Proposal for a COUNCIL DECISION on further exceptional financial assistance to Kosovo

(presented by the Commission)

EXPLANATORY MEMORANDUM

1. Introduction

The United Nations Interim Administration Mission in Kosovo (UNMIK) was established in June 1999 following UN Security Council Resolution 1244 (1999) of 10 June 1999. UNMIK was mandated to set up an international civil presence and to provide interim administrative structures under which the people of Kosovo can enjoy substantial autonomy. Headed by the Special Representative of the UN Secretary General (SRSG), UNMIK consists of four components ("pillars"), which are humanitarian aid (UNHCR lead), civil administration (UN lead), institution building (OSCE lead) and economic reconstruction and development (EU lead).

Since its inception, UNMIK has aimed at consolidating the central and municipal structures and to integrate the people of Kosovo in the interim administration of the province. A major achievement in this area has been the creation of the over-arching Joint Interim Administrative Structure (JIAS) in the beginning of 2000 absorbing the existing legislative, executive and judicial structures. The structure includes the Kosovo Transitional Council (KTC), the JIAS highest-level consultative body, the Interim Advisory Council (IAC) serving as an advisory cabinet for the SRSG as well as acting as an executive board for the JIAS, and 20 Administrative Departments, each led by two co-heads, one Kosovar and one UNMIK official. At the Local level, municipal elections took place on 28 October 2000, which represents a major move towards democratisation.

The European Community has responded promptly to the Kosovo crisis by making available staff and equipment of KFOR, providing humanitarian aid through ECHO (the European Community Humanitarian Office) and setting up a Task Force in Kosovo (TAFKO) in early July 1999. The Task Force was responsible for implementing the EC Reconstruction Programme for Kosovo pending the establishment of the European Agency for Reconstruction (EAR). Formally in place since 20 February 2000, the Agency inherited EUR 134.5 million of commitments made in 1998 and 1999 and had EUR 261 million to implement as 2000 commitments. These funds were materialised into assistance programmes in the energy, housing reconstruction, transport, water, waste, enterprise development, agriculture and support to local administration sector. The pace of implementation set by the Agency has been extremely rapid. Around 90% of this allocation has been contracted and 60% of the contracted amounts have been disbursed by the end of 2000. In December, an additional EUR 175 million were committed for Kosovo in the context of the Notenboom procedure. This funding will be contracted and disbursed as part of the 2001 assistance programme. More generally, the European Commission together with the World Bank organised two donors' conferences in Brussels for Kosovo (July and November 1999) to secure the funding of UNMIK's reconstruction activities.

Despite the complex circumstances, UNMIK, and in particular its Pillar IV responsible for economic reconstruction and development, have moved substantially forward in implementing the economic programme presented at the Second Donors' Conference for Kosovo on 17 November 1999 in Brussels. With the support of the IMF and the World Bank, progress has been considerable in setting up a sound institutional and economic framework including the legalisation of the circulation of the DEM and making it the most widespread currency in use in the province, providing for a functioning banking and payments system, and promoting the reconstruction process as well as the development of the private sector. UNMIK has also achieved important results in the fiscal domain by ensuring proper budgetary accounting, creating a revenue base and keeping public expenditures under control.

In this domain, the Community supported the creation of essential administrative functions under the Kosovo Consolidated Budget and made an essential contribution to their consolidation. In February 2000, following a Commission proposal [1], the Council decided to provide exceptional Community financial assistance to Kosovo of up to EUR 35 million in the form of a grant [2]. The funds were made available to the United Nations Interim Mission in Kosovo (UNMIK) through its Central Fiscal Authority (CFA) in two instalments (March and August 2000) after consultation of the Economic and Financial Committee (EFC). This exceptional assistance, which formed part of an overall European Community assistance package, was complementary to the resources provided by the World Bank and bilateral donors.

[1] COM(1999) 598 final, OJ C 56, 29.2.2000, p. 66-67.

[2] Council Decision 2000/140/EC of 14 February 2000, OJ L 47, 19.2.2000, p. 28-29.

