VZCZCXYZ0000
RR RUEHWEB

DE RUEHPS #0099/01 0371342
ZNY CCCCC ZZH
R 061342Z FEB 07
FM USOFFICE PRISTINA
TO RUEHC/SECSTATE WASHDC 7000
INFO RHEHNSC/NSC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

C O N F I D E N T I A L PRISTINA 000099 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EUR/SCE AND EUR/ACE 
STATE PLEASE PASS TO TREASURY FOR BRAD BELL 
AID FOR EE/ECA, EE/DGSR, EE/EG 
NSC FOR BRAUN 
 
E.O. 12958: DECL: 02/01/2017 
TAGS: ECON KPRV KCOR PGOV PREL YI
SUBJECT: KOSOVO: CREATING GOOD GOVERNANCE OF PUBLICLY OWNED 
ENTERPRISES IN TRANSITION TO KOSOVAR AUTHORITY 
 
REF: (A) 06 PRISTINA 424 (B) 06 PRISITNA 998 (C) 06 
 
     PRISTINA 1055 
 
Classified By: COM Tina Kaidanow for reasons 1.4 (B) and (D). 
 
¶1. (C) Summary.  The final status package proposal presented 
to Kosovo on February 2 provides UNMIK the opportunity to 
establish corporate governance and oversight structures for 
publicly-owned enterprises (POEs) as they transition to 
Kosovar authority.  Several UNMIK agencies and some PISG 
officials have been lobbying for regulations in the KTA 
successor law that would provide clear governance and 
oversight requirements for POEs as part of the post-status 
transition to Kosovar authority.  They, including the 
International Monetary Fund, do not believe that POEs should 
come under the direct authority of ministries in a 
post-status environment.  UNMIK and some PISG officials want 
to establish an independent holding company for the POEs that 
would be under the authority of the Kosovo Assembly. 
According to UNMIK officials, the World Bank believes that 
the ministries should run the POEs to help make the ministers 
more accountable for these enterprises.  The SRSG's position 
on this issue remains unclear.  USOP believes that it would 
be prudent for UNMIK and the PISG to establish strong, 
independent corporate governance structures and proper 
oversight for the POEs as they transition to Kosovar 
authority, but full privatization post-status should be the 
ultimate goal to ensure their managerial and operational 
efficiency, lessen the costs to the Kosovo Consolidated 
Budget, and implement good public policy.  End Summary. 
 
FINAL STATUS PACKAGE PROPOSAL PROVIDES UNMIK THE OPPORTUNITY 
TO ADDRESS POST STATUS GOVERNANCE AND OVERSIGHT CONCERNS FOR 
POEs 
 
¶2. (C) Article 1.2 in Annex Seven (Property and Archives) of 
the final status package proposal presented by UN Special 
Envoy Marti Ahtisaari to the PISG on February 2 requires 
competent Kosovo authorities to take appropriate measures to 
implement European Union principles of corporate governance 
and liberalization of POEs.  This language was a welcome 
addition for several UNMIK agencies and PISG officials 
concerned about the governance and oversight of POEs. 
UNMIK's Office of Oversight for POEs (OPOE), The Kosovo Trust 
Agency (KTA) -- which is responsible for the administration 
and maintenance of publicly-owned enterprises (POEs)-- and 
some Provisional Institutions of Self-Government (PISG) 
officials have been lobbying for regulations in the KTA 
successor law that would provide clear governance and 
oversight requirements for public utilities as part of the 
post-status transition period from UNMIK to Kosovar 
authority. 
 
¶3. (C) Several UNMIK and PISG officials are concerned about 
ensuring good POE governance and do not want POEs under the 
direct authority of Kosovo government officials, noting 
concerns about corruption, nepotism, and mismanagement. 
These officials believe that establishing formal corporate 
government structures and rules for good governance will act 
as a deterrent against these concerns.  According to Chiara 
Bronchi, Fiscal Affairs Director in UNMIK's Pillar IV 
(responsible for Kosovo's economic policy), the International 
Monetary Fund (IMF) also shares these concerns, and its 
resident representative for Kosovo has quietly discussed them 
with the Special Representative of the Secretary General 
(SRSG) Joachim Rucker. 
 
UNMIK SUPPORTS HOLDING COMPANY CONCEPT AND GOOD GOVERNANCE 
STRUCTURES FOR POEs... 
 
¶4. (C) Officials in UNMIK's Office of Legal Affairs (OLA), 
OPOE, KTA, Pillar IV, and some PISG officials want to develop 
an independent holding company for POEs with corporate 
governing structures in accordance with international 
principles and standards for good governance.  According to 
OPOE officials, the Kosovo Assembly would have ownership and 
oversight responsibilities for the POEs.  The Kosovo Assembly 
would appoint a professional, competent board of directors to 
oversee the holding company.  The board members of the 
holding company would then appoint professional, competent 
board members to the POE boards.  Finally, the POE board 
members would appoint the management of the public utilities. 
 OPOE, OLA, Pillar IV and KTA officials believe that multiple 
layers of supervision would strengthen good governance and 
ensure accountability at each level.  OPOE officials said the 
appointment of board members, who could be either Kosovars or 
 
internationals, should be carried through in a structured, 
transparent process with clear, stringent selection and 
evaluation criteria, as well as an appropriate compensation 
package, thus avoiding favoritism, nepotism, conflicts of 
interest, and holding board members accountable for their 
actions.  Bronchi said that Pillar IV and KTA have quietly 
formed a working group to develop language in the KTA 
successor law that would require POEs to be administered 
under an independent holding company. 
 
