Brussels, 9.11.2005

SEC (2005) 1423

Kosovo

(under UNSCR 1244)

2005 Progress Report

{COM(2005) 561 final}

{COM(2005) 558 final}

A. Introduction (...)3

1. Preface (...)3

2. Context (...)4

3. Relations between the EU and Kosovo (...)5

B. Implementation of the stabilisation and association process (...)7

1. Political situation (...)7

1.1 Democracy and the rule of law (...)8

1.2 Human rights and the protection of minorities (...)15

1.3 Regional issues and international obligations (...)23

1.4 General evaluation (...)24

2. Economic criteria (...)26

2.1 Economic developments (...)26

2.2 Progress towards economic stability and competitiveness (...)28

2.3 General evaluation (...)36

3. European Standards (...)38

3.1 Internal market (...)38

3.1.1. Free movement of goods (...)38

3.1.2. Movement of persons, services and the right of establishment (...)39

3.1.3. Free movement of capital (...)39

3.1.4. Customs and taxation (...)39

3.1.5. Competition (...)40

3.1.6. Public procurement (...)40

3.1.7. Intellectual property law (...)41

3.1.8. Statistics (...)41

3.2 Sectoral policies (...)43

3.2.1. Industry and SME (...)43

3.2.2. Agriculture (...)44

3.2.3 Environment (...)45

3.2.4. Transport policy (...)46

3.2.5. Energy (...)47

3.2.6. Information society and media (...)49

3.2.7. Financial Control (...)50

3.2.8. Other policies (...)50

3.3 Justice, freedom and security (...)50

3.3.1. Visas, border control, asylum and migration (...)50

3.3.2. Money laundering (...)51

3.3.3. Drugs (...)51

3.3.4. Police (...)52

3.3.5. Fighting organised crime and terrorism (...)53

4. General evaluation (...)54

C. European Partnership: Overall assessment (...)56

STATISTICAL ANNEX (...)59

A. Introduction

1. Preface

In June 2000 in Feira, the European Council confirmed that:

“its objective remains the fullest possible integration of the countries of the [Western Balkans] region into the political and economic mainstream of Europe through the Stabilisation and Association process, political dialogue, liberalisation of trade and cooperation in Justice and Home Affairs. All the countries concerned are potential candidates for EU membership”.

Ahead of the EU-Western Balkan Thessaloniki Summit in June 2003, the General Affairs and External Relations Council adopted “The Thessaloniki agenda for the Western Balkans: moving towards European integration”. The Thessaloniki agenda strengthened the Stabilisation and Association process by introducing new instruments to support reform in these countries and their European integration efforts, including European Partnerships. This agenda was endorsed by the European Council and by the countries of the Western Balkans in June 2003.This agenda also applies to Kosovo as governed under the auspices of UN Security Council Resolution 1244.

In June 2005, the European Council reiterated that:

“… each country’s progress towards European integration, taking account of the evolution of the acquis, depends on its efforts to comply with the Copenhagen criteria and the conditionality of the Stabilisation and Association process. Moreover, in this process, regional cooperation and good neighbourly relations will remain essential elements of EU policy.”

The structure of the report is largely the same as that used in previous years and assesses the implementation of the Stabilisation and Association process. The report:

– describes the relations between Kosovo and the Union;

– analyses the political situation in Kosovo in terms of democracy, the rule of law, respect for human rights and the protection of minorities;

– assesses the economic situation in Kosovo in terms of economic developments and progress towards economic stability and competitiveness;

– reviews Kosovo’s capacity to implement European standards, i.e. in gradually making legislation in key policy areas more compatible with European legislation and standards;

– examines the extent to which Kosovo has addressed the European Partnership priorities.

This report takes into consideration progress since the 2004 report. It covers the period from March 2004 to 30 September 2005. It looks at whether the planned reforms referred to in the 2004 annual report have been carried out and examines new initiatives, also assessing the overall level of implementation.

Progress has been measured on the basis of decisions actually taken, legislation actually adopted and the degree of implementation. As a rule, legislation or measures that are in various stages of either preparation or Parliamentary approval have not been taken into account. This approach ensures equal treatment for all countries and permits an objective assessment of each country/entity in terms of their concrete progress in implementing the Stabilisation and Association process.

The report draws on numerous sources of information. Kosovo has been invited to provide information on progress made since the publication of the last report. Council deliberations and European Parliament reports and resolutions have been taken into account in drafting the report. [1] The Commission has also drawn on assessments made by various international organisations, in particular the contributions of the Council of Europe, the OSCE, the international financial institutions, and non-governmental organisations.

2. Context

Kosovo’s institutional set up is governed by the United Nations Security Council Resolution 1244 establishing an interim international civilian administration, the United Nations Mission in Kosovo (UNMIK) with the Special Representative of the Secretary General (SRSG) as ultimate responsible. The Constitutional Framework for Provisional Self-government of Kosovo divided responsibilities between UNMIK and the Provisional Institutions of Self-Government (PISG) for the purposes of developing a meaningful self-government in Kosovo pending a final settlement. The Commission’s assessment in this report refers to all Kosovo authorities regardless of their respective competences.

The reporting period started marked by the wave of violent riots which swept throughout Kosovo in March 2004 and reflected the fragility of Kosovo’s reconciliation process. In this context, the Secretary-General of the United Nations asked Ambassador Eide to review the policies and practises of all actors in Kosovo. This report provided the basis for his recommendation to the Security Council on November 2004 of an integrated strategy on a way forward in Kosovo until mid-2005 and in preparation for the future status process.

During this period, the European Union has given its full support to Mr Jessen-Petersen, the new Special Representative of the Secretary General who took up his post in June 2004 for the implementation of this integrated strategy. Under his leadership, there has been a noticeable improvement of cooperation between UNMIK and the provisional institutions resulting in renewed impetus to the process towards the compliance of on the eight standards: Functioning of Democratic Institutions, Rule of Law, Freedom of Movement, Sustainable returns and Right of Communities, Economy, Property Rights, Dialogue and Kosovo Protection Corps.

Furthermore, the European Union has continued to support UNMIK restructuring efforts in the direction of increasing the responsibilities, capacities and accountability of the provisional institutions of self-government so that they take full ownership of the situation on the ground.

In June 2005, Ambassador Eide was appointed as special envoy tasked to conduct the comprehensive review of the Kosovo standards. His report has been the basis for the UN Secretary-General decision to move to the next stage of the political process. The conclusions of the review are in line with this report. In particular, the EU will ensure that the respect of the standards remain of prime importance in the context of Kosovo’s long term European perspective. To this effect, the monitoring of the Standards implementation will be progressively merged with the EU integration process as the European Union will be gradually taking the lead role in promoting reforms in Kosovo. On 24 October the UN Security Council endorsed the launching of talks on the future status of Kosovo.

3. Relations between the EU and Kosovo

Recent developments in bilateral relations

The vehicle currently keeping Kosovo firmly anchored in the EU policy for the Western Balkans is the Stabilisation and Association Process Tracking Mechanism (STM). This mechanism was set up in November 2002 aiming to assist Kosovo authorities to benefit fully from the core elements of the Stabilisation and Association Process, notably, EU assistance, policy advice, monitoring of EU standards and trade concessions. The STM contributes to institution building and administrative reform, increasing understanding within the administration of the principles and aims underlying European policy and practice. In the reporting period, the Commission met regularly with Kosovo authorities in this context.

The European perspective of the Western Balkans is also open to Kosovo. This is reflected in the adoption of the European Partnership published in June 2004 which formulates – as overarching recommendation – the implementation of the Standards. Kosovo adopted its Action Plan for the implementation of the European Partnership Priorities on in January 2005 and provided the Commission with updates on its progress in implementing the Action Plan in April, June and September 2005.

In April 2005 the Commission published a Communication reiterating its determination to helping Kosovo, provided political leaders demonstrate a clear commitment to democratic principles, human rights, protection of minorities, rule of law, market economic reform and the values on which the European Union is based. This communication provides a support agenda to enhance socio-economic development and closer integration of Kosovo into the region.

In June 2005, the EU High Representative for the CFSP and the EU Commissioner for Enlargement submitted a joint report to the Council on the future EU Role and contribution in Kosovo. This report served as the basis of the European Council declaration of 16 and 17 June 2005, recalling the European Union’s contribution to the implementation of United Nations Security Council Resolution 1244 on Kosovo and reaffirming that any future solution for Kosovo must be fully compatible with European values and norms and contribute to realising the European prospects of Kosovo and the region. The European Council also stressed the EU’s willingness to play a full part in the future international presence in Kosovo, in close cooperation with the relevant partners and international organisations.

Two informal inter-parliamentary meetings between the European Parliament delegation for relations with the countries of South East Europe and the Kosovo Parliamentary Assembly were held in Pristina in March 2004 and in Brussels in June 2005. In January 2005, the EU Commissioner for Enlargement visited Kosovo. Furthermore the Commisioner hosted a ministerial delegation visit to the Commission on June 2005, organised by the OSCE Mission in Kosovo. These contacts with Kosovo’s provisional institutions aim to help them in better understanding their role and encouraging the implementation of the standards as a mean to get closer to the EU.

The EU is Kosovo’s largest trade partner. Imports from the EU represent a share of 67.3% of total imports, amounting to around EUR 190 million.

