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IFLR1000 Doing Business Guide 2013

IFLR 1000 Interview with our Managing Partner Mr. Dastid Pallaska regarding the “Doing Business Guide 2013”

1. What attributes does Kosovo have that makes it a unique investment destination?

Kosovo has promulgated a number of laws that seek to attract foreign investments. In this respect, the Law on Protection of Foreign Investments should be emphasised in particular. First and foremost, this law offers a very low threshold for qualifying as a foreign investor. The qualification as a foreign investor enables foreign physical or legal persons to benefit from a number of rights and privileges, including - but not limited to - (i) the guarantee for equal treatment; (ii) prohibition of discrimination; (iii) guarantee for the stability of the investment regime; (iv) the right for free transfer of personnel and funds in and out of Kosovo; and (v) the right to compensation for actions of the public institutions that are in violation of domestic or international law. The stability of the investment regime is one of the most important guarantees that Kosovo offers to its foreign investors. According to the law, foreign investors are not only protected from retroactive application of detrimental laws but they are also entitled to receive compensation for damages suffered as a result of detrimental changes of the law.

In addition to the above, Kosovo is the only country in the Balkans that uses the Euro as its official currency. Furthermore, between 2000 and 2010 Kosovo has seen a robust economic growth with a 6.5% annual average growth of real GDP. Throughout the financial crisis Kosovo has maintained a steady GDP growth, which – according to the Central Bank of Kosovo and the International Monetary Fund – in 2011 was 5% and in 2012 is expected to be 3.8%. The conservative fiscal policies of the Government of Kosovo coupled with the inability of Kosovo to issue debt, due to its political status, have resulted in Kosovo having the lowest sovereign debt in the region, amounting to only 5.85% of the GDP. With respect to other attributes, according to a 2011 survey with foreign investors, conducted by the Economic Initiative for Kosovo (ECIKS), 20% of the surveyed foreign investors stated that the young and dynamic workforce is the main advantage of Kosovo for foreign investors, followed by the fact that Kosovo is an emerging market, has competitive labor costs, has a good geographical position and is rich with natural resources.

2. What are the main drivers of investors moving to Kosovo over the last year? / What have been the key growth sectors and market opportunities of the last 12 months?

The ongoing process for the privatisation of publically owned enterprises has been, and continues to be, the main driver of foreign investments in Kosovo. While Kosovo has privatised most of its socially-owned enterprises, in the past two years Kosovo has commenced the process for the privatisation of its publically owned enterprises that primarily include public utility companies. In this respect, in 2010 Kosovo laid out a 20-year concession for Prishtina International Airport, while a few months ago the Kosovo Energy Distribution and Supply company was also privatised. Presently, the Government of Kosovo is administering an open and competitive tender for the privatisation of Post and Telecommunications of Kosovo, which is the most profitable publically owned enterprise in the country, a process that is expected to be concluded early next year.

In addition to the above, Kosovo's lignite reserves – which are considered to be the fifth largest reserves in the world – have also attracted the attention of many foreign investors. Although Kosovo's tender for the construction of two 300 MW lignite based power plants in the Sibovc lignite pool has stalled for the time being, many investors are also looking at the Dukagjini lignite pool in western Kosovo. The continued interest of foreign investors in Kosovo's lignite reserves has convinced policy makers to offer a more flexible legal framework for the exploration and exploitation of these reserves. Namely, while under the present legal framework the exploitation of lignite can be granted only through an open and competitive process, the impending reforms foresee that concessions can also be granted without a competitive process.

In 2011 Kosovo has seen an 8% growth in foreign direct investments. According to the information from the Investment Promotion Agency of Kosovo, in 2011 25% of the foreign direct investments went to the construction sector, which was followed by the production sector with 20%, financial services with 19%, real estate with 14% and the processing industry with 7%.

3. Can you identify the key economic risks that foreign investors have faced when Doing Business in Kosovo in the last year?

Kosovo's ambition to join the European Union has resulted in a policy of the Government of Kosovo to have all its laws compatible with European standards. While from a general point of view this approach is to be commended, the adoption of such laws without building the capacities of the institutions to implement these laws has created a number of bottle-necks for businesses. By way of example, the adoption of an EU compatible merger-control law, while leaving the Competition Authority with a handful of employees that do not necessarily have all the resources to implement the law may become an impediment for businesses in Kosovo.