In addition, the Commission released EUR 10 million in budgetary support in February and earmarked another EUR 28 million to fund expenditures for electricity imports still in the year 2000, both financed on an exceptional basis under OBNOVA. Therefore, the pledged total Community support to the budgetary sphere amounts to EUR 73 million (some DEM 142 million). This amount represents 48% of the overall deficit for 2000 (including targeted budgetary support of some DEM 100 million) of a tentatively estimated DEM 300 million (EUR 153 million).

2. Recent Developments in the Economic and Financial Sphere

2.1. General economic situation

For lack of reliable statistical sources, it is difficult to quantify the economic development in Kosovo. Already before the crisis of spring 1999, the economy of Kosovo suffered from the international isolation of the Federal Republic of Yugoslavia (FRY), the slow pace of economic reform, and a total neglect of investment for almost a decade. As a consequence of the conflict, housing and public facilities were damaged, agricultural and industrial production came to a standstill and even the few basic payment functions carried out by the formal financial sector ceased to exist. In October 1999, the International Labour Organisation (ILO) estimated the rate of unemployment to be well over 50% with an important segment of the population composed by young people [3].

[3] ILO (Lajos Hethy): Employment and Workers' Protection in Kosovo, October 1999.

Economic activity has resumed with considerable speed after the conflict. Agriculture production is estimated to be at more than 75% of its pre-war level; construction and some trade-related services are booming. But industrial production appears to be still very low. The post-war recovery is likely to continue as the construction boom will persist, largely driven by the major international donor-funded reconstruction program.

GDP per capita in 1995 was unofficially estimated about USD 500. Preliminary, highly tentative estimates produced by the IMF indicate GDP per capita to be currently in the range of USD 650-850. UNMIK data suggest that GDP per capita may even exceed USD 1,000. Workers' remittances from abroad remain a major source of household income.

Anecdotal evidence suggests that inflation has not been a problem to date and there are no complaints of rising prices or of shortages of key commodities. Imports are estimated to correspond to about 80% of GDP. There are hardly any exports, although there is some unrecorded trade with the rest of Serbia taking place. Other areas of economic policy are discussed below in more detail.

2.2. Economic Policy Areas

Until the end of the winter 1999/2000, UNMIK had to devote great attention to secure emergency maintenance of basic infrastructure facilities and to the extent possible to improve them. Results have been rather satisfactory in some areas, less in others. From the outset, UNMIK had to struggle to secure reliable energy supply. Despite substantial technical and financial assistance from donors, notably the Community, and considerable improvements, the supply of energy is still subject to cuts and rationing. Improvements are more evident in other areas: the Pristina Airport is operational since January 2000 and major road repair work began in June. UNMIK and KFOR re-established some of the main railway links, an international and domestic mail service has re-started, a mobile telephone network has been created and major repairs are underway to Kosovo's fixed telephone network.

With a view to improving the efficiency of the reconstruction process, UNMIK presented in April 2000 a comprehensive program of public investment ("Kosovo: Reconstruction 2000"). The programme outlines in detail the priority needs for reconstruction investment across all sectors in 2000 and aims at directing donor assistance and enhancing its co-ordination. A specific donor co-ordination unit within the Department of Reconstruction was set up, which acts as a focal interlocutor for the donors and is in charge of the extension of the programme to the following years.

The Community support via the TAFKO and subsequently the EAR was developed in co-ordination with UNMIK. In 2000, the Agency managed EUR 395 millions which at the end of the year were complemented with an additional tranche of EUR 175 millions. Therefore, the Agency is responsible for the implementation of a total envelope of EUR 571 million in EC assistance programme in Kosovo.