Community assistance

Community assistance to Kosovo has been provided since 1999 under a variety of instruments including humanitarian aid, exceptional financial support and financing to Pillar IV of UNMIK. Since 2000, the CARDS programme has been the main financial instrument for Kosovo, with programmes mainly implemented by the European Agency for Reconstruction. To date, this assistance amounts to more than € 1.6 billion, and if topped up with bilateral aid from EU Member States – exceeds the EUR 2 billion.

In 2004 the CARDS allocation amounted to some EUR 78.9m; in 2005 an additional EUR 59.5m were provided in programmes designed to reflect the priorities of the European Partnership and support the implementation of the Standards. As an example, institution building support was earmarked for the two new ministries of communities and returns and local government as well as the prime minister’s office. Local government reform and the delivery of public services were supported. In the economic field, assistance was designed to support the privatisation process and the incorporation and restructuring of the public owned enterprises, strengthen the SME sector and develop coherent economic strategies.

As in previous years, in 2005, funding was provided to finance the operation of UNMIK Pillar IV. The Pillar together with the Provisional Institutions of Self-government is responsible for economic development and is an integral part of the UNMIK pillar structure. The 2004/2005 EC funding for Pillar IV amounted to about EUR 45 m.

Assistance is coordinated with EU member states, other donors and international financing institutions, including the World Bank and the IMF. As donor funding decreases for Kosovo, the European Commission has been encouraging Kosovo institutions to improve their donor coordination within the provisional institutions of self-government in order to maximise donor funding effectiveness.

B. Implementation of the stabilisation and association process

1. Political situation

The conditions for the Stabilisation and Association process were set out in the conclusions of the General Affairs Council in April 1997. To become EU members, the countries concerned need to satisfy the criteria established in the Copenhagen European Council conclusions of June 1993. The Copenhagen political criteria stipulate that countries must have achieved “stability of institutions guaranteeing democracy, the rule of law, human rights and respect for and protection of minorities.”

Elements to be examined include democratic principles, human rights, the rule of law, respect for and protection of minorities and regional cooperation. In addition to these, specific elements of relevance to individual countries are also examined, including respect for international obligations such as peace agreements and cooperation with the International Criminal Tribunal for the former Yugoslavia (ICTY).

In its 2004 report, the Commission found that:

“The UN key decision to operationalise the Standards for Kosovo, and the launch – although amidst difficulties – of the Dialogue between Pristina and Belgrade on issues of common concern, were the main developments over the reporting period.

Just at the time when the direct dialogue between Pristina and Belgrade seemed to be finally on track and the Kosovo standards implementation plan was about to be finalised, the ethnically motivated violent incidents that occurred in March 2004 marked a serious setback to the establishment of a secure, democratic and multi-ethnic Kosovo.

Over the reporting period, the performance of the Provisional Institutions of Self-Government (PISG) and public administration has started to improve, but significant deficiencies still need to be addressed with determination. The transfer of non-reserved competencies from the United Nations Interim Administration Mission in Kosovo (UNMIK) to the PISG was completed by the end of 2003. Now the PISG need to make full use of the transferred competencies to take greater responsibility for the reforms and their implementation under the ultimate responsibility of UNMIK, which in addition holds the reserved powers. The late and inadequate reaction of the PISG to the events of March 2004 raises serious concerns. The rule of law needs to be strengthened, in particular as regards effective implementation and enforcement of the legislation.

While some efforts were made notably in the second half of 2003, substantial and sustainable return of displaced persons to Kosovo was hampered by the unfavourable socio-economic conditions and precarious security situation. The March 2004 violent incidents have led to the forced displacement of members of minority communities and have exacerbated the climate of insecurity with a very adverse impact on the overall process of returns.

The European perspective means that Kosovo people will be able to benefit from the peace and prosperity that the process of European integration has secured in a free and democratic manner throughout most of the continent. To achieve this aim, Kosovo needs to be firmly anchored in the Stabilisation and Association process. However, the March 2004 incidents show that Kosovo people and the PISG need to engage seriously in the process.”

The section below provides an assessment of political developments in Kosovo since the 2004 report, including the overall functioning of its executive and judicial system, the rule of law, respect for human rights and protection of minorities and regional issues. Such developments are closely linked to Kosovo’s ability to implement the reforms and reach the standards that are required to make further progress in the Stabilisation and Association process and towards the EU.

1.1 Democracy and the rule of law

Overall, the provisional institutions of self-government have shown a higher commitment towards the implementation of the Standards for Kosovo and have made particular efforts to redress the consequences of the March violence and to regain credibility after such a major setback. However, democratic deficits and efficiency in their functioning need to be addressed and more commitment is needed by the political leadership in the institutions at central and local levels to guarantee impartiality in the exercise of their public functions.

The reporting period was marked by a fast changing political environment and the absence of Kosovo Serbs from the political scene. Provisions in the Constitutional framework designed to protect minority rights in the Assembly and Government continued to reserve ten seats in the Assembly, three Ministerial, three Deputy Ministerial and one Assembly Presidency positions for minority communities. However, the boycott of the 2004 elections by Kosovo Serbs (0.3%) reduced their Assembly representation from twenty two members to the reserved ten, of which only two members of the Serb Civil Initiative took their seats in the Assembly and have participated regularly. The absence of the Serbian List for Kosovo and Metohija representatives in the Assembly and the Government has prevented the promotion of the legitimate Kosovo Serb interest in the institutions. However, neither the Provisional institutions nor the majority media have succeeded to create the necessary confidence building measures to facilitate the Kosovo Serb participation into the political process. In February, President Tadic visited a number of municipalities with significant Kosovo Serb population. The first visit to Kosovo by a Serbian President since 1999 took place in relative calm but failed to help encourage the participation of Kosovo Serbs into the political process.

Direct dialogue between Pristina and Belgrade has resumed in the reporting period. Four working groups on technical areas of mutual interest are in place: Energy, Returns, Transport and Telecommunications and Missing Persons. Both delegations have been able to travel to both Pristina and Belgrade without hindrance. In general, there is a need to intensify the frequency of the dialogue and the preparation of the Kosovo delegations in terms of technical experience and seniority in order to get more fruitful results. Regarding political dialogue, Kosovo’s president and prime minister have declared that they are ready to meet their Serbian counterparts. However, no meetings have been set and both the Kosovo and the Serbian side have not been constructively seeking a compromise solution that would satisfy both parties.

Relations between the main Kosovo Albanian political parties have been strained and tensions between them mounting. The main opposition parties were highly critical of procedures in the assembly and openly accusing some government members of engaging in criminal activity. Under pressure of the international community, Kosovo’s president formally retired from his position as president of the Democratic League of Kosovo party in 2005. However no successor has been identified and he continued chair party meetings and continues to play a key role within his party. A private security service guarding the presidency was replaced by the Kosovo Police Service in April. The president’s role at the Kosovo forum is generally acknowledged to be positive and constructive. His role in the forming of an inclusive team of Kosovo Albanian political representatives for the Status negotiations has been instrumental. Despite his health problems, the PM has pledged to continue fulfilling his political functions.

Parliament

The Kosovo Assembly is still in the process of developing a truly democratic culture. Its new rules of procedure were only adopted in May 2005. Since this adoption there have been no reports of serious procedural violations. Eleven Assembly committees have been established. However, not all of them are fully operational with particular concern on the shortcomings of the Committee on Rights and Interests of Communities. The Assembly secretariat has not made the best efforts to provide free access to official documents for members of the Assembly and the public. The Assembly has not always exercised well its activity in executive oversight, especially with regard to the (non) implementation of Assembly laws and financial expenditure. Decisions on important matters, such as budgetary spending, have often been reached in a manner that was not transparent and excluded the majority of the Assembly. It has not been convened frequently enough to guarantee full political debate and the delivery of quality legislation and right overseeing of the work of the executive branch. For the first time, Kosovo’s Assembly saw the emergence of a true parliamentary opposition. Technical issues have become highly politicised bones of contention between government and opposition parties, which are still growing into their new role.

In this context the joint statement of the Informal inter-parliamentary meeting between the European Parliament delegation for relations with the countries of South East Europe and a delegation of the Kosovo Parliamentary Assembly the June in June 2005 outlined the need for the Kosovo Parliamentary Assembly to pay more attention to its role of legislator and for monitoring law implementation. It outlined that the Parliament should ensure full respect of the rules and should become the place for fair political debate and constructive confrontation between the governing and the opposition parties.

Government

After the multi-party coalition which dominated the political scene between 2000 and 2004, the elections of October 2004 resulted for the first time in Kosovo in a government coalition formed between the Democratic League of Kosovo (LDK) and the Alliance for the Future of Kosovo (AAK). The AAK’s president Ramush Haradinaj was given the post of prime minister which he hold until March 2005, when he was indicted by the International Criminal Tribunal for the Former Yugoslavia (ICTY). He immediately resigned, voluntarily surrendered and was transferred to The Hague. He was released on bail and returned to Kosovo in June. Neither the indictment nor the return sparked unrest.

The end of the former broad coalition strengthened the role of the prime minister and allowed for a more coherent political agenda, but it also resulted in the politicisation of more technical issues. The swift designation of Mr Haradinaj’s successor Bajram Kosumi allowed the smooth continuation of the government coalition..

The new government has established three new Ministries (Ministries of Local Governance Administration, Communities and Returns and Energy and Mines) and ensuring a multi-ethnic composition (three ministries are allocated to minorities and three deputy ministerial positions). However, the key cabinet post of minister of agriculture, forestry and rural development reserved to a Kosovo Serb has remained empty. Although there has been an effort to grow as a government and improve joint rather than individual leadership, the government’s work has been tainted by corruption accusations.

