Kosovo's Privatisation Hiccups

The privatisation process in Kosovo is running into difficulties as staff at the agency managing it grow concerned at the legal implications of what they are doing.

The jittery mood was highlighted when the Kosovo Trust Agency, KTA, cancelled the latest round of sell-offs, only to reinstate it later.

The KTA - a European Union-run agency - has been trying without success to get full legal immunity for staff who sign contracts that one day might lead to legal action.

On October 7 the KTA suspended the third round of privatisation because of concerns over its legal vulnerability. The tender for 22 firms was announced in September and bids were due to be opened on November 11 but the EU head in Kosovo, Nikolaus Graf Lambsdorff called the date off.

His decision came after a United States businessman filed a lawsuit in New York against the KTA, over a timber plant at Pec (Peja), at the beginning of October.

Kosovo prime minister Bajram Rexhepi immediately wrote to Lambsdorff asking for an urgent resumption of the process. "The decision... will have a catastrophic effect on the investors," he said. "By admitting that there are flaws so serious that the entire process must be completely halted, you will throw into doubt any possibility that the KTA and EU can actually manage the privatisation process."

The tender was put back on track late on October 22 after a KTA board meeting.

The temporary suspension does not seem to have been a direct consequence of the US lawsuit. What is clear, though, is that it was prompted by growing concerns within the agency about its vulnerability to litigation. The issue has left EU managers at odds with the United Nations, which administers Kosovo.

Across Eastern Europe, privatisation has been a difficult and often contentious exercise. In Kosovo, however, the problems have greatly complicated by the fact that no one knows what the province's ultimate status will be - a sovereign state or part of Serbia. This has meant that the EU has entered sensitive and uncharted territory as it pursues privatisation.

Although privatisation started in May this year, legal aspects of the process have been debated for two years.

In 2001, the UN Interim Administration Mission in Kosovo, UNMIK, contracted the European Union to oversee the process, and established the KTA in June 2002 under EU management.

In the first two rounds, the KTA disposed of 20 firms, all but one to Kosovo Albanian buyers. The purchase price was duly paid, and a total of around 24 million euro deposited in Kosovo's central bank pending any claims made by creditors.

But none of the sales has been finalised, because the agency's managing board has not ratified the contracts.

This leaves investors unable either to take control of the companies they have bought, or to claim their money back. "We paid more than a million euro, yet we can't do anything until the contract is ratified," one buyer, who asked to remain anonymous, told IWPR. "Every day of waiting is a pure loss - frozen money yields no profits."

Kosovo has around 500 state firms, known as "socially owned enterprises", which it inherited from Tito's Yugoslavia. UNMIK's privatisation list contains 415 companies, currently employing some 30,000 people.

Belgrade has raised numerous concerns about privatisation in Kosovo, the simplest of which is that - as a successor state to Yugoslavia - it claims ownership of many of the companies now up for sale.

Far more immediate, however, is the question of debt owed to Serbian and international creditors. Selling off these companies complete with outstanding debts raises the prospect of future claims.

The government in Belgrade says many Kosovo firms still owe money to Serbian companies, and has pressed for these debts to be repaid before they are sold off. The KTA has said previously that the new private firms will inherit any outstanding debt, and provision was made for eventual payment. But the Serbs question why they should wait for the process to end before this happens.

As well as the issue of claims within the former Yugoslavia, Serbia is irked by the fact that it is currently servicing a 1.5 billion US dollar debt which Kosovo firms owe to international creditors. While it is obliged to do so as guarantor of the debts, it argues that it is carrying the burden for firms which it neither controls nor benefits from.

Nenad Vasic, an analyst specialising in Kosovo economy told IWPR, "The basis of Serbia's complaint is that it is paying the debts of Kosovo enterprises without receiving any profit from them; it is unable to settle outstanding debt claims; and the status of local manufacturing branches of Serbian companies also remains unresolved."

Vasic thinks Serbian banks and companies can and should sue the KTA both in Belgrade and international commercial courts.

It is unclear how strongly these various claims would weigh in international arbitration. But the debt issues in particular provide a number of points on which the new companies might find themselves in court one day.

If this happened, KTA officials who sign off on privatisation deals could end up in court as well. Aware of this, KTA staff have grown increasingly uncomfortable with their role in recent months. Sources close to the EU and KTA have complained to IWPR that the UN has left them holding a in a difficult position.

"They gave us the dirty work to do, fully aware of how problematic and difficult it might prove," said the source.

To reduce the risks, UNMIK ruled in June last year that the KTA should enjoy legal immunity within the protectorate. It set up a special chamber of the Kosovo supreme court to handle any claims made against the agency - though it will not admit lawsuits. EU spokeswoman Monique de Groot told IWPR that "so far it was thought that regulation on the KTA provides enough security to its members."

But these measures have proved insufficient to reassure international officials in the KTA, who fear that they personally could be sued anywhere outside Kosovo. This is believed to have led to their refusal to ratify earlier privatisation contracts.

As a solution, the EU has asked the UN to grant the KTA worldwide immunity from legal action arising out of its work.

EU chief Lambsdorff recently wrote to the UN legal office in New York asking for full immunity for KTA staff and board members. The response which the UN sent on October 9 - seen by IWPR - ruled this out.

The result is a stand-off between the UN and the EU. It is not certain what compromise they will agree on, and when it will happen. EU spokeswoman De Groot would tell IWPR only that "further UN clarification" was being sought.

IWPR has learned that KTA director Juergen Mendricki who resigned at the end of September left his post because of the immunity issue. Although the official explanation was that Mendricki left for personal reasons, KTA board member Bedri Shabani said "Mendricki told the board members that he had to leave since UN had not met his legal requests".

When IWPR spoke to Mendricki, he refused to comment on his time at the KTA.

A KTA source who asked to remain anonymous told IWPR that a split has emerged in the agency between EU consultants reluctant to proceed until legal matters are sorted out, and the US-based consultancy Barring Point which wants to press ahead.

IWPR raised this with a Barring Point consultant who asked not to be named, but said no such schism had arisen.

Details of the terms on which the KTA reinstated the privatisation tender are unclear, but the signs are that pressure from advocates of privatisation forced the agency to backtrack without winning any concession on immunity.

Tanja Matic is IWPR's Kosovo project coordinator. Alma Lama is a journalist working for RTK television in Kosovo.