Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No: 32171-XK

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED GRANT

IN THE AMOUNT OF SDR 4.7 MILLION (US$7.0 MILLION EQUIVALENT)

TO THE

UNITED NATIONS INTERIM ADMINISTRATION MISSION IN KOSOVO FOR THE BENEFIT OF KOSOVO

FOR A

BUSINESS ENVIRONMENT TECHNICAL ASSISTANCE PROJECT

M A Y 10,2005

Private and Financial Sector Development Department ECCU4 Europe and Central Asia Region

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective April 4,2005)

BETA BSC CQ CPOS EAR EU FMR GDP GIS GPN HPD IBRD IC ICB IDA IPA IPRR ISDS I T KCA KCBS KCSP L A N LCS MCO MEF MPS M T I MUDIS NCB OED PISG PPA QCBS RVP SBD SIDA SME

Currency Unit Euro

US$1.50438

Euro US$1 SDR 1

FISCAL YEAR January 1 - December 3 1

ABBREVIATIONS AND ACRONYMS

Business Environment Technical Assistance Business Service Center Consultants Qualification Commitment and Payment Orders European Agency for Reconstruction European Union Financial Monitoring Report Gross Domestic Product Geographic Information System General Procurement Notice Housing and Property Direciorate Intemational Bank for Reconstruction and Development Individual Consultant Intemational Competitive Bidding Intemational Development Association Investment Promotion Agency Immovable Property Rights Register Integrated Safeguards Data Sheet Information Technology Kosovo Cadastre Agency Kosovo Cluster and Business Support Program Kosovo Cadastre Support Program Local Area Network Least Cost Selection Municipal Cadastre Office Ministry o f Economy and Finance Ministry o f Public Services Ministry o f Trade and Industry Municipal Development Information System National Competitive Bidding Operations Evaluation Department Provisional Institutions o f Self-Government Public Procurement Agency Quality and Cost Based Selection Regional Vice President Standard Bidding Document Swedish Intemational Development Authority Small and Medium Enterprise

FOR OF'FlCLAL USE ONLY

I

SPN TA TOR TSS U N D P U N H C R UNMIK U S A I D

This document has a res t r i c ted distribution and may be used by recipients only in the performance of their official duties. I t s contents may not be otherwise disclosed without Wor ld Bank authorization.

Special Procurement Notice Technical Assistance Terms o f Reference Transitional Support Strategy United Nations Development Program Uni ted Nations H i g h Commissioner for Refugees United Nations Interim Administration Miss ion in Kosovo United States Agency for International Development

Country ManagedDirector: Orsalia Kalantzopoulos, ECCU4 Sector Director: Fernando Montes-Negret, ECSPF Sector Manager: Gerard0 Corrochano, ECSPF Task Team Leader: Ir ina Astrakhan. ECSPF

UNITED NATIONS INTERIM ADMINISTRATION MISSION IN KOSOVO FOR THE BENEFIT OF KOSOVO

BUSINESS ENVIRONMENT TECHNICAL ASSISTANCE GRANT

CONTENTS

Page

STRATEGIC CONTEXT AND RATIONALE ................................................................. 3

Poli t ical and Economic Developments ............................................................................... 3

Rationale for Bank involvement ......................................................................................... 8

Higher level objectives to which the project contributes .................................................... 8

PROJECT DESCRIPTION ................................................................................................. 9 Lending instrument ............................................................................................................. 9

Project development objective and k e y indicators .............................................................. 9

A . 1 . 2 . 3 .

B . 1 . 2 . 3 . 4 . 5 .

Project components ........................................................................................................... 10

Lessons learned and reflected in the project design .......................................................... 11

Alternatives considered and reasons for rejection ............................................................ 12

C . IMPLEMENTATION ........................................................................................................ 13

1 . Partnership arrangements (if applicable) .......................................................................... 13

2 . Institutional and implementation arrangements ................................................................ 13

3 . Moni tor ing and evaluation o f outcomes/results ................................................................ 15

4 . Sustainability ..................................................................................................................... 15

5 . Crit ical r isks and possible controversial aspects ............................................................... 16

6 . Grant conditions and covenants ........................................................................................ 16

APPRAISAL SUMMARY ................................................................................................. 17

. . .

D . 1 . 2 . 3 . 4 . 5 . 6 . 7 .

Economic and financial analyses ...................................................................................... 17

Technical ........................................................................................................................... 17

Fiduciary ........................................................................................................................... 17

Social ................................................................................................................................. 18

Environment ...................................................................................................................... 18

Safeguard policies ............................................................................................................. 19

Policy Exceptions and Readiness ...................................................................................... 19

1

Annex 1: Country and Sector or Program Background ......................................................... 20

Annex 2: Ma jo r Related Projects Financed by the Bank and/or other Agencies ................. 22

Annex 4: Detailed Project Description ...................................................................................... 28

Annex 5: Project Costs ............................................................................................................... 37

Annex 6: Implementation Arrangements ................................................................................. 38

Annex 7: Financial Management and Disbursement Arrangements ..................................... 40

Annex 8: Procurement Arrangements ...................................................................................... 44

Annex 9: Economic and Financial Analysis ............................................................................. 53

Annex 10: Safeguard Policy Issues ............................................................................................ 54

Annex 11: Project Preparation and Supervision ..................................................................... 55

Annex 12: Documents in the Project F i l e ................................................................................. 56

Annex 13:Statement o f Loans and Credits .............................................................................. 57

Annex 14: Country at a Glance ................................................................................................. 58

Annex 15: Maps ........................................................................................................................... 59

.. 11

KOSOVO BUSINESS ENVIRONMENT TECHNICAL ASSISTANCE

PROJECT APPRAISAL DOCUMENT EUROPE AND CENTRAL ASIA

ECSPF

Source BORRO WEWRECIPIENT

Date: September 8,2004 Country Director: Orsalia Kalantzopoulos Sector ManagedDirector: Fernando Montes- Negret

Team Leader: Irina Astrakhan Sectors: Sub-national government administration (50%); Central government administration (20); General industry and trade sector (1 5%); Law and justice (1 0%); General finance sector (5%) Themes: Other financial and private sector development (P); Personal and property rights (P); Land administration and management (P); Rural markets (S); Regulation and competition pol icy (S) Environmental screening category: No t Required

Project ID: PO88045

Foreign Total Local 0.00 0.00 0.00

Lending Instrument: Technical Assistance Grant

IDA GRANT FOR POST-CONFLICT Total:

Safeguard screening category: N o imDact

____

0.00 7.00 7.00 0.00 7.00 7.00

Project Financing Data [ ] Loan [ ] Credit [XI Grant [ ] Guarantee [ ] Other:

;Y 2006 4nnual 1.00 Clumulative 1.00

For Loans/Credits/Others: Total Bank financing (USsm.): 7.00

2007 2008 2009 0 0 0 0 2.00 2.00 2.00 0.00 0.00 0.00 0.00 0.00 3.00 5.00 7.00 0.00 0.00 0.00 0.00 0.00

Proposed terms: Grant Financing Plan (US$m)

[ ]Yes [XINO Does the project depart f rom the C A S in content o r other significant respects? Ref: PAD A.3 Does the project require any exceptions f rom Bank policies? Re$ PAD D. 7

I s approval fo r any po l i cy exception sought f rom the Board?

[ ]Yes [XINO

[ ]Yes [XINO Have these been approved by Bank management? [ ]Yes [ IN0

[ ]Yes [XINO

[XIYes [ ]No

Does the project include any crit ical r isks rated “substantial” o r “high”? Re$ PAD C.5 Does the project meet the Regional criteria for readiness for implementation? Re$ PAD D. 7 Project development objective: The overall project development objective i s to improve the business environment by reducing uncertainty o f k e y regulatory processes, improv ing delivery o f related services, strengthening property rights, and increasing transparency and accountability o f implementing institutions. This wil l be achieved by strengthening the capacity o f institutions charged with administering regulatory services for businesses and property transactions.

Project description: Business Services Integration: This component aims to reduce regulatory uncertainty, reduce existing administrative barriers to starting and operating a business, improve the transparency and accountability o f regulatory functions administered by municipalities, and facilitate investment. Immovable Property Rights Enhancement: This component wil l help secure immovable property rights as a contribution to land market development and facil i tating new business start-ups in terms o f improv ing access to capital, improv ing use o f property rights as collateral through mortgages, and reducing transaction times. Project Coordination and Monitoring. This component aims to build capacity o f related project institutions to ensure proper implementation o f a l l activities through strengthening capacity for procurement, financial management, and monitoring and evaluation o f results. Which safeguard policies are triggered, i f any? None. Significant, non-standard conditions, if any, for: None. Covenants applicable to project implementation: MEF will maintain a financial management system acceptable to the Bank. The project’s financial statements wi l l be audited by independent auditors acceptable to the Bank and o n terms of reference acceptable to the Bank commencing w i t h the accounts fo r the year ending December 31, 2006. The annual audited statements and audit report wil l be provided to the Bank within six months o f the end o f each fiscal year. MEF will maintain acceptable financial management o n a cash basis o f accounting including additional commitment.

2

A. STRATEGIC CONTEXT AND RATIONALE

1. Political and Economic Developments

Kosovo’ i s emerging from a post-conflict environment. At the end o f the conflict, in 1999, United Nations Security Council (UNSC) Resolution 1244 authorized the establishment o f the United Nations Interim Administration Mission in Kosovo (UNMIK) as the interim administration o f Kosovo, to be replaced over time wi th local institutions. The presence o f a large NATO-led intemational peace-keeping force has ensured a reasonable degree o f security. Estimates o f GDP are unreliable and prone to significant changes as data collection efforts improve. After falling an estimated 20 percent as a result o f the 1998-99 conflict, domestic economic activity has begun to grow at an average o f 3 percent per annum.2 But the situation remains precarious. The issue o f KOSOVO’S final status remains unresolved. Government institutions are weak. And recent economic growth has been driven by donor support, which i s not sustainable and already beginning to fall.

The governance structure in Kosovo i s complex. In 2001, a Constitutional Framework established the legal framework for the transfer o f responsibilities to the Provisional Institutions of S e l f Govemment (PISG) comprised o f a President, a 120-member Assembly, and an executive branch headed by a Prime Minister. The handover has gradually taken place since 2001. Currently PISG’s responsibilities include the provision o f education, health, social welfare, energy, telecommunications, and some forms o f transport services. Until KOSOVO’S final status i s determined, however, UNMIK retains control over the Banking Payments Authority o f Kosovo (BPK), publicly-owned and socially-owned enterprises, customs, and ultimate responsibility for economic and fiscal matters wi th the power to veto decisions made by the PISG that i t finds inconsistent with UNSC Resolution 1244 o f June 10, 1999.

Under a pol icy o f “standards before status” UNMIK and the PISG are working on a specific series of reforms aimed strengthening democratic institutions, protecting minority rights, and establishing the basis for a market e ~ o n o m y . ~ In mid- 2005, the UN wil l review progress toward these standards. On that basis, the UN wil l decide an appropriate critical path and timing for initiating discussions on KOSOVO’S final status. Progress in the development o f capable public sector institutions wil l be a critical factor in that decision.

Macroeconomic Issues

Since the end o f the 1999 conflict, there has been a shift away from the policies o f the former Socialist Federal Republic o f Yugoslavia toward a liberal market policy. The former trade regime was replaced by a simple regime with n o quantitative barriers and init ial ly a single 10 percent tari f f rate, followed by a subsequent two-tier tar i f f rate with a lower zero percent rate on capital and intermediate goods. The use o f foreign exchange was legalized for all domestic

’ Kosovo is currently under Uni ted Nations’ interim administration pursuant to Uni ted Nations Security Counci l Resolution 1244 (1999) of June 10, 1999 (hereafter referred to as Kosovo). ’ All GDP data are estimates only. Considerable progress has been made o n the compilation o f economic statistics but there are st i l l large errors and omissions, dif f iculty in capturing informal activity, and a lack o f fundamental data such as a recent census and production-based estimates o f National Income Accounts.

See “Kosovo Standards Implementation Plan ’ (March 3 1, 2004).

3

transactions, ini t ial ly establishing the Deutsche Mark and later the Euro as the local currency. The Banking and Payments Authority o f Kosovo was established to handle domestic payments, and, inter alia, licensing and supervision o f the banking sector. A Ministry o f Economy and Finance (MEF), with responsibility for the Kosovo Consolidated Budget, and a new tax system and administrative structure have also been established.

National Income Account data in Kosovo are weak and largely based on estimates o f household consumption from the Household Budget Surveys and Government spending from the Treasury accounts. The resulting estimates o f Gross Domestic Product (GDP) are weak and are prone to considerable revisions as new data becomes available. The latest GDP data indicate that there has been a recovery o f economic activity and positive growth since 2000.4 According to end 2004 IMF estimates real GDP growth, reflecting high levels o f public and private investment, reached approximately 30 percent in 2001 and has since averaged around 3 percent per year. GDP per capita, at approximately US$400 in 1995, increased to around an estimated US$780 by 2001 and over US$l,OOO in 2003. The National Income Accounts (NIA) are in a nascent state. On-going IMF work revising the methodology to include a more comprehensive coverage o f the donor sector, suggest that GDP per capita could be as high as euros 1252 in 2004. Price stability has been achieved, with inflation rates coming down from double digits at the beginning o f the decade to zero inflation in 2003. Despite the slow-down in the post-conflict reconstruction boom, private sector activity continues to show signs o f recovery, wi th construction activity exhibiting considerable strength and banking credit more than doubling in each o f the last three years.

The external financial position has also improved markedly since 2000. The current account deficit (before foreign assistance) has fallen dramatically in the last three years from almost 80 percent o f GDP to 50 percent o f GDP in 2004, primarily due to an improvement in the merchandise trade balance and as a result o f a contraction in import^.^ The external situation i s s t i l l far from sustainable: the trade deficit in 2004 was about 50 percent o f GDP6. Regular exports have been growing rapidly in the last four years, but from a very l o w base: merchandise exports are currently only about 5 to 8 percent o f imports.

Prospects for economic growth depend upon the success o f two overarching factors: (i) a resolution o f Kosovo’s political status and the maintenance o f peace and security in the region; and (ii) implementation o f a pol icy program that promotes private sector-led growth, including completion o f the reconstruction effort and export promotion, wi th in a sustainable macroeconomic framework which wil l require fiscal prudence.

Estimates o f macroeconomic data are based o n the IMF and Kosovar authorities estimates concluded in November 2004. The next revision i s due following the IMF mission planned for April 2005. In the past, these revisions have resulted not only in new current estimates and future projections, but also to changes to historic estimates.

I t should also be noted that there i s also considerable uncertainty regarding the accuracy o f balance o f payments estimates. Error and omissions have been growing in size and accounted for 49 percent o f the current account deficit in 2003. Given stepped up efforts to stem smuggling, however, i t i s un l ike ly that unrecorded trade f lows fully explain accounting discrepancies. The export amounts, in fact, include an allowance for smuggling.

The off icial trade balance includes sales to expatriates as exports.