The administration attention has focused on the implementation of the Standards for Kosovo with a view to meet the UN Comprehensive review date. However, the long term commitment to substantial reforms beyond this date needs to be assured. The central coordination capacity of the prime minister’s office has developed but still needs to be significantly further strengthened in order to provide effective strategic direction, planning and government coordination. Additional efforts are necessary to build up efficient and effective government mechanisms, in particular in relation to coordinating ministries and developing coherent policies that are implemented consistently at central and municipal level.

Public administration

One of the major cross cutting issues to be tackled in Kosovo is the strengthening of public administration, as overall Kosovo’s public administration remains extremely weak inefficient and overstaffed.. Basic public services provision needs to be reinforced across all sectors.

A key highlight of the reporting period has been the positive trend in the recruitment of minority communities in the PISG. Minority employment at central level is estimated at 11%. Sixteen of the thirty municipalities have met or exceed targets. Special recruitment campaigns are underway at the central and municipal level but an overarching strategy for ensuring sustainable minority representation in the PISG is needed including adequate access to information for vacancies in the long-term.

An UNMIK commissioned assessment in April 2005 concluded that the foundations for a functioning system of public administration were gradually being established. It furthermore found that the legal basis was in place and the required institutions existed for managing the civil service and financial management processes, a comprehensive public administration reform strategy or action plan has yet to be agreed upon. However, serious efforts to improve the public administration could not be witnessed.

The Civil Service Law was promulgated by the SRSG on in December 2001 (UNMIK Regulation 2001/36) and governs all civil service employment covered by the Kosovo consolidated budget. It stipulates a contract-based employment system based on an extendable contract of limited duration of three years. Two institutions, an independent oversight board and a senior public appointments committee are established by the law. All appointments, except senior appointments are decentralised to Kosovo’s institutions which determine job descriptions and classification. Recent dismissals of several permanent secretaries have given rise to concerns about transparency and independence of public selection procedures and dismissals. For the sake of ensuring the efficiency and independence of the civil service, there is merit in the consideration of senior public service staffing contracts not to be decided by lapse of time. Furthermore, decisions to renew or end public servants employment should be made after a sound evaluation process. Proper performance appraisal procedures also need to be put in place.

In May 2005, the ministry of finance and economy and the ministry for public service established a working group at the deputy minister’s level to implement a new pay and grade system in the public sector. The creation of the working groups between the ministry of finance and economy and the ministry for public services was intended to improve control over the calculation of wages, the definition of job description and related harmonised payment structures in addition to the reduction in the budget expenditures. In September 2005, the government announced that due to technical problems, the Pay and Grading Scale Review could not be implemented. Any solution for this problem should be kept in line with International Monetary Fund recommendations. It is very important that any salary balancing exercise is kept budgetary neutral.

The capacities of the Kosovo institute of public administration have been further enhanced and the number of training courses delivered has increased. However, the institute has not managed to grow into a role as independent and authoritative provider of generic public administration training and it suffers from low acceptance among line ministries as they continue to operate their own training departments and do not sufficiently make use of the services the institute can offer.

Administrative capacity at the municipal level is also weak both at the administrative and at the strategic planning level, e.g. when it comes to developing medium to long term economic development strategies. Furthermore, the relationship between the central and the municipal level needs to be further defined in terms of clearly determining the roles and obligations of each level.

Belgrade-sponsored parallel administrative structures [2] continue to operate in most predominately Kosovo-Serb municipalities. The March 2004 event severely hampered the efforts made by UNMIK and the PISG at integrating the two structures.

The main areas of parallel activities are courts, education, administration and health care. In terms of education, two systems of education continue to operate in Kosovo and there is little mutual recognition of certificates and diplomas. Furthermore, there are still parallel administrative structures with regard to property registration, which cause legal uncertainty for property rights holders. The Serbian ministry of Internal Affairs has several offices in Kosovo that administer drivers’ licences, passports, identifications cards and vehicle registration plates. A number of Kosovans rely on these services, especially those that wish to travel to Serbia proper, as UNMIK documents are not recognised there. The parallel health care system continues to function alongside the PISG-run health care, and is financed by the Serbian ministry of Health.

Improving basic public services provision to all communities is needed including as a contribution to reducing demand for services provided by parallel structures. In the absence of meaningful and sustainable guarantees of equal access to quality services for all minority communities, the dismantling of parallel structures has to be seen in the wider context of the reform of local government.

Decentralisation has become one of the most controversially discussed issues in Kosovo politics. The framework for the reform of local government in Kosovo was endorsed by the government in July 2004. The ministry for local government developed a working programme in 2005 for the reform of local government leading up to the full implementation of the reform in 2008.

The implementation of the decentralisation process has proved to be difficult. The international community had to exercise pressure on Kosovo’s institutions on several occasions to move the decentralisation process forward. The main issue is the area and population size of the pilot municipality units. The initial proposal was changed to accommodate mainly Kosovo Serb concerns and a second, so-called ”plan B”, proposed amendments, addressing those concerns, and increasing the number of cadastral units within the pilot municipality units. In August 2005, five executive decisions were signed by UNMIK, establishing the territorial delineation of the five pilot municipality units. Subsequently the Government nominated councillors and inaugurated the three Provisional Assemblies of the three pilot municipal units of Hani I Elezit and Junik (Kosovo Albanian majority) and Mamusha (Kosovo Turk majority). However, Kosovo Serb leaders have continued to reject the process and in consequence; the two Kosovo Serb majority pilot municipalities of Gracanica and Partesh have not been inaugurated.

A positive step was, however, taken on 16 September, when delegations from Pristina and Belgrade met to discuss decentralisation, in a meeting organised by UN Secretary-General’s Special Envoy and hosted by the Austrian Foreign Ministry. This encounter facilitated an exchange of views and greater understanding of respective positions. There needs to be now a greater compromise that allows more concrete progress to be achieved in this important issue.

The lack of reliable demographic data is a serious impediment for Kosovo’s policy makers to design policies related to local government reform and economic development. The last census was held in 1991 but boycotted by the majority of Kosovo’s population. In December 2004, the Kosovo Population and Housing Census law was promulgated followed by a Government declaration on the intention to carry out a census in 2006. This census should provide reliable date on the number and geographical distribution of the population, the demographic structure and main socio-economic characteristics of the population, as well as information on dwellings and buildings used for housing. However, the present capacity of the Statistical Office of Kosovo is insufficient to undertake such a complex exercise. Early indications show that the conditions are not fulfilled to carry out a reliable census in full respect of international standards in 2006. The European Commission Statistical Office is working in close cooperation with the Council of Europe and key agencies in this field to support the Government in making the preparations for a Census pilot project due to start by the end of 2005..

The Kosovo Protection Corps (KPC) made some progress in becoming a multi-ethnic civil emergency organisation. Its involvement in the implementation of civil reconstruction and humanitarian projects has been appreciated by the international community. A publicity campaign for minority recruitment has helped to increase the number of minority members to 5.5 percent. Nevertheless, the ubiquitous display of the Albanian flag and of pictures of Albanian national and Kosovo Liberation Army war heroes at Kosovo Protection Corps premises and gatherings remains discouraging to minority members. This is an issue to be addressed if KPC is genuinely committed to become an organisation representative of all communities in Kosovo. A civil protection brigade as the future core of the KPC was created in June 2005 but without any consequent budget assignments. A certain improvement in disciplinary trends has been seen. The KPC needs to continue its streamlining and professionalisation. It should ensure that it performs its mandated functions in a transparent and accountable way and in full compliance with human right standards and the rule of law.

Judicial system

Kosovo’s judicial institutions remain week and unable to deliver a proper service, both in the civil and criminal sectors, needing to be substantially improved. One underlying difficulty is the legal uncertainty in relation to the laws that govern Kosovo. An extensive, coherent and comprehensive body of law governing Kosovo has yet to be defined. The main issue in this respect is the applicability of laws in Kosovo which is divided between UNMIK regulations and certain (Yugoslav) laws in force in Kosovo on 22 March 1989. While the applicability of laws has been defined by UNMIK regulations in theory, exactly which laws are in force is not always clear to practitioners thus undermining the rule of law and creating legal uncertainties.

The court system of Kosovo comprises a supreme court, a commercial court, a high court for minor offences, five district courts, 24 municipal courts and 25 minor offences courts. Supreme Court chambers dealing with constitutional matters or human rights have not been created. Kosovo does not have a system of administrative courts.

The efficiency of the judicial system is still very low. The length of procedures and the case overload remains a major problem. Due to the absence of a modern case management system and the increasing number of complaints lodged, the number of backlogs of cases is steadily increasing. Appointment procedures for judges can take up to one year.

Deeper structural reforms are required for a professional justice system to take root. Judges and prosecutors generally graduated under the Yugoslav system and were forcedly out of work between 1989 and 1999. Initial legal education programmes have started to be delivered by the Kosovo Judiciary Institute but continuous legal education remain to be made compulsory. The new provisional criminal and criminal procedure codes entered into force in April 2004, but both judges and prosecutors are not always able to properly implement the quite extensive legal and practical changes these codes brought about. When and where judgements are delivered there are concerns that the execution of justice remains selective at times.

The enhance role of prosecutors under the new criminal code and criminal procedure code, directing and supervising the work of judicial police in the petrial stage of criminal proceedings, makes more urgent the need to establish institutional safeguards to guarantee the autonomy an impartiality of the prosecution system.

