Source: EURLEX
Language: en
Format: md

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# 52012SC0339

**COMMISSION STAFF WORKING DOCUMENT accompanying the document Commission Communication on a Feasibility Study for a Stabilisation and Association Agreement between the European Union and Kosovo\* /\* SWD/2012/0339 final \*/**

  

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ \*          This designation is without prejudice to positions on status, and is in line with UNSCR 1244/1999  and the ICJ Opinion on the Kosovo declaration of independence.

COMMISSION STAFF WORKING DOCUMENT

accompanying the document

Commission Communication on a
Feasibility Study for a Stabilisation and Association Agreement between the
European Union and Kosovo[\*]

Table of Contents

1........... POLITICAL CRITERIA.. 5

1.1........ Democracy and the rule of
law.. 5

1.1.1..... Legislature. 5

1.1.2..... Executive and President 6

1.1.3..... Public administration. 7

1.1.4..... Reform of the security
sector 8

1.1.5..... The judicial system.. 8

1.1.6..... The fight against corruption. 10

1.1.7..... Relations with the
international community. 11

1.2........ Human Rights and the
protection of minorities. 12

1.2.1..... Civil, political, economic
and social rights. 12

1.2.2..... Respect for and protection
of minorities, cultural rights. 13

2........... ECONOMIC CRITERIA.. 15

2.1........ Economic situation and
stability. 15

2.1.1..... Economic situation. 15

2.1.2..... Fiscal policy. 17

2.2........ Price and trade
liberalisation. 17

2.3........ Privatisation, private
sector development and financial reform.. 17

2.3.1..... Privatisation and private
sector development 17

2.3.2..... Financial sector reform.. 18

3........... ABILITY TO ASSUME THE
OBLIGATIONS RESULTING FROM AN SAA.. 19

3.1........ Political dialogue. 19

3.2........ Regional cooperation. 19

3.3........ Free Movement of Goods. 20

3.4........ Movement of workers,
establishment, services and capital 22

3.4.1..... Movement of workers. 22

3.4.2..... Establishment 23

3.4.3..... Supply of services. 23

3.4.4..... Current payments and
movement of capital 24

3.5........ Approximation,
implementation and enforcement of legislation. 24

3.5.1..... Competition. 24

3.5.2..... Intellectual property rights. 25

3.5.3..... Public procurement 26

3.5.4..... Standardisation,
accreditation, conformity assessment, metrology and market surveillance. 27

3.5.5..... Consumer protection. 28

3.6........ Justice and home affairs. 29

3.6.1..... Reinforcement of
institutions and rule of law.. 29

3.6.2..... Asylum, migration, visa
policy, control of borders/boundary. 30

3.6.3..... Combating money laundering. 32

3.6.4..... Preventing and combating
organised crime and other criminal activities, including terrorism.. 33

3.7........ Cooperation policies. 34

3.7.1..... Economic, monetary,
statistical cooperation and the protection of EU financial interests. 34

3.7.2..... Investment promotion and
protection, industrial cooperation, small and medium-sized Enterprises (SMEs)
and tourism.. 35

3.7.3..... Agriculture. 37

3.7.4..... Customs, taxation and
financial control 38

3.7.5..... Employment, social policy,
public health policy, education and training, and research technology and
development (RTD) 40

3.7.6..... Culture, audio-visual,
telecommunications and postal services and information society. 42

3.7.7..... Transport 43

3.7.8..... Energy, including nuclear
safety. 45

3.7.9..... Environment and climate
change. 46

3.8........ Financial cooperation. 47

INTRODUCTION

The main
principles of the Stabilisation and Association Process (SAP) were set out in a
Commission Communication of May 1999[2] and were
confirmed by the Council in June 1999. Through this process, the European Union
(EU) expresses its determination to
take up the challenge and responsibility to contribute to the stability of the Western
Balkans region. In return for compliance with the relevant conditions, the EU
offers the countries tailor-made contractual relations: Stabilisation and
Association Agreements. The conditions for establishing contractual relations
with the Western Balkans countries are set in the Council Conclusions of April
1997. The main elements include a credible engagement to undertake democratic
reforms, respect and protect human rights, minorities and freedom of
expression, and free and regular elections. The Council also expects
implementation of the first economic reforms, readmission from Member States
and commitment to the regional cooperation.

The Feira European Council (June 2000)
gives a clear signal to the Western Balkans region establishing the status of
potential candidates for membership. This
message is further reinforced by the summit in Zagreb (November 2000). The
European Council Conclusions of March 2003 state that the future of the Western
Balkans is within the EU and strong political will and sustained efforts are
required to secure it. The Thessaloniki agenda for the Western Balkans of June
2003 makes clear that the Western Balkans countries and support to their
preparation for the future integration into the European structures and
ultimate membership into the Union is a high priority for the EU.

To date, feasibility studies have been
prepared for Albania, Bosnia and Herzegovina, Croatia, the former Yugoslav
Republic of Macedonia, Serbia and Montenegro. Stabilisation and Association
Agreements have subsequently been signed
with all these countries. The December 2011
Council recalls the EU's willingness to assist the economic and political
development of Kosovo through a clear European perspective, in line with the
European perspective of the region. The Council underlines the need to take
concrete steps to that effect. In February 2012, the Council takes note
of the intention of the Commission to launch the feasibility study for a
Stabilisation and Association Agreement between the European Union and Kosovo,
without prejudice to Member States' position on status, or any future decisions
to be taken by the Council.

The purpose of this Staff Working Document is to provide a technical analysis of
the political, economic and legislative developments in Kosovo. The document
describes the progress that Kosovo has achieved in the past three years and
considers whether Kosovo is ready to start negotiating an SAA. It also
describes the outstanding challenges that Kosovo faces to meet its obligations
under such an agreement and gives an indication of the required commitments in
this context. This analysis is without prejudice to the legal status of Kosovo
and Member States' positions on the status of Kosovo.

The document is based on extensive
contributions from the Kosovo authorities, the EU Office in Pristina,
international organisations and relevant
international and local non-governmental organisations. The Commission has also
substantially drawn on information obtained during the sectoral and plenary
meetings of the Stabilisation and Association Process Dialogue organised
between January and July 2012. The findings of this Staff Working Document
constitute the basis of the Commission Communication on a feasibility study for
a Stabilisation and Association Agreement between the European Union and Kosovo[3].

1.
POLITICAL CRITERIA
1.1.
Democracy and the rule of law
1.1.1.
Legislature

Kosovo's political system is based on the
principles of a parliamentary democracy. The Assembly of Kosovo is the primary
legislative institution and is directly elected for a four year mandate. Over
the past three years, the Kosovo's Assembly has been strengthening its capacities
and its supervision of the executive. Improvements can also be noted with
regard to the preparation of legislation and monitoring of its implementation
by parliamentary committees through outreach activities and public hearings.
Kosovo has just undertaken a major reform of its constitution, in which the
Constitutional Reform Committee of the Assembly has played an important.

In September 2011, the Constitutional Court
clarified that deputies have only a functional immunity. Therefore, outside of the
scope of his/her responsibilities a deputy is to be treated as any other
citizen. This is sufficient protection for deputies to exercise freely their
duties as members of the Assembly.

In general, Kosovo has put in place an
institutional framework for legislation and control of executive which is based
on democratic principles.

To meet its obligations under an SAA, Western Balkans countries need to have credible engagement to undertake democratic reforms and free
and regular elections. Kosovo has held elections regularly at both
central and municipal levels. The system
is based on a competition of political parties and voters can chose freely between
them. Over the past three years, there have been different coalition
governments and new parties, including those highly critical of the governing
coalition, could enter the Assembly. However, the last general elections in
2010/2011 were marked by serious shortcomings and technical difficulties. It is important that the legislation better reflects best
practice in the EU and implementation is also in line with international
standards. To this end, the Assembly has established an ad hoc committee on
electoral reform.

It is also important that the Assembly and
the government continue to improve their coordination and joint planning. The
Assembly's legislative capacity needs to be further enhanced, notably the Assembly's
Department for Legal and Procedure Issues. The legislative procedure needs to
be strengthened to ensure cross-sectoral expertise and compliance with the acquis.
The responsible bodies of the Assembly need
to ensure a stronger oversight of the budget expenditure of the parliament
during the course of the financial year. Furthermore, the Assembly needs to
strengthen its oversight function of the executive, through improved scrutiny
of legislation and monitoring of implementation of policies and laws.

The budget of the Assembly, as well as
proposals on changes to its administration, need to be approved by the
government. These processes need to be made more independent from the
government. This can be achieved through adopting
legislation on the status of the Assembly's civil servants. It is also
important that the government consults the Assembly on modifications to the draft
budget of the Assembly before the government submits the budget to the Assembly
for adoption.