4

Business en viron m en 1

A dynamic and vibrant private sector, where f i r m s are investing, generating employment, improv ing productivity, and exporting, i s fundamental to promoting broad-based economic growth. Wh i le many factors contribute to growth, there i s growing recognition o f the important role the business environment plays in determining the growth o f the private sector. The quali ty o f the business environment i s largely determined by the nature o f the regulations imposed o n businesses and the effectiveness o f institutions charged with enforcement o f those regulations. I t i s also affected by the level and quali ty o f infrastructure services, access to finance, the level o f competition, and the degree o f physical and legal security.

Significant progress has been made over the last four years in putt ing in place the basic legal framework and institutional structures necessary for a market-oriented economy. Most o f the required commercial legislation has been enacted, including laws o n companies, bankruptcy, pledges, real property rights registration, foreign investment, accounting, and mortgages. Simultaneously, much progress has been made in establishing the institutions to administer and enforce these laws. However, weak institutional capacity, combined with a lack o f regulatory predictability, transparency, and accountability, threaten to undermine this notable progress and create ferti le ground for growth o f the grey economy.

In 2003 a Kosovo Business Environment Survey’ was conducted to ident i fy aspects o f the business environment that negatively affect the entry, ex i t and operation o f f i r m s and their performance. The most significant constraints were found to b e the lack o f reliable infrastructure, and particularly, inadequate power supply. Fol lowing this, the major constraints reported by f i r m s in the survey were unfair o r in formal competition, regulatory po l icy uncertainty, corruption, and the cost o f and access to financing.

These findings reflect, to varying degrees, (i) the weak enterprise regulatory regime, and (ii) the st i l l rudimentary property rights system.

’ Kosovo s Business Environment: Constraints to Growth, World Bank, 2004.

5

~~ ~~ ~~

Eva luat ion of G e n e r a l Const ra in ts to Opera t ion (% o f f i rms rank ing const ra in t a s ”major” o r “very severe” )

Electricity

R e g u l a t o r y l E c o n . policy uncertainty Corrupt ion

Transportat ion Cr ime, thef t and disorder

C o s t o f f inancing C u s t o m s a n d trade regulat ions

L e g a l sys temlconf l i c t resolut ion A c c e s s to f inancing

M a c r o e c o n o m i c instabil ity Tax administrat ion

Te lecommunica t ions

Unfa i r o r in fo rmal compet i t ion

Tax rates

Ski l ls a n d educat ion o f workers Access to Land

L a b o r regulat ions Bus iness l i cens ing lopera t ing permits

0 10 20 30 40 50 60 7 0

Source: Kosovo ‘s Business Environment: Constraints to Growth, World Bank, 2004.

The enterprise regulatory regime

Accord ing t o the same survey, 37 percent o f a l l f i r m s and 51 percent o f manufactur ing f i rms ci te regulatory and economic p o l i c y uncertainty as a significant constraint to business. Th is finding par t l y reflects a constantly evolv ing legal environment that, t o some extent, i s a by-product o f transition. I t also reflects on-going shifts in author i ty from UNMIK t o the PISG, as w e l l as the evolut ion o f p o l i c y as a result o f the transfer o f fo rmer ly reserved functions. Th is type o f uncertainty affects future investment and employment decisions o f firms, as investors cannot assess r isks and cost-benefit results o f possible investments with any degree o f confidence.

The high degree of regulatory p o l i c y uncertainty, complex i ty and non-transparency results from the fact municipal i t ies in K o s o v o are responsible for establishing the overal l enterprise regulatory regime. This includes promulgat ion and enforcement o f enterprise regulations-such as licensing, permits and inspections. This arrangement i s based on Regulat ion 2000/45 (“On Self-Government of Municipalit ies”) w h i c h gives municipal i t ies broad powers to regulate economic act iv i ty within their jurisdictions.

As a result o f th is system, there are essentially 30 di f ferent regulatory regimes throughout Kosovo. In m a n y cases, regulations are vague, poorly enforced, d o not def ine service del ivery standards for enforcement bodies, and invo lve mul t ip le of f ices or directorates within a g iven municipal i ty. Central authorities handle other regulatory funct ions for the enterprise sector, such as industry-specific licensing, business registrat ion and tax registration, with l i t t le coordinat ion at the mun ic ipa l level.

Further, enforcement o f regulations such as licensing, construct ion permits, and heal th and trade inspections has been extremely erratic. Be tween 1999 and 2003, most mun ic ipa l assemblies h a d not passed regulations governing these functions, and w h e n they did, m a n y fai led to enforce

6

them, o r applied them in a discretionary fashion. This has created a great deal o f confusion among firms as to wh ich administrative and regulatory requirements are in effect and when and h o w they are expected to comply. Where there i s uncertainty and a lack o f transparency w i t h respect to regulatory requirements and administrative procedures, the environment m a y become ripe for growth o f o f f ic ia l corruption-and as a byproduct-growth o f the grey economy.

In addition to the pol i t ical uncertainty and security concerns, the complex and uneven regulatory environment also deters domestic and foreign direct investment in Kosovo. T o address this issue, the PISG plans to establish an Investment Promotion Agency (IPA) with broad responsibilities for investment climate improvement based o n the existing Of f ice o f Investment Promotion in the Ministry of Trade and Industry. The agency wil l p lay a k e y ro le in identi fying administrative barriers and constraints to domestic and foreign investment and promote measures to reduce these constraints. I t wi l l also provide a one-stop-shop service point for foreign direct investments.

In order to rationalize and harmonize the licensing requirements, a new, un i form regulatory framework needs to be put in place. This framework should a im to dramatically reduce the number o f licenses required to operate a business, place l imi ts o n the number o f tax, trade, health and other inspections, define max imum t ime periods for approval o f applications by local officials, reduce the fees imposed for meeting administrative and regulatory requirements, clari fy and strengthen procedures to appeal decisions, and strengthen penalties imposed o n enterprises for i l legal operation. In addition, the Government needs to build the institutional capacity o f municipalities to implement this new system. This should include measures to improve service delivery by integrating a l l services in one off ice within each municipal i ty and adopt measures to improve accountability and transparency o f the system overall.

Immovable property rights

One-third o f enterprises in the Kosovo survey indicated that the cost o f financing i s a major o r very severe constraint, and 26 percent believe access to financing i s a significant constraint. The average interest spread, interest rate, and collateral requirements are a l l higher in Kosovo than other countries o f the region (with the exception o f Serbia and Montenegro); additionally, the average duration o f loans i s much shorter. This reflects a lower level o f competit ion in the banking sector relative to other countries in the region and a higher degree o f investment risk in Kosovo. In addition to po l i t ica l uncertainty, one o f the ma in factors contributing to degree o f investment risk i s the weak framework for immovable property rights.

The establishment, registration and enforcement o f immovable property rights are s t i l l at a rudimentary stage, and have worsened as a result o f the recent confl icts and the resulting loss o f records. In addition, weak public sector institutional capacity undermines the confidence o f the banking and business communities that these rights wil l be legally recognized, protected by public bodies, and enforced by the judiciary. This in turn increases the cost o f finance and l imi ts access to it through the banking system.

UNMIK established the Kosovo Cadastre Agency (KCA) in June 2000 to set po l i cy and provide oversight to the Mun ic ipa l Cadastre Offices (MCOs) wh ich are charged with establishing,

7

updating, and maintaining immovable property records. However, the M C O s have weak capability to effect ively administer the property registries, and to issue property titles. The Kosovo Cadastre Support Program (KCSP), financed jo in t l y by the Governments o f Norway, Sweden and Switzerland between November 2000 and October 2003, provided the in i t ia l funding necessary for jumpstart immovable property registration activities in Kosovo.

Despite evident achievements toward building requisite institutional capacity, there i s a strong consensus that the investment environment continues to be severely constrained by unreliable immovable property records. In the current environment, potential buyers, lessees, renters, and mortgagors are hesitant to collateralize or acquire the ownership o r use o f properties since often they are unable t o identi fy true owners o r use-right holders and have confidence that the rights are securely held.

The unfinished po l i cy and institutional agenda in the area o f immovable property registration i s therefore substantial. The cri t ical areas where further donor support i s necessary were identif ied during the f inal phase o f implementation o f the KCSP. This pr ior i ty program i s outl ined in the “Proposed Program for Development o f Land Administration in Kosovo” and grouped in five intervention areas: (i) institutional strengthening; (ii) cadastre maintenance and immovable property rights registration; (iii) cadastre and land information system development; (iv) geo- informatiodspatial data infrastructure development; and (v) education, continuous professional development and training.

2. Rationale for Bank involvement

Bank involvement in this project brings two main benefits. First, the Bank brings i t s extensive experience throughout the region in improv ing the business environment and strengthening property rights. In Kosovo related activities include the Private Sector Development Technical Assistance project and the 2004 Business Environment Assessment. Elsewhere in the region, i t has supported a number o f projects at simplifying the business registration process throughout the former Yugoslavia. I t has also supported immovable property rights enhancement projects in Albania, Bulgaria, Croatia, Macedonia, Romania, Russia, Serbia, Slovenia, and Ukraine.

Second, the Bank offers a holistic approach to the sector and the abi l i ty to shape the po l i cy dialogue in a w a y that the grantee and other donors cannot. This approach wil l help the Government formulate a more cohesive development strategy and maximize the impact o f donor assistance.

3. Higher level objectives to which the project contributes

As noted above, the resolution o f KOSOVO’S poli t ical status i s linked to achievement o f a set o f standards as set forth in the Standards for Kosovo published in Pristina in December 2003 and subsequently endorsed by the UN Security Council. The Standards for Kosovo do not constitute a comprehensive economic development p lan for Kosovo, but rather priori t ize key areas for improvement in consolidating the legal and institutional basis fo r sustainable economic development. Whi le considerable progress has been made in building the necessary legal structures and developing po l i cy initiatives, the standards recognize that capacity for economic

8

p o l i c y planning, implementat ion and act ion in these areas must b e strengthened. Among other objectives, the standards a i m t o ensure a compet i t ive market economy, fa i r enforcement o f proper ty rights, and the ru le o f law.

G i v e n that progress against the standards i s the basis for any consideration o f KOSOVO'S f ina l status, the B a n k project feeds d i rect ly in to the Kosovo Standards Implementat ion P lan w h i c h sets out the actions and pol ic ies to reach the standards. The project contributes to the achievement o f these standards by addressing inst i tut ional weaknesses in the areas o f property rights, and enterprise regulation. I t also supports the government's broader inst i tut ional re fo rm efforts by building the capaci ty o f municipal i t ies to p rov ide services m o r e ef f ic ient ly and effectively. M o r e broadly, the pro ject also wi l l he lp the Government meet the target o f creating a compet i t ive domestic market, an effective regulatory framework, and an investment c l imate conducive to growth.

T h e project agenda also reflects the pr ior i t ies and overarching objectives o f the Government as set forth in the Strategies of Kosovo 's Medium-Term Economic Development (2003-08)'. I t also relates d i rect ly to one o f the k e y objectives o f the Transitional Support Strategy (TSS) for K o s o v o (approved by the Board on April 13,2004) to support broad-based economic growth and employment. T h e Transitional Support Strategy outl ines an 18 m o n t h strategy and focuses on: (i) encouraging broad-based and sustainable economic growth and employment creation; (ii) restructur ing k e y sectors o f the economy as par t o f the t ransi t ion process; and (iii) assisting the P I S G t o address k e y economic standards. The project i s fully in l ine with TSS approach to ensure that capaci ty building wil l b e a k e y cross-cutting focus g iven the n e w l y established nature o f m a n y o f the K o s o v o institutions.

B. PROJECT DESCRIPTION

1. Lending instrument

This project addresses problems in the business environment that resul t from v e r y weak inst i tut ional and administrative capaci ty o f related institutions. A Technical Assistance Grant was selected as pr io r B a n k experience in K o s o v o and elsewhere in the reg ion has shown that i t i s a w e l l suited instrument fo r building inst i tut ional and administrative capacity. Inst i tu t ional capaci ty building wil l require sustained support over several years, w h i c h i s d i f f i cu l t to prov ide through most policy-based operations. W h i l e gett ing the legal fi-amework and pol ic ies right i s a necessary f i rst step, strengthening the capaci ty o f inst i tut ions i s a long-term, systemic process, requi r ing years o f detailed technical support.

2. Project development objective and key indicators

The overa l l project development object ive i s to improve the business environment by reducing uncertainty o f k e y regulatory processes, improving del ivery o f re lated services, strengthening proper ty rights, and increasing transparency and accountabi l i ty o f implement ing institutions. Th is wil l be achieved by strengthening the capaci ty o f inst i tut ions charged with administer ing regulatory services fo r businesses and proper ty transactions.

Ministry o f Trade and Industry, June 2003. 8

9

Specific object ives and k e y indicators o f each component wi l l be:

Business Sewices Integration: T o reduce regulatory uncertainty, reduce exist ing administrat ive barriers to starting and operating a business, improve the transparency and accountabi l i ty o f regulatory functions administered by municipal i t ies, and facil i tate investment. K e y indicators include: (i) reduced regulatory compl iance costs fo r businesses; (ii) number o f municipal i t ies adopting harmonized l icens ing framework; (iii) number o f Business Service Centers apply ing n e w service standards; (iv) increased number o f registered businesses in municipalit ies; and (v) improved business services del ivery at munic ipa l and central levels.

Immovable Propertv Rights Enhancement: T o secure immovab le proper ty rights as a contr ibut ion to land market development and faci l i tat ing n e w business start-ups in terms o f improving access to capital, improving use o f property r ights as collateral through mortgages, and reducing transaction times. K e y indicators include: (i) t i m e l y service del ivery standards introduced and monitored; (ii) number and types o f transactions registered in the systems and the annual g rowth o f the number o f transactions; (iii) number o f updates-subdivisions and consolidations-registered in the cadastre systems checked against a special sample surveys to discover non-registered subdivisions; (iv) and number o f bui ld ings inventor ied in to the building cadastre and ongoing updates.

Project Coordination and Monitoring. This component aims to build capacity o f related project institutions to ensure proper implementat ion o f a l l activit ies through strengthening capacity fo r procurement, f inancial management, and m o n i t o r i n g and evaluation o f results. K e y indicators include: (i) proper and ef f ic ient management o f procurement, financial management and audi t reports; (ii) effect ive monitoring and evaluation; and (iii) t imely development and implementat ion o f high qual i ty project act ion plans.

3. Project components

The project i s comprised o f the f o l l o w i n g components:

Business Services Integration (US$2.63 million). Th is component a ims to reduce regulatory uncertainty, harmonize business regulations and the l icensing f ramework at the central and municipal- level, reduce exist ing administrat ive barriers to starting and operating a business, improve the transparency and accountabi l i ty o f regulatory funct ions administered by municipalit ies, and facil i tate investment. Through i ts m a i n activities, the project wil l improve publ ic access throughout K o s o v o to regulatory informat ion, legislation, guidelines, and required documentation. The m a i n activit ies to b e funded wi l l include: (i) establishment o f Business Service Centers (BSCs) that wil l integrate implementat ion o f enterprise regulat ions and services in up to 30 municipalit ies; (ii) rehabi l i tat ion o f B S C premises; (iii) upgrading o f the Kosovo business registration system; and (iv) assistance and capacity building o f the Of f ice. o f Investment Promot ion and any successor or successors thereof.