Major crimes are dealt with by international judges and prosecutors. An efficient witness protection –also in the face of intimidation- does not yet exist. Care should be taken to further develop the legal framework for witness protection, in such a way as to ensure that the safety of vulnerable witnesses is appropriately balanced with the accused’s right of defence. No war crimes cases are currently being directly handled by local courts and/or prosecutors. The majority of cases relating to the March 2004 events are being handled by the local judiciary, with cases against 423 persons resulting in 209 guilty convictions to date. International prosecutors are working on all cases that resulted in death, involving the burning of Serb houses, churches and monasteries, cases against the organizers/leaders of the riots, flagrant cases of inter-ethnic violence and cases involving significant violence against police. International prosecutors are handling approximately 44 cases; verdicts have been reached in 11 cases. The highest sentence was handed down in July 2005, when the defendant was sentenced to 18 years imprisonment for attempted murder.

The judicial inspection unit received appropriate funding in 2005 but still has to develop its capacities. The judicial police unit foreseen in the new provisional criminal code of procedure that will undertake certain investigatory task under the supervision of the public prosecutor has been set up.

Recruitment of qualified staff from the minority population remains a critical issue, especially with regards to the Serb minority. About 10% of judges and 9% of prosecutors are from minorities. The recruitment of members from the Serb community is hampered by the continuous existence of Serb community parallel courts especially in the northern municipalities. Intimidation of potential Serb recruits from their own communities, uncertainties concerning their future pension rights and a perceived lack of freedom of movement by members of this community are among the factors having negative impact on members from the Serb minority. Full access to justice for minority communities in Kosovo still need to be achieved.

Whereas there is a downward trend in the overall crime rate, with crime clearance dates broadly comparable for majority and minority communities, the general security situation has been undermined in the first half of 2005 by the failure to identify the authors of several high-profile crimes against politicians, journalists and members of the police service. Low level crimes on minorities are common but rarely reported. Law enforcement agencies need to significantly increase the effectiveness of the investigations of reported crimes to bring perpetrators to justice and remedy the prevailing atmosphere of impunity. Without more decisive action, the general feeling of insecurity will remain and inter-community trust and dialogue will not be restored.

Anti-corruption policy

Corruption in Kosovo is wide-spread at all levels. Kosovo is not a party to the main international conventions in the field of anti-corruption (Council of Europe criminal law convention on corruption, Council of Europe civil law convention on corruption, and its additional protocol and the UN convention against corruption). Although some of these provisions have to some extent been interpreted in the domestic legislation such as the provisional criminal code of Kosovo and the law on the suppression of corruption, more effort is required to launch a more cohesive and forceful action against corruption.

The law on the suppression of corruption was promulgated in May 2005 providing; inter alia, for the creation of a Kosovo anti-corruption agency. The law prescribes that an anti corruption strategy should be prepared by the anti corruption agency for the Government to be approved by the assembly. Both the Agency, the strategy and the Action Plan for the implementation of the Anti-Corruption strategy need to be put in place as a matter of priority.

Since 2003, a financial investigation unit, staffed by Guardia di Finanza officers, has the mandate to conduct financial inspections of public bodies and public enterprises as well as other organisations receiving public funds and launch criminal investigations. Also an investigation task force - comprised of representatives of the UN office of internal oversight services, the European anti-fraud office and the financial investigation unit – has received a wide mandate to undertake administrative investigations to identify fraud in the expenditure of public funds. The Office of the SRSG is coordinating the implementation of recommendations issued by the investigation task force. Internal investigation services have been set up in the police and the judiciary.

There are frequent reports about irregularities in public tendering procedures. The recent revision of the public procurement law is a step forward. The law reflects EU standards in terms of defining a clear division between the executive and regulatory functions. It has yet to be passed by the Assembly. It is expected that the implementation of the new law in coordination with the external audit activities of the Auditor General Office will contribute to the improvement of the situation and better use of public funds.

1.2 Human rights and the protection of minorities

Observance of international human rights law

Pursuant to the constitutional framework for provisional self-government in Kosovo, the main international human rights and fundamental freedoms instruments are directly applicable in Kosovo.

Hence, a) The Universal Declaration on Human Rights; b) The European Convention for the Protection of Human Rights and Fundamental Freedoms and its Protocols; (c) The International Covenant on Civil and Political Rights and the Protocols thereto; (d) The Convention on the Elimination of All Forms of Racial Discrimination; (e) The Convention on the Elimination of All Forms of Discrimination Against Women; (f) The Convention on the Rights of the Child;(g) The European Charter for Regional or Minority Languages and h) The Council of Europe’s Framework Convention for the Protection of National Minorities, are all directly applicable in Kosovo. Furthermore, the rights of minorities are protected under the Constitutional Framework.

As the Kosovo legal system does not have a human rights court, the ombudsperson continues to be an important institution to monitor and protect the human rights situation in Kosovo. The mandate of the ombudsperson is somewhat limited by the fact that UNMIK and KFOR are not judicially accountable. In 2004, the ombudsperson was contacted by approximately 4000 people who sought advice or lodged a complaint. The ombudsperson’s fifth annual report (2004 – 2005) was published in July 2005. The mandate of the current international ombudsperson expires on 31 December 2005. There are concerns that it may be premature to transfer the post as inevitable pressures may prove too difficult for a Kosovan ombudsperson to be accessible to all communities and remain independent. The PISG will have to provide a full and active support to ensure that the new ombudsperson can pursue this crucial mandate successfully and show higher respect for the implementation of the Ombudsperson recommendations.

No developments are accounted for in the field of protection of personal data.

Civil and political rights

There is no death penalty in Kosovo. Prisons generally meet international standards although facilities are sometimes overcrowded. Prison overpopulation has improved in comparison to last year as some units of Dubrova prison have been renovated. The new criminal law requires special places for the detention of mentally disabled people, but due to the lack of specialised institutions, there is a lack of capacity to receive such persons. The Kosovo Correction Service (KCS) is fully multiethnic. Women make up 18% of the KCS (comparing favourably with Western European norms).The Constitutional Framework and the Criminal Procedure Code prohibits practices of torture and ill-treatment.

As regards freedom of expression and media, a series of measures were introduced towards the development of professional and self regulated media. A Code of Conduct for print media was adopted by leading media in April 2005. Most daily and weekly newspapers followed suit and subscribed to the Code, which is only partially implemented. Another important step towards media self-regulation was taken in August 2005 when the press council statute was signed by leading print media representatives. Future complaints will be handled by the press council.

The Temporary Media Commissioner has licensed 111 broadcast stations, of which 72 broadcast primarily in Albanian, 33 in Serbian, three in Bosnian, two in Turkish, one in Gorani and ten partly in Roma, although an application for a full Roma-language radio station in Prizren remains under review by the office of the temporary media commissioner. The proportion of public broadcasting in minority languages is 9.6% of televised programmes and 12.5% of radio broadcasting. However, the government has yet to implement its strategic plan for minority media.

The law on the independent media commission was promulgated in July 2005. The law governs the establishment and the functioning of a permanent broadcast regulator that will replace the temporary media commissioner by end 2006.

Private and public broadcasters’ roles during the March 2004 riots were questionable and contributed to fanning the riots. In December 2004, the temporary media commissioner reached settlements with the broadcasters Koha Vision TV, TV 21 and the public broadcaster Radio Television of Kosovo (RTK) where the broadcasters acknowledged their violations of principles embodied in the Code of Conduct for the Broadcast Media in Kosovo in their broadcasting during the March 2004 events. The settlements established that the broadcasters would earmark funds to provide professional training for their journalists.

. In 2005 two new academic institutions were established: the Kosovo institute of journalism and communication and the Kosovo media institute, aiming to help build up the professional capacity in the media sector. The question of funding both institutions remains to be addressed.

UNMIK regulations and the Constitutional Framework provide for the freedom of assembly. Although still weak in terms of capacity and influence, local non-governmental organisations continue to operate and are increasing their experience and capacity. However, this process is mainly donor driven and participation in public life is still quite limited.

As far as property rights, the institutional framework regulating and protecting property rights is very weak. Moreover, there is a general sense of lawlessness and a perceived culture of impunity surrounding property issues. Property rights suffer from incomplete and sometimes missing records, inadequate property related legislation, implementation problems, ineffective municipal regulation of construction, discriminatory practices and lack of coordination between responsible actors.

Overall, the illegal occupation of property, including agricultural land and commercial property continues to affect individuals' rights to property and hamper economic development, the returns process and the establishment of the rule of law.

The Housing Property Directorate and Housing and Property Claims Commission (HPD/HPCC), the international quasi-judicial body with exclusive jurisdiction over certain conflict related residential property claims, has adjudicated 97% of its 29,131 residential property claims. By September 2005, more than 15,395 HPCC decisions had been implemented resulting in 1220 evictions and 264 properties released voluntarily. The completion of directorate’s work is foreseen for the end of 2005. Repossession of property to the rightful owner remains a serious challenge; only 1,691 (11%) of implemented claims have resulted in repossession.

However, there is an important backlog of property related court cases which amount to more than 44,000 cases at present. Moreover, international monitors have identified irregular practices regarding the verification of property transfers and the use of the Office of the Temporary Representative.