With regard to the appointments to
independent institutions such as the Institution of Ombudsperson, but also
regulatory agencies and bodies, the Assembly faces challenges in terms of delays
and allocation of sufficient budgetary
means. Delays and lack of budget cause serious difficulties for the
institutions to function properly and to implement their mandate.

Under an SAA, Kosovo
would commit itself to further strengthen the democratic principles of its
governance. Respect for the principles of international
law and rule of law in general will form the basis of the domestic and external
policies of parties to an SAA.

1.1.2.
Executive and President

The government holds regular and frequent
meetings and proposes ambitious legislative strategies. The government has good
capacities to draft legislation and has the
potential to increase legislative alignment with the acquis in the short
period of time. The inter-ministerial coordination of policies has improved
over the past three years.

The Ministry of European Integration leads
the overall coordination of the EU agenda through a Task Force for European
Integration. The Ministry has demonstrated strong capacities by successfully
coordinating the third year of the sectoral and plenary meetings of the
Stabilisation and Association Process Dialogue, as well as through a
comprehensive input of institutions of Kosovo to the preparation of this study.
The President
is also active in promoting the EU integration agenda in Kosovo. A
National Council on European Integration (placed under the office of the
President and inaugurated in March 2012) serves as a high-level coordination
body. Its aim is to build a consensus on the European agenda through an inclusive
and cross-party approach.

The President is elected by the Assembly.
His/her election requires a two thirds majority of all deputies for a five year
term. In its July judgement, the Constitutional Court
confirmed the full length of the mandate of the current President. The
President actively enforces her constitutional duties and takes steps to oppose
legislation, for example if it is not in
line with European practices and standards (e.g., the legislation related to
criminalisation of defamation and the requirement for journalists to disclose
their sources of information). This demonstrates that
there is a separation of powers in Kosovo today.

Over the past three years, Kosovo has made
significant progress on decentralisation. The Ministry of Local Government
Administration (MLGA) has taken steps to ensure a more efficient monitoring of
the local government structures.

Kosovo has put in place the necessary
institutions of the executive and there has also been sufficient political
stability enabling progress in its reform process.

To meet its obligations under an SAA, Kosovo needs to improve its governance. The
focus of Kosovo needs to be on implementing its ambitious EU reform agenda. The government needs to ensure
its legislative agenda better corresponds to the capacities of individual
ministries and to the available budget. The coordination
between the government and the Assembly also needs further strengthening.

Efforts to implement
the decentralisation need to continue, including by strengthening the administration
at the municipal level. The challenges include budgetary constraints, absorption capacities,
weak professional expertise at municipal level as well as a lack of political
will at central level to decentralise its competencies in certain fields.
Inclusive decision-making as well as administrative and budgeting processes are
hampered by a lack of data management and evidence-based planning capacities.
The municipal authorities need a tailor-made central level guidance and
enhanced capacity development. The newly-established Serb-majority
municipalities also face these challenges. Furthermore, some of them require
further assistance from the central level to ensure their sustainability given
their small size.

Decentralisation remains a specific challenge
in the north of Kosovo. The government has opened a new administrative office
in northern Mitrovicë/Mitrovica to provide services to people. It is clear that
the solution to these political challenges requires a constructive and
proactive approach of all involved parties. In the context of these challenges in the north, successful
implementation of the decentralisation south of the river Ibër/Ibar is
essential.

Under an SAA, Kosovo would need to
respect and implement democratic principles of governance. Furthermore, the
governance of Kosovo would need to be ensured through an adequate and more
effective executive at all levels of administration.

1.1.3.
Public administration

In view of an SAA, a legislative framework,
accompanied by the relevant policies and the relevant institutions for its
future implementation need to be in place. The independence of public
administration bodies, like the Ombudsperson Institution, needs to be
respected.

The existing legal framework in the area of
public administration is appropriate. The legislation is inspired by the latest
approaches to public administration in Europe.
The laws on civil service and on salaries in the civil service provide the
legal conditions for a stable, unified and professional civil service. The legal
framework needs to be completed, notably by adopting some important
implementing regulations. Delays in applying the new legislation undermine the
establishment of a professional public administration and create the conditions
for a legal vacuum that is detrimental to the reform process. In the short term,
Kosovo needs to adopt all secondary legislation for the laws on civil service
and salaries for the civil service.

The Ombudsperson Institution of Kosovo
(OIK) is one of the key independent bodies related to public administration. It
is an instrumental human rights protection body and it faces major challenges,
notably in terms of budget and premises. There are also occasional interventions from the Ministry of Finance into its
budget, although the Ombudsperson Institution is supposed to be financially
independent. Kosovo's government and the Assembly need to enhance considerably
their political support to the Ombudsperson and put emphasis on the follow-up
of its decisions. In the short term, Kosovo needs to allocate suitable premises
to the Ombudsperson and ensure its budgetary independence through obliging the
government to include the Ombudsperson's draft proposal for budget, without any
changes, into the global draft budget submitted to the parliament.

To meet its obligations under an SAA, Kosovo needs to focus in particular on
implementing the policies and actions on public administration reform,
reflected in the strategy, action plan and relevant legislation, including
through allocating sufficient and
sustainable resources. To date, there has been little progress in
implementation of the strategy. There are also concerns with regard to the
budgetary costs of the strategy and the financial sustainability of the
proposed reform.

The second important independent body
related to the public administration is the Independent Oversight Board (IOB).
The IOB plays an essential role for the
functioning of an accountable and law-based administration. Better compliance
with the IOB decisions remains of high importance for the proper functioning of
the administration and for an effective system of checks and balances.

The Ministry of Public Administration (MPA)
is the legal and policy making institution in the field of public
administration and public administration reform.
However, the Ministry is insufficiently staffed to pilot these key reforms
effectively. This undermines its capacity to perform a coordination role, and to
implement strategies and legislation. In addition, the MPA has very little
capacity to influence the government's political agenda and reforms related to
public administration, and it does not obtain sufficient political support.

Under an SAA, Kosovo would need to
enhance further its efforts to improve professionalism, accountability,
efficiency and effectiveness of its public administration at all levels, which
is fundamental for a successful implementation of the necessary future reforms.
The ultimate aim of these efforts would be the proper functioning of state
institutions for the population's benefit.

1.1.4.
Reform of the security sector

Kosovo has put in place the constitutional
and legal framework to regulate its security sector. There are also
institutional structures for democratic control of the security sector (e.g.
parliamentary Committee for Internal Affairs, Security and Supervision of the Kosovo Security Force, and Oversight
Committee for Kosovo Intelligence Agency). The Kosovo Security Council, chaired
by the Prime Minister, is the key authority for policy-making and advising on
security issues. In emergency situations, the Council can assume an executive
role. The main actors in the security sector are the Kosovo Police, the Kosovo
Intelligence Agency and the Kosovo Security Force. No local security force
currently has defence capacities. A full strategic review of the security
sector has been launched and should be concluded in June 2013.

NATO's KFOR and EU's rule of law mission
EULEX continue to contribute to Kosovo's security. The Commission puts
particular emphasis on the need for Kosovo to maintain good cooperation with
EULEX and actively support implementation of its mandate.

To meet its obligations under an SAA, the scrutiny of the security sector by the
parliamentary committees needs to be further enhanced. The Kosovo Assembly needs to develop further its
capacity to perform an effective oversight of this sector. Furthermore, the
main political parties continue to rely on their own informal security
arrangements, which is an issue of serious concern.

Under an SAA, Kosovo would need to further
strengthen the democratic control of the security sector.

1.1.5.
The judicial system

Over the past three years, there has been
significant reform of the judiciary. A comprehensive legal framework (laws on
courts, on the Kosovo Prosecutorial Council, on the Kosovo Judicial Council,
and on Prosecution) was adopted in 2010. The full implementation of these laws,
which constitutes a major judicial and prosecutorial reform, will lead to the
introduction of a new court system on 1 January 2013 (with seven Basic Courts and one Appeal Court). The principles of
independence, impartiality, accountability and efficiency are at the heart of
this reform. Judicial independence is enshrined in Kosovo's legislation, which
requires the judiciary to act in an independent and impartial manner.

The Supreme Court is the highest judicial
authority in Kosovo. The Constitutional Court, as the guardian of the Kosovo constitution,
is independent in the performance of its responsibilities. The Court has issued
a number of important decisions with strong political impacts, which have been
respected by all authorities and political leaders.