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Immovable Property Rights Enhancement (US$3.36 million). This component aims to enhance property rights as a contribution to land market development and to facilitate new business start- ups in terms o f improving access to land and capital and reducing transaction approval times. This would be accomplished through: (i) technical assistance to allow a rapid start-up o f sub- project tasks and to improve the policy and legal framework; (ii) support for the improvement o f the new immoveable property rights registration system in up to 30 municipalities; (iii) volume o f mortgages registered in the new system; (iv) cadastre reconstruction and renewal, and updating in at least six municipalities; and (v) implementation o f a national cadastre o f buildings to facilitate their ownership, use and registration.

Project Coordination and Monitoring (US$0.58 million). This component aims to build capacity o f related project institutions and ensure proper implementation through strengthening capacity for procurement, financial management, and monitoring and evaluation o f results. The main activities to be funded wil l include: (i) design and establishment o f project monitoring and evaluation system including; (ii) support for investment climate surveys (ii) training for procurement, disbursement and financial management; (iii) auditing o f project accounts; and (iv) project coordination. While disbursement and procurement wil l be carried out by the Public Procurement Agency and the Grant Uni t o f the Ministry o f Economy and Finance, the component wi l l support capacity building o f the above-mentioned institutions. To carry out this component, the project wi l l finance a small Project Secretariat that include two to three local experts, some o f whom may be individuals seconded from local agencies. The major role o f the Secretariat wil l be to provide support to the Steering Committee in leading the broad pol icy reform agenda related to the business environment in Kosovo and coordinating the implementation of activities under the project. The component wi l l also cover the cost o f the overall monitoring and evaluation of the specific performance indicators and the business environment more broadly. Specifically, investment climate surveys (using the 2002 mini- ICA methodology) wil l be carried out twice during the lifetime o f the project. The component wil l also finance four project audits.

4. Lessons learned and reflected in the project design

Priorit ization and sequencing of reforms. The project seeks to address a number o f weaknesses o f the Kosovo business environment at the same time. Given that challenge, the three components o f the project represent priori ty areas that wi l l help lay the groundwork for economic development and improvement in the business environment.

Importance of donor coordination. The project team recognizes the significant amount o f donor activity in Kosovo and the importance o f coordinating fully with other donors. Two donor meetings were held during preparation for the immovable property component attended by four donors, with K C A leading the coordination. The project preparation team devoted special attention to assessing where other international donors are already active and where there are gaps in donor support. The project wil l make donor coordination a priority throughout implementation as well.

Importance of a one agency model -for land administration and business sewice integration. Intemational best practice has been observed in the design o f the business services component

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and in the support o f the one agency model for land administration in Kosovo. W i th regard to land administration in Kosovo, which i s based upon a unified system, other projects in the region have shown that a dual or triple agency system undertaking cadastre, registration and administration i s expensive and inefficient. With respect to the design o f the business service component, care has been taken to integrate lessons from international experience that point to the need to limit the services to be delivered by “one-stop-shops.” This experience shows that the design o f these programs frequently suffers from too high expectations and too ambitious mandates o f the agencies.

Importance of establishing realistic monitoving indicators. The Bank’s experience with many projects including the Kosovo Pilot SME Line o f Credit has pointed to the importance o f establishing focused and realistic monitoring indicators. This i s crucial particularly in a post- conflict setting when project goals are often highly ambitious. As a result, for the proposed Business Environment Technical Assistance project, the preparation team focused on producing a narrow set o f monitoring indicators that could be achieved in the given timeframe.

5. Alternatives considered and reasons for rejection

No project option. The Bank team considered pursuing no project in the area o f business environment. This was rejected as i t would mean that municipalities would be left without any assistance to improve the clarity, accountability and delivery o f regulatory services. Further, the K C A would be l e f t to implement the immovable property registration program with l i t t le additional support from other donors. Under current implementation arrangements, this could take significantly longer.

Narrowinn of project scope. The project team considered another project model that included additional components focused on enhancing food safety and strengthening the judicial system. However, in the interests o f simplicity and ease o f implementation and upon the recommendation of the Quality Enhancement Review panel, both components were dropped. This decision was taken even though i t was explicitly recognized that both components had substantial merit and addressed important constraints in the business environment. The food safety component was considered key to development o f commercial agriculture and ago-processing, and hence o f private sector development in Kosovo. However, i t involved significant institutional and legislative developments to execute. The judicial component included an assessment o f property, creditor rights and contract rights enforcement, and involved a large number o f institutions and stakeholders. The Bank i s currently working wi th the government and other donors to help identify alternative funding vehicles for both components. In particular, the European Agency for Reconstruction i s likely to provide additional support for the food safety component, and the Bank i s working to identify another donor to fund the judicial assessment.

Centralized regulatow - framework rejected. An alternative approach to the business services component was considered, which would have included amending the legal framework to rescind certain regulatory powers granted to municipalities and definition o f a new centralized licensing regime for the territory. I t was determined that this approach would be met with significant resistance by project beneficiaries, and that the alternative o f working wi th municipalities to harmonize the regime on a voluntary basis would produce more effective

12

results. Indeed, the Associat ion o f Munic ipa l i t ies o f Kosovo, a representative body for these beneficiaries, has issued a po l i cy statement endorsing the object ive o f harmonizat ion o f licensing. In terms o f immovable property registration, the funct ion i s already decentralized, with the KCA leading the mun ic ipa l cadastre of f ices in training and monitoring operations.

C. IMPLEMENTATION

1. Partnership arrangements (if applicable)

Business sewices integration. This component wil l build on the experience o f the t w o mun ic ipa l business in fo rmat ion centers established on the p i l o t basis with U n i t e d Nat ions Development Program support. The range o f services prov ided by the munic ipa l Business Service Centers wi l l b e expanded, and the centers wil l become “one-stop-shops” for the business communi ty . The project wil l also benef i t from partnership with the U n i t e d States Agency for International Development ( U S A I D ) L o c a l Government In i t ia t ive Program - technical expertise o f the resident advisers wil l facilitate harmonizat ion o f regulatory functions and establishment o f B S C s in six municipal i t ies. The project a ims to achieve synergy with the n e w Kosovo Cluster and Business Support Program (USAIDKhemonics) . The later, with i ts grass-roots approach to supporting business development and building capacity o f business associations, can contribute to business environment improvement by ident i fy ing the most binding administrat ive barriers, moni tor ing r e f o r m implementation, vo ic ing business concerns, and faci l i tat ing private-public dialogue.

Immovable propertv rights enhancement. A number o f donors have been i n v o l v e d in the sector in recent years, and the proposed project wi l l build substantially upon this work. The m a i n donors supporting land administrat ion between 2000 and 2003 have been the Governments o f Sweden, Norway, and Switzerland, and U n i t e d Nat ions Centre for H u m a n Settlements (UNCHS). During the nex t three years, i t appears that Sweden wi l l support cadastre maintenance and Immovab le Property Rights Register (IPRR). N o r w a y wil l support legal and surveying issues, w h i l e Switzer land wi l l finance topographical mapping, system development, t ra in ing and GIs. U S A I D has no plans at th is stage to support immovab le proper ty r ights improvement. A B a n k representative wil l join and participate in the exist ing donor steering commit tee that coordinates work in the sector and holds coordinat ion meetings every s ix months.

2. Institutional and implementation arrangements

The project wil l b e implemented over four years. Several ministr ies wil l serve as implement ing agencies to carry out the project. G i v e n the number o f counterparts, a Project Steering Commit tee wil l be established to oversee project implementat ion. The commit tee wi l l b e supported by a smal l Secretariat staffed by two to three experts who wil l p rov ide technical support t o the Secretariat, and b e responsible for coordination, annual planning, monitor ing, reporting, and dissemination o f project’s results. Speci f ic roles and responsibi l i t ies are described below.

13

Project Steering Committee. The Project Steering Committee wi l l be comprised o f representatives o f k e y stakeholders including the Ministry o f Trade and Industry (MTI), the Ministry o f Publ ic Services (MPS), Ministry o f Loca l Government, UNMIK Pi l lar IV, UNMIK Pil lar 11, the Association o f Municipalit ies o f Kosovo, and Off ice o f the Pr ime Min is ter (Director of Legal Office). The scope o f work will include:

0

0

0

0

0

Strategic guidance for overall project implementation. Development and approval o f annual plans fo r project activities, project budget, and procurement plan. Coordination and consensus building among k e y project stakeholders o n k e y po l i cy issues related to project implementation. Identi f icat ion o f broad pol icy and strategic issues related to business environment and implementation o f po l icy reforms. Mon i to r ing o f the overall progress made by the Government in improv ing the business environment.

Project Secretariat. A small Project Secretariat wi l l support the Project Steering Committee in carrying out a l l activities. The scope o f work wi l l include:

0

0

0

Facil i tat ion and effective coordination o f a l l day to day activities required for project implementation. Preparation o f annual plans, budgets, and procurement plans for approval by Steering Committee. Support o f project procurement including development o f Terms o f Reference (TORs), establishment and participation in selection committees, and evaluation o f project completion reports. Mon i to r ing o f project performance indicators and preparing progress implementation reports, inc lud ing commissioning o f investment climate surveys (at mid- term and project completion).

0

Public Procurement Agency. The Public Procurement Agency (PPA) wil l oversee the procurement o f a l l goods and services for the project in compliance w i t h Intemational Development Agency (IDA) procurement guidelines and procedures. The Agency wi l l rev iew the TORs and select consultants in close cooperation with implementing agencies including the Kosovo Cadastre Agency, the Business Registry, the Association o f Municipal i t ies o f Kosovo, and the Investment Promotion Office. Bo th the PPA and the implementing agency wil l participate in the committee that wi l l evaluate the technical and financial proposals (and bids in case o f goods, works and technical services). B o t h will also participate in contract negotiations. The PPA wil l draft the contracts for each package. The respective implementing agency wil l s i g n the contract and wi l l be responsible for ensuring that the contract i s implemented.

Ministry of Finance--Grant Unit. The Grant Unit o f the MEF wil l be responsible fo r disbursement, f inancial reporting, and auditing o f the project. The Grant Unit wil l work in close cooperation with the implementing agencies to secure proper financial management.

Implementing Aaencies. Several agencies wil l be invo lved in implementation o f the project. Fo r the Business Services Integration component, the M T I and i t s various agencies (including the Business Registry and the Investment Promotion Off ice) wi l l be the ma in counterparts. The

14

Association o f Municipalities also wil l play a key role in the establishment and development o f Business Services Centers and harmonization o f the regulatory regime at the municipal level.

For the Immovable Property Rights Enhancement component, the main counterpart wi l l be the KCA, which i s anchored in the Ministry o f Public Services. Staff o f the K C A wil l work closely with the PPA to carry out procurement for the project, and also monitor overall progress and project performance indicators.

See Annex 6 for additional details.

3. Monitor ing and evaluation o f outcomes/results

The Project Secretariat wi l l be responsible for overall monitoring and evaluation o f the outcomes and results. The project wi l l include at least two fol low up investment climate surveys that measure progress in reducing constraints to business and regulatory compliance costs. These surveys wi l l be conducted as part o f the mid-term review as well as at the conclusion o f the four year project cycle. They wil l use the same methodology as that o f the Kosovo Business Environment Survey that was conducted in June 2004. At least two special surveys wil l be conducted to help detect and ensure equity in the treatment o f minorities in land transactions and the results input into M C O procedures.

The findings o f these surveys wi l l be shared and discussed with members o f the Steering Committee with the aim o f influencing and furthering the pol icy dialogue on the investment climate and helping the government develop strategies to address top priorities and constraints to business.

The project wi l l include four project audits.

4. Sustainability

The overall objective o f the project is to create a business environment conducive to enterprise creation and sustainable growth, reduction o f informality, thus contributing to dynamic economic growth and job creation in the country. In this way, al l project activities are geared toward achieving this goal. A t the institutional level, the sustainability o f the project hinges on the capacity building o f the relevant institutions including the MTI, Association o f Municipalities, Business Registry, Office o f Investment Promotion, and K C A . The project specifically supports the development o f these institutions and aims to streamline their functions so that their activities will continue beyond the project cycle.

The long term sustainability o f the results wi l l also depend in large part o n the resolution of the overall political situation in Kosovo and the maintenance o f peace and security. Whi le these factors are external to the project, they are highly likely to affect the investment climate overall and the prospects for growth of a dynamic private sector-which i s an important long te rm objective o f the project.

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5. Cri t ical risks and possible controversial aspects

Lack of institutional capacity. Inst i tut ional capacity in K o s o v o i s l im i ted at a l l levels o f government. At the same t ime that the project a ims to improve the inst i tut ional capacity o f the related agencies, the low starting point m a y present implementat ion challenges. M a n y o f the k e y institutions m a y n o t have the necessary capacity to carry out the various project activit ies and therefore wil l need significant technical assistance. To mi t igate th is risk, the project envisions technical assistance to implement ing agencies, extensive t ra in ing o f procurement specialists, close supervision, and a strong f ie ld presence. The project wil l also draw heavi ly upon the additional technical expertise prov ided by other donors.

Scope of reform agenda and large number of counter-parts. The project tackles a broad r e f o r m agenda and as a result involves several local counterparts and implement ing agencies. Some o f these agencies have l i m i t e d inst i tut ional capacity, w h i c h m a y present significant challenges during project implementat ion. In order to mit igate the risk, the B a n k has decided to nar row the scope o f the project significantly, focusing o n areas with the greatest potent ia l impact. I t wil l also continue to work in close partnership with other agencies to implement agreed-upon strategies.

Evolving structure of provisional government. The evo lv ing nature o f the prov is ional government i s l i k e l y to present implementat ion challenges, as w e l l as the upcoming r e f o r m o f loca l government. The specific functions and responsibil i t ies o f var ious government ministr ies and agencies are no t w e l l defined, in m a n y cases there are over lapping responsibilities. Th is i s a particular p rob lem with regard to municipal i t ies and central agencies, and thus, m a y affect implementat ion o f the cadastre component and the establishment o f the business support centers. The project wi l l deal with this issue by w o r k i n g closely with a l l m a j o r stakeholders inc lud ing the Associat ion o f Munic ipa l i t ies o f K o s o v o to ensure that a l l responsibil i t ies under the project are c lear ly defined.

Immovable Property Uncertainties. L a n d possession and ownership i s one o f the sensitive issues in K o s o v o and certainly was a controversial matter from 1989-1999 w h e n di f ferent rules appl ied depending on a buyer’s nat ional i ty. Some groups are unable to return t o the i r homes. The project will continue t o undertake consultations and monitor social indictors during implementation.