Illegal construction is rampant. The government has made efforts to complete the existing legal framework in order to enable the municipalities to address the issue. Delays in the development and approval of new spatial and urban plans have created additional difficulties in this regard. Furthermore, municipal authorities need to more effectively ensure that public works are conducted in accordance with the legal framework regulating expropriations and that adequate compensation is provided in all cases.

The registration of property is also under reform, with a newly established Immovable Property Rights Register in place. The lack of access to judicial and cadastral records that were removed or destroyed before and during the 1999 conflict adversely affects the reliability of both the cadastre and immovable property rights register. Moreover, further accountability mechanisms and internal oversight are required to prevent fraud.

Finally, a number of individuals lack security of tenure and suffer the legacy of years of discrimination and the weakness of local institutions. Thus, a significant portion of Roma, Ashkali and Egyptian property right holders did not register or legally secure their rights because, at the time, they either were not fully aware of its value or implications or felt the registration fees were too high. Further measures are required to confer these individuals with legal security of tenure and access to all services provided by the cities, in accordance with international human rights standards. Specific measures directed to protect their right to sustainable return, in cases were their settlements were destroyed is also necessary. A positive step has been taken in respect of informal settlements which have been almost completely mapped. Work is undergoing on an action plan for their regularisation.

Economic and social rights

Kosovo experiences the worst unemployment in the region with young people and women disproportionately represented among the unemployed. A legislative framework is in place which provides for basic labour standards, protection of workers’ rights, prohibition of child labour, rights of association and equal opportunities. This also provides for a labour inspectorate, which is operational but requires further support in terms of policy development and capacity building particularly on enforcement.

A tri-partite advisory council provides a framework for social dialogue. However, more exposure by the relevant authorities and social partners in making social partnership more effective is necessary. In particular, more capacity building support is required for employers and trade unions to reinforce social dialogue and partnership structures at local and national levels.

Capacity of the public employment services in assisting the unemployed with labour market integration has been developing steadily but its ability to deal with the chronic numbers of jobless is severely constrained. A network of eight vocational training centres provides training courses reflecting local employers' needs but demand on courses far outweighs supply. Similarly, employment advisory services which provides counselling, sign-posting and support to job-seekers is grossly overstretched.

Support to ethnic minorities continues to be a difficult area. For the Serb community part of the problem is non-recognition of Kosovo based services. More efforts are needed by the employment services to engage the Roma and Ashkali communities. Further cooperation with civil society and non-governmental organisations could facilitate this process.

UNMIK regulations and the Constitutional Framework provide for freedom of religion. However the connection between religion and ethnicity has an impact on the freedom of religion of Kosovo Serbs. Some members of the Kosovo Albanian community continue to be hostile to and suspicious of the Serbian Orthodox Church. A law on religion was adopted by the Assembly but is yet to be promulgated by the SRSG.

The health care system in Kosovo is faced with numerous challenges due to insufficient funds and lack of access, especially for minority communities. The legal framework protecting people with mental disabilities remains unclear. The situation of persons with physical disabilities remains difficult due insufficient legislation in this area, lack of access to health care, lack of disability-friendly infrastructure and discrimination is common.

Young women and men in Kosovo, under the age of 25, constitute 52% of the population. Infant mortality is high; 35 per 1000 live births. This is mainly due to poor delivery practices and poor quality of new born care. Furthermore, there are some noteworthy child protection problems, such as the growing incidence of child labour and cases of child trafficking. Other societal abuses include discrimination and intimidation of homosexuals.

The education system is facing serious quality problems. Laws on primary and secondary education and on higher education were adopted but the administrative and financial responsibility for primary and secondary school has been devolved to municipalities who lack necessary administrative skills. There is a lack of infrastructure; schooling remains to be provided in up to three shifts in extreme cases. Kosovo higher education is in a critical situation. It needs to reform the curriculum, ensure staff development, improve administration and promote research. The Universities of Mitrovica and Pristina remain highly politicised. The rector of the University of Pristina was replaced by an interim board on the pressure of the Ministry and the international community and the University of Mitrovica remains inaccessible for Kosovo Albanians. Education and training is underfinanced and lack the necessary resources and infrastructure for quality outcomes. Many vocational training and higher education programmes lack not only laboratories and equipment but also relevance to the labour market. The education system is characterised by high levels of early school leavers, in particular of vulnerable groups.

Regarding gender equality, women in Kosovo are seriously disadvantaged. Around 31% participate in the labour force while the figure for men is 75%. Furthermore, women earn four times less than men. Men have, on average, two more years of schooling than women. Domestic violence is rampant and Kosovo is still a place of origin, transition and destination of trafficking in human beings. Although official statutory law gives women the right to own, rent and inherit property, customary law does not. This results in women giving up their property rights, and by doing so, hampering their improved economic perspective.

In recent years, developments in terms gender equality include the promulgation of a law on gender equality and the anti-discrimination law in 2004. The Kosovo Action Plan on the Achievement for Gender Equality was adopted by the Government in 2004. There is also a regulation on Prohibition on Domestic Violence and Trafficking of Persons and in May 2005 the Action Plan to Combat Trafficking was adopted by the government. However the family law that was adopted by the Assembly was rejected by the SRSG. This law needs to be reviewed on priority basis.

Other gender equality mechanisms consist of the establishment of gender officers in every ministry and the establishment of an inter-ministerial working group on gender equality. At municipal level, there are municipal gender officers assigned in every municipality and there are gender equality committees in 18 municipalities. The Office of Gender Equality that is foreseen in the Gender Equality Law was set up in June within the Prime Ministers Office. Despite existing legislation and mechanisms of gender equality, the Assembly continues to adopt laws that discriminate directly and indirectly against women. Furthermore, there is a lack of skills, capacity, and financial resources to enforce the implementation of the gender equality laws. For example, in the case of the Municipal Gender Officers, their mandate is not clearly defined and they lack skills and budget to be able to perform their duties optimally.

Women are not adequately represented within the PISG. Women rarely occupy leadership posts. The government includes one female minister and one female deputy minister. 28% of assembly members are women but there is no female member of the Presidency of the Parliamentary Assembly. The presence of women in the executive and legislative bodies reflects the legal requirements for gender representation in the electoral lists. Approximately the same percentage applies to the woman representation in the municipal assemblies but only one (of 30) is a Municipality Chief Executive Officer and there is no President of a Municipal Assembly.14% of Kosovo Police Service Staff are female.

Minority rights, cultural rights and the protection of minorities

While the human rights situation in Kosovo has improved, these developments need to be sustained and enhanced especially when it comes to minorities. Minority communities, mostly Serbs and Roma, face discrimination, restrictions in freedom of movement, access to education, health care, public utilities and social assistance due to poor quality of services and security concerns. The extent of discrimination varies to a greater and lesser extent, depending on each community.

In August 2004 an agreement was signed by UNMIK and the Council of Europe related to the Framework Convention for the Protection of National Minorities. According to the agreement, the Committee of Ministers of the Council of Europe, assisted by the Advisory Committee on the Framework Convention, shall monitor the implementation of this treaty in Kosovo. In May 2005, UNMIK submitted its first official report to the Council of Europe. The Shadow Report, prepared with contributions from the civil society was published in October.

The anti-discrimination law that was adopted in 2004 has been facing difficulties in the area of implementation as there is lack of budget and subsidiary legislation. Furthermore, the Office of Good Governance, Human Rights, Gender and Equal Opportunity in the prime minister’s office, is currently working on a strategy for human rights. The strategy aims at promoting and protecting human rights and focuses on people with disability, missing persons, minorities, women, and children.

The need to enhance the use of minority languages in central and municipal authorities remains. While some improvements have been made in municipal translation services, they are still not sufficiently developed due to lack of funding and sometimes political will. There has been an increase in signs in minority languages, especially on public buildings, although many multi-lingual signs have recently been subject to vandalism. There is still widespread use of Albanian nationalistic symbols which are perceived as intimidating by minority communities.

There are still cases where members of minority communities are targets of harassment, threats and violence based on their ethnicity, but in general the situation has improved, and a declining trend in crimes against minorities can be detected. However, perpetrators are rarely apprehended. There has been a decrease in the number of minorities that use military escorts. Since August, no regular KFOR escorts are required. Steps have been taken to increase cooperation between KFOR, UNMIK police and the Kosovo Police Service. An example would be the transfer of responsibility of the bridge in Mitrovica over to Kosovo Police Service. Furthermore, experimental lines for an integrated transport system started in June 2005. Nevertheless, there have not been sufficiently vigorous outreach actions by the authorities at central and local level to help overcome the perception of insecurity, which is still very much present amongst the minority communities.

Kosovo has significant cultural and religious heritage sites that constitute important symbols for different communities inside and outside of Kosovo. In July 2004 the Decan monastery became the first site located in Kosovo to be added to UNESCO’s world heritage list. In May 2005, UNESCO, in collaboration with UNMIK, the Council of Europe and the Commission, hosted the first international conference of donors for the cultural heritage in Kosovo with a view to raise funds for the restoration and preservation of 75 Orthodox, Muslim and vernacular cultural heritage sites in Kosovo. 34 of the above sites were damaged in the 2004 violent events or subject to vandalism. Approximately €10m were pledged including € 2m allocated by the EU.