In addition to the overall court structure,
Kosovo has put in place the key institutions of the judiciary, notably the
Kosovo Judicial Council (KJC) and the Kosovo Prosecutorial Council (KPC).
Remuneration in the judiciary has improved since 2011, placing the judiciary on
equal footing with the executive and legislative pillars, which enables the sector
to attract qualified professionals, and has the potential to help preventing
external influence on judicial staff. Kosovo has reached sufficient capacity in
this area. The major elements of the legislative framework, as well as the key
institutions, with improved capacities and a good understanding of the
remaining challenges, are in place. While implementing the judicial reform, Kosovo
needs to ensure that the competencies of the Special Prosecution are not
amended in light of the new court structure. Introduction of a special chamber on corruption and organised
crime needs to mirror the current competence and scope of the Special Prosecution.

To meet its obligations under an SAA, Kosovo needs to focus in particular on improving the independence,
effectiveness, accountability and
impartiality of the judiciary. Kosovo needs to ensure successful implementation
of the judicial reform. Kosovo also needs to provide appropriate security and
protection measures for judges, prosecutors, witnesses and complainants as well
as court staff, and needs to provide effective safeguards against threats or
intimidation. Kosovo's international judicial cooperation needs to be more
proactive leading to investigations. The KJC and KPC need to increase
recruitment of judges and prosecutors from minorities, as set out in the
legislative framework.

There are further challenges for the
judiciary on which progress needs to be made by Kosovo. The election procedure
of the KJC voting members needs to be brought in line with the relevant
European standards (and recommendations
of the Venice Commission) to ensure that the majority of voting members are
elected by their peers. To ensure successful implementation of the new court
system from 1 January 2013, its financial and human resources need to be
increased. Further amendments to the package of four laws and to the law on the
Special Prosecution, which are currently under preparation, may disrupt the
justice system and cause difficulties in the transition to the new court
structure.

In 2009, all sitting judges and prosecutors
underwent a vetting and re-appointment process led by the International
Judicial and Prosecutorial Commission (IJPC). The number of judges is currently
insufficient; there is a particular lack of civil judges in the courts of
second instance. Efforts are needed to finalise the selection process for judges and prosecutors by filling
in the remaining vacant positions (currently 29 for prosecutors and 51 for
judges), especially for minorities for which Kosovo legislation reserves a
specific number of positions. Judicial and Prosecutorial Councils conducted an
outreach campaign to these minorities, notably Serbs, but further efforts are
necessary in this regard. Local Kosovo Serb judges and prosecutors refused to
undergo the vetting process (led by the IJPC) and are still reluctant to apply
for vacant positions advertised by the Kosovo Judicial Council.

The Judicial Council has the legal mandate
to ensure the independence and impartiality of the judicial system, as
enshrined in the legislation. The Council needs to act decisively to protect
judges' independence and impartiality. External influence and political
interference remain a serious challenge for the judicial system in Kosovo. The
constitution establishes that the appointment criteria for judges and prosecutors
are defined by law. However, the current legislation is weak and is not
harmonised. Newly-recruited judges are subject to a three-year probationary
period, which is not in line with Venice Commission recommendations.

Allegations of corrupt behaviour in the
judiciary continue. The limited independence and impartiality of the judiciary
in practice is a serious impediment to strengthening the rule of law. Judicial
and Prosecutorial Councils need to ensure that any disciplinary or criminal
offences committed are addressed vigorously to improve
the reputation of the judiciary. The Councils and other Kosovo institutions
need to address the reluctance of Kosovo prosecutors and judges to prosecute
and try politically sensitive or high-profile cases against influential
defendants.

Allegations of threats and intimidation are
frequent and continue to persist in the judiciary. The law on courts provides
the legal basis for protective measures, but Kosovo needs to do more to enhance
security for the judiciary. Access to, and control of, court premises remains
lax, the public has unhindered access to the offices of judges and some trials
are held in judges' offices instead of the courtroom. This is not only an issue
from the perspective of rule of law, but also has the potential to create
security risks for the judges and court administrative staff. Appropriate
security measures should also be provided for prosecutors, witnesses and
complainants.

Enforcement of judgments, in both civil and
criminal cases, is weak. This is a major impediment towards creating confidence
in the judiciary. Kosovo needs to focus more on creating the means to implement
and enforce legislation and judicial
decisions. In this regard, the current bailiff system needs to be reformed to
be more efficient when it comes to enforcing civil case judgments.

In terms of increasing efficiency, the
Judicial Council adopted a strategy to reduce backlogs to deal with over
160,000 cases accrued by 31 December
2008. To date, more than 55% of this caseload has been adjudicated. However,
the overall trend reveals an increase in the total number of pending court
cases since the number of filed cases (after 31 December 2008) continues to be
higher than the number of cases resolved. This could partly be due to the registration
system, which needs to be streamlined.

Access to
justice is hindered in the north of Kosovo. The District Court based in
northern Mitrovicë/Mitrovica is staffed only with 6 international judges and 2
international prosecutors from EULEX. The Serb community in the north does not
accept local judges in the Court. Parallel Serbian municipal courts exist in
the north, but they deal mainly with civil cases. For criminal offences there
are no law enforcement mechanisms in the north other than EULEX.

Under an SAA, respect for the principle
of the rule of law is reflected in the cooperation on consolidating the rule of
law, and reinforcement of institutions in general and of law enforcement and
the administration of justice in particular. Cooperation under an SAA requires
further strengthening of the judiciary's independence and improving its
efficiency.

1.1.6.
The fight against corruption

In view of an SAA, Kosovo needs to have an anti-corruption legislative framework,
accompanied by polices and institutions for its implementation.

Over the past three years, Kosovo has taken
a number of important steps to fight against corruption by adopting the
necessary elements of the legal framework: laws
on declaration of assets, preventing conflicts of interest in exercising public
functions, whistle-blowers, public procurement and financing of political
parties. The current legal framework has
provisions strong enough to bring tangible results in this area.

Kosovo set up the independent
Anti-Corruption Agency in 2006. The Agency is the lead institution to monitor
the implementation of the law on the prevention of conflicts of interest and
the law on the declaration of assets of public officials,
as well as of the anti-corruption strategy and action plan. It also deals with
processing individual complaints on potential corruption cases and has the
obligation to notify other authorities such as police and prosecution, if it
finds grounds for further investigation. A National Anti-Corruption Council was
set up by the President of Kosovo in February 2012. The Council aims to improve
coordination and to raise awareness among all bodies and institutions involved
in the fight against corruption.

In terms of the administrative capacity,
over the past three years, prosecution and police have been reorganised with
the aim to improve the fight against corruption. In 2010, the Special Prosecution
established an anti-corruption task force composed of prosecutors (from both
Kosovo and EULEX) and police investigators. The aim of this task force is to
investigate economic and financial crime. The police also established a
Directorate against economic crime and corruption. Inspection departments have
been set up in many authorities and institutions, with the objective to address
and monitor the situation with regard to
corruption and/or criminal behaviour within the organisation itself. In
general, Kosovo has sufficient elements of the legal framework in place as well
as the relevant institutions. In the short term, Kosovo needs to demonstrate a
clear commitment to deliver results in the fight against corruption, including
launching investigations, in close coordination with EULEX. Kosovo needs to
adopt a new anti-corruption strategy.

To meet its obligations under an SAA, Kosovo needs to deliver on investigations and prosecution of
corruption cases and to improve the reliability
of statistics on the fight against corruption. It is clear that there are
further challenges that Kosovo needs to address. The law on the prevention of
conflicts of interest needs relevant reporting obligations since currently
conflict of interest cases continue to be largely un-reported. The sanctions
provided in the laws on declaration of assets and conflict of interest (fines
up to a maximum of € 2,500, or a prohibition to exercise a public function
for the maximum period of one year) are rather symbolic and the laws need to
provide for dissuasive and proportionate sanctions.

Financing of political parties is not
sufficiently transparent. The law on financing of political parties contains
several weaknesses that need to be addressed.
It needs to prohibit or strictly regulate donations from legal entities that
provide goods or services to public administration. It also needs to oblige
political parties to have a single bank account and to define timeframes for
publishing their financial reports.

Kosovo also needs to adopt the new strategy
and action plan for the fight against corruption. The evaluation of the
anti-corruption strategy 2009-2011
suggests its limited implementation is due to a lack of inter-institutional
cooperation and coordination, and a lack of support and commitment by the
senior leadership in all public institutions.

To ensure that the new strategy is
implemented successfully, and that tangible progress will be made in the fight
against corruption, Kosovo needs to
simplify the institutional set-up for the fight against corruption and avoid
overlapping responsibilities. Successful investigations and prosecutions are
key. It therefore needs to improve the cooperation between the enforcement and
judicial authorities to make them more efficient and effective, and improve the
reliability and comparability of statistics in this area. High-level political
support needs to be ensured in support of the work in the fight against
corruption; the political willingness expressed in the meetings of the
Anti-Corruption Council needs to be put into practice.