Political and constitutional uncertainties. The po l i t i ca l and const i tut ional uncertainties surrounding the future o f K o s o v o are considerable, and are l i k e l y to have impl icat ions f o r the business environment in the long term. The uncertainties are also l i k e l y to affect implementat ion of the project in the short term. Extensive consultations with the loca l populat ion wil l b e a p r io r i t y to ensure that the project i s adapted to the current environment.

6. Grant conditions and covenants

Financial covenants

MEF will maintain a f inancial management system acceptable to the Bank. The project’s financial statements wil l b e audited by independent auditors acceptable to the B a n k and o n terms of reference acceptable to the B a n k commencing with the accounts for the year ending December

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3 1, 2006. The annual audited statements and audit report wil l be provided to the Bank within six months of the end o f each fiscal year.

The audits wil l need to be conducted in accordance with International Standards on Auditing (ISA) as issued by the International Federation o f Accountants and on TORS acceptable to the Bank.

MEF will maintain acceptable financial management on a cash basis o f accounting including additional commitment.

D. APPRAISAL SUMMARY

1. Economic and financial analyses

N o t Applicable.

2. Technical

The Immovable Property Rights Enhancement sub-project supports an agency that has had four years of technical assistance and a territory completely covered by digital orthophoto mapping recent date 2003-2004. Maximum use wi l l be made o f these assets. Most o f the surveys, data collection and processing wil l be outsourced to the private sector.

3. Fiduciary

The financial management arrangements o f the project are acceptable to the Bank. As o f the date of this report, the Recipient i s in compliance with i t s audit covenants o f the existing Bank- financed project. Current project financial statements and auditing arrangements for the previous grants managed by MEF are acceptable and i t has been agreed that these arrangements wil l be replicated for the proposed project. The annual audited project financial statements wi l l be provided to the Bank within six months o f the end o f each fiscal year.

An Operational Financial Accountability Report was finalized in April 2005. Despite significant progress since 2001, public financial management in Kosovo suffers from fundamental weaknesses, and basic structures for financial accountability are s t i l l in their infancy. The overall legal framework for budgeting and budget management i s largely compatible with internationally recognized standards, but for some aspects i t appears to be too advanced for the current administration’s capacity. Carry-over practices and weaknesses in capacity, organization and coordination hamper budget preparation and undermine the credibility o f the budget as a policy management instrument. W h i l e treasury and cash management are well-regulated areas of public financial management, they suffer from inefficiencies. The system through which Commitment and Payment Orders (CPOs) f low to ensure authorization o f payments i s well regulated. The Treasury authorizes commitments and payments based on proposals and supporting documentation by budget organizations and municipalities. The Treasury pays from a single account in the central Banking and Payment Authority o f Kosovo.

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As with most public financial management functions, accounting i s constrained by limited capacity, and financial reporting needs more realistic requirements and statutory deadlines, improved procedures, and trained personnel. Internal control and internal audit at all levels o f govemment are in their infancy. Considerable time and effort wi l l be required to make them fully operational. External audit i s undeveloped and, as wi th internal audit, i t wil l need sustained external support for i t s development.

Specific procedures are developed by MEF to secure proper financial accountability o f this project.

The Bank's Operational Procurement Review o f June 2004 identified several corrective measures to be taken by the Government including need for simplifying the Law on Public Procurement that became effective on June 09, 2004 (UNMIK Regulation 2004/3 o f February 9, 2004). The review also recommended (i) creation o f new oversight bodies including the Public Procurement Regulatory Commission (PPRC) and PPA; and (ii) preparation and use o f implementing regulations and Standard Bidding Document. European Agency for Reconstruction (EAR) i s assisting PPRC in these areas as wel l as also in the training. Substantial work remains to be done to build capacity in the PPA, PPRC and major spending institutions to implement public procurement efficiently and cost-effectively.

4. Social

The project i t se l f does not present any significant social issues. However, the TORS for consultants wi l l highlight relevant social issues, if any, and offer guidance on how they are to be handled. The specific consultant contracts also wi l l include requirements that assistance wil l be guided by Bank Safeguard policies and procedures. Compliance wil l be supervised closely.

Residential property issues in Kosovo are being handled by Housing and Property Claims Commission, the Housing and Property Directorate (HPD). HPD i s handling the claims that were made in response to the call for claims and o f 29,000 claims received by the closing date in June 2003 about 90 percent decided by HPD. They consist o f claims by those that lost rights to apartments and residences prior to 1999, informal transactions between 1989-1999, and owners unable to take possession. Also U N H C R works on creating improved conditions for the return o f those forced to leave Kosovo and internally displaced persons: secure property rights i s one o f the conditions supported. U N H C R provides legal aid across Kosovo and i s providing advice on property rights to the Roma. Gender at law i s treated equally, but by tradition in Kosovo in some groups could be improved. Overall the immovable property rights sub-proj ect component wil l monitor the above aspects o f the project and wil l coordinate with U N H C R and H P D or its successor, to help address such issues.

.

5. Environment

In accordance with World Bank safeguard policies on environment (OP/BP/GP 4.01 Environmental Assessment) the project was assigned Category C, indicating that no environmental issues are anticipated. This was based upon the project design, which i s primari ly

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technical assistance and does not include any physical construction activities, other than minor renovations o f municipal cadastre offices dealing to establish more customer service-oriented receptions areas and service counters.

The real property rights component o f the proposed project deals with land administration and project actions are subject to public notice, transparency, land holder consultation, opportunities for appeal, and court challenges. Improvements to the legal framework and improved information technology systems are included in the project. Environmental protection wil l benefit form this general framework and through improved information technology systems by making data more readily available to other constituencies-forestry management agency, non- governmental organizations, and other govemment ministries.

6. Safeguard policies

Safeguard Policies Triggered by the Project Yes N o Environmental Assessment (OPIBPIGP 4.01) 11 [ X I

Natural Habitats (OP/BP 4.04) [I [ X I

Pest Management (OP 4.09) [I [ X I Cultural Property (OPN 11.03, being revised as OP 4.1 1) [ X I

Involuntary Resettlement (OP/BP 4.12) [I [ X I Indigenous Peoples (OD 4.20, being revised as OP 4.10) [ X I

Forests (OP/BP 4.36) [I [ X I

Safety o f Dams (OP/BP 4.37) [I [ X I

Projects in Disputed Areas (OP/BP/GP 7.60)* [I [ X I

Projects on International Waterways (OP/BP/GP 7.50) [I [ X I

[I

[I

The project’s compliance with the Bank’s safeguard policies has been reviewed to ensure that al l potential issues have been taken into account in the project’s design, and it has been concluded that no Bank safeguard pol icy is triggered by the proposed project. I t has the Bank’s S3 Safeguards Classification.

7. Policy Exceptions and Readiness

None.

* By supporting the proposedproject, the Bank does not intend to prejudice the f ina l determination of the parties’ clainis on the disputed areas

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Annex 1: Country and Sector or Program Background

KOSOVO: BUSINESS ENVIRONMENT TECHNICAL ASSISTANCE - XK

Structure and Dynamics o f the Private Sector

For the business environment in Kosovo to be understood in proper context i t i s essential t o keep in mind a few fundamental issues. First, the 1999 confl ict resulted in extensive damage to physical assets and infrastructure throughout the territory and totally disrupted economic activities. Reconstruction, whi le on-going, i s a t ime consuming, costly process and i t wi l l require several more years for Kosovo to return to some degree o f normali ty.

Second, Kosovo has a unique legal status under the interim administration o f the Uni ted Nations In ter im Administrat ion Miss ion in Kosovo (UNMIK). Uncertainty regarding the ult imate resolution o f KOSOVO’S legal status i s an overarching and fundamental constraint o n the territory’s prospects for sustained growth. Wi thout a doubt, this issue hinders the establishment o f a business environment conducive to enterprise development, sustainable growth, and foreign direct investment. Resolution o f this issue wil l open the doors to small business development and foreign investment in key sectors o f the economy, such as energy, mining and agriculture.

Third, given fundamental changes in the structure and ro le o f government (coupled with recent decentralization), the institutional capacity necessary to establish and enforce clear and predictable market rules and protect the rights o f i t s participants i s very weak, particularly at the municipal level. This increases uncertainty and risks, constrains investment and lending by the banking sector, and development o f formal contractual relationships among market participants.

Fourth, the experiences o f the period f rom 1989 to 1999, when many Kosovars were excluded from engaging in an array o f commercial activities, forced entrepreneurs in to an underground economy. This legacy o f the “grey economy” persists today, although for a variety o f different reasons, and poses one o f the fundamental challenges to establishment o f a level p lay ing f ie ld among market participants necessary for a market economy dependent upon the supremacy o f the principle o f competition. Further, and o f n o less significance, i t deprives government (central and local) o f much needed fiscal revenues. In formal competit ion i s identi f ied by a large proportion o f enterprises as one o f the most severe constraints o n entry and operation o f f i r m s .

The enterprise sector in Kosovo i s comprised o f about 30,000 formal businesses and i t i s dominated by very small f i r m s (micro-enterpri~es).~ M o s t f i r m s are organized as sole proprietorships or partnerships, employing less than four persons (ha l f having o n l y one

The number o f registered firms has declined f rom about 50,000 in 1999 (when interim registration was required), to 30,000 as o f December 2003 (after re-registration was required). A large por t ion o f the difference i s accounted for by the fact that multiple units o f a parent company were issued separate registration numbers under the inter im registry, while today a l l such entities are issued a single registration number. I t i s also assumed that many o f those registered in 1999 were “paper” companies that never actually operated. The remainder either went out o f business o r became informal (i.e., those operating without legal status). Estimating the extent o f informali ty i s fraught with diff iculty, but some estimates o f the size o f the informal sector indicate that as many as 40-50 percent o f enterprises may be operating informally.

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employee), and they typically engage in wholesale or retail trade or service activities (60 percent o f a l l f i rms). KOSOVO'S economy has traditionally been dominated by production o f primary products, particularly in agriculture, extraction o f lignite for power production, and other mineral processing. Even today, very few f i r m s are involved in significant value-adding activities. Other major sectors o f importance (by number o f f i rms) include manufacturing (15 percent), construction (1 0 percent), and transport, storage and communication (5 percent)."

Private commercial investment (excluding housing) has grown from 5.4 percent o f GDP in 2000 to 11 percent in 2002 and 2003. This compares favorably to Serbia and Montenegro during 2002 (1 1.3 percent) and Albania (12.5 percent)." However, while this overall level o f private investment i s a positive development, the composition o f investment is narrowly based upon construction activities. Housing construction has been the main driver o f investment since 1999 (financed mainly by remittances) and as o f 2003 s t i l l comprised about 64 percent o f total private investment, down from 70 percent in 2002. The economy cannot sustain this level o f investment in housing construction for long, and this fact further highlights the need to address constraints in the business environment that inhibit growth o f private investment into a more diversified (and higher risk) range o f productive activities.

The Kosovo Standards Implementation Plan

The proposed project wil l help support the authorities to meet the targets set out in the "Standards for Kosovo" published in Pristina on December 10, 2003 and subsequently endorsed by the UN Security Council. Progress against these targets wil l be the basis for any review in mid-2005 to begin consideration o f Kosovo's final status.

According to the Kosovo Standards Implementation Plan-which sets out priority actions to achieve the standards-a top priori ty i s energizing the Kosovo economy. Although much o f the legal framework for a market economy has been put in place over the last few years, implementation and enforcement o f the new laws and regulations i s severely lacking. The institutions with responsibilities related to economic development-including the MTI , MPS, KCA, the Business Registry, and the Investment Promotion Agency-will need considerable capacity building support to deliver services. The proposed project targets these institutions directly and wil l support the authorities in meeting the standards.

lo Source: Kosovo Business Registry. Data on value-added by sector is not available. " Source: Wor ld BanWIMF staff estimates.

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Annex 2: Major Related Projects Financed by the Bank and/or other Agencies

KOSOVO: BUSINESS ENVIRONMENT TECHNICAL ASSISTANCE - XK

Project

World Bank Financed Projects

Project Description

Pi lo t S M E Line o f Credit

Economic Assistance Grant IV

Private Sector Development Technical Assistance Project

Provided financing to SMEs o n market-based terms in an effort to jump-start production and economic activity o f the private sector Assisted Kosovo in the implementation o f a structural re form agenda aimed at enhancing medium-term macro-fiscal sustainability, sustaining adequate public service delivery in the face o f declining donor support, and promoting private sector driven growth (i) Supported the establishment and operation o f a modern business registry system; (ii) Strengthened the capacity o f the commercial and supreme courts and improve the quality o f legal services; and (iii) Supported the development o f basic accounting standards, provide training for local accountants, and assist in the establishment o f an association o f accountants.

Status

Completed

Completed

Completed

OED Outcome Ratings

Unsatisfactory

Satisfactory

Satisfactory

Outcome Ratings: H S (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)

Other Development Agency Financed Projects

I I Donor Project Description

The Loca l Government Init iative Program supports six p i l o t municipalities through resident adviser assignments.

U S A I D - RTI Intemational

Supports local economic development through establishment o n a p i lo t basis o f two municipal business information centers.

U N D P

Institutional Support to the Ministry o f Trade and Industry. M a i n objectives o f the project are: (i) institutional strengthening o f the MTI, (ii) enterprise development, and (iii) complementary technical assistance The Kosovo Information Technology and Munic ipa l Development Information Systems projects financed introduction o f modem information systems, including local area networks and staff training, in 13 municipalities o f Kosovo Kosovo Cluster and Business Support Program (KCBS) aims to stimulate economic growth and employment opportunities through strengthening competitiveness o f enterprise clusters (livestock, fruit and vegetables, construction) and removing barriers for their develoument

EAR

U N D P

US AID-Chemonics

Status

Ongoing

Ongoing

Ongoing

Completed

Ongoing

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Topographical mapping, system development, training and GIS for K C A and MCOs Switzerland

Sweden

Norway

EAR

Technical and training in cadastre maintenance and IPRR for K C A and MCOs. Legal framework completion, business planning and financial management and training for K C A Agricultural Land Uti l izat ion Project: wil l support the increased use o f agricultural land, through technical assistance and training in the fol lowing aspects o f land administration and management: (i) legal technical assistance in developing a regulatory framework for the laws on Agricultural Land, Spatial Planning and Environmental protection, (ii) technical assistance and training in the implementation and enforcement o f the regulatory framework; (iii) implementation o f a pi lot land consolidation scheme; and (iv) development o f land leasing and valuation activities.

Planned i Planned 7

23

Annex 3: Results Framework and Monitoring

KOSOVO: BUSINESS ENVIRONMENT TECHNICAL ASSISTANCE - XK

Results Framework

Project Development Objective

To i m p r o v e the business env i ronment by r e d u c i n g uncertainty o f k e y regu la to ry processes, improving d e l i v e r y o f related services, strengthening proper ty r ights, a n d increasing transparency a n d accountab i l i t y o f imp lement ing inst i tut ions.

Intermediate Results One per Component Component One: Business Services Integration

Reduced regu la to ry compl iance costs o f business.