In March 2005, a significant step was achieved with the signature by representatives of the Serbian Orthodox Church of a memorandum of understanding with the PISG relating to the reconstruction of churches destroyed in March 2004 for which the PISG allocated € 4.2 m. The memorandum started being implemented in June 2005. A joint Pristina-Belgrade Reconstruction Implementation Commission has been established. Significant progress has been achieved in the last months with eleven sites tendered for restoration. Bids are currently under evaluation while tendering documentation is under preparation for the restoration of 16 additional sites. However, more progress in the field of legislation related to Cultural heritage and the establishment of adequate structures for the preservation of Cultural sites is necessary. In addition, more funding should be allocated to finalise the reconstruction of the Orthodox sites damaged during the March riots. Following the successful visit in September of the PISG Minister of Culture, Youth and Sports to his counterpart in Belgrade, the Minister announced that an additional €1.5m will be added for the reconstruction of Orthodox sites.

Important obstacles remain to a sustainable returns process, resulting in few returnees. The overarching obstacle for the return of refugees and internally displaced population (IDP) is security concerns. This is coupled with a sense of uncertainty of over the future status of Kosovo as well as limited opportunities in Kosovo to sustain a livelihood. Another major impediment of return are property-related obstacles as returnees have difficulties in repossessing property left behind when fleeing Kosovo. Consequently, many of those displaced, in particular Serbs and Roma, have not yet found a durable solution.

The March events of 2004 were profoundly destructive as they damaged confidence in the return process. According to UNHCR statistics, as of 30 August, 1,364 people remain displaced as a result of the March 2004 violence. Of those over 200,000 that have been displaced since 1999, only 3,144people returned voluntarily in 2004 and 2005. The perspective of return varied considerably according to the region and ethnic group. The highest number of returns took place in the regions of Pec and Pristina. The total number of minority returnees since 1999 is estimated at around 13,060. However, no reliable statistics are available on how many of those returnees stayed in Kosovo. Although dialogue with Belgrade on this important issue has not progressed, some cooperation could be witnessed between Kosovo and Montenegro with the establishment of a joint protocol between Kosovo and Montenegro on the return of IDP.

There are an estimated 22,000 minority IDP in Kosovo. The situation of Roma, Ashkali and Egyptians deserves particular attention. A high percentage of the displaced Roma still live in hazardous and very precarious conditions in northern Kosovo and in the Pristina region. Attempts to dismantle the camps are ongoing but have to be pursued more vigorously. The Roma, Ashkali and Egyptians suffer from a lack of documentation and education. Both factors represent an obstacle for them to reclaim land and access social structures and services. Furthermore, there is an almost complete absence of Roma, Ashkali and Egyptian at the level of public institutions. This explains partly the difficulties met by these minorities to advocate their rights and protection.

Three IDP camps in northern Mitrovica for Roma, Ashkali, and Egyptian are situated on sites heavily lead-polluted caused by the former Trepca mining activities and thus pose a serious health risk to the inhabitants. In July 2004, the World Health Organisation released a report on elevated blood lead levels in the IDP communities and recommended a set of emergency measures, including the evacuation of the centres. An agreement was signed in April 2005 by UNMIK, UNHCR, OSCE and the Mitrovica Municipal Assembly President creating a framework for the return of former residents of the Roma Mahalla to their homes in southern Mitrovica. However, the returns process has not yet started. Return is unlikely to happen this year as work is ongoing to rubble clear the site and to chose the design of the buildings. The question of funding also remains unclear. This situation is unsustainable and need to be fully addressed without further delay.

Following a March 2005 UNHCR assessment that returns should be considered unsafe for Kosovo Serbs and Kosovo Roma as well as Kosovo Albanians where they are in a minority situation but that returns for Ashkali, Egyptian as well as Gorani and Bosniak could be considered safer in certain circumstances. Kosovo Albanians have been forcibly returned to Kosovo, mainly from Germany, Switzerland and Sweden. Some 4000 Kosovo Albanians were returned in 2004 while the figure was 1500 in 2005. In May, Germany - in agreement with UNMIK- also started a process of forced returns for members of the Ashkali and Egyptian communities. Since then, some 100 members of these communities have been forcibly returned to Kosovo. It is very important that the forced return of members of the Roma community happen in a framework that ensure their safe and sustained reintegration into Kosovan society. There are serious concerns that this may not be yet the case.

In November 2004, the SRSG announced the creation of a new ministry of communities and returns and in January 2005 a Kosovo Serb was appointed minister. The government has allocated approximately €10m for return activities; most of those funds are managed through UNDP. The establishment of the ministry of Communities and Returns and its cooperation with existing institutions in the area of returns has proven to be challenging.

In July 2005, the SRSG and the prime minister launched a strategic framework on communities and returns in order to revitalise the returns process. The Framework outlines the future for the returns process and builds on three main priority areas; the promotion of safety and freedom of movement; the creation of sustainable conditions for returns; and the enhancement of institutional support for returns. While the framework foresees the creation of a programme of action on communities and returns, this has yet to be designed. It is still necessary to ensure the full and concrete participation of all minorities in the design of long term sustainable returns projects including income generating components and measures to facilitate freedom of movement.

Sufficient security guarantees for minorities remain a key question to be addressed. Although efforts have been made, the situation still is not yet satisfactory. On the positive side, it can be said that basically no major inter-ethnic incident has been recorded since March 2004 and the freedom of movement has increased. Officially all municipalities have functioning Local Crime Prevention Councils.. However, episodes of harassment and intimidation of minority groups are still widespread, e.g. through anti minority graffiti, stone-throwing incidents.

Although there have been positive developments such as the endorsement by most municipalities of the 2005 Municipal Returns Strategy, appointments of municipal returns officers and more support to “Go-and-See” and “Go-and Inform” visits, the unconditional commitment at municipal level to explicitly condemn all manifestations of anti-minority-communities sentiment and publicly promote the return process is still insufficient to create the conditions for safe and sustainable returns.

1.3 Regional issues and international obligations

The reporting period has been characterised by significant progress in the participation and presence of Kosovo in regional co-operation initiatives. Under the UN Security Council Resolution 1244, Kosovo’s participation in regional fora and negotiation of international agreements falls under UNMIK authority. However, PISG line ministries are closely associated in these initiatives to ensure that the Kosovo government is fully capable of fulfilling its obligations under the constitutional framework for self-government.

In May 2003 UNMIK submitted a statement of intent to the Stability Pact, committing itself to the obligations set out in the Memorandum of Understanding on Trade liberalisation and facilitation. Kosovo signed a free trade agreement with Albania in 2003 and a temporary free trade agreement with the former Yugoslav Republic of Macedonia in September 2005. Negotiations are ongoing with Bosnia Herzegovina.

Relations with the former Yugoslav Republic of Macedonia have been enhanced as demonstrated with the opening of a Trade Office in Pristina in March 2005 and the more fluid dialogue at senior level. However, the problems in relation to the physical demarcation of the border on the part of Kosovo have not yet been resolved.

Also in March 2005, Kosovo participated to the opening of the negotiations on an agreement on a European common aviation area. The objective of the negotiations is to create a common area for aviation based on the rules and standards applicable in the European Union.

Kosovo is a member of the Athens process on energy and signed the South East Europe Energy Community Treaty in October 2005. This is a significant step for Kosovo on the way to increased regional co-operation and secure energy supply in the region as this is essential for economic and social development and stability. Within this context, Serbia raised obstacles in the participation of Kosovo in the South East Europe Transmission System Operator Task Force (SETSO TF). With the support of the Commission these difficulties have been overcome lately and the Energy Regulatory Office of Kosovo will be represented in the SETSO TF.

The sixth meeting of the national coordinators for the EU Charter on Small and Medium Enterprises was held in Pristina in April 2005; the first time Kosovo hosted this event. The ministry of trade and industry adheres to the principles set out in the EU Charter and has committed itself to their implementation.

Kosovo became a signatory to the memorandum of understanding on the Development of a South East Europe Core Regional Transport Network in June 2004. The signatory countries, the Commission, the Stability Pact and International Financial Institutions are working jointly to expedite the implementation of the Memorandum. A Kosovo delegation participated in April 2005 in the first South East Europe Transport Observatory (SEETO) steering committee that was held in Tirana. In June 2005 Kosovo hosted the second SEETO meeting where coordinators from all signatory countries/entities met.

In June 2005, the Committee of the Regions and the Congress of the Council of Europe, in partnership with the European Commission, the Council of Europe and the Stability Pact for South-Eastern Europe, held a conference on the role of EU regional and local authorities in the process of democratic consolidation in the Western Balkans Regions. The conference was attended by delegates from the whole region.

As regards international obligations, cooperation with ICTY has been satisfactory as shown by Kosovo’s cooperation in relation to case (IT-04-84) Haradinaj et al. ICTY indictees Ramush Haradinaj, Idriz Balaj and Lahi Brahimaj were immediately transferred to The Hague after the indictement was made public.

1.4 General evaluation

The political situation in Kosovo remained stable during the parliamentary elections and the subsequent establishment of the coalition government, as well as on the occasion of the ICTY indictment and voluntary surrender of the former Prime Minister. However, substantial democratic and efficiency deficits weaken the performance of the provisional institutions of self-government.

Relations between Kosovo Serbs and Kosovo Albanians have remained strained. The Kosovo Serbs’ boycott of the 2004 elections undermined their capacity to address their community’s legitimate concerns through democratic means. At the same time, the Kosovo Albanian majority failed to create the necessary conditions to facilitate Kosovo Serb participation in the political process. The implementation of local self government reform was significantly hampered by this situation.