Under an SAA, cooperation would be aimed
at further strengthening the independence of the judiciary and improving its
efficiency and at improving the functioning of the police and other law
enforcement bodies in fighting corruption.

1.1.7.
Relations with the international community

Kosovo has been recognised by 92 countries.
Kosovo is not a member of the United Nations (UN), the Organisation for
Security and Cooperation in Europe (OSCE)
or of the Council of Europe (CoE), and thus is not able to fully benefit from
the evaluation mechanisms of the relevant conventions. All three organisations
are present in Kosovo. Kosovo is not a member of the World Trade Organisation. It
is a member of the World Bank and International Monetary Fund (IMF) with which
it has a Stand-By Arrangement. Kosovo has good cooperation with the
International Criminal Tribunal for the former Yugoslavia.

The EU maintains a strong presence in
Kosovo. In early 2012, the European Commission Liaison Office and the office of
the Special Representative were merged
into an EU Office, and a double-hatted EUSR/Head of Office was appointed. This
has streamlined and enhanced the EU's visibility in Kosovo.

The EU has extended the mandate, including
certain executive powers, of its rule of law mission, EULEX, to expire in June
2014. The EULEX mandate was endorsed by the Assembly in September. The Kosovo
authorities have committed to cooperate fully with the EULEX Special Investigative
Task Force, which investigates the allegations raised by the Parliamentary
Assembly of the Council of Europe in its resolution of January 2011.
Strengthened cooperation between EULEX and local institutions, such as the Special
Prosecution, has led to an increased number of arrests and search warrants.
Kosovo needs to maintain good cooperation with EULEX, needs to continue to actively
support implementation of its mandate, including of the Special Investigative
Task Force.

KFOR has also continued to assist in
providing security, notably in the north
of Kosovo. Its overall presence is about 5,600.

The International Steering Group (ISG),
having determined that Kosovo had substantially implemented the terms of the
Comprehensive Settlement proposal and Kosovo having adopted the necessary
constitutional and legal framework, declared the end of the supervision of
Kosovo's independence, and the end of the mandate of the International Civilian
Representative on 10 September.

1.2.
Human Rights and the protection of minorities
1.2.1.
Civil, political, economic and social rights

Kosovo has a solid legal basis for the
protection of human and fundamental rights. These guarantees are directly
enshrined in Kosovo's constitution. Kosovo has obligations to ensure that its
own legislation, policies and practices meet
the international requirements. The constitution lists the main international
agreements and instruments directly applicable in Kosovo including the
Universal Declaration of Human Rights, the European Convention for the
Protection of Human Rights and Fundamental Freedoms, and its Protocols. In case
of conflict, the latter take precedence over domestic laws. This is an
important mechanism, as Kosovo is not a member of the UN or of the Council of
Europe, due to status considerations. Furthermore, the constitution provides
individuals with the right to refer violations by public authorities of their
individual rights and freedoms, guaranteed by the constitution, to the
Constitutional Court. The Ombudsperson may also refer matters to the
Constitutional Court.

The Kosovo Assembly has a specialised
Committee on Human Rights, Gender Equality, Missing Persons and Petitions. Its
mandate is to review draft legislation and ensure compliance with international
and European legislation on human rights. Over the past three years, Kosovo has
established several structures at central and municipal level to assist with
the protection, promotion and enforcement of human and fundamental rights. The
international community has been intensively involved in building Kosovo
capacities in this area over the past three years.

In general, Kosovo's institutions have
taken good initiatives to start
implementing the human and fundamental rights, as well as to increase the
general awareness about these rights.

To meet its obligations under an SAA, Kosovo needs to focus in particular on streamlining and
simplifying the multitude of bodies dealing with the protection of these rights
to ensure effective monitoring and enforcement of the legal framework in this area. Furthermore, the focus
needs to be on freedom of expression. Freedom of expression and freedom
of the media are guaranteed in the constitution. More needs to be done to
ensure they are respected in practice. Kosovo needs to investigate and prosecute
any physical attacks against journalists and to complete the parliamentary
procedure to change the Criminal Code on criminal liability of media and
protection of journalist sources. Regarding property rights, there are
weaknesses in the existing systems and legal frameworks, as well as in the
implementation. Kosovo needs to make progress on enforcing and ensuring respect of the property rights,
for example through decreasing the backlog of cases and improving enforcement
of judicial and administrative decisions.

Following the October 2011 report of the Council of Europe's Committee for the Prevention of Torture
and Inhuman or Degrading Treatment or Punishment (CPT), conditions in some detention facilities have
improved. In this context, Kosovo
needs to continue monitoring the situation with regard to torture and ill-treatment,
ensuring improvements in all facilities. Over the past three years, Kosovo has
also been gradually improving the standards in the prison system. The
Ministry of Justice needs to continue its efforts to increase the
professionalism of the correctional staff.

At the same time, Kosovo needs to continue
addressing other issues. Further efforts are required to tackle the issues of impunity
and access to justice by making the judiciary work more efficiently. Slow
procedures need to be effectively eliminated and judgments enforced. This
includes the need to ensure access to justice in practice, especially to the
more vulnerable groups in society, including victims of trafficking. The unresolved
fate of persons gone missing in the conflicts in the 1990s (1,770 cases as of
August 2012) remains a humanitarian concern. To identify the fate of missing
persons requires further resources and active
regional cooperation. Freedom of assembly and association as well
as freedom of thought, conscience and religion are guaranteed through
adequate legislation and are generally respected, although they could be more
actively implemented.

Kosovo's legal framework provides for women's
rights. Gender equality is also well enshrined in the legal system, but
implementation is slow. The implementation of the law on protection against
domestic violence needs to be improved.
The Convention on the Rights of the Child is directly applicable in
Kosovo. The juvenile justice system is operating on the basis of the Juvenile
Justice Code, which is broadly in line with EU standards. Legislation on anti-discrimination
is adequate although its practical enforcement remains a challenge. There
needs to be more political will to promote tolerance. Persons with
disabilities are faced with little access to employment, goods and services,
transportation and education. The key challenge for persons with disabilities
is socio-economic. Special care needs to be paid to this group of persons when
designing employment policies. The enforcement of labour and trade union
rights needs to be further improved, including through increasing the capacity
and quality of labour inspectors.

Under an SAA, Kosovo would need to respect and implement democratic principles
and human rights as set out in key international documents such as the
Universal Declaration of Human Rights and the European Convention of Human
Rights. Respect for the principles of international law and rule of law in
general would form the basis of the domestic and external policies of parties
to an SAA. Kosovo would need to ensure that the basic rights and freedoms are
guaranteed and their enforcement gradually improved.

1.2.2.
Respect for and protection of minorities,
cultural rights

In view of an SAA, there needs to be a legislative framework guaranteeing the
protection of minorities and of cultural rights. The enforcement of these rights needs to be supported by an adequate
institutional structure.

Kosovo has a solid legal basis for the
protection of minorities and of cultural heritage. These guarantees are
directly enshrined either in Kosovo's
constitution and regulated by the law on the protection and rights of minorities.
As the Council of Europe Framework Convention for the Protection of National
Minorities is directly applicable in Kosovo and takes precedence over Kosovo
legislation, Kosovo has clear obligations to ensure that its own legislation,
policies or practices meet the international requirements. This is important
taking into consideration that Kosovo is not a member of the Council of Europe.

Following the end of supervised
independence, Kosovo's constitution and legislation continues to have
guarantees of representation, cultural rights, language rights to its
minorities, as well as rights of the Serbian Orthodox Church. Currently,
representatives of minorities have 25 seats guaranteed in the Assembly as a result of
the system of guaranteed and reserved seats (13 for the
Serbian community and 12 for members of other minorities). Two of the five
deputies of the Assembly's Speaker are from non-Albanian minorities. Persons
belonging to minorities are also well represented in the government.

In terms of language rights, the reformed
Language Commission has the potential to improve the protection of linguistic
rights. Budget, staff and premises need to be allocated to the Office of the
Language Commissioner. The law on the Public
Broadcaster provides for establishing a channel in the Serbian language. This
needs to start broadcasting. In her annual address, the President addressed the
Assembly in Serbian as well as Albanian: a positive sign, which needs to be
followed by other political leaders and Kosovo institutions.

With regard to the Roma, Ashkali and
Egyptians, Kosovo's application for the Roma Decade membership is a positive
initiative. With the support of the international
community, Kosovo has been closing the lead contaminated camps.

With strong support of international
community, Kosovo has continued offering the possibility of return. Overall,
over 23,000 persons belonging to minorities have returned to Kosovo since the
conflict in 1990s.