H a r m o n i z e d l i cens ing f r a m e w o r k agreed upon and b e i n g adopted by municipal i t ies.

Business Service Centers app ly ing n e w service standards.

Customers have better access to business services.

Component Two: Enhancement o f Immovable Property Rights

Regu la to ry f r a m e w o r k conduc ive for strengthening i m m o v a b l e p roper ty r ights.

T h e IPRR i s eff icient, accurate, a n d

Outcome Indicators

Reduced regu la to ry compl iance costs for businesses.

I m p r o v e d p r o v i s i o n o f services to business a t m u n i c i p a l and central levels.

Increased n u m b e r o f registered businesses in municipal i t ies.

I m p r o v e d property, credi tor a n d contract r ights.

Increased access to f inance.

Results Indicators for Each Component Component One:

% o f management t i m e spent on compl iance with business regulat ions.

N u m b e r o f mun ic ipa l i t ies adopt ing h a r m o n i z e d l i cens ing f ramework .

N u m b e r o f Business Service Centers a p p l y i n g n e w service standards.

% cus tomer satisfact ion.

Component Two :

Purpose, numbers, a n d qua l i t y o f leg is la t i ve amendments made.

T i m e l y service d e l i v e r y standards

Use o f Outcome Information

Use o f Results Monitoring

Component One:

T h e resul ts wil l b e u s e d to r e v i e w q u a l i t y o f d e l i v e r y o f regu la to ry services a t m u n i c i p a l a n d cent ra l levels.

T h e data wil l b e used in the r e v i e w o f op t ions for modifying l o c a l l i c e n s i n g f r a m e w o r k to address concerns o f resistant mun ic ipa l i t ies .

T h e da ta wil l b e u s e d to update in te rna l per fo rmance a n d cus tomer service standards.

T h e surveys wi l l b e u s e d to i m p r o v e s t a f f t ra in ing .

Component Two:

T h e resul ts wi l l i m p r o v e the opera t ion o f the sys tem regu la ted by the l a w .

T h e repor ts wil l p r o v i d e gu idance to

24

~

operated with reasonable transaction costs

The cadastre system i s updated and maintained regularly.

The registration and cadastre systems serve as the means o f increasing the use o f immovable property as collateral for credit.

A building cadastre i s established and used for mult iple purposes incl. property tax; apartment registration; building improvement purposes.

T w o surveys wil l be commissioned to ensure the systems are impartial in treatment o f a l l persons.

introduced and monitored and improved customer satisfaction associated with the use o f the new IPRR system monitored.

Numbers and types o f transactions registered in the systems and the annual growth o f the numbers o f transactions:

Numbers o f updates-subdivisions and consolidations-registered in the cadastre systems checked against a special sample surveys to discover non-registered subdivisions.

Numbers and magnitude o f the mortgages made.

Numbers o f buildings inventoried into the bui ld ing cadastre and the extent o f continuous updating.

The cadastre and IPRR will be reviewed to ensure impartial treatment o f a l l persons.

the managers o f the system as to how to improve it.

The results f r o m these six areas wil l guide KCA as to h o w to tackle up- dating in the future.

A survey wil l be commissioned o n an annual basis apart f rom the numbers f r o m the registration system.

The results wil l guide managers in providing better services for registering apartments and parts o f buildings.

25

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Annex 4: Detailed Project Description

KOSOVO: BUSINESS ENVIRONMENT TECHNICAL ASSISTANCE - XK

Component 1 : Business Services Integration

The objective o f the this component i s to reduce regulatory uncertainty, remove existing administrative barriers to starting and operating a business, improve the transparency and accountability o f regulatory functions administered by municipalities, and facilitate investment. This wou ld be accomplished by: (i) rationalizing and harmonizing the municipal and central l icensing framework; (ii) integrating administration o f dispersed regulatory functions and other enterprise-related services in to Business Service Centers (BSCs) in as many as 30 municipalit ies and adopting new service delivery standards; (iii) improv ing public access to regulatory information, legislation, guidelines, and required documentation; and (iv) establishing and building capacity o f an Investment Promotion Agency.

The project wil l a im to improve the provision o f regulatory and other publ ic services to the enterprise sector by integrating services delivery in to a single off ice within each municipality. These BSCs wou ld serve as “one-stop-shops” for the business community. The project wou ld also provide assistance to integrate services for foreign investors under the Investment Promotion Agency, wh ich wou ld be established under the Ministry o f Trade and Industry (MTI). The centrally-based Kosovo Business Registry wi l l expand i t s outreach by including the BSCs in i t s network and equipping the centers for electronic filing o f business registration applications. The Tax Administration wi l l also place staff in f ive BSCs o n a p i lo t basis. These staff wou ld remain under the authority and budget o f the Tax Administration, but wou ld work alongside munic ipa l staff in the BSCs. A t the same time, the project wou ld support a comprehensive assessment o f administrative bamers and development o f recommendations for their reduction through simplification o f procedures and harmonization o f municipal and central government regulatory functions.

Sub- Components

(i) Upgrading o f Kosovo Business Registration System (estimated cost: U S $ 275,000)

This sub-component wou ld include software-programming expertise for the Kosovo Business Registry and purchase o f equipment (servers, computers, etc.) required for electronic filing o f business registration applications by BSCs and transmittal o f data from BSCs to the Registry. I t wou ld also support staff training and technical maintenance in municipalities, as w e l l as pr in t ing o f operational manuals and registration forms.

Software-programming US$170,000 Equipment for Registry and municipalit ies US$50,000 Staff training for municipalit ies US$15,000 Technical maintenance in municipalit ies US$30,000 Pr in t ing o f manuals/forms us$10,000

Sub-total US$275,000

28

(ii) Equipment and Rehabi l i tat ion o f B S C Premises (estimated cost: US$550,000)

T h i s wi l l inc lude the purchase, instal lat ion and testing o f equipment fo r B S C s (servers, computers, etc.) fo r 23 smaller municipal i t ies and seven larger municipal i t ies.

Equipment US$250,000 Rehabi l i tat ion o f premises US$300,000

Sub-total US$550,000

(iii) Establishment o f Business Service Centers (estimated cost: US$1,200,000)

This sub-component would finance consultants to assist up to 30 municipal i t ies in establishing the BSCs. The consultants w o u l d develop m o d e l mun ic ipa l assembly decisions t o b e used as guides by munic ipa l assemblies in legal ly establishing integrated B S C s and delegating them specific functions, work with each mun ic ipa l i t y to establish and equip the B S C office, t ra in s ta f f in n e w operating procedures, l icensing processes, and database management, design and conduct pub l i c in fo rmat ion campaigns, and develop w e b sites for enterprise services. Specific activit ies w o u l d include:

0 Preparation o f m o d e l documents, including: mun ic ipa l assembly decisions establishing B S C s and transferring functions t o them;

0 Development o f n e w standardized operational procedures for B S C s and preparation o f a m o d e l operating manual;

0 Tra in ing o f B S C staf f in n e w internal operating procedures, filing o f business registration applications (to b e prov ided by Business Regis t ry s ta f f - project to cover cost o f t ravel and per d i e m for B S C staff), and database ut i l izat ion; Development o f standardized, transparent guidelines and cr i ter ia fo r conduct ing inspections by munic ipa l agencies; Development o f investor in format ion booklet iden t i f y ing a l l steps invo lved in starting a business, licenses and documentation required, l is t o f relevant loca l and central decisions/regulations, appeal procedures, etc. Publ ic in format ion campaigns in municipal i t ies informing the pub l ic o f introduct ion o f BSCs. W e b site development and l inks to government “E-Portal” for K o s o v o ( including onl ine access to appl icat ion forms, documents, decisions and regulations, etc.)

0

0

0

0

Consul t ing contract to establish B S C s US$1,200,000

Sub-total us$1,200,000

(iv) Assistance for the Investment Promot ion Agency (estimated cost: US$600,000)

MTI current ly i s in the process o f establishing the Investment Promotion Agency (in the exist ing Of f ice o f Investment Promot ion) to promote domestic and foreign investment in

29

Kosovo, to prov ide logistical assistance to foreign investors w h o are start ing a business or purchasing an enterprise through the pr ivat izat ion program, and to ident i f y and promote measures to reduce administrative constraints to pr ivate sector investment.

Speci f ical ly, the project w o u l d finance consultants to: (i) conduct an assessment o f administrat ive barriers (such as building and land permits, taxes, tariffs, customs duties and procedures, and inspections), inc lud ing a complete inventory o f current licensing, working permit, and inspection requirements (and their associated administrative procedures) per formed by b o t h central authorities and each munic ipa l i ty ; develop recommendat ions to reduce administrative barriers and rationalize the l icensing regime by el iminat ing out-dated l icensing requirements and duplication; develop recommendat ions to harmonize mun ic ipa l inspections and w o r k i n g p e r m i t requirements; rev iew fees with the a i m o f reducing administrative costs to businesses, and s imp l i f y appl icat ion procedures; (ii) assist the P A in establishing procedures for providing logist ical support to investors, inc lud ing inter-ministerial coordination; (iii) Develop a p romot iona l strategy ( including publications); and (iv) assist the IPA in organiz ing an investment p romot ion conference.

Assessment o f administrative barriers US$400,000 Adv isory assistance t o IPA us$100,000 Equipment for P A US$30,000 Publications/Promotional materials US$50,000 Investment Promotion Conference us$20,000

Sub-total US$600,000

Outcomes and benefits. First, the project wi l l support establishment o f a m o r e transparent business environment that will support enterprise development and sustainable growth. Second, i t wi l l contribute towards harmonizat ion o f business regulations across municipal i t ies and between municipal i t ies and central government agencies. Third, i t wi l l assist in establishing one- stop-shop service centers and improve mun ic ipa l business service and s i m p l i f y business licensing, inspections, permits and other procedures. These improvements wil l have the overal l benefit o f reducing regulatory compl iance costs for business, thus faci l i tat ing overal l pr ivate sector development and increasing competit iveness o f enterprises in Kosovo.

Component 2: Enhancement o f Real Property Rights

The object ive o f this component i s to enhance immovab le proper ty r ights as a contr ibut ion to land market development and to support business environment improvement. Th is wil l b e achieved through support for the n e w system o f the immovab le proper ty r ights registration, improvement o f the cadastre reconstruction process, and establishment o f a n e w ‘building’ cadastre (a building inventory). The component wil l b e focused on the K o s o v o Cadastre Agency (KCA) and the 30 mun ic ipa l cadastre of f ices (MCOs) and their de l ivery o f services to c i v i l society.

30

Priori tv issues. The K C A and the MCOs wil l be supported in their efforts toward building and upgrading the cadastre, and to continue implementing the new registry system. They wil l take measures to improve the transparency o f all processes, and improve access to the records. There i s lack o f awareness about the implications o f the new laws among the MCOs and municipal court staff, as well as among potential customers. Efficiency o f operations also needs improvement. Though the new laws establish a 15-day processing period for transactions by the MCOs, significant delays are still the norm (the average processing time i s 30-50 days when no special dispute i s present). In addition, office space i s in short supply and “customer service” areas are generally non-existent. The goal wi l l be an overall 10 day turn-around period including the 5 working day notice period.

In rural areas farmers hold their lands under “possession lists” which have been compiled for 55 percent o f the estimated 2.5 mi l l ion parcels in Kosovo, but the records do not necessarily match the situation in the field. This unreliability comes about because o f unofficial subdivisions, unrecorded sales, lost records due to the 1999 conflict, out o f date off icial cadastre maps dating back to the 1960s. Rural areas, as w i th urban areas, are only covered by the old land cadastre that does not include buildings or apartments.

Addressing - Post Conflict Land Issues. After the end o f the conflict in 1999, an early action o f UNMIK was to repeal the several discriminatory laws that had been put in place between 1989 and 1999 by the former government. To help with the housing and the return o f displaced people, UNMIK also established a Housing and Property Directorate (HPD) to process claims o f those that had been the subject o f discrimination and coerced sales. Another action taken was the establishment o f a Housing and Property Claims Commission to handle the claims o f three groups o f people: (i) those who lost their residences as a result o f discriminatory laws issued after March 23, 1989; (ii) informal transactions after March 23, 1989 that were regarded by the former government as illegal; and (iii) those that had occupied the property o f others illegally before March 24, 1999. A claims period was started and i t finished July 1, 2003 during which time some 29,061 claims were made, o f which 90% have now been dealt with. Also HPD has access to the land records held by the Government o f Serbia through an office in Serbia. The project wil l monitor the implementation o f real estate project in terms o f the above claims and decisions, and wil l monitor the on-going work o f H P D and relative to the project.

The Basic Law on Property Rights from 1980 (which i s currently the relevant law in Kosovo) has no gender bias nor does i t discriminate against ethnic groups. This though wil l also be the subject of monitoring during the implementation o f the project.

Sub-components The goals would be achieved through the fol lowing activities:

(i) Implementation Support, Registration Improvement, and Land Policy and Legal Technical Assistance (US$lSO,OOO)

Consultants would be needed to start-up the three operational components, to support the further development o f the land pol icy framework, legal framework development especially the Law for Immovable Property Rights Registration, the cadastre law and the mortgage law. These consultancies would complement the Swedish TA project support. K C A requires support with related immovable property rights pol icy matters. Also

31

(ii)

monitoring o f progress would be undertaken with two special surveys to review the ‘impartiality’ o f the systems. Limited study tours and some operational costs. A total o f U S $ l 80,000 would be used to engage national and international consultants.

Consulting contracts (5) Us$180,000

Sub-total us$180,000

Support for the Establishment o f an Immovable Property Rights Registration System in the Municipalities (US$1,390,000)

The objective o f this sub-component i s to support Kosovo wi th the implementation o f a new immovable property rights registration system, which is a critical part o f land market and to support business establishment both small and large. I t wil l facilitate buyers and entrepreneurs to transact wi th more secure property rights including would facilitate more mortgages, al l done in a timely and low cost manner. The component would include customer-focused services in dealings in real property markets and therefore, would mean customer reception areas, service counters, document and plan viewing counters being installed.

The component would support the on-going implementation o f the Law on the Establishment o f the Immovable Property Rights Register (IPRR) in up to 30 MCOs. I t would work with the Swedish TA o f 15 months (for IPRR) and 15 months from Norway (for business planning and legal TA). Systems process improvement and streamlining would also be a goal. In order to achieve this, a model office wil l be established in Ferizaj M C O to pi lot and test methodologies and implement improved customer service functions, procedures and workflows. This would serve as a demonstration office for the other MCOs in the territory o f Kosovo. This would also include study tours to other countries in the region with well-developed customer service functions. In Pristina, a new location for the M C O is needed or the complete replacement or renewal o f the old office complex. This component would in particular provide funds for renovation, equipment, training, and publicity campaigns. I t would also support the employment o f specialist staff to support the staff o f the MCOs for three years. The regulated 15-day turn-around time for a transaction would be reduced to ten days by the end o f the project (including the five day publicity period). The funds available would be split according to whether the office was rated to be large, medium or small. The publicity and awareness campaign would inform al l stakeholders o f their rights, benefits and duties. A document and archiving strategy would be developed to reduce the daily inf low o f paper documents, as well as the paper-based IPRR.