Overall, the rule of law needs to be significantly strengthened. One underlying difficulty is the legal uncertainty which exists in relation to the laws that govern Kosovo. The administration of justice continues to be a major problem as the backlog of cases increases. The judicial institutions and the law enforcement agencies need to be substantially improved to be capable of fully enforcing the law, notably as far as property rights and fighting organised and financial crime is concerned. Corruption is widespread and there is a lack of cohesive and forceful action against it.

Kosovo’s administrative capacity remains extremely weak. Its public administration is inefficient and subject to political interference, and does not always act equitably. Although a legal basis for the civil service and for public finance management is in place, there is a lack of transparency and accountability. Government coordination must be enhanced and the relationship between the central and municipal level needs to be further defined. Improving basic public service provision to all communities is a priority, not least to help reduce the demand for services provided by the parallel structures that continue to operate in most predominately Kosovo-Serb municipalities.

There has been further progress in enhancing freedom of expression, with the establishment of the regulatory framework for independent media and the establishment of two new academic institutions to foster quality journalism. An anti-discrimination law was adopted but now needs to be fully implemented if it is to properly protect the rights of the most vulnerable, in particular children and women. The ombudsperson institution has continued to play a crucial role in safeguarding human rights and the protection of minorities.

Some outreach efforts have been made on the part of Kosovo’s institution to condemn acts of violence against minority groups, to increase minority representation and to encourage return of refugees but they remained just declaratory statements without being translated into practice on the local level. Thus the situation of ethnic minorities continues to be extremely difficult. The use of minority languages in central and municipal authorities is insufficient and hinders participation into the institutions. Minorities’ access to public services is also a problem. Regarding the return of refugees and internally displaced people, the number of returnees remains very low. Uncertainty over Kosovo’s future status and fears about security, coupled with bleak employment prospects, is discouraging the return of Kosovo Serbs and other communities. Particular attention is required to ensuring a sustainable livelihood for all minority communities already living in Kosovo but the situation of Roma, Ashkalija and Egyptian communities, notably those living in health-hazardous conditions, requires urgent action.

The technical dialogue with Belgrade has resumed and the participation of Kosovo in regional co-operation initiatives has enhanced.

The opening of discussions on Kosovo’s future status is a challenge for the entire region. The strong commitment of all parties to a multi-ethnic, stable and democratic Kosovo will be essential to achieve a sustainable settlement that reinforces the security and stability of the region and its further progress towards the EU.

2.

Economic criteria

In its 2004 Report, the Commission found that:

“Despite some improvements, the economic situation remains a cause for concern: Kosovo’s economy is still heavily dependent on foreign aid and remittances and is far from being viable. Unemployment is high and likely to increase, thus creating fertile soil for social and political unrest. Privatisation of socially-owned enterprises and restructuring of public utilities have not advanced satisfactorily. The management of public finances need to be more efficient and transparent.”

In examining the recent economic developments in Kosovo, the Commission’s approach is being guided by the conclusions of the European Council in Copenhagen in June 1993, which stated that membership of the Union requires:

- the existence of a functioning market economy;

- the capacity to cope with competitive pressure and market forces within the Union;

and by the Conclusions of the Council of Ministers of 29-30 April 1997, which stated that contractual relations with the EU require:

- macroeconomic institutions and policies necessary to ensure a stable economic environment;

- comprehensive liberalisation of prices, trade and current payments;

- setting up of a transparent and stable legal and regulatory framework

- de-monopolisation and privatisation of state-owned or socially-owned enterprises;

- establishment of a competitive and prudently managed banking sector.

In the analysis below, the Commission has followed the methodology applied in previous annual Regular Reports, to the extent applicable in the case of Kosovo: the lack of information, in particular the absence of national accounts, or the often limited reliability of available information, inhibits analytical work and calls for cautiousness on conclusions which can be reached.

2.1 Economic developments

Macroeconomic developments

Economic developments in 2004 and the first half of 2005 have to a large extent been influenced by the decline in donors’ support and a lack of dynamism of the economy. GDP growth - which is now estimated by the IMF [3] to have been negative in 2002 and 2003 - increased significantly in 2004 to an estimated 3.7% level, on the back of a substantial increase in public expenditure towards the end of the year, which led to a high budget deficit (5.9% of GDP). An adjustment in consumer prices, which had been inflated by the international community’s presence, is under way: CPI inflation turned negative in the second half of 2004, and prices further decreased by 0.5% [4] in the first eight months of 2005 (year-on-year). Owing to a considerable trade deficit, the current account balance has continued to post high negative figures (close to 30% of GDP in 2004), and provisional data for the first semester 2005 suggest a further deterioration in the trade balance. Given the absence of sizeable foreign direct investment inflows, the financing of the current account deficit continued to rely on foreign assistance (around 23% of GDP in 2004) and, to a lesser extent, private capital transfers.

(...PICT...)

Structural reforms

While privatisation resumed in mid-2004 and progressed markedly thereafter, progress in other key structural reform areas, such as public enterprises restructuring and law enforcement, have been more limited. The main development in the area of structural reforms since the 2004 SAP report has been a renewed focus on the privatisation of socially-owned enterprises (SOEs) following changes in the Kosovo Trust Agency’s (KTA) management in summer 2004. Several “waves” of privatisation have been launched since July/August 2004. On the side of publicly-owned enterprises (POEs), restructuring has been progressing more slowly and has been hampered by the slow pace of POEs’ incorporation as a necessary preceding step. Preparations for the incorporation of KEK, the electricity utility, are ongoing. Following the effective transfer of the budget responsibility to the PISG in 2002, continued improvements in the process of institutional capacity building took place, notably in the Ministry of Finance and Economy. A new regulatory environment has been established in the area of energy, with the adoption of a series of laws in June 2004, the establishment of a regulatory authority and the signature of the Energy Community Treaty establishing a Regional Energy Market in South East Europe.

2.2 Progress towards economic stability and competitiveness

Establishment of market principles

The development of market principles requires that prices, as well as trade, are liberalised and that an enforceable legal system, including property rights, is in place. Macroeconomic stability and consensus about economic policy enhance the performance of a market economy. A well-developed financial sector and the absence of any significant barriers to market entry and exit improve the efficiency of the economy.

Consensus about the essentials of economic policy has been strengthened, but, at times, achieving it remains a challenge. The particular institutional setting of Kosovo, with responsibility of the budget preparation and implementation transferred to the PISG, while budget approval remains ultimately an SRSG power, have led to long and difficult discussions between PISG and UNMIK before the approval of the 2005 budget. The current year’s budget was eventually only agreed in February 2005 and approved in March. Budget implementation also suffered from weaknesses in economic governance and monitoring, as evidenced by the uncontrolled of expenditure disbursements towards the end of 2004, to some extent due to a change in budget management, which led to a high fiscal deficit. Given the absence of independent monetary policy - with the euro as the main currency in circulation - fiscal policies are the core element of macroeconomic policies in Kosovo and do require a solid and sustainable framework based on a high degree of consensus among the parties. Recent improvements took place with the PISG Council of Ministers approval in June 2005 of a Medium Term Budget Framework, in agreement with UNMIK.

Growth in Kosovo remains highly vulnerable to declining donor assistance. Assistance by foreign donors - even though sharply declining - still contributed to some 23% of GDP in 2004, against 36% in 2002 and 28% in 2003. Additionally, the local consumption of international community expatriates in Kosovo (which is accounted as “exports”) represents another 5.7% of GDP in 2004 and is also on a declining trend. According to IMF estimates, growth in 2004 amounted to 3.7%. In spite of an increase of regular exports in 2004 by some 14%, even though from a very low level, remittances continued to constitute the main channel of transmission from the international economic environment to the local economy. Local consumption increased in 2004 by an estimated 4.3%, and continued to rely heavily on imports which represent 40% of consumption. There is continuous and rapid shift from declining donor financed investment - in the context of the Public Investment Programme (PIP) which remains off-budget - to investment financed from the budget, which considerably increased in 2004. Private sector investment in machinery and equipment (i.e. without taking housing investment into account) remained weak and continued to be constrained by high real interest rates. The unresolved status situation also remained an impediment to improved investment and growth dynamics.

The trade deficit remained very high. While imports in 2004 did not increase markedly against 2003 (+3.8%), data of the Statistical Office of Kosovo for the first eight months of 2005 point to a high growth (+23%, year-on-year) and a subsequent apparent increased trade deficit. However 2005 import data are being distorted by a revised tax regime applying to cars, which led to increased numbers of cars registered as imports in 2005, even though they had been imported in Kosovo in previous years. The coverage ratio of exports on imports remained extremely low in 2004 (around 19% including the local consumption of international community expatriates, or only 5.4% without the latter, i.e. for only “regular exports”). The local consumption of international community expatriates continued to decline: this regular loss of “exports” (in the IMF methodology) driven by the local market of expatriates consumption is a real challenge for Kosovo’s economy which is currently not yet able to fully replace such local “exports” by regular ones abroad. The trade deficit overall remained considerable in 2004, around 34% of GDP as in 2003. The current account deficit after foreign assistance is estimated to have increased markedly - by five percentage points - to 7.5% of GDP in 2004, mainly owing to the continued decrease in donors’ disbursements. Given the absence of sizeable FDI inflows, the closing of the substantial current transactions’ gap (after donors support) appears to have been taking place through private persons’ capital transfers

Unemployment remains very high. According to recent data from the Central Employment Service, the number of registered job seekers increased in 2004 by 7% to 302.000. By the end August 2005, the number of recorded job seekers further increased to around 314.500 [5]. The 2004 Labour Force Survey conducted by the Ministry of Employment however estimates a reduction in the unemployment rate from 49% (end 2003) to 42.3% end 2004, owing to a revision of active population data, notably the integration of an estimated 100.000 employed in the agricultural sector. The weak economic activity, the decline in donors support and continued structural adjustments in socially-owned and publicly-owned enterprises are estimated to have negatively affected the labour market situation. These figures should, however, be interpreted with caution given the particularly unreliable character of employment and active population data and the very large size of the informal sector. The rise in registered unemployment also appears to have been influenced by toughened enforcement of eligibility criteria for social assistance. The World Bank, taking into consideration seasonal and informal employment, estimated unemployment to be lower than suggested by official data and to be comprised between 23 and 33% of the labour force in 2004.