As regards, cultural rights including
cultural heritage, Kosovo has been taking steps to implement the Council of
Europe and UNESCO conventions on cultural
rights. Protection of cultural heritage has somewhat improved following the
adoption of related legislation, but implementation is lagging behind,
especially at municipal level. Kosovo authorities have successfully taken over
from KFOR the security of most of the cultural and religious sites of the
Serbian Orthodox Church; only two sites – the Pejë/Peć Patriarchate and the Manastiri
i Deçanit/Visoki Dečani Monastery – are still protected by KFOR.

In the short term, Kosovo needs to ensure
existence of a body enabling direct consultation on the promotion and
protection of religious and cultural heritage with religious communities,
notably the Serbian Orthodox Church.

To meet its obligations under an SAA, Kosovo needs to focus on promoting multi-ethnic Kosovo. It needs to
create conditions for Serbs to feel part of Kosovo's future and conditions for
return for persons who wish to do so. Budget, staff and premises need to be
allocated to the Office of the Language Commissioner. It is equally important
to implement legislation related to the protection of cultural heritage and of
the Serbian Orthodox Church notably laws on the historic centre of Prizren and
on the village Hoçë e Madhe/Velika Hoča. Broadcasting by the public broadcaster
needs to be ensured in Serbian language. Physical attacks motivated on the
basis of ethnicity or religion need to be investigated and perpetrators brought
to justice. Kosovo also needs to progress on implementing the strategy and
action plan for the Roma, Ashkali and Egyptians, including through the
allocation of the necessary funds. Kosovo needs to increase the overall share
of persons belonging to minorities in public administration.

It is clear that there are further issues
in this area that Kosovo needs to address. Challenges relate both to the
enforcement of legislation and to the political framework. Kosovo needs to
improve further the implementation of legislation on the use of official
languages at an institutional and social level throughout Kosovo. The "Forty
Actions" to integrate Roma, Ashkali and Egyptians need to be implemented
both at central and municipal levels. These minorities are vulnerable and they
suffer both direct and indirect discrimination. Also they have limited access
to the Kosovo education system. The access to education, the fight against
school drop-out, and qualitative education outputs need to complement the
recent Romani curriculum. Similar issues persist with regard to Turkish,
Bosniak and Gorani minorities. The teaching and learning of other minority
languages is not sufficiently promoted.

It is important that security incidents
targeting returnee sites and properties are thoroughly investigated and tried.
Incidents targeting the Serb returnee
community in certain areas south of the river Ibër/Ibar have negative impact on
this community and increase their feeling of vulnerability and lack of
confidence in the authorities in ensuring their security.

Under an SAA, Kosovo would need to respect and implement the rights of persons
belonging to minorities on the basis of international and European standards.
Kosovo would also need to offer the possibility of
return for displaced persons who may wish to come back.

2.
ECONOMIC CRITERIA

Respect for market economy principles
should form the basis for domestic and external policies. This entails a stable
macroeconomic environment supported by a stable institutional framework, a
comprehensive liberalisation of prices, and trade and current account
transactions. The creation of a strong private sector through de-monopolisation
and privatisation and the establishment of a prudently managed financial sector
are also important factors. These policies should be supported by a stable and
transparent legal and regulatory framework.

Kosovo has implemented the initial
essential reforms towards establishing a fully functioning market economy. This
is sufficient to establish contractual relations with countries from the
Western Balkans, as stated in the Council Conclusions of April 1997.

2.1.
Economic situation and stability
2.1.1.
Economic situation

Economic policies have been volatile over
the past three years. Kosovo has undergone a period of marked fiscal expansion,
which boosted economic growth and budget revenue. At the same time, this has
increased external imbalances and
economic vulnerabilities. Since the second half of 2011, fiscal consolidation
steps have been undertaken in reaction to existing financial constraints. The
government has also advanced reforms to improve the economy's regulatory
business environment. There is broad consensus in the society on pursuing
market-based policies. At the same time, corruption and informal business
practices are still widespread, and remain important challenges to economic
development. In this context, the rule of law needs to be strengthened.

Economic stability has largely been
preserved. Kosovo's fully euroised economy has been relatively insulated from
the global economic crisis, due to its limited integration in the international
economy. Banks' lending is funded from
domestic sources and the sector remains well‑capitalised and profitable. After failing
to implement an IMF Stand-By Arrangement (SBA) in 2010, economic policies have
recently been anchored by a Staff-monitored programme and a new SBA, aiming at
restoring fiscal sustainability. Nevertheless, the economic situation is
challenging. The economy provides few employment opportunities. External
imbalances are high and economic activities are predominantly concentrated in
the services sector, in particular retail and wholesale trade. Reliance on
remittances and direct or indirect support of donors has been declining but
remains significant.

The economy expanded on average by around
4% over the last three years. Growth is expected to have accelerated to 5% in
2011, mainly driven by domestic demand with strong increases in government
consumption and investments. Exports of goods and services have also increased,
but still cover only about a third of total imports. The production base
remains extremely narrow. Agriculture, mostly semi‑subsistence, contributes
about 17% of the value added in the economy. Manufacturing is limited and
concentrated in the extraction of raw materials, which also dominate the
exports of goods.

Data on employment is scarce and often not
reliable. Employment and activity levels are extremely low[4].
Estimates suggest that only about a quarter of the working age population have
a job and only one woman out of eight is employed. Unemployment is above 40%
and especially pronounced among the youth – more
than 70% of whom are without a job. About 80% of all unemployed have been
without a job for more than a year, revealing deep structural challenges. There
has been relatively high growth over the last three years, but job creation is
lagging and not enough jobs are created to reduce labour market pressures. In
addition, the economic structure is largely based on sectors relying on low‑skilled
labour. Most of the labour force is unskilled or semi-skilled, implying
potential constraints for businesses trying to develop in sectors with higher
value added. High remittances inflows have an important impact on the labour
market, as they tend to increase the reservation wage and reduce incentives to
work. The lack of perspective for a job, especially among the young population,
is putting strains on social cohesion and encourages emigration.

Inflation has been volatile, moving from a
deflation of -2.4% in 2009 to an average annual inflation of 7.4% in 2011. Food
and energy prices are by far the biggest contributors to inflation dynamics.
Domestic prices are highly dependent on international commodity price
movements. Food prices have a share of about 35% in the consumer basket,
marking a decline over the recent years[5]. After increases ranging between 30-50% in 2011, the net monthly
average wage in the public sector reached € 368 in December 2011. Public
sector wages have risen more than 60% altogether in the last three years, far
surpassing productivity gains. There is scarce information about private sector
wages but a survey done by the Kosovo Business Alliance shows that their
average levels are below public sector wage levels.

Kosovo uses the euro as a legal tender and
the Central Bank has limited policy instruments. Banking supervision and
conservative lending policies of the commercial banks have been key in
preserving financial sector stability. Credit
is financed out of domestic deposits and banks observe an informal 80%
threshold for the loans-to-deposits ratio. As part of the agreement with the
IMF, the central bank and the Ministry of Finance have established a special
reserve fund for providing emergency liquidity assistance to the financial
sector.

High and persistent external imbalances
represent a particular challenge for the economy. The current account deficit
widened from 10.5% in 2009 to 14.5% of GDP in 2011[6].
Trade deficits have stayed above 40% of GDP and have even expanded lately. They
are only partially financed by surpluses in the trade in services and in the
income account. Current transfers, both to the government and the private
sector, have declined but still remain
significant and finance about half of the deficit in the trade in goods. Kosovo
is a recipient of large remittances inflows, which are mostly channelled to
finance consumption. Capital inflows have been dominated by foreign direct
investments, averaging 7.7% of GDP since 2009. However, most investments have
gone into the non-tradable sectors – in particular financial intermediation,
construction and real estate, re-enforcing the existing structure of the
economy. Kosovo's total external indebtedness has remained stable at around 30%
of GDP in the last three years. Most of the debt is private, long‑term and linked to foreign direct investments. The
Central Bank of Kosovo has recently published the international investment
position (IIP), which measures the difference in external financial assets and
liabilities, showing a solid 2.3% of GDP.

2.1.2.
Fiscal policy

In a euroised economy, the role of fiscal policy is key in preserving macroeconomic stability. In the
last three years, fiscal policy has been expansionary and volatile, but the
government is taking efforts to stabilise expenditures. The budget deficit
increased from 0.7% in 2009 to 2.6% of GDP in 2010, before corrective actions
brought it down to 1.9% in 2011. Excluding significant one‑off dividend
receipts and budget grants, the deficit
averaged just under 5% of GDP between 2009 and 2011. Primary spending grew by a
nominal 45% over this period, driven mainly by strong increases in capital expenditure
and spending on wages. Government priorities have been heavily oriented towards
road infrastructure, leaving little resources to finance other pressing
development and social needs. The construction of a highway to Albania launched
in 2010 has weighed heavily on the budget, suppressing other capital
expenditure and reducing fiscal space to finance other expenditure that could
contribute to improving social cohesion and prospects for sustainable long-term
employment and growth. By the end of 2011, total revenue increased by around
38% in comparison to 2008 as both tax and non-tax revenue increased strongly.
In this period, the government drew significant dividends from the public
telecom company. Moreover, tax revenue has been boosted by increased indirect
taxation and improved tax collection. Most of the revenue is collected at the
border, reflecting the structural dependency on imports to meet even basic
consumption and investment needs.