The stakeholders include immovable property owners and possessors, along wi th support professionals (real estate agents, advocates, bankers, surveyors), and stakeholders in government departments, the staff o f the new property rights and related systems. Cost involved would be:

Renovations in 30 offices (average) US$450,000

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(iii)

Publicity and awareness campaign US$180,000 Supply o f specialized staff in 30 offices for 3 years US$365,000 Specialized equipment for Registration US$350,000 Document and archiving strategy and training US$45,000

Sub-total US$1,390,000

Cadastre Reconstruction (US$l, 146,000)

This sub-component would support the reconstruction o f cadastral information to bring in harmony the available cadastre records and maps, including appropriate public awareness campaigns, updating o f the cadastre records and maps, and the public viewing and approval procedure o f the renewed cadastre for about 5,900 hectares o f urban, mixed and rural areas within selected MCOs (Mitrovice, Peje, Prizren, Ferizaj, Lipjan, plus two more to be selected.) and about 600 hectares in Pristina. The public awareness campaigns wil l assist in mobilizing the critical support o f proprietors and possessors in the cadastre renewal process. To strengthen the capacity o f K C A for operational design and implementation of cadastre renewal projects, adequate international TA wil l be required. The renewal wil l substantially make use o f the available recent orthophoto mapping o f Kosovo.

The sub-component would contribute to the improvement o f business environment by reducing the insecurity o f land tenure, due to the problem o f missing records from the period 1989-1999. For example, in Pristina, the cadastre records are available until 1964, while the records o f changes (e.g., subdivisions) between 1964 and 1999 have been removed. Also, an area o f 450 hectares developed between 1965 and the late 1990s has no cadastre records at all. In support, Sweden plans fifteen consultant months for strengthening the cadastre maintenance, and Switzerland plans supporting this task with ‘TA in i t s Output 2. Much o f the Bank-supported tasks, especially data capturing from available orthophotos and data collection in the field, harmonisation o f graphical and textual databases, the backstopping public viewing would be contracted out to private sector data entry specialists and surveyors, while some office works, l i ke quality control wil l be performed by K C A .

Project funds would support the reconstruction o f cadastre and records improvements in:

Public awareness campaigns US$180,000 Cadastre renewal in Pristina M C O US$132,000 Cadastre renewal in Urban areas US$270,000 Cadastre renewal in Mixed urbadperi-urbadrural areas US$240,000 Cadastre renewal in Rural areas US$264,000 T A in support o f cadastre renewal projects US$60,000

Sub-total US$1,146,000

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(iv) Building Cadastre Establishment (US$650,000)

There are an estimated 600,000 buildings (including houses) o f all types in Kosovo, with 250,000 o f them in rural areas, wi th many o f them unrecorded. This i s an important component as in Kosovo building and parts o f buildings are capable o f separate ownership from the land itself. This component would measure buildings from the digital orthophoto maps and locate them relative to immovable property parcel boundaries and compile related information from available records into a building database. This cadastre would undertake the task listed in C3 Apartment and Building Register in KCA’s Proposed Program for Development for the Development of Real property Administration in Kosovo 2004-2006 dated October 23,2003.

This building cadastre would be used to help with the correlation o f buildings with legal real property plots, subsequent apartment registration, and the cadastre would be shared with the municipalities to allow them to address “illegal building” that i s wide-spread in Kosovo, and for other purposes. A f i rst task would be to review the experience o f Slovenia, which completed a national building cadastre in 2001 and 2002. A next step would be to conduct a pi lot project in a representative area to refine the design o f the building cadastre; this would be entail about 1,000 buildings to test the init ial design o f the national building cadastre including the design o f an up-dating system. The final step would be to inventory al l 600,000 buildings and implementing up-dating mechanisms for the system. Overall the Swedish International Development Authority (SIDA) has allocated about 15 months o f consultants to this task. The IDA grant would allocate two months o f a building cadastre expert to start the process off. A contract for this work is planned to be bid competitively to the private sector.

Pilot project contract US$50,000 M a i n ‘building cadastre’ contract US$550,000 Expert guidance, training, study tour US$50,000

Sub-total US$650,000

Outcomes and benefits. First, the component would enhance secure immovable property rights and support easy and safe mechanisms for real property transactions, and it would assist Kosovo in the improvement o f real property markets overall. Second, i t would provide secure tenure and help intensify investments in real property for agricultural, residential, industrial and commercial development and construction, Le., i t would facilitate business actions by private sector companies and others, in supporting efficient real property transactions. Third, i t is expected to foster economic growth by encouraging a more intensive use o f real property and to facilitate access to credit via mortgages.

I t would contribute to the improvement o f the real property systems in Kosovo and, therefore, to the operation o f the real property markets. The main outcome would be the increased number of users actually using the systems, especially for helping secure mortgages and sales. Another important outcome would be the establishment o f a registration system with predictable turn around times and affordable transaction costs.

34

The outcomes o f this component would be: (i) a secure system o f immovable property rights registration will be established and put into operation for all municipal areas and would register an estimated 50,000 transactions (during the project period); (ii) up-dated cadastre documents- confirming property rights-would be registered in the new cadastre and property rights systems for 60,000 parcels; (iii) a new dynamic ‘building cadastre’ system would be introduced for 600,000 buildings throughout Kosovo (based on existing mapping) with a transaction based up- dating system through the municipal offices.

Coordinator Coordinator Coordinator Coordinator

Implementation arrangements. This component would be directed by K C A which reports to the Ministry o f Public Services (MPS). Policy guidance would be provided by the same steering committee within MPS that guides the existing donor support from Sweden, Norway and Switzerland. A Memorandum o f Understanding would be signed by al l relevant donors outlining the basic principles and responsibilities o f the various donors supporting K C A .

The financial, procurement and monitoring and reporting work for project would be supported by the overall Project Steering Committee and Secretariat anchored in the MTI (see Annex 6).

The KCA,wou ld also specifically dedicate staff to work on the sub-project. This would include (i) a sub-project director (indeed the Chief Executive Officer o f KCA); (ii) a deputy sub-project director; (iii) a procurement specialist; (iv) a financial specialist; and (v) a component coordinator for each o f the three main sub-components. This K C A sub-project Coordinating Committee would link with the BETA Project Secretariat as necessary but at least on a monthly basis. K C A would develop the technical specifications, the TORS for the component, requests for No-Ob.jections, and supervise the contracts in association with K C A and the MCOs. A Technical Working Group consisting o f the three sub-component MCOs, the donors as available, and others would meet implementation issues.

coordinators, representatives o f the monthly or as needed to advise on

Su b-Project

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Component 3: Project Coordination and Monitoring

The component aims to ensure proper implementation and coordination o f al l project components and all aspects o f project management including financial management, procurement, monitoring and evaluation o f project results. The main activities to be funded wil l include: (i) design and establishment o f project monitoring and evaluation system; (ii) performance o f investment climate surveys; (ii) training for procurement, disbursement and financial management; (iii) auditing o f project accounts; and (iv) project coordination. W h i l e disbursement and procurement wil l be carried out by the Public Procurement Agency and the Grant Unit o f the Ministry o f Economy and Finance, the component wil l support capacity building o f the above-mentioned institutions.

The component will finance the design o f a monitoring and evaluation system that the Government can streamline and use to monitor improvements in the business environment as well as specific project performance indicators. As part o f this system, investment climate surveys (using the 2002 mini- ICA methodology) wi l l be carried out twice during the l i fet ime o f the project. Perfonnance indicators for the various components wil l be assessed o n an ongoing basis in collaboration with project related staff at the MTI, KCA, and the Association o f Municipalities in particular. The component wi l l also finance four project audits.

To carry out this component, the project wil l finance a small Project Secretariat that includes two to three local experts, some o f whom may be seconded from local agencies. The major role o f the Secretariat will be to provide technical support to the Project Steering Committee in coordinating project implementation and leading the broad pol icy reform agenda related to the business environment in Kosovo.

The Project Steering Committee wil l be comprised o f representatives o f key stakeholders including the Ministry of Trade and Industry, the Ministry o f Public Services, Ministry o f Local Government, UNMIK Pillar IV, UNMIK Pillar 11, Association o f Municipalities o f Kosovo, and Office o f the Prime Minister (Director o f Legal Office). Annex 6 provides details on the overall implementation arrangements.

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Annex 5: Project Costs

K O S O V O : BUSINESS ENVIRONMENT TECHNICAL ASSISTANCE - XK

Local Foreign Total

mi 11 ion million mi 11 ion Business Services Integration 0 2.625 2.625

Project Cost By Component and/or Activity US$ US$ US$

(i) Upgrading of business registration system (ii) Equipment and rehabilitation o f BSC

0.275 0.550

1.200 0.600

premises (iii)Establishment o f BSCs and harmonization (iv)Assistance and promotion o f investment

promotion agency

Immovable Property Rights Enhancement 0 3.366 3.366 (ii) Land pol icy and legal framework 0.180 (iii)Establishment of an IPRR system 1.390 (iv)Cadastre reconstruction and renewal 1.146 (v) Building cadastre 0.650

Project Coordination and Monitoring 0 0.580 0.580

Unallocated contingencies 0.429 0.429

Total Project Costs' 7.00 I 7.00

Total Financing Required 7.00 7.00

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Annex 6: Implementation Arrangements

KOSOVO: BUSINESS ENVIRONMENT TECHNICAL ASSISTANCE - XK

T h e project wi l l b e implemented over four years. The o f f i c ia l recipient o f the grant wil l b e U N M I W P i l l a r IV, o n beha l f o f Kosovo. The implement ing agencies wi l l b e the M i n i s t r y o f Trade and Indus t ry for the Business Services Integrat ion component and the K o s o v o Cadastre Agency (under the M i n i s t r y o f Publ ic Services) for the Immovab le Property Rights component.

G i v e n the large number o f stakeholders invo lved in the project, a Project Steering Commit tee supported by a smal l Project Secretariat would b e established to oversee and facil i tate project implementat ion and coordinate with implement ing agencies. The Secretariat wil l w o r k c loseiy with the Pub l ic Procurement Agency and the Grant Unit o f the M i n i s t r y o f Economy and Finance to facil i tate a l l procurement and disbursement matters.

Specific ro les and responsibil i t ies o f the various partners ' are described be low.

Project Steering Committee

The Project Steering Commit tee wi l l b e comprised o f representatives o f k e y stakeholders inc lud ing the M i n i s t r y o f Trade and Industry, the M i n i s t r y o f Pub l ic Services, M i n i s t r y o f L o c a l Government, UNMIK Pi l la r IV, UNMIK Pi l lar 11, Associat ion o f Munic ipa l i t ies o f Kosovo, and Of f i ce o f the P r i m e Min is te r (Director o f Lega l Office). The scope o f work wil l include:

Strategic guidance for overal l project implementat ion. Development and approval o f annual p lans for pro ject activities, project budgets, and procurement plans. Coordinat ion and consensus building among pro ject stakeholders o n k e y p o l i c y issues related to project implementation. Ident i f icat ion o f broad p o l i c y and strategic issues related to the business environment. M o n i t o r i n g o f the overal l progress made by the Government in improving the business environment.

Project Secretariat

A smal l Project Secretariat wi l l support the Project Steering Commit tee in carry ing out a l l activities. The scope o f work wil l include:

Faci l i tat ion and ef fect ive coordinat ion o f a l l d a y to day activit ies required for project implementation. Preparation o f annual plans, budgets, and procurement plans f o r approval by Steering Commit tee. Support o f project procurement inc lud ing development o f TORS, establishment and part ic ipat ion in selection committees, and evaluat ion o f project comple t ion reports.

38

Monitoring o f project performance indicators and preparing progress implementation reports, including commissioning o f investment climate surveys (at mid-term and project completion).

Project Secretariat *

Public Procurement Agency

The PPA wil l oversee the procurement o f al l goods and services for the project in compliance with IDA procurement guidelines and procedures. The Agency will review the TORS and select consultants in close cooperation with implementing agencies including the KCA, the Business Registry, the Association o f Municipalities o f Kosovo, and the Investment Promotion Office.

Project Steering Committee

Ministry of Finance/ Grant Unit

. Ministry of Trade and Industry . Ministry of Public Services m Ministry of Local Government

. Kosovo Cadastre Agency Public Procurement

Office of Prime Minister (Dept of Legal office) UNMIK Pillar IV and Pillar I1

Association of Municipalities of Kosovo Agency

Grant Unit--Ministry of Economy and Finance

The Grant Unit o f the MEF will be responsible for disbursement, financial reporting, and auditing o f the project. The Grant Unit will work in close cooperation with the implementing agencies to secure proper financial management.

Component 1 : Business Services Integration . . Business Registry . Association of Municipalities

Ministry of Trade and Industry

Component 2: Immovable Property Rights Enhancement

Ministry of Public Services . Kosovo Cadastre Agency

I I 39

Annex 7: Financial Management and Disbursement Arrangements

KOSOVO: BUSINESS ENVIRONMENT TECHNICAL ASSISTANCE - XK

Country Issues

An Operational Financial Accountabil ity Report was finalized in April 2005. Despite significant progress since 2001 , public f inancial management in Kosovo suffers from fundamental weaknesses, and basic structures for financial accountability are s t i l l in their infancy. The overall legal framework for budgeting and budget management i s largely compatible with internationally recognized standards, but for some aspects i t appears to b e too advanced fo r the current administration’s capacity. Carry-over practices and weaknesses in capacity, organization and coordination hamper budget preparation and undermine the credibi l i ty o f the budget as a po l i cy management instrument. Whi le treasury and cash management are well-regulated areas o f publ ic financial management, they suffer f rom inefficiencies. The system through wh ich Commitment and Payment Orders f l ow to ensure authorization o f payments i s w e l l regulated. The Treasury authorizes commitments and payments based o n proposals and supporting documentation by budget organizations and municipalities. The Treasury pays f rom a single account in the central Banking and Payment Author i ty o f Kosovo.

As with most publ ic financial management functions, accounting i s constrained by l imi ted capacity, and financial reporting needs more realistic requirements and statutory deadlines, improved procedures, and trained personnel. Internal control and internal audit at a l l levels o f government are in their infancy. Considerable t ime and effort wi l l be required to mak.e them fully operational. External audit i s undeveloped and, as with internal audit, i t wil l need sustained external support for i t s development.

A financial management assessment was conducted for the project. The assessment found that the MEF has developed satisfactory specific procedures to ensure proper f inancial accountability o f this project.

Strengths and Weaknesses

The significant strengths that provide a basis o f reliance o n the project f inancial management system include: (i) the experience o f MEF and UNMIK o f implementing previous projects and satisfying Bank financial management requirements; and (ii) the audit reports and management letters issued by the auditors.

There are n o significant weaknesses o f the project f inancial management system.