The development of the private sector has been identified as a key priority area for the transformation of the Kosovar economy. UNMIK is processing with a mixed strategy defined among others in a "White Paper" circulated to the IAC in May 2000, which foresees support to the existing enterprises and incentives for the creation of new ones. In the case of existing public enterprises, UNMIK's strategy aims at attracting private investors via concessions, lease or management contracts. A first example of management contract that UNMIK hopes to replicate for other medium and large enterprises is the contract concluded with the Swiss Holderbank for the Sharr cement factory. The contract envisages a 10-year concession for the exploitation of the plant in return for substantial investment and industrial restructuring. An important component of the contract is the attempt to build social consensus around this form of commercialisation by contributing part of the profit to a workers' fund. An agreement between UNMIK and a group of major mining companies has been signed in mid-August to begin rehabilitation of the Trepca mining and metallurgical complex in northern Kosovo. The consortium is to take remedial actions including repairing or replacing safety and production equipment.

The "White Paper", which has recently been revised, includes also as main elements, the commercialisation of non-private enterprises in the short term, the completion of the legal framework, the definition of property rights and the necessity to build social consensus around privatisation. In the long term, public enterprises shall be transferred to a "Kosovo Enterprise Agency (KEA)", which will decide on their restructuring and commercialisation. Pending institutional uncertainty, privatisation remains extremely difficult.

Further progress has been achieved in the definition of an appropriate legal and institutional framework for the development of the private sector. For instance, business registration in Kosovo has been completed, with almost 26,000 businesses registered and the drafting of modern commercial laws is completed or at an advanced stage.

Following the recommendations of the IMF, the Banking and Payments Authority of Kosovo (BPK), set up in November 1999, has made important progress in establishing the legal and regulatory framework for a sound banking and payments system. Progress has been faster than expected in the area of bank licensing and supervision. Licensing applications for banks and non-bank micro-finance institutions have been designed, as well as forms and manuals to greatly facilitate the application and licensing process. BPK has adopted a considerable number of prudential and supervisory regulations, which establish the essential foundations for a modern supervisory function, based on international best regulatory practices. For instance, licensed banks are required to apply International Accounting Standards and external auditing. The BPK has already begun the training of Kosovar banking supervisors.

The only licensed bank in Kosovo ("MEB") so far appears to operate smoothly, to continuously expand its coverage and range of products and to increase its staff and staff-qualification. The BPK's bank supervision completed the inspection report of MEB. Furthermore, the BPK granted preliminary approval, i.e. allowance to prepare for opening, to 7 applicants for a banking license. Due to problems of the new banks to raise adequate capital, the necessity to carry out investigations on some major shareholder and some unresolved property issues regarding the premises, there is no indication when final licenses will be issued. In addition, the BPK has granted approval to nine micro-finance and non-bank groups to provide limited deposit and micro-type lending, essentially covering the non-bankable segment of the market. Eight institutes are already operational.

In addition, the BPK has continued to develop its payments system to offer payment services to UNMIK, the Kosovo civil administration and NGOs. A modern system donated by Norway has been installed and became operational in June 2000. Training of staff is on-going. BPK took over the cash import as well as cash shipments within the province. The preparation process for the changeover from the D-mark to the Euro in 2002 has started. Finally, the BPK will soon take over the responsibility of insurance regulation and supervision.

Equally important institutional development has been promoted by UNMIK in the fiscal area. The establishment of the Central Fiscal Authority (CFA) in November 1999 has been a first, significant step towards the creation of a modern budget management system. The CFA, which has been subsequently integrated into the JIAS, has specific responsibilities for design and execution of the Kosovo budget. The UNMIK Tax Administration was officially established in April 2000. Since then, an organisational structure based upon taxation administration functions (returns processing, audit, collection, taxpayer service and education, appeals etc) has been implemented. By the end of October, 151 local employees had been hired and trained and Regional Tax offices opened in the five regions and local tax offices in two municipalities. Two taxes - a Hotel Food and Beverage Sales tax and a Presumptive tax - are currently being administered. The UNMIK Customs Service was established officially at the end of August 1999, under the aegis of the EC Customs Assistance Mission in Kosovo (CAM-K). The Service currently employs 97 Customs Officers supported by guards and other ancillary workers which essentially collect revenues at international border crossing points, the Administrative Boundary Line (ABL) with Montenegro and an inland Tax Collection Point.