Budget deficits have been financed
mainly by withdrawals of previously accumulated government deposits, which
since 2008 have fallen by around 7 percentage points to 3.5% of GDP in 2011. In
2009, Kosovo assumed obligations towards the World Bank. This accounts for most
of the government debt, which stood at about 6% of GDP by the end of July 2012.
This is well within the legally‑binding limit of 40% of GDP for government and
government‑guaranteed debt. In 2012, the government started issuing treasury
bills and declared its intention to develop further the domestic market for
government securities. Overall, in view of the significant contingent and
implicit liabilities, especially in the energy sector, and the numerous
expenditure priorities, future government indebtedness needs to be carefully
managed and monitored.

2.2.
Price and trade liberalisation

Kosovo is not a member of the World Trade
Organisation (WTO) and, consequently, has not had to undergo the deep reform
and trade liberalisation which membership
in this organisation implies. Kosovo is a member of the CEFTA and as such a
signatory to the agreement eliminating barriers to trade between its members
and harmonising provisions on modern trade policy issues such as competition
rules and State aid.

The price‑setting mechanism in Kosovo is
mostly free, with independent regulatory bodies regulating the prices of
electricity, district heating, water,
solid waste, postal services and some telecommunication services. Current
governance arrangements as regards publicly-owned enterprises ensure that government
does not directly interfere in the price setting mechanism of their services.

2.3.
Privatisation, private sector development and
financial reform
2.3.1.
Privatisation and private sector development

The privatisation
of socially-owned enterprises begun in 2002. The Privatisation Agency of Kosovo
has privatised (fully or partially) 306 socially‑owned enterprises. The Agency
has accumulated significant proceeds in the process, which have been ring‑fenced
to satisfy creditors and workers claims. In 2011, a new legislative framework was adopted that is expected to speed up
the liquidation process. However, the privatisation of some large socially-owned
enterprises still needs to be addressed.

A number of large publicly-owned
enterprises in key sectors have been tendered for privatisation. In addition,
the government has entered into or is considering long‑term public‑private
partnerships (PPPs) as a way to draw‑in
private investments and develop the infrastructure. In 2010, a 20-year contract
was awarded to an international consortium to operate the Pristina airport. The
tender has been completed for the Electricity Distribution and Supply Company
in June 2012. The privatisation of the public telecom company is currently on‑going
and is due to be finalised by the end of the year. Large privatisations and
PPPs have the potential to attract investments and improve efficiency. They
should however be managed carefully to limit government exposure to future
liabilities and provide the right incentives for improved business and
operational performance of the companies.

Services are the key component of Kosovo's
private sector. Enterprises tend to be very small and mostly family-run. There
is vigorous business creation, but most
companies do not achieve significant growth. The obstacles to private sector
development are numerous, ranging from a weak rule of law, corruption and
unfair competition to unstable electricity supply, unskilled labour force as
well as difficult and costly access to finance.

In the past year, the government has taken
some initiatives to improve the business environment. The process of business
registration has been simplified and facilitated, the number of required
documents for exporting and importing has been reduced, and a number of
licences have been removed. Kosovo has made important steps towards improving
its legislative and regulatory framework but still faces a major challenge with
regard to its implementation.

2.3.2.
Financial sector reform

The financial sector (excluding the Central
Bank) has expanded by more than 40% over the last three years, reaching around
75% of GDP in the end of 2011. The sector is dominated by eight commercial
banks (76% share in total assets), followed by pension funds (17%),
microfinance institutions (4%) and insurance companies (3%). Concentration is high
and the three biggest banks hold 73% of the assets. Close to 90% of all bank
assets are managed by banks under foreign ownership. All banks have capital
adequacy ratios above the required minimum of 12% and the average ratio for the
whole system is around 18%. Banks' profitability and liquidity indicators are also high. Non-performing loans remain at
manageable levels, although they have slightly increased to about 7% in the
first half of 2012. Financial intermediation has steadily deepened and total deposits
and lending has increased on average by double‑digit rates over the last three
years. The system relies on domestic sources of finance. Deposit levels have
been kept constantly above lending, providing an additional source of stability
in a relatively risk‑averse system.

In April, a new law on banks, microfinance
institutions and non-bank financial institutions was adopted. It enhances
governance standards, introduces tighter restrictions for lending to
bank-related parties and allows consolidated supervision for banking groups.
Additionally, the law strengthens the existing framework for bank resolutions.
This includes establishing a framework that authorises the Central Bank to take
control of a bank before it reaches insolvency. It also provides a clear legal
framework for oversight of microfinance and non-bank financial institutions.

3.
ABILITY TO ASSUME THE OBLIGATIONS RESULTING FROM AN
SAA
3.1.
Political dialogue

There is a broad convergence between the
external policies of Kosovo and those of the EU. A formalised process, a
political dialogue, in which the EU and Kosovo would have an opportunity to
meet and discuss regional and international issues, would have the potential to
contribute to improving further Kosovo's understanding
of EU priorities in this area. Kosovo has established the institutions to
undertake a political dialogue.

An SAA would provide the framework for a
political dialogue that focuses on integration, gradual rapprochement, further
convergence of positions on international issues, as well as regional
cooperation and good neighbourly relations.

3.2.
Regional cooperation

Following the UN General Assembly
Resolution of September 2010, the EU has facilitated a dialogue between
Pristina and Belgrade. The dialogue was launched in March 2011 to promote
cooperation, achieve progress on the path to the European Union and improve the
lives of the people. The parties reached agreements on free movement of persons, customs stamps, recognition of
university diplomas, cadastre records, civil registries, IBM and on regional
cooperation. It is essential that Kosovo continues implementing in good faith
all agreements reached between Belgrade and Pristina to date and that it
engages constructively on the full range of issues with the facilitation of the
EU.

The agreement on regional cooperation of 24
February provided for the modalities for Kosovo's participation and
representation in regional cooperation arrangements. This has been an important
step towards ensuring an effective participation of Kosovo in regional
initiatives. Both parties need to continue implementing
the agreement. Inclusive and representative regional cooperation requires that
the February agreement is implemented by both Kosovo and Serbia.

Kosovo also chaired the Central European
Free Trade Agreement in 2011, including the ministerial meeting in November
2011. Kosovo is also a member of the Regional Cooperation Council. Kosovo
participated in the meetings of the South East Europe Transport Observatory
(SEETO) forum, including the ministerial meeting at the end of 2011. Kosovo
also participates in the Energy Community Treaty. Kosovo was accepted into the
South East Europe (SEE) Centre for Entrepreneurial Learning, the Regional Rural
Development Standing Working Group in the SEE, the Regional Environmental
Network for Accession, and the Network of Associations of Local Authorities of the
SEE.

Kosovo is ready to participate in other
regional initiatives. The agreement on regional cooperation of February should
allow Kosovo to increase and extend its direct participation in regional
mechanisms. This includes the Transport Community
Treaty, judicial cooperation, and arrangements for employment and social
policies within the framework of the SEE Employment and Social Policy Network
and the SEE Health Network. It should also ensure Kosovo's full participation
in the Roma Decade.

According to the Council Conclusions of
April 1997, regional cooperation is one
of the conditions for contractual relations with the EU. To meet its
obligations under such an Agreement, Kosovo needs to ensure active and
constructive cooperation with all partners from the region.

Under an SAA, Kosovo would commit itself
to the active promotion of regional cooperation, in all areas covered by the agreement.

3.3.
Free Movement of Goods

Trade policy

In view of an SAA, Kosovo needs to have the administrative capacity to conduct
negotiations in trade-related areas. It needs to be able to identify the
benefits and costs of changes in trade regimes resulting from negotiations with
the EU and take meaningful commitments which can then be implemented. An
appropriate negotiating structure also must be in place and there need to be
mechanisms for consulting the relevant stakeholders. This capacity needs to be
maintained throughout the negotiation process, and Kosovo needs to be able to
provide evidence that the reforms requested as a result of the negotiations can
be implemented progressively after signature.

The Ministry for Trade and Industry has
been reorganised. The Trade Department of the Ministry for Trade and Industry
has been reinforced, but other trade-related departments still need to be
restructured. The new organisational
structure is not yet fully operational or staffed. To negotiate effectively and
to implement the trade-related parts of an SAA, Kosovo needs to strengthen
further its administrative capacity. In the short term, it needs to implement
fully the government decision on the restructuring of the Ministry.