Implementing Agencies

The Grant Unit o f the MEF will be responsible for disbursement, f inancial reporting, and auditing o f the project. The Grant Unit wil l work in close cooperation with the implementing entities to secure proper financial management.

Specific roles and responsibilities o f the various partners are described in Annex 6.

40

Funds Flow

All payments wi l l be made by the MEF from i t s own sources o f funds and no special account wi l l be needed. Based on the documents prepared by the M T I and KCA, al l relevant documents wi l l be processed by the Grant Unit in the MEF before submission for payment to the Treasury in MEF, either to be paid by treasury or by direct payments. The MEF will prepare al l the relevant documents in support o f applications for withdrawal, s i g n i t and forward to the Bank through UNMIK. Contribution from the Recipient will be made using normal PISG procedures.

All Commitment and Payment Orders (CPOs) produced by the M T I and the K C A wil l be submitted to the MEF. Both entities producing the CPOs have duly established finance units with adequate staffing, and the processing of the project invoices wil l follow the normal procedures these units are already using. The grant unit o f the MEF wil l assign a staff member in the Grant Unit to be the focal point for processing and control o f payments, production o f withdrawal applications, as wel l as producing quarterly and annual financial statements for the project. The Project Secretariat wi l l work closely wi th the KCA, MTI and MEF to ensure that quarterly Financial Monitoring Reports (FMRs), annual financial statements and other progress reports are submitted timely to the Bank reflecting the implementation status o f the project.

Accounting Policies and Procedures

The accounting books and records are maintained on a cash basis by MEF based on the documentation provided by the K C A and M T I including additional commitment information for signed contracts. Quarterly and yearly project financial statements are presented in EUR. MEF has instituted a set o f appropriate accounting procedures and internal controls including authorization and segregation o f duties for this project based on previous similar projects.

The policies and procedures are further elaborated in a financial management manual.

Internal Audit

N o internal audit i s established and no such function i s deemed necessary.

External Audit

As of the date o f this report, the Grant receiver i s in compliance with i t s audit covenants o f the existing Bank-financed project. Current project financial statements and auditing arrangements for the previous projects managed by MEF are acceptable, and i t has been agreed that these arrangements wil l be replicated for the proposed project. The audit wil l only cover the project activities.

The auditor wil l be appointed by the MEF. Specific TORS wil l be agreed during negotiations. The audits are conducted in accordance with International Standards on Auditing.

41

The annual cost o f the audits wil l be covered by the grant.

Reporting and Monitoring

MEF wil l produce all financial reports and statements o f expenses for the Bank. The formats o f the quarterly FMRs will be agreed during negotiations to be used for project monitoring and supervision and the formats o f these wil l be included in the financial management manual. MEF will produce a full set o f FMRs every three months throughout the l i f e o f the project.

Information Systems

The chart o f accounts i s based on the Government's Financial Management Information System. This system was assessed in the Operational Financial Accountability Report and found to be acceptable for the purpose o f registering the necessary financial information. As the participants under the project fall under the umbrella o f the Kosovo Consolidated Budget, a l l project related payments would be made via the Single Treasury Account (STA), and the accounts would be maintained as part o f the MEF's accounting system. Based on monthly reports from this system (Freebalance) MEF wil l in cooperation wi th the Project Secretariat, K C A and MTI produce the quarterly and annual financial reports required mainly through reports f rom the Freebalance system. The consolidated reports on uses o f funds according to organizational code, the uses o f funds according to sub-component, and the commitment/obligation analysis report with commitment and actual data, (that i s report 1 to 3) wi l l al l be produced by the Freebalance system on request of the Grant Unit. The contract monitoring information (report 4a and 4b) wi l l be produced by K C A and M T I based on the commitment/obligation analysis report and the information on each contract. The narrative report and the consolidation o f the other reports wi l l be done by the Project Secretariat.

Disbursement Arrangements

Disbursements from the Grant wi l l be made based on the transactional disbursement method, reimbursing the Recipient based on SOEs as well as using direct payments from the Grant, although only in exceptional cases as initiated by the MEF. N o special account wil l be opened. Reimbursement wil l be made monthly throughout the project period. There i s no plan to move to periodic disbursements.

42

Allocation of Credit Proceeds

Expenditure Category Amount in US$ m i l l i on Financing Percentage

Goods, works, consultant’ services, 7.0 100 percent and 95 training and incremental operating costs percent o f local

expenditure for services procured

local ly

Total 7.0

Supervision Plan

During project implementation, the Bank will supervise the project’s f inancial management arrangements in t w o m a i n ways: (i) review the project’s quarterly financial management reports as well as the project’s annual audited financial statements and auditor’s management letter; and (ii) during the Bank’s supervision missions, review the project’s f inancial management and disbursement arrangements to conf i rm that satisfactory financial management arrangements have been maintained. As required, a Bank-accredited Financial Management Specialist wi l l assist in the supervision process.

43

Annex 8: Procurement Arrangements

KOSOVO: BUSINESS ENVIRONMENT TECHNICAL ASSISTANCE - XK

A. General

Procurement for the proposed project wou ld be carried out in accordance w i t h the W o r l d Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated M a y 2004; and "Guidelines: Selection and Employment o f Consultants by Wor ld Bank Borrowers" dated M a y 2004, and the provisions stipulated in the Grant Agreement. The various items under different expenditure categories are described in general below. F o r each contract to be financed by the IDA Grant, the different procurement methods or consultant selection methods, the need for pre- qualification, estimated costs, prior review requirements, and t ime frame are agreed between the Borrower and the Bank in the Procurement Plan. The Procurement Plan wil l be updated at least annually o r as required to reflect the actual project implementation needs and improvements in institutional capacity.

The procurement contracts wou ld in i t ia l ly be advertised in a General Procurement Not ice (GPN), and Specific Procurement Notices (SPN) to be issued thereafter as needed. These notices and the GPN wil l be published online in the UNDP in the Development Gateway's "dgMarket." The individual SPN fo r goods, works and consulting services wil l be also advertised at least in one newspaper o f national circulation in Kosovo and in an electronic portal with free access. All SPNs for goods, works and those for consulting services estimated to cost US$200,000 or more shall be also advertised in the UNDP online and in dgMarket.

Project Agencies wou ld fo l low the Wor ld Bank anti-conuption measures and wou ld not engage services of f i rms and individuals debarred by the Bank. The listing o f such debarred f i r m s and individuals i s located at: http://www. worldbnnk. orn/htmI/opr/proC.ure/debarr. html.

Procurement o f Works: Works procured under this project wou ld include rehabil itation o f existing BSCs offices (component I) and o f MCOs offices (component 11); i t i s foreseen that such rehabilitation works wil l not to exceed US$15,000 per office. The shopping procedures (Le. o n the basis o f at least three quotations obtained) wil l be used for works contracts estimated less than US$50,000 equivalent. In order to make the contracts attractive, increase competit ion as w e l l and reduce the number o f contract to be managed, the PPA wil l combine in the m a x i m u m extent possible these rehabil itation works in different cities and use the national competit ive bidding (NCB) procedures, if necessary. For works contracts less than US$lOO,OOO each the NCB procedures wi l l be used. The PPA wil l use the Bank's National Standard Bidding Documents and shopping documents for c i v i l works agreed with o r satisfactory to the Bank.

Procurement o f Goods: Goods procured under this project wil l include information technology (IT), office equipment (hard/software), publications/promotional materials, etc. The procurement wi l l be done using the Bank's standard bidding document for a l l international competit ive bidding (ICB). Contracts for goods wi l l be grouped in bid packages as much as feasible. Detai led equipment packages wi l l be prepared based o n the annual procurement plans fo r the implementing agencies.

44

International Competitive Bidding). Goods packages estimated to cost U S $ l O O , O O O and above per contract wou ld be procured through ICB. Procurement o f large I T equipment and software wi l l fo l low also this method.

Shopping. Goods packages estimated to cost less than U S $ l O O , O O O per contract m a y be procured through Shopping procedures o n the basis o f at least three quotations obtained. The PPA wou ld solicit quotations f rom at least three (normally 5-6) suppliers f rom eligible source countries.

In case o f Shopping for procurement o f IT equipment (hardware, software, etc.) the PPA in collaboration with the implementing agencies wi l l fo l low the procedures set forth in the Bank external website. When solicit ing quotations, the PPA and the implementing agencies wi l l include in the shortlist the authorized f i r m s wh ich are recommended in this web-site; in addition, other f i r m s o r local dealers m a y b e added to the shortlist, upon checking their credentials with respective manufacturers.

Direct Contracting: The KCA has purchased an application software f rom a supplier (COWI, Denmark) financed f rom Swedish Government under competit ive procedures (original contract US$l50,000). The Bank wi l l finance purchasing o f last t w o modules (and maintenance thereof) o f the software fo l lowing direct contracting to the same supplier in an amount not exceeding US$30,000 equivalent, as contract extension o f the original contract for wh ich the supplier was selected competitively.

Technical Services: The project includes some technical services contracts for building cadastre and i t s renewal along w i t h publ ic i ty campaign (Le. buying t ime for media advertisement, etc). These contracts wi l l be procured based o n the unit prices quoted by quali f ied bidders. The ICB procedures wi l l be used for contracts o f U S $ l O O , O O O or more, whi le for contracts less than U S $ l O O , O O O equivalent, the N C B procedures wil l be used. Shopping procedures (Le. o n the basis o f at least three quotations obtained) wil l be used for technical services contracts estimated less than US$50,000 equivalent.

Selection o f Consultants: Consulting services consists o f technical assistance, capacity building and training for project components. N o c i v i l servants wi l l be financed under the grant. The applicable selection methods wi l l be as follows:

Quality and Cost Based Selection (QCBS) method wil l be a preferred method for a major i ty o f consulting assignments such as technical assistance, etc depending o n the size and complexity o f work to be carried out.

Consultants QualzJications (CQ) will be used for contracts estimated to cost less than U S $ l O O , O O O equivalent, such as specialized review, study, etc. CQ shall be used in cases when the above methods do not apply.

Contracts with individual consultants (IC) m a y be used for services where teams o f personnel are not required and where the qualif ication and experience o f the ind iv idual consultant are the paramount requirements.

45

Training: Train ing plans wou ld be prepared by the implementing agencies each year and updated as needed. Training plans wi l l include trainees, purpose, period o f training, institutions selected, estimated costs, etc., and wi l l be reviewed by the Bank before implementation.

Operating Costs: The project coordination and monitoring component wil l assist in ensuring proper implementation o f a l l the project components and a l l aspects o f project management, including f inancial management, procurement, monitoring and evaluation o f project progress and results. In addition, i t wil l support (i) training and strengthening o f local capacity in procurement and financial management; (ii) providing additional expertise in establishment o f project monitoring and evaluation system, if required; (iii) conducting investment climate surveys to monitor business environment changes; and (iv) financing the audit costs for the implementation period.

The procurement procedures and SBDs to be used for each procurement method, as w e l l as model contracts for works and goods procured, are presented in the Project’s Operation Manual.

B. Assessment o f the agency’s capacity to implement procurement

Procurement activities wi l l be carried out by the PPA in close cooperation with the implementing agencies.

An assessment o f the capacity o f the procurement agency to implement procurement actions for the project was carried out by Arben Maho, Procurement Analyst, o n December 2004. The assessment reviewed the organizational structure for implementing the project and the interaction between the project’s staff responsible for procurement and the implementing agencies. The main procurement function wi l l remain with the PPA ,wh ich i s staffed with a director and 15 procurement specialists (1 3 officers and two administrative staff) with different backgrounds such as economics, law, and engineering. Other staff are expected to b e recruited during the coming six months. The PPA wil l assign two full t ime procurement staff, who along with the PPA director, wil l implement the procurement activities under the grant. Procurement o f very small value o f less than US$15,000 per contract m a y be conducted, as foreseen in the actual Public Procurement Law, by the respective implementing agencies under close supervision o f the PPA.

The PPA has some experience w i t h publ ic procurement basically funded by the government budget and f rom different donators. Whi le the PPA has modest experience with Bank’s procurement, the implementing agencies do not have experience in conducting international procurement. Therefore, i t i s recommended that this project be placed in “high” procurement r i s k category, wh ich yields an ex- post review ratio o f one in f ive contracts.

Based o n the findings and recommendations o f the assessment o f the capacity o f the implementation agency to conduct procurement, the Recipient shall implement the fo l lowing action plan:

0 The PPA’s t w o procurement officers assigned to the project should be sent t o attend procurement training in International Labor Organization in Turin, Italy, preferably before Board presentation. In addition, one staff o f each implementing agency should b e

46

designated as the back-up for the procurement officer. Furthermore, the PPA’s and implementing agency procurement officers and the backup should attend, i f possible, on a regular basis, procurement training seminars that the World Bank wil l organize in the region. The project launch workshop to be organized by the World Bank around grant effectiveness should include a strong procurement training element specific to the procurement arrangements, including procurement methods, under the project.

0 The Project Secretariat should include a suitably qualified project coordinator. This project coordinator should coordinate all project activities, including procurement activities, with the PPA and the implementing agency procurement and other staff. The project coordinator should also receive training in procurement preferably before grant effectiveness. To ensure continuity, procurement coordinators should not be changed frequent 1 y.

0 The operational manual should include a detailed section on the procedures for collaboration, with special reference to procurement, between the Project Secretariat, PPA and other implementing agencies to avoid any delays that may be caused by the lack o f clarity in this regard.

0 In order to avoid any confusion, a clear communication procedure between the PPA, Project Secretariat, implementing agencies, and the Bank should be established and included in the operational manual. For example, all correspondence relating to procurement should be routed to the Bank through the PPA. The role o f the PPA wil l be to ensure the completeness and accuracy o f the information being exchanged w i th the Bank team. This wil l also allow the PPA to keep track o f the procurement and other activities being undertaken by implementing agencies and to take corrective measures in case of delays. Furthermore, this wil l allow PPA to collect data on procurement, etc., for preparing consolidated periodic project progress reports.

0 During the project launch workshop the Bank should provide the PPA and the implementing agencies with all the standard procurement documents to be used under the project. The Bank staff should also explain the contents o f these documents during the project launch.

0 The PPA should be fully equipped with computers, fax machines, photocopiers, etc, in order to function efficiently.

One year after loan effectiveness, the conduct o f procurement under the project wil l be reviewed to take into account potential procurement risks. Recommendations wil l be made if necessary to improve the procurement process.

C. Procurement Plan

The procurement plan agreed between the Borrower and the Project Team wil l be available at PPA, MPS, ND.E. “Germise”, 4th floor, Rr. Nena Tereze pn., 38000, Prktina. I t will also be available in the project’s database and in the Bank’s external website. The Procurement Plan wil l

47

be updated in agreement with the Project Team annually o r as required to reflect the actual project implementation needs and improvements in institutional capacity.

D. Frequency o f Procurement Supervision

In addition to the pr ior review supervision to be carried out f rom Bank offices, the capacity assessment recommended that procurement supervision missions to the f ie ld to carry out post review of procurement actions be carried out at least every 12 months.