After a first phase in which the CFA experienced some problems to increase and stabilise revenue levels as well to control expenditures notably for public service wages and utilities, the budgetary situation shows signs of substantial improvement, in particular from summer 2000 onwards. Revenue developed quite favourably and had reached DM 216.6 million at the end of November. On the expenditure side, the actual spending relative to budgeted amounts was below pro-rata; total expenditure as of November 2000 stood at DM 321.8 million. Certain budget adjustments have been initiated in August shifting budgeted allocations between departments and leaving overall expenditures almost unchanged (DEM 430.8 million). Against this background, the CFA expects a deficit of roughly DEM 300 million in 2000, which will be fully funded by external assistance.

The positive performance of the past few months has to be weighted against some potential risks. Revenues still rely almost exclusively on customs, excise, and sales tax, which are likely to slip back during winter season. The introduction of a 15% wage withholding tax has been put to hold as the UN refused to grant the requested waiver of the general practice to exempt remuneration of UN local staff from taxation. The lack of any form of taxation exacerbates the difference in salary levels between local staff employed directly by the UN and those (including judges and Kosovar department heads) working for the Kosovo local administration. Another area, where the CFA had to remain particularly vigilant to avoid major policy slippage, was the control of expenditures of the big spending departments . This applies in particular to the situation of public utilities, most notably the energy sector.

As for financing, total donor commitments to the budgetary sphere in 2000 amount to some DEM 300 million (including designated support of some DEM 100 million). As of 30 November, 90% of these pledges had already been disbursed. Apart from a DEM 29 million carry-over from 1999, undesignated budget support includes some DEM 28 million from the US, about DEM 8 million from Canada, DEM 15 million from Japan and DEM 10 million from the World Bank, altogether DEM 61 million. The Community has released about DEM 88 million (including the EUR 35 million of the exceptional assistance and EUR 10 million financed under OBNOVA), and designated EUR 28 million for energy imports of which a major part has been released by the end of the year 2000. The remainder comes from other bilateral donors. In the light of the positive budgetary developments, it seems that the CFA has been able to carry-over a certain amount into the 2001 budget.

3. Outlook 2001

As noted, economic activity has rapidly increased after the conflict. In some sectors (e.g., services) current activity is probably much higher than ever in the past. Although difficult to quantify, the post-war recovery is expected to continue. The construction boom is likely to persist for a few years, driven by the major international donor-funded reconstruction program. The international presence in Kosovo (UN, KFOR, government institutions, NGOs, etc.) represents a major source of income, which is likely to remain so for some time to come.

Some preliminary estimates produced by the IMF indicate GDP growth rates in the order of 10-15% per annum for the next couple of years. Although those estimates will need to be revised when a more robust statistical base is available, they represent a reasonable working assumption for the elaboration of a medium-term outlook. Obviously, the developments in Belgrade are likely to affect this outlook.

Despite some upward pressure on prices, inflation is expected to remain moderate. Some of the reform measures already envisaged (introduction of the VAT, increase of excise and revision of customs duties for food products, among others) will probably translate into consumer price increases, although it is impossible at this stage to say what the precise impact will be. Further upward pressure on food prices could derive from the phasing out of humanitarian aid, including food aid, in the next months, although this could be curbed by the expected increase in domestic agricultural production.

The expansion of the private sector will create new job opportunities and contribute to reduce unemployment. However, given the very high unemployment rate, medium-term unemployment is likely to remain high.

UNMIK's medium-term fiscal strategy acknowledges the necessity to make progress towards a self-financed budget, to increase budget sustainability and to reduce donors' general budget support. On the revenue side, this entails to increase local revenues by widening the tax base and by introducing a new range of taxes. New customs and tax officials will be recruited and an appropriate taxpayer education campaign will be run. On the expenditure side, UNMIK will have to limit operating expenditures, including by resisting pressure for salary increases and maintenance of high staffing levels. If some expenditure on goods and services linked to start up activities of the Departments are likely to be reduced in 2001, new pressure will derive from the necessity to address social issues. The promotion of social stability through education, health, provision of basic social welfare will remain a priority. According to the CFA, transfers for social welfare - together with road maintenance - might require significant expenditure increases and will increase further the pressure to develop the revenue base. This is in line with recommendations of the World Bank, which advises to address certain aspects of the social policy agenda in the near future also in view of the planned downscaling of humanitarian aid programmes by donors.