A Council for Trade Policy has been
established, as the inter-ministerial platform for the trade policy
coordination. At the operational level, the policy dialogue among all relevant
Ministries and also with businesses within the framework of the Trade Policy
Working Group and its five sectoral subgroups has been recently established. It has become the centre of the
Ministry's trade policy activity in the short period of time.

These bodies are designed to help define
Kosovo's negotiating positions for the trade related aspects of an SAA and
other trade negotiations. In the short term, to improve the understanding of the
impacts of trade provisions of the Stabilisation and Association Agreement on
Kosovo's economy, Kosovo needs to prepare
an analytical study, including a clear statement of its negotiating priorities.
Kosovo also needs to appoint a chief negotiator. The negotiator must have the
full collaboration of relevant colleagues in the Ministry and in the other
relevant Ministries to have a fully operational negotiating team capable of
covering all aspects of trade negotiations. Finally, appropriate institutional
arrangements and mechanisms need to ensure the overall coordination of the
negotiation process.

Kosovo has been modernising the
trade-related regulatory framework with a view to approximation to the acquis
by adopting new legislation in line with
EU standards and eliminating non-EU compatible regulations. To meet its
obligations under an SAA, Kosovo needs to implement this new legal
framework.

Kosovo is a member of CEFTA. As such, it
has a tariff-free regime for all industrial goods and agriculture products with
all CEFTA members. As a member of CEFTA, Kosovo applies only occasional non-tariff and
technical barriers to trade, within the tariff free regime for all industrial
goods and agriculture products with all its members. Kosovo also enjoys
customs-free access to the EU Market for manufactured products, through the
unilateral regime. Kosovo has the right to establish
protective measures against unfair trade practices (dumping and subsidised
imports).

A flat 10% custom tariff is applied on goods imported from the EU into
Kosovo, with some goods enjoying duty-free access, such as pharmaceutical products, certain agricultural products and livestock,
fertilisers, and others. Kosovo's trade balance is
marked by a significant trade deficit, which exceeded € 2 billion in 2011
(45% of GDP). The EU is by far Kosovo's most important trading partner,
accounting for nearly half of its external trade. The share of exports to CEFTA
member countries was about 26% in 2011 with Albania and the former Yugoslav Republic of Macedonia and Serbia
being the main trading partners.

90% of Kosovo's
exports consist of raw materials, on which the EU applies no restrictions.
Industrial products benefit from the Community's autonomous trade measures (ATMs) in
place until 2015, with no quantitative restrictions or duties. The
only exceptions are veal, wine, sugar and certain fishery products, which are
subject to tariff quotas. The ATMs are important for Kosovo's economy
and for its weak export sector. The value of Kosovo's export grew in 2011; this
was largely due to increased world commodity prices. Exporters focused mainly
on maintaining existing markets rather than expanding exports and penetrating
new markets. There is a good potential to exploit the preferences further for
business development.

Trade in industrial goods

Kosovo has not yet made use of the full
potential of the benefits granted through the EU preferential trade regime and
has a substantial trade deficit in industrial goods. To take full advantage of
an SAA, Kosovo needs to undertake structural change towards higher added value
in export goods, especially in intra-industry trade with EU companies. Within
the scope of the Kosovo's Economic Vision Strategy and Action Plan, aimed at
boosting the private sector, the number of documents necessary for export and
import of traded goods have been reduced. Only two documents are now required
for exports and three for imports.

A significant proportion of Kosovo's total exports
(61%) are primary products such as raw materials or goods with a low
level of processing and relatively low value added, essentially base metals. Consequently, the overall performance of the country's
exports remains sensitive to developments in external demand. Mineral products represent the
second largest category, with over 12% of total exports. Manufactured exports
mainly consist of machinery, plastic and leather. Imports
are generally of a higher processing stage, either intermediate or consumer
goods. In 2011, Kosovo's imports exceeded € 2.1
billion, with an annual increase of almost 15%. The structure of Kosovo imports
is stable. The largest category is mineral products (mostly fuel and ceramic
products). Industrial goods, machinery and equipment represent about 11% of
total imports, or about 28% of total imports from the EU.

Trade in agricultural goods and
fisheries

Agriculture is a key sector in Kosovo.
Agriculture and fishing has a share of about 17% in the total value added in
the economy. It is the main source of income for the majority of the
population. The sector has further growth potential, both in terms of
production and trade. Kosovo is a net importer of agricultural products. Import
of agricultural products (food and beverages, live animals and vegetables)
amounts to almost 22% of all imports but less than 8% of all exports.

The main agricultural exports are
beverages, spirits and vinegar (wine, edible vegetables and vegetable and fruit
preparations). The most important imports of agricultural products in terms of
value are beverages, spirits and vinegar, edible meat, dairy products, pastries
and milk preparation. Kosovo's main trading partners
are the EU, Albania, Serbia, the former Yugoslav Republic of Macedonia and
Turkey. For all agricultural and food categories, a negative trade balance
prevails. Kosovo faces a large agriculture trade deficit. With the EU alone,
this deficit amounted to € 138 million in 2011.

Organic agriculture is at an early stage of
development. The produce has to be certified in Albania and the former Yugoslav
Republic of Macedonia.

To meet its obligations under an SAA, Kosovo needs to continue
agricultural structural reforms. It needs to accelerate the harmonisation of
veterinary, sanitary and phytosanitary rules with EU standards to help its
exports meet international requirements.
Privatising processing plants and their upgrade to the level fulfilling the
required quality and safety standards would improve their commercial
competitiveness and thus prepare for an SAA. This would also help improve the
trade balance between the EU and Kosovo and improve export performance for all
agricultural products. Kosovo also needs to improve its statistical data
collection as there are significant differences between the EU and Kosovo data
on agricultural trade.

Under an SAA, ensuring free movement of
goods is one of the main objectives. The parties establish gradually a free
trade area, within a transitional period to be determined during the
negotiations. This free trade area would have to be in conformity with relevant
WTO provisions.

Kosovo would commit not to establish
quantitative restrictions or measures having an equivalent effect, to
progressively dismantle its respective customs duties and equivalent measures
on almost all trade with the EU. It would commit to prevent practices
discriminating directly or indirectly against EU producers. The EU autonomous
trade measures already contain a standstill clause making them conditional on
the beneficiaries not introducing new import duties and measures having
equivalent effect in trade with the EU. This would become a contractual
obligation under an SAA. The customs authorities in Kosovo would need to be
able to enforce and safeguard these demanding trade regimes.

3.4.
Movement of workers, establishment, services and
capital
3.4.1.
Movement of workers

The main elements of institutional and
legal framework with regard to equal treatment of workers are in place. Foreign
citizens who want to work in Kosovo for a minimum
of three months need to have a work permit issued by the Ministry of Labour and
Social Welfare. The Ministry sets the number of employment permits for foreign
persons, in accordance with the employment opportunities. The number of permits
for the following year is set at the end of each calendar year. The Labour
Inspectorate supervises the implementation of the legislation and controls work
permits.

Several categories of foreign workers are
exempt from the obligation to obtain a work permit, which facilitates the
access to the labour market for foreign nationals
in certain sectors. Kosovo has also undertaken measures to assist foreign
nationals in specific areas. For example, in the construction sector Kosovo
recognises foreign licences, thus making it easier for foreign companies to
bring employees to work in Kosovo. Lawyers, who are permanent residents, are
also allowed to provide services in Kosovo.

A lack of reliable statistics on the labour market makes it
difficult to assess the short- and long-term needs of foreign labour. A labour market
assessment would help Kosovo to determine when there is a need to recruit
third-country nationals.

To meet its obligations under an SAA, Kosovo needs to continue in strengthening the legal framework and
its needs to enhance considerably its administrative capacity. At present,
Kosovo has limited legal and institutional capacity necessary to introduce a
limited coordination of social security systems as foreseen by an SAA. The
social security system in Kosovo is still in its very early stages. The existing
legislation is rudimentary. There is currently, depending on the sector, either
no insurance system at all or no system suitable for coordination. The
negotiation of bilateral agreements on social security proves to be difficult
and some branches of social security do not yet exist in Kosovo.

Under an SAA, Kosovo would need to
ensure equal treatment as regards working conditions, remuneration and
dismissal of workers who are legally established in its territory. The legally
resident spouse and children of a worker legally employed in Kosovo would have
access to the labour market during the period of the worker's authorised stay.
Kosovo would be required to lay down the rules for the
limited coordination of social security systems to
EU nationals legally employed in Kosovo and their family members residing with
them.