48

E. Details o f the Procurement Arrangements Involving International Competition

Description Type

1. Goods, Works, technical services and Consulting Services

Number of Estimated Procure Preparation Selection Contract Contract Prior

items/ sub- Method TORsjinvita n slices/ Cost ($US) ment of Signing Completio Review

packages tion

Procurement plan for BETA Project, Kosovo Version dated March 27, 05

I. BUSINESS SERVICES INTEGRATION 2,625,000

(i) Upgrading of business registration system

(a) Expertise to adapt the existing software for Business Registry

(b) Equipment for the registry and municipalities

(c) Staff training for municipalities

(d) Technical maintenance in municipalities

(d) Printing and translation of manuals, registration forms

(ii) Equipment and rehabilitation of BSC premises

275,000

cs 2 170,000 CQ 01-Sep-05 20-Sep-05 01-Oct-05 01-Jan-06 Yes

Shoppin G 1 50,000 9 15-Sep-05 15-Oct-05 30-Oct-05 01-Jan-06 Yes

cs 2 15,000 IC 20-Ian-06 15-Feb-06 25-Feb-06 01-Apr-06 No

01-Dec- Ol-Dec- cs 2 30,000 CQ 01-Nov-05 20-Nov-05 05 08 No

Shoppin TS 1 10,000 9 20-Jan-06 20-Feb-06 28-Feb-06 30-Jun-06 Yes

550,000

(a) Equipment - (b) Rehabilitation of

premises

G 3 250,000 ICB 01-Nov-05 20-Ian-06 05-Feb-06 01 -Apr -06

01-Ian-07 05-May-

CW 3 300,000 NCB 01-Feb-05 20-Apr-06 06 I

49

(iii) Establishment of BSCs and harmonization of regulatory regimes in municipalities

(iv) Assistance to Investment Promotion Agency

administrative barriers

Project Steering Committee and IPA

(a) Review of

(b) Advisory services to

(c) Equipment for IPA (d)

Publications/promotional materials

promotion conference (organization of conference, renting facilities, etc)

11. ENHANCEMENT OF REAL PROPERTY RIGHTS

(e) Investment

05-Dec- cs 1 1,200,000 QCBS 15-Aug-05 20-Oct-05 05 01-Jun-08 Yes

600,000

cs 1 400,000 QCBS 01-Oct-05 20-Dec-05 15-Ian-06 15-Jan-07 Yes

cs 3 100,000 I C 15-Sep-05 20-Oct-05 30-Oct-05 01-Apr-06 No Shoppin

G 1 30,000 9 15-Sep-05 20-Oct-05 30-Oct-05 01-Apr-06 Yes

TS multiple 50,000 9 30-Sep-05 15-Nov-05 05 06 shoppin 30-Nov- 01-Mar-

cs 1 20,000 CQ 15-Mar-06 20-Apr-06 30-Apr-06 01-Oct-06 No

3,366,000

(i) Associated Registration improvement, Land Policy and Legal Framework

of IPRR cs

of Policy and Legal cs

transactions re: impartially cs

and Procurement Traininq cs

(e) Specialized software for KCA *) G ( i i ) Support for the Establishment of an Immovable Property Rights Registration System

and extensions cw

(a) Advisors in Support

(b) Advisers i n Support

(c) Review of land

(d) Project Management

(a) Office Renovations

(b) Office Renovations

(c) Publicity Campaign

(d) Publicity Campaign

(e) Specialised Staff in

(f) Specialized

and extensions CW

- strategy and design cs

- materials, radio TS

MCOs cs

equipment - G (iii) Cadastre Reconstruction and Renewal

(a) TA in support cs (b) Publicity Campaigns

CS (c) Cadastre Renewal in

for (iii) (c) and (d)

Pristina + 2 mun (i.e. preparation of maps for

50

180,000 0 1-N OV-

2 70,000 I C 01-Aug-05 01-Sep-05 05 01-Apr-07 No

2 50,000 I C 01-Feb-06 01-Mar-06 01-Apr-06 01-Apr-07 Yes

2 20,000 I C 01-Aug-06 01-Sep-06 01-Oct-06 01-Feb-08 No

1 10,000 IC 01-Aug-05 01-Sep-05 01-Oct-05 20-Jan-06 No

Direct Contract

1 30,000 ing 01-Oct-05 01-Oct-06 Yes

1,390,000 01-May- 01-May-

1 100,000 NCB 2-Feb-06 01-Apr-06 06 07 No Yes

Shoppin (first multiple 350,000 9 01-Mar-06 01-May-06 01-Jul-06 01-Jul-09 two)

01-May-

01-Dec- Ol-Dec-

01-Mar-

15-May- 15-May-

1 40,000 I C 01-Feb-06 01-Apr-06 06 01-Feb-07 Yes

2 140,000 NCB 0 1 - 0 C t - O L 01-Nov-06 06 08 No

1 390,000 QCBS 01-Oct-05 15-Dec-05 01-Feb-06 09 Yes

9 Shoppin

4 370,000 15-Mar-06 15-Apr-06 06 Y 1,146,000 Ol-Dec-

30-Dec- 2 60,000 I C 01-Aug-05 01-Sep-05 01-Oct-05 07 Yes

Yes 2 180,000 CQ 01-Feb-06 01-Mar-06 01-Apr-06 08 -~

(office supplies, telecom,

staff ( j ) Audit of Project

Accounts

training 50,000 No 01-May-

cs 4 60,000 CQ 01-Mar-06 01-Apr-05 05 15-Jun-05 NO

TOTAL:

Consulting.Services : 1. All contracts with firms $50k and more

2. All contracts with individuals $25k and more

*) procedures (original contract $150,000). The Bank will finance purchasing of iast two modules (and maintenance thereof) of the software following direct

contracting to the same supplier in an amount not exceeding $30,000 equivalent, as contract extension of the original

contract for which the supplier was selected competitively: **) object); The World Bank's standard bidding documents for NC5 and IC5 will be used respectively.

- The KCA has purchased a software application from a supplier (COW:, Denmark) financed from Swedish Government under competitive

- These contracts for building cadastre and its renewal, will be procured based on the unit price (per hectare, per land parcel, or per real estate

LEGEND:

CS = Consulting Services

G = Goods TS = Technical Services

CW = Civil Works

OC = Operating Costs CQ = Selection Based on Consultant

QCBS= Quality and Cost Based

IC = Selection of Individual

ICB = International Competitive

NCB = National Competitive Bidding

Qualifications

Selection

Consultants

Bidding

6,571,000

51

(i) All ICB contracts for goods, works and technical services estimated to cost above USS100,OOO per contract and (ii) first two N C B contracts for works and technical services, and (iii) first two shopping contracts for goods, works and technical services, wi l l be subject t o prior review by the Bank.

(ii) All consult ing services estimated to cost above US$50,000 per contract, and (ii) contracts with individual consultants to cost each US$25,000 equivalent o r more wi l l be subject t o prior review by the Bank. TORS, budgets and selection methods will require Bank's p r io r approval fo r a l l consultants contracts regardless their value.

Training and Study Tours wou ld be prior-reviewed by the Bank in the fo rm o f Annual Training and Study Tour Plans. The Bank wil l provide N o Objection to the plans upfront, wh i le changes and additions to the plans wou ld be reviewed separately as they occur.

The above pr io r rev iew thresholds for goods, works, technical services and consulting services ( f i rms and individuals) m a y be revised should i t be determined after a year o f Grant effectiveness that there has been the desired strengthening o f the procurement capacity o f the PPA and implementing agencies and the procurement act ivi ty performance i s satisfactory to the Bank.

Post Review: All contracts not subject to the Bank's p r io r review wil l be subject to ex-post review, o n a. selective basis. Approximately, one out o f f ive contracts for goods, works, and consulting services wi l l be subject to ex-post review.

52

Annex 9: Economic and Financial Analysis

KOSOVO: BUSINESS ENVIRONMENT TECHNICAL ASSISTANCE - XK

Not applicable.

53

Annex 10: Safeguard Policy Issues

KOSOVO: BUSINESS ENVIRONMENT TECHNICAL ASSISTANCE - XK

The project i s a technical assistance project and i s no t expected t o present any signi f icant safeguards issues. The specific consultant contracts wi l l include requirements that assistance wil l b e guided by B a n k Safeguard pol ic ies and procedures. Compl iance wil l b e closely moni tored by the borrower and supervised by the Bank.

In accordance with World B a n k safeguard pol ic ies on environment (OP/BP/GP 4.01 Envi ronmenta l Assessment) the project has been assigned Category C, indicat ing that no environmental issues are anticipated. This was based u p o n the pro ject design w h i c h i s p r i m a r i l y technical assistance and does not include any physical construct ion activities, other than minor renovations o f mun ic ipa l cadastre of f ices dealing to establish m o r e customer service-oriented receptions areas and service counters.

54

Annex 11 : Project Preparation and Supervision

K O S O V O : BUSINESS ENVIRONMENT TECHNICAL ASSISTANCE - XK ~

Planned Actual PCN rev iew M a y 2004 August 2004 I n i t i a l PID to PIC September 2004 September 2004 I n i t i a l I S D S to PIC September 2004 September 2004 Appraisal M a r c h 2005 M a r c h 2005 Negot iat ions April 2005 April 2005 Board /RVP approval M a y 2005 M a y 2005 Planned date o f effectiveness August 2005 Planned date o f mid- te rm rev iew August 2007 Planned c los ing date August 2009

Key institutions responsible for preparation o f the project: 0

0

0

United Nations Interim Administration Mission in Kosovo (UNMIK) Ministry o f Trade and Industry (in coordination with municipalities through the Association o f Municipalities o f Kosovo), Ministry o f Public Services, Kosovo Cadastre Agency

Bank staff and consultants who worked on the Droiect - N a m e T i t le Unit

I r i n a Astrakhan Sr. Pr ivate Sector Development Specialist ECSPF Gerhard B o t h a Sr. Financial Sector Specialist ECSPF Alexandra Drees-Gross Pr ivate Sector Development Specialist ECSPF A r b e n M a h o Procurement Analyst ECSPF Si lv ia M a u r i Pr ivate Sector Development Consultant ECSPF Lynn Holste in Lead L a n d Admin is t ra t ion Specialist E C S S D Aleksandr Nacev Sr. Agr icul tural ist E C S S D Olav R e x Christensen Sr. Financial Management Specialist ECSPS M a r k Walker Lead Counsel LEGEC Vic to r ia Stanley Operations Analyst E C S S D V i v i e n Gyur is Consultant E C S S D

Bank funds expended to date on project preparation: US$366,550 Bank resources: FY04 US$180,862 FY05 US$140,000 Trust funds: FY04 US$22,788 FY05 US$20,900

Project costs reflect the fact that the project was originally designed with four components. The project scope was narrowed upon recommendation o f the Quality Enhancement Review panel.

Remaining costs to approval: US$46,100

Bank resources: FY05 US$40,000 Trust funds : FY05 US$6,100

Estimated annual supervision cost: US$150,000

The high estimated costs reflect the complexity o f the project, and expected costs related to supervising the two components.

55

Annex 12: Documents in the Project Fi le

KOSOVO: BUSINESS ENVIRONMENT TECHNICAL ASSISTANCE - XK

Letter f rom UNMIK establishing Project Steering Committee

Kosovo Country Economic Memorandum, March 2004. Kosovo Business Environment: Constraints to Growth, June 2004 Kosovo Standards Implementation Plan, March 2004

56

Annex 13: Statement o f Loans and Credits

KOSOVO: BUSINESS ENVIRONMENT TECHNICAL ASSISTANCE - XK

Original Amount in USS Millions

Difference between expected and actual disbursements

Proiect ID FY Pumose IBRD I D A SF GEF Cancel. Undisb. Orig. F m . Rev’d

PO79259 2004 COMM DEVT FUND 2 0.00 0.00 0.00 0.00 0.00 3.94 0.09 0.00

PO79260 2003 EDUCATION 0.00 0.00 0.00 0.00 0.00 3.68 1.10 0.01

PO79019 2003 ENERGY SECT TA 2 0.00 0.00 0.00 0.00 0.00 1.46 -0.15 0.00

PO72405 2002 SOC PROT (KOSOVO TF) 0.00 0.00 4.20 0.00 0.00 1.39 1.39 0.69

PO70365 2001 PILOT WS (KOSOVO TF) 0.00 0.00 4.60 0.00 0.00 0.62 -3.98 0.00

Total: 0.00 0.00 8 80 0.00 0.00 11.09 - 1.55 0.70

KOSOVO STATEMENT OF IFC’s

Held and Disbursed Portfolio In Mil l ions o f U S Dollars

Committed Disbursed

IFC IFC

FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic.

Total portfolio: 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic.

Total pending commitment: 0.00 0.00 0.00 0.00

57

KOSOVO:

Annex 14: Country at a Glance

Kosovo at a Glance BUSINESS ENVIRONMENT TECHNICAL ASSISTANCE - XK

POVERTY and SOCIAL

2003 Population, mid-year (millions) GNI per capita GNI (millions)

Average annual growth, 199703

Population (%) Laborforce (%)

Most recent estimate (latest year available, 199703)

Poverty (% ofpopulation below national poveriy line) Urban popijlation (% of total population) Life expectancy at birth (years) Infant mortality (per 7,000 live births) Child malnutrition (“h of children under 5) Access to an improved water Source (% ofpopulation) Illiteracy (% ofpopulation age 15+) Gross primary enrollment (“A of school-age population)

Male Female

KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1983

GDP (US$ billions) Gross domestic investmentiGDP Exports of goods and sewicesiGDP Gross domestic savingsiGDP Gross national savingsiGDP

Current account balanceiGDP Interest paymentsiGDP Total debtiGDP Total debt sewiceiexports Present value of debtiGDP Present value of debtiexports

1983-93 198303 (average annual growth) GDP GDP per capita Exports of goods and services

Kosovo estimates

1 9

37 37 74 35

61 6

95 96 97

1993

2002

1 2 2 0

Europe & Central

Asia

473 2,570 1,217

0 0 0 2

63 69 31

91 3

103 104 102

2002

1 6 34 5 1 2 5

-51 5

-62 0

2003

3 1 4 0

Lower- middle- income

2 655 1480 3,934

0 9 1 2

50 69 32 11 81 10

112 113 111

2003

2 0 29 3 10 4

-47 5

-56 2

2003-07

STRUCTURE of the ECONOMY

(% of GDP) Agriculture Industry

Services

Private consumption General government consumption Imports of goods and sewices

Manufacturing

(average annual growth) Agriculture Industry

Services

Private consumption General government consumption Gross domestic investment Imports of goods and sewices

Manufacturing

1988 1996

20.4 28.8 47.4 33.8

32.2 37.4

1983-93 199303

2002 2003

96.9 96.1 14.6 17.9 98.6 97.1

2002 2003

~~

Note Data are estimates for Kosovo

58

Annex 15: Maps

KOSOVO: BUSINESS ENVIRONMENT TECHNICAL ASSISTANCE - XK

59