Against this course of action, the Kosovo General Government Budget for 2001, which was adopted in late December, projects revenues from local sources to reach almost DEM 338 million (compared to an estimated DEM 210 million in 2000). Yet, such estimates are crucially dependent on the timely implementation of the VAT and the income tax. Expenditures are projected to reach about DEM 500 million, with some adjustments in departmental allocation. This will require a great effort to reduce the number of public employees and to control the overall wage bill in particular in the utilities and the departments of Education and Health. Under those assumptions and if expenditure for energy imports are included (as recommended by the Working Level Steering Group (WLSG) [4]) the deficit would be in the order of some DEM 180 million (excluding capital outlays).

[4] The WLSG is the supporting body to the High Level Steering Group (HLSG) and essentially consists of experts from the G8 (Canada, France, Germany, Italy, Japan, Russia, the United Kingdom, the United States), the Presidency of the EU, IFIs (IMF, World Bank, EBRD and EIB) and the Stability Pact. It was created as a result of the Cologne summit by the Heads of State and Government to guide the donor coordination process for the economic reconstruction, stabilisation, reform and development of the South East Europe. The HLSG/WLSG are jointly chaired by the World Bank and the European Commission.

Finally, UNMIK has presented recently a new Public Reconstruction Investment Program (PRIP), which covers the period 2001-2003. The programme that benefits from the support of the World Bank builds on the 2000 PRIP. However, more precise cost estimates are elaborated for each project. Furthermore, a closer link has been established between the PRIP and the Kosovo Consolidated Budget with the aim to ensure coherence and compatibility already at the level of conception of the budget between capital and recurrent expenditure. This may be seen as a first step towards ensuring that capital expenditure, in due course, became part of the ordinary budget.

4. Possible Further Exceptional Community Financial Assistance

Despite considerable progress in developing a domestic revenue base, Kosovo continues to rely upon donor external financing in order to provide essential administrative functions and to establish a sound and stable framework for economic development. The province cannot benefit from financial assistance associated to IMF or World Bank programmes. Moreover, it is not in a position to borrow either domestically or in the international financial market.

Under those circumstances, if external official assistance in the form of grants is not forthcoming, there is a risk that further progress towards the creation of a modern market economy and a sustainable economic growth path could be seriously jeopardised. The most immediate consequence will be the paralysis of basic administrative functions (including in the judiciary and revenue collection), as well as major costs for the standard of living of the population. Economic, social and political stability not only in Kosovo, but more generally in the Balkan region would be endangered.

With all this considerations in mind, it seems appropriate to provide a second exceptional Community financial assistance to Kosovo in a joint effort of the international donor community. Against the overall financing needs in the budgetary sphere for the year 2001 currently estimated at some DEM 180 million (EUR 90 million), the Commission therefore proposes to provide further exceptional financial grant assistance for Kosovo in the amount of up to EUR 30 million. This order of magnitude seems appropriate against the budget gap estimated for the year 2001. It also takes into account that the Commission has the intention to earmark separately up to EUR 20 million to provide targeted financial assistance in 2001 to cover specific needs for electricity imports in case they arise.

Before submitting its proposal, the Commission has consulted the Economic and Financial Committee, which endorsed the initiative.

The envisaged assistance would be released in at least two instalments. Its effective implementation would be subject to appropriate macroeconomic and structural adjustment conditionality. This would include that UNMIK continues in its efforts to promote the reconstruction process, the development of the private sector, the establishment of a sound banking and payments system, as well as further efforts to enhance the revenue base, control public expenditure and ensure budgetary transparency.

2001/0045 (CNS)

Proposal for a COUNCIL DECISION

on further exceptional financial assistance to Kosovo

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community, and in particular Article 308 thereof,

Having regard to the proposal from the Commission [5],

[5] OJ C..., ..., p. ...