4. What are the main political risks (developments?) affecting inward investment that you have observed recently?

Overall, there are no material political risks for foreign investments in Kosovo as long as investments have been completed in full accordance with the law. Having said that, I must admit that there are a number of small political parties that have yet to overcome the nostalgia of socialism regarding the role of the state in the economy in general and particularly with respect to the management of publically owned assets. Although these parties do not admit that their policies are inspired by a socialist ideology, in essence their position is that the state should have a role in the management of these assets. Although most of the mainstream opposition political parties and the general public opinion have objections with respect to the manner in which the privatisation is being carried out, they support the idea of privatisation and the concept of a free market economy driven by the private sector.

5. What are the key regulations that govern in-bound FDI?

Although each sector is regulated by different legal instruments, the law on the protection of foreign investments, elaborated above, is the only cross-sector law that is exclusively focused on the rights and privileges of foreign investors. In addition to the rights and privileges described above, according to this law foreign investors are entitled to compensation in case of damage or destruction of their assets as well as failure of the institutions of the Government of Kosovo to offer them security. Furthermore, the law guarantees foreign investors protection from expropriation, facilitation of entry as well as visa assistance for their expatriate personnel. More importantly, the law provides that the rights and privileges of the foreign investors, foreseen by this law, are acquired irrevocably by the investor at the moment the investment is made.

According to this law, the disputes between foreign investors and the government can be submitted for resolution to international arbitral tribunals, such as ICISD, ICC or UNICITRAL etc. The Government of Kosovo, acting on behalf of all its agencies and other institutions, has consented to this dispute resolution mechanism and the aforementioned forums by way of this law. Furthermore, if – and when – an arbitral award is rendered against it, the Government of Kosovo cannot invoke sovereign immunity to avoid the enforcement of the arbitral award. In this respect, it should be noted that the law provides that arbitral awards rendered in these cases shall have the status of final judgments of the court of last instance and they shall be enforced in accordance with the New York Convention.

6. Which Free Trade Agreements does your country currently enforce? Are there any prospective additions for the next 12 months?

Kosovo has been a part of Central European Free Trade Agreement (CEFTA) since 2007 and benefits from Autonomous Preferential Trade Preferences with the European Union 2011 – 2015, which includes a duty-free access to the European Union market, as well as the Generalised System of Preferences with the United States that foresees preferential duty-free entry in the US market for 4,800 products from Kosovo.

CEFTA gives Kosovo access to a Central European market consisting of 32 million people and which includes Albania, Bosnia and Herzegovina, Croatia, Kosovo, Macedonia, Moldova, Montenegro and Serbia. In addition to this, it should be noted that Kosovo has signed agreements for the promotion and protection of investments with Albania, Austria, Turkey, Belgium-Luxembourg Economic Union, Switzerland and United States (OPIC) and is in the process of concluding similar agreements with 16 other countries from the region, EU and Asia.

7. Are there any exchange controls that affect the flow of capital in your territory?

No. On the contrary, as stated above, the Law on the Protection of Foreign Investments explicitly provides guarantees for the free transfer of funds in and out of Kosovo.

8. What incentives are in place to attract foreign investors?

Kosovo does not have a separate set of incentives to attract foreign investments. However, in an effort to improve the overall business climate, Kosovo has introduced a tax system that includes a 10% flat corporate income tax and has removed the tax on dividends. Furthermore, Kosovo has a progressive personal income tax up to 10% and the mandatory pension contributions for the employer are only 5%.

9. What pitfalls should foreign investors be conscious of?

As long as investors act in Kosovo with the same caution that they employ at home, namely by seeking to eliminate or minimise risks through formal contracts, the business ventures that are pursued in Kosovo become more predictable.

10. What can investors expect when negotiating in Kosovo?

In general the people of Kosovo are very friendly to foreigners and, as a result of this, the overall climate is rather receptive of foreign individuals and companies. In commercial negotiations investors should expect that their local counterparts will place a great deal of importance on couple of key issues, such as price, while neglecting the other legal technicalities that may be very important to the transaction. It should be noted that most local businesses that work for or with foreign investors are not used to and do not utilise lawyers or other professional advisers when negotiating complex transactions. Therefore, foreign investors should ensure that their local partners understand fully the extent of the obligations to which they are agreeing. In absence of this, local partners may be agreeing to terms that they cannot meet, which will cause problems that will be difficult to enforce even after relief is obtained from the court.

11. What is the main advice that you would give to a prospective investor interested in Kosovo?

The main advice I would give to foreign investors in Kosovo would be to do business in Kosovo just like they do it in their home countries. Namely, a proactive approach in seeking to minimise the risks is a key factor in ensuring the success of the business venture. Furthermore, foreign investors should avail themselves of the assistance of professional advisers, i.e. lawyers, financial advisers and accountants and not rely on the informal mechanisms that are heavily utilised by domestic businesses.

