills building with model
• Build capacity for arbitration in the Kosovo Chamber of
•
contract farming programs. Commerce Arbitration Center.
Establish default treatment of unregistered businesses as
• Develop outgrower and contract farming support programs
•
legal entities.
Establish a professional legal clinical program designed
•
to raise capacity of commercial lawyers and provide free
advice and capacity building to small-holder farmers and
sME processors.
Establish small-scale, subsector-specific (e.g., fruits, dairy,
•
non-wood forest product (NWFP)) pilot arbitration pro
grams to resolve low-value disputes between farmers and
processors/exporters.
Provide incentives for commercial lawyers to visit trade
•
shows with producers.
Clarify that arbitration centers outside the KCC are
•
permitted.
March 2010 | 75
Nicholas Klissas Wade Channell Charles schwartz Emily Friedberg
UsAID/EGAT UsAID/EGAT UsAID/EGAT Booz Allen Hamilton
202.712.0115 202.712.1909 202.712.1761 703-377-5498
nklissas@usaid.gov wchannell@usaid.gov cschwartz@usaid.gov friedberg_emily@bah.com
AgCLIR: Kosovo MARCH 2010
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