...BUT SOME ARE PRESSING TO INCLUDE MANDATORY INTERNATIONAL 
OVERSIGHT AND OTHER OPTIONS 
 
¶5. (C) OPOE officials and managing directors from the Kosovo 
Energy Corporation (KEK) and Post and Telecom of Kosovo (PTK) 
have argued that a mandatory international presence is needed 
for the independent holding company and POE boards.  They 
believe that internationals would help ensure that the proper 
corporate governance and anti-corruption structures, board 
member evaluation and selection criteria, and accountability 
standards are clearly established to administer the public 
utilities.  However, most PISG officials argue that an 
international presence is unnecessary.  Other PISG officials 
want to put POE administration under full ministerial control 
with the proper corporate governance structures, but allow 
the Kosovo Assembly the authority to impose mandatory 
reporting requirements on ministers, as well as remove them 
with a two-thirds majority vote of no confidence if they 
perform poorly. 
 
WORLD BANK: MINISTERS SHOULD RUN POEs TO ENSURE 
RESPONSIBILITY AND ACCOUNTABILITY 
 
¶6. (C) According to Bronchi and Alexander Borg-Olivier, Head 
of UNMIK OLA, the World Bank believes that POEs should be 
placed under ministerial authority to ensure that the 
ministers take full responsibility and accountability for 
them.  The World Bank resident representative said the Bank 
will soon provide recommendations outlining its views on 
governance of POEs.  Bronchi said Pillar IV and KTA are 
waiting for the recommendations, but added that they want to 
negotiate with the Bank to get it to see things their way. 
 
 
SRSG VIEWS ON THE HOLDING COMPANY REMAIN UNCLEAR 
 
¶7. (C) The views of SRSG Joachim Rucker remain unclear. 
According to Bronchi and Olivier, Rucker was supportive of 
the independent holding company and planned to push for this 
concept at a November 17, 2006 meeting with the World Bank. 
However, when the World Bank advocated for the POEs to be 
under the control of the ministries, Rucker decided not to 
push the idea.  Bronchi believes that Rucker still supports 
the independent holding agency concept and noted that PM Agim 
Ceku has quietly told the SRSG not to put POEs under the 
ministries.  But she added that the SRSG wants to be on the 
same page with the international community. 
 
PRIVATIZATION SHOULD BE THE ULTIMATE GOAL FOR POEs 
 
¶8. (C) Full privatization of public utilities post-status is 
the best way to ensure their maximum managerial and 
operational efficiency, while lessening the costs to the 
Kosovo Consolidated Budget (KCB).  An independent holding 
company is a good concept as long as there are sound, 
stringent corporate governance and oversight policies and 
structures in place.  Post agrees that the POEs should not be 
put under the ministries due to concerns about corruption, 
political manipulation, mismanagement and the 
internationally-accepted public policy practice of separating 
the administration of utilities from public policy 
implementation. 
 
¶9. (U) Full privatization of POEs, like PTK and Pristina 
International Airport, improve the potential of these 
companies to become viable, operationally efficient 
businesses (ref A).  Full privatization would also help 
remove costly expenditures such as KEK from the budget and 
release funds for other public needs.  The Ministry of 
Finance and Economy (MFE) estimates that KEK will continue to 
be a drain on the KCB.  MFE projections estimate that KEK 
could need as much as 100 million euros for its operational 
and maintenance costs, as well as electricity imports in 
2009-2010, accounting for 13-14 percent of the 2007 KCB of 
717.5 million euros (ref B). 
 
¶10. (C) Comment: There is a need for sound, stringent 
corporate governance and oversight structures for POEs as 
they transition to Kosovar authority.  The concept of an 
independent holding company is a practical solution for this 
to occur, especially given Kosovo's easily manipulated 
political and economic climate.  However, an independent 
holding company should be the first step in helping Kosovo 
fully privatize the POEs.  USOP will work with the Kosovo 
government to take steps toward this end; USAID already has 
opened a dialogue and provided advisers for the purpose of 
advancing such a process.  The reality of additional 
competencies and responsibilities after the resolution of 
final status, and the projected decrease in KCB revenues over 
the next few years (ref C), has started to attract the 
attention of senior-level PISG officials, who realize that 
serious policy decisions must be taken regarding POEs if they 
want to effectively govern Kosovo during and after the 
transition period.  End Comment. 
 
¶11.  (SBU)  USOP does not/not release this cable to UN 
Special Envoy Ahtisaari. 
KAIDANOW