Inflation, which had already been low in previous years, was negative in the second half of 2004 and in early 2005. Consumer price inflation (CPI) reached for 2004 as a whole 0.2%. It turned negative as of September 2004 and reached -2.5% by the end of 2004 (year-on-year). This negative trend in CPI inflation continued in the first eight months 2005 with a -0.5% decrease (year-on-year). Housing-related prices fell, pointing to a reduction of the share of international community expatriates’ consumption in local demand. This, combined with gains of productivity in the retail sector and the overall sluggish growth developments, contributed to the negative evolution of prices.

The use of the euro as legal tender and as the main currency in circulation continued to provide a stable monetary environment. This excludes any independent monetary policy or the monetisation of budget deficits. BPK, the Banking and Payments authority of Kosovo, continued to impose tight reserve and liquidity requirements upon banks (e.g. loans cannot exceed 75% of deposits) in order to avoid any liquidity crisis. The use of the euro has also continued to facilitate economic transactions with Kosovo’s main trading partners, the Western Balkan countries - most of which have a formal or managed peg to the euro - and the euro area. M2 money [6] increased by 9.2% in 2004 and 6.1% by August 2005 (year-on-year) [7].

Considerable increases in expenditure, in the context of an important reform of budget rules, have resulted in a sizeable deficit in 2004. These increased payments depleted a large share of budgetary cash reserves accumulated over the previous years. The growth of general government spending had, until 2003, been financed through the expansion of domestic fiscal resources, which increased five-fold from 2000 to 2004. The budget posted significant surpluses in cash terms in 2001-2003, resulting in a reserve of accumulated cash deposits of EUR 307 million by the end of 2003. In the course of 2004, the authorities switched from commitment-based to cash-based budget management. Other changes were made, such as a very restricted possibility for budget users to carry forward budget endowments from one year to another. This resulted in a considerable deficit (on a cash basis) of around EUR 147 million (5.9% of GDP), i.e. more than EUR 60 million above the initially budgeted amount. Border taxes still constituted the main source of government revenue (71.5% of the total) and remained in 2004 close to their 2003 level. The 2005 budget foresees a deficit of 3.9% of GDP, to be financed from the accumulated cash balance. Latest IMF estimates however point to a likely higher deficit of some 5.8% of GDP. A Medium-Term Budget Strategy 2006-2008 was approved in June 2005. It does not consolidate financing needs that will derive from the Public Investment Programme (PIP) or from the restructuring process of POEs, under the assumption that a large of these needs will have to be financed from donors’ support and, at a later stage, borrowing. A broader consolidated approach of medium-term expenditure and financing needs was under preparation in the form of the Medium-Term Expenditure Framework expected to be finalised in autumn 2005. Budget data are based on GFS II standards [8], even though not fully compliant with these standards. Given the absence of any debt servicing at the current stage, there is no difference between the primary balance and the overall one.

The policy mix did not fully reflect the delicate juncture at which Kosovo’s economy is presently situated. The boom after the end of the war, fuelled by the arrival of the international community and the donor reconstruction support, was short-lived. The downsizing of donor support and of the international community’s presence currently severely hamper growth. This process, combined with expected liquidations of non viable SOEs and POEs restructuring, results in further pressure in the labour market. The low level of local savings, high real interest rates and the limited size of the local banking sector limit finance available for investment. The very large external deficits, as well as the lack of access to foreign borrowing, call for a prudent stance of fiscal policy. Fiscal discipline associated with the continuation of market oriented reforms is the only economic option for Kosovo. However fiscal consolidation was not pursued in 2004. To achieve this, the authorities will have to make expenditure cuts over the short term and to establish a medium term sustainable fiscal framework, a process for which first steps have been taken with the adoption of a Medium Term Budget Framework.

The price setting mechanism is fully free. The authorities do not intervene, even in the case of housing or utilities’ prices. Current governance arrangements as regards POEs, which remain under the authority of UNMIK – Pillar IV, further ensure the absence of government interference in the price setting mechanism of their services.

The private sector plays a predominant role in employment and production. However its exact size and share in the economy are difficult to assess due to the absence of reliable statistics and because of the large share of the informal economy. The IMF estimates the private sector’s disposable income share of Gross National Disposable Income at 84% in 2004. Agriculture is mainly in private hands, with land under SOE property accounting for some 30% of total cultivated surfaces.

Privatisation resumed in 2004 and progressed markedly. The third wave of privatisation was launched in July 2004, followed by five other waves in autumn 2004 and the first three quarters of 2005. By early July 2005, 42 out of the 150 SOEs initially slated for privatisation had been privatised (a number of them were split, resulting in a total of 50 contracts being signed). The privatisation of 98 other SOEs was still ongoing. In early July the KTA board approved the sale of Ferronikeli, an industrial minerals company, for EUR 33 million. The KTA expects to have privatised by the end of 2005 around 120 companies. Privatisation of SOEs on an ongoing concern basis is however not possible for the bulk of loss-making or non-operating enterprises among the total 500 SOEs. Non-viable SOEs are expected to be liquidated, and in this context preparations in view of assets auctioning were taking place. The SRSG adopted in April an amendment to the KTA regulation which introduces an ‘eminent domain’ clause enabling swifter property expropriation and a more limited risk exposure of the seller. This is expected to facilitate the privatisation of a number of SOEs, notably the 140 agro-industrial ones, which has so far been delayed.

While market entry is quite open, market exit is difficult and lengthy owing to weaknesses in the judiciary. Enterprise registration in the Registry held in the Ministry of Industry and Trade points to a dynamic trend of enterprise creation, to the extent which can be recorded within the formal economy. The number of new firms registered increased in 2004 by around 9.800, against some 8.800 in 2003. In the first semester of 2005 new registrations amounted to 5.800, i.e. 12.4% of the total number of registered firms. According to a 2004 survey by the Ministry of Trade and Industry, new enterprises predominantly rely on private sources of funds (for two thirds of the total), the remainder being financed through bank loans. Non-profitable SOEs’ liquidation has been hampered by uncertainties related to property rights and has not yet actually taken place. The bankruptcy law is not being implemented, in spite of the establishment of a special bankruptcy division in the Pristina Municipal court.

The basic legislation of a market-oriented economy is in place. However the establishment of property rights remains a challenge, and legal uncertainty, weaknesses in law implementation, contract enforcement as well as contingent liabilities continue to constitute an impediment to economic activity and in particular to investment. The uncertain legal situation as regards property rights continued to hamper property transfers. The determination of SOE ownership in particular raised complex issues, and left open room for litigation, thus presumably reducing the price which bidders were ready to offer in the course of privatisation. Property registers exist but are often not complete. The Serbian government authorised in early 2005 access to the cadastral documents in Belgrade, which should also contribute to clarify the situation with regard to ownership. However, in order for such improvements as regards property determination to be effective, a functioning judiciary system is indispensable. This situation of insufficient definition and enforcement of property rights has wide-ranging effects which hamper economic activity. A good example for this is the inability of KEK, the electricity incumbent utility, to recover through litigation its unpaid bills from its customers and, as a result, considerable operating losses of the company, given the very poor degree of customers’ payment compliance and discipline.

The banking sector, newly created since 2000, still plays only a limited role in the economy’s financing. Loans to the private sector (non including households) are rapidly increasing, from a very modest base however: they increased in 2004 to 11.6% [9] of GDP, from 8% of GDP in 2003. Loans to households increased more than two-fold in 2004 and represented 22% of the banks’ lending by the end of the year. In the second quarter 2005, banks loans in total further increased by 48.6% vis-à-vis the second quarter of 2004. The local banks remain very liquid, with a deposits-to-loans ratio of 181% by the end of 2004, pointing to a sufficiently strong refinancing base for further expansion of their loans’ portfolio, provided this can take place without any deterioration of the quality of their credits which remains crucial. Nominal interest rates remained high - on average 16% for 3 months to 1 year maturities in the first quarter 2005, but nevertheless recorded a slight decrease to 15.4% by August 2005. The average lending-to-deposit spread stood at 12.9% by end 2004 (for maturities between 3 months and one year) and somewhat decreased to 12.3% by August 2005. Such levels point to high lending risks, owing notably to the difficulty to recover collateral as a consequence of weaknesses in the judiciary, as well as to lack of management skills and inefficiencies in the local banking sector.

The structure of the banking sector remained broadly unchanged. By the end of 2004, it consisted of seven banks, of which two banks with majority foreign ownership. All banks are privately controlled, while some minority shares are held by SOEs. The three largest banks accounted for 74% of total banks’ assets and their market share in terms of loans increased by four percentage points in 2004 to 71%. The banks’ network