Having regard to the opinion of the European Parliament [6],

[6] OJ C..., ..., p. ...

Whereas:

(1) The Commission has consulted the Economic and Financial Committee before submitting its proposal;

(2) The Security Council of the United Nations adopted Resolution 1244 (1999) on 10 June 1999 [7] aiming to promote the establishment, pending a final settlement, of substantial autonomy and self-government in Kosovo within the Federal Republic of Yugoslavia;

[7] S/RES/1244 (1999) adopted by the UN Security Council at its 4011th meeting on 10 June 1999.

(3) The International Community, based on the Resolution 1244 (1999), has set up an international security presence (KFOR) and an interim civil administration - the United Nations Interim Mission in Kosovo (UNMIK);

(4) UNMIK consists of four components ("Pillars") and the European Union (EU) has taken the lead role [8] for the fourth Pillar responsible for economic reconstruction;

[8] International civil presence in Kosovo: Report of the Secretary-General pursuant to Paragraph 10 of Security Council Resolution 1244 (1999), S/1999/672, 12 June 1999, II.5.

(5) UNMIK has taken steps to involve the main political parties and ethnic communities of Kosovo in its activities and is continuing to do so;

(6) UNMIK, and particularly its Pillar IV, have achieved substantial progress in setting up an institutional, legal and policy framework conducive to the creation of a sound economy based on market principles. It has provided for a functioning banking and payments system and promoted the development of the private sector. UNMIK has also made progress in developing the revenue base and keeping expenditures under control;

(7) UNMIK established a Central Fiscal Authority providing for transparent and accountable procedures to manage the Kosovo budget;

(8) On the basis of estimates from UNMIK presented in agreement with the International Monetary Fund (IMF), Kosovo requires external support to further progress in establishing a sound market economy and a civil administration; it is estimated that exceptional external financial assistance of some EUR 90 million would be needed until end-2001;

(9) UNMIK has presented a request for exceptional financial assistance; the international community considers that the provision of external budgetary support, fairly shared among donors, is essential to help cover the residual financing needs identified under the budget prepared for Kosovo by UNMIK;

(10) Kosovo is not in a position to borrow either domestically or on the international financial market and it is not eligible for membership of the International Financial Institutions and may therefore not benefit from financial assistance associated to their programmes;

(11) Although economic activity has resumed with considerable speed after the conflict, Kosovo is at a low level of economic development and its GDP per capita is estimated to be below other countries of the region and to be one of the lowest in Europe;

(12) Kosovo's current low level of economic development is the result of a long term neglect as well as conflict-related damages which can not be overcome quickly but require reliable support over a significant period of time so as to establish sustainable institutions and to achieve durable economic growth;

(13) The Community found it an appropriate measure to help ease Kosovo's financial constraints in the exceptionally difficult circumstances and already provided for financial assistance in the form of straight grants in 2000 amounting to EUR 35 million [9];

[9] Council Decision 2000/140/EC of 14 February 2000, OJ L 47, 19.2.2000, p. 28-29.

(14) Financial assistance from the Community, in liaison with other donors, in the form of straight grants to be made available to UNMIK in support of the Kosovo people continues to be the appropriate measure;

(15) Without prejudice to the powers of the budgetary authority, the financial assistance will be part of the envelope of aid foreseen for Kosovo in 2001, and therefore subject to the funds being available in the general budget;

(16) The exceptional financial assistance should be managed by the European Commission;

(17) The Treaty does not provide, for the adoption of this decision, powers other than those of Article 308;

HAS DECIDED AS FOLLOWS:

Article 1

1. In addition to the financial assistance already decided by the Council (2000/140/CE) on 14 February 2000, the Community shall make available to UNMIK exceptional financial assistance in the form of straight grants of up to EURO 30 million, with a view to alleviating the financial situation in Kosovo, facilitating the establishment and continuation of essential administrative functions and supporting the development of a sound economic framework.

2. This assistance shall be managed by the Commission in close consultation with the Economic and Financial Committee and in a manner consistent with agreements or understandings reached between the IMF and UNMIK or any other internationally recognised authorities of Kosovo.