12. Are there any restrictions which govern the involvement of foreign counsel?

Foreign counsel cannot be used in Kosovo, except in partnership with a domestically licensed counsel. All major foreign investors use foreign counsel from their home countries to assist them identifying the local counsel. In this respect, during the initial phase of entry into Kosovo most foreign investors are advised by their home counsel as well as local counsel. However, after this phase the foreign investors rely almost entirely on local counsel.

13. Which areas of corporate law do you feel are currently the most under-developed?

The corporate law of Kosovo is rather developed. However, the areas of the law that are underutilised are those relating to merger and demerger of companies. Also the transfer of business transactions is rare although, under the law, they can be effected with minimal tax implications.

14. What are the key compliance issues that in-house counsel should be aware of when Doing Business in Kosovo?

The top three compliance issues that in-house counsel should be aware of in Kosovo relate to corporate law, tax law and employment law. In addition to these areas, and depending on the nature of the business, in-house counsel should also ensure full compliance with environmental laws as well as competition law.

15. How mature/ stable is the banking industry in Kosovo?

Kosovo's banking system is rather sound and due to Kosovo's minimal exposure to the global financial systems, it has not been affected by the financial crisis. The banking system in Kosovo consists of eight commercial banks, of which six are foreign-owned. The banking system represents 76.3% of the total assets in the financial sector. The loans offered by banks in Kosovo have a maturity period of up to 15 years. According to the report of the Central Bank of Kosovo, 69.9% of the loans are enterprise loans. In this respect, most of loans are granted to enterprises in the trade sector, while the loans in the production sector make up only 24.8% of the total loans granted to enterprises. The review of the structure of liabilities of the banks reveals that 79% of the liabilities are deposits, which in 2011 have reached €2.10 billion, representing an annual growth of 8.5%.

Having said the above, it should be noted that the interest rates offered by Kosovo banks remain high primarily due to the challenges in the judicial system.

16. What are the impending investment opportunities in Kosovo in 2012 -2013?

In addition to the ongoing privatisation processes in the energy and telecommunications sectors, Kosovo has urgent infrastructure development needs. Namely, according to the PPP (public-private partnership) Unit of the Government of Kosovo, there is a €5 billion infrastructure gap in Kosovo, which is expected to be met in the next three to five years. It should be noted that this year Kosovo is expected to complete the Morinë-Prishtina segment of the highway connecting Kosovo to Albania (Route 7). In addition to this, in 2013 Kosovo will commission the construction of the Prishtina – Hani i Elezit highway (Route 6), connecting Kosovo to Macedonia, the estimated value of which is expected to be € 600 million. In 2013 Kosovo is also expected to tender a PPP (public-private partnership) concession (BOT) for service areas in Route 7, which includes an estimated investment of €36 million. Furthermore, in 2013 Kosovo is expected to award a concession for the building and operation of a premier ski resort in Brezovica, which carries an estimated investment of €60 million.

17. How is competition governed in this territory?

The law for the protection of competition in Kosovo is EU compatible and, inter alia, includes protection from abuse of dominant position as well as merger-control mechanisms. According to the law, a dominant position is reached if an enterprise has over 40% of the market share. However, enterprises may challenge this assumption by showing that in spite of the fact that they hold over 40% of the market share they are subjected to competition or do not have a superior position in the market. The law requires that merger notifications are made in transactions when the total revenues of the participating enterprises in the international market exceed €100 million or when the total revenues of at least two participants to the merger in the Kosovo market exceed €3 million.

Notwithstanding its moderate capacities, the Kosovo Competition Authority is functional and in 2012 has been active. Also, although most businesses are not adhering to the merger-control notification requirements, gradually the Kosovo Competition Authority has started to enforce the law in this respect.

18. Dissolution and bankruptcy?

Voluntary dissolution of companies in Kosovo is governed by the law on business organisations and, in this respect, there are no notable challenges. Having said this, Kosovo has serious challenges with the implementation of its bankruptcy and reorganisation laws. Namely, in spite of the fact that the law on liquidation and reorganization of legal persons in bankruptcy has been enacted in 2003, this law is not being implemented due to the fact that an administrative instruction governing the procedures foreseen by this law has not been adopted yet. Consequently, the Commercial Court has not had any cases related to the bankruptcy and reorganisation of businesses in Kosovo.

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