Article 2

1. The Commission is empowered to agree with UNMIK, after consultation with the Economic and Financial Committee, the economic conditions attached to this assistance. These conditions shall be consistent with any agreement referred to in Article 1(2).

2. The Commission shall verify at regular intervals, in consultation with the Economic and Financial Committee and in liaison with the IMF and the World Bank, that economic policies in Kosovo respect the objectives and economic policy conditions of this assistance.

Article 3

1. The assistance shall be made available to UNMIK in at least two instalments. Subject to the provisions of Article 2, the first instalment is to be released on the basis of a Memorandum of Understanding between UNMIK and the Community.

2. Subject to the provisions of Article 2, the second and any possible further instalment shall be released on the basis of a successful completion of the economic policy conditions referred to in Article 2(1) and not before three months after the release of the previous instalment.

3. The funds shall be made available to UNMIK through the Central Fiscal Authority exclusively in support of Kosovo's budgetary needs.

Article 4

All related costs incurred by the Community in concluding and carrying out the operation under this Decision shall be borne by UNMIK if appropriate.

Article 5

The Commission shall address to the European Parliament and to the Council an annual report, which will include an evaluation on the implementation of this Decision.

Done at Brussels,

For the Council

The President

FINANCIAL STATEMENT

1. Title of operation

Further exceptional financial assistance to Kosovo.

2. Budget heading involved

B7-548

3. Legal basis

The forthcoming Council Decision based on Article 308 of the Treaty.

4. Description of operation

4.1 General objective

Provision of an exceptional financial assistance in the form of straight grants of up to EURO 30 million to UNMIK as Kosovo's external position heavily relies on external financial assistance from official sources, with a view to ensuring the creation, resumption or continuation of essential administrative functions in Kosovo.

4.2 Period covered and arrangements for renewal

Until the end of 2001.

5. Classification of expenditure or revenue

Non-compulsory expenditure; differentiated appropriations

6. Type of expenditure or revenue

Straight grant (100% subsidy), which would be released in at least two successive instalments.

7. Financial impact

7.1 Method of calculating total cost of operation (relation between individual and total costs)

The present estimates by UNMIK Pillar IV endorsed by the IMF and the World Bank, of Kosovo's total external financing needs in 2001 amount to EUR 90 million (excluding capital outlays). A Community contribution of up to EUR 30 million is proposed in order to cover a substantial part of these needs; the difference is expected to be pledged by other bilateral donors.

7.2 Itemised breakdown of cost - Schedule of commitment and payment appropriations

EUR million (at current prices)

BUDGET YEAR // 2001

Commitment appropriations // 30

Payment appropriations // 30

8. Fraud prevention measures

The funds will be paid directly to the Central Fiscal Authority (CFA) of Kosovo, which is under the control of Pillar IV of UNMIK, only after verification by the Commission Services, in consultation of the Economic and Financial Committee and in liaison with the IMF and World Bank Services, that the economic and institutional policy implemented in Kosovo is satisfactory and that the specific conditions attached to this assistance are fulfilled.

The assistance will be subject to verification, control and auditing procedures under the responsibility of the European Court of Auditors and the European Antifraud Office (OLAF).

9. Elements of cost-effectiveness analysis

9.1 Grounds for the operation

By supporting the efforts to organise economic reconstruction and development and to establish a well functioning market economy this assistance would improve Kosovo's prospects of economic recovery and future growth. It would help it face the severe economic and social consequences of more than a decade of under-investment and neglect, as well as of the hostilities of 1999. It would lower its dependence on external financing for the medium and longer term.

9.2 Monitoring and evaluation of the operation

This assistance is of exceptional nature. It will be made available to UNMIK through the CFA.

The Commission Services in close co-operation with the European Agency for Reconstruction will monitor and evaluate the action in liaison with the IMF and World Bank.

10. Administrative expenditure (Section III, Part A of the budget)

This action is exceptional in nature and will not involve an increase in the number of Commission staff and/or other administrative expenditure.