3.4.2.
Establishment

The legal framework for the right of
establishment is the law on business organisations, which allows foreign-owned companies to establish their business under the same
conditions as local businesses as long as they are registered with the Kosovo
Business Registration Agency (KBRA). In
support of inter alia business establishment and registration, 25
one-stop-shops have been established in different municipalities.

The business registration certificate,
fiscal number and VAT certificate will be issued on the spot in these 25
one-stop-shops. The business registration process has been simplified by
removing the provision requiring the deposit of the minimum start-up capital (€ 5,000) for limited
liability companies and by reducing start-up capital for joint stock companies
from € 25,000 to € 10,000. These simplifications will facilitate
business start-ups, and reduce the time to start a business. The legal framework and the practices are non-discriminatory.

To meet its obligations under an SAA, Kosovo needs to continue in a progressive alignment with the EU
provisions. The alignment with EU standards on the
recognition of professional qualifications and company law, including accounting,
auditing and corporate governance is limited. Further progress in those two
areas will contribute to make Kosovo a more attractive location for business.

Under an SAA,
Kosovo would need to ensure that EU companies have the right of establishment
in Kosovo. EU companies established in Kosovo should be granted either local
treatment or most-favoured-nation (MFN) treatment, whichever is more
favourable. During the transition period, the issue of extending these rights
to EU nationals or Kosovans wishing to establish themselves as self-employed
independents would be examined. Notwithstanding the provisions governing the
free movement of workers under the agreement, special establishment provisions
could be introduced for "key personnel".

3.4.3.
Supply of services

The legal framework for trade in services
allows for a relatively open economy to foreign service providers. In terms of market
access, for most services, there are no legal restrictions on foreign firms
establishing a commercial presence in Kosovo. Once they are established,
foreign-owned firms are subject to the same rules as domestic ones. The share of services in the economy has been stable in the last
years, at approximately 60%.

Foreign-owned local firms are free to
determine their ownership structure (allowing up to 100% foreign ownership) and
whether they will enter into a joint
venture with local or other foreign-owned firms. Within the overall
privatisation policy, specific service providers are in the process of being
privatised, such as the Post and Telecommunications of Kosovo (PTK).

Overall, Kosovo is a net exporter of
services. This is the only sector, where Kosovo has a positive trade balance.
The export of services represents approximately 10% of GDP, while imports
account for approximately 7.5% of GDP. The positive balance mainly reflects
increased revenues from the communication and travel services. Service exports have an important potential for faster economic
growth. During the next three years, exports of services are expected to grow
by 6.5% in real terms. The main contributors to this growth are travel
services, which mainly depend on visits of diaspora in Kosovo. In general, Kosovo
has a relatively liberal regime for the supply of services.

To meet its obligations under an SAA, Kosovo needs to continue in the progressive alignment of its
legislation with the acquis. It also needs to improve its statistics on services.

Under an SAA, a liberal regime for the
supply of services, consistent with the relevant WTO rules, in particular Article
V of GATS, would be provided for. Companies not established in the territory of
the respective other contracting party would gradually acquire the right to
provide services, in accordance with the GATS provisions and taking account, in
particular, of progress in approximation of laws in the various fields. The
agreement would contain a stand-still clause. The implementation of this
liberalisation would be closely monitored under the agreement.

3.4.4.
Current payments and movement of capital

Kosovo already enjoys a liberal regime for capital movements, including foreign direct investment. There are no restrictions regarding foreign ownership or
investment in the financial sector or in other assets. The
liberalised rules constitute an important
economic and regulatory achievement and should in the long-term help attract
the foreign capital. The repatriation of profits is also liberalised. Kosovo has concluded a number of bilateral
investment treaties, inter alia with Albania, Belgium and Luxembourg.

As regards international payments, efforts
to negotiate an interim SWIFT code (an ISO 3166-1 user-assigned code) in the
absence of UN membership have not been successful. The banking sector seems
solid both in terms of legal rules and capitalisation, and is progressively
becoming more fluid. Kosovo only has an embryonic financial market and no stock
exchange. The supervision capacities and procedures are established and
efficient, with competent staff in the Central Bank of Kosovo.

To meet its obligations under an SAA, further reform is needed to introduce Basel II risk requirements
and to establish a legal framework in line with EU standards on the free movement of
capital and payment systems.

Under the SAA, Kosovo would commit
itself to ensuring a liberal and non-discriminatory regime of both inward and
outward movements of capital, in particular for direct investments. Protection
of investors as regards liquidation and repatriation of investments and profits
will also need to be covered.

3.5.
Approximation, implementation and enforcement of
legislation

European integration departments have been
set up in all ministries, coordinated by the Ministry of European Integration
(MEI) and there is a good basis to improve further the coordination across the
central administration. Over the past three years, Kosovo has made progress in approximation of legislation to
the EU acquis. The legal framework is complex, since it comprises a
mixture of applicable legislation from the previous administrations from before
1999, from UNMIK and now the Kosovo authorities.

To meet its obligations under an SAA, Kosovo needs to increase the capacities and level of expertise in the field of legislative
alignment to the EU acquis. It needs to continue improving the
coordination mechanism with the focus on implementing and enforcing the
legislation.

Under an SAA, Kosovo would commit itself
to ensure gradual approximation of existing and future Kosovo legislation to
that of the EU. Kosovo would have to ensure that approximation would extend to
all elements of the EU acquis referred to in the agreement.

3.5.1.
Competition

Kosovo has a law on State aid. The
independent Kosovo Competition Commission is in place and became operational in
2009. During its four years of activity, some important cases have been investigated. Between 2009 and 2011, the Commission
dealt with 32 cases related to cartels, mergers, concerted practices (including
10 insurance companies for agreement on fixed-prices in third party liability
insurance), and also dominant position. The decisions of the competition
authority can be appealed to the Supreme Court. Several appeals are currently
pending. The Competition Commission has not been involved in the competition aspects of privatisation of large publicly owned enterprises.

To meet the obligations of the SAA, considerable further efforts are required. The law on State aid
needs to be supplemented by the necessary secondary legislation. Certain
aspects of the law on protection of competition need to be amended to be
compatible with EU competition rules, in particular as regards the definition
of dominant market position. Particular emphasis needs to be put on building the institutional capacities
in this area. The State aid board and the independent State
aid commission for approval of aid need to be established. The Kosovo
Competition Commission also requires suitable premises. Overall, enforcement of
the legislation and a significant strengthening of the administration in charge
of competition are necessary to ensure the application of provisions in line
with the EU standards.

Under an SAA, Kosovo would commit itself
to prohibit and police i) all agreements between undertakings and concerted
practices which prevent, restrict or distort competition; ii) abuse of a
dominant position by one or more undertakings, iii) any state (public) aid
which distorts or threatens to distort competition by favouring certain
undertakings or certain products. Kosovo would commit itself to apply these
rules to public undertakings and undertakings with special rights. Kosovo would
also commit itself to adjust state monopolies of a commercial character so that
no discrimination exists regarding the conditions under which goods are
procured and marketed. Kosovo would also need to ensure transparency in the
area of state (public) aid by establishing comprehensive inventories of aid
schemes and by reporting annually to the European Commission.

3.5.2.
Intellectual property rights

Laws on copyright and related rights,
patents and trademarks are in place and are broadly in line the acquis.
Provisions on infringement of copyrights were inserted in the Criminal Code.
The law on trademarks includes, inter alia, provisions on provisional measures
and other enforcement issues but does not make a reference to the Paris
Convention. Local and foreign trademarks are treated equally provided that
foreign trademarks are registered in Kosovo.

As regards enforcement, the Industrial
Property Office (IPO) is an independent agency within the Ministry of Trade and
Industry. There is also a Committee of Appeal. A trademark database is
operational and its data is currently being digitalised. With the adoption of
the intellectual property rights strategy 2010 – 2014, the IPO created a comprehensive strategy, which provides for
an inter-institutional implementing and monitoring body, the IP Council. Its
role is to steer and oversee IP implementation and includes members from the
customs, police and judicial council. Non-governmental organisations are
invited to participate on an ad hoc basis.

The Copyrights and Related Rights Office
was established in 2010 within the Ministry of Culture. Its mission is to
accredit and supervise the organisations representing right holders and other stakeholders active in IPR
matters. Recently, the Copyright Office launched a public awareness campaign
and sponsors some inter-institutional initiatives, such as a strategy against
forgery. The Copyright Office has also developed cooperation with foreign IPR
institutions.

A task force has been established to fight
piracy. An intellectual property rights Unit was set up within the Customs and
became fully operational in January 2011. The IPR sector was also included in
the Kosovo Customs Strategic Operation Framework 2011-2014. Customs have
approved 22 applications for action and referring to 129 trademarks. Judges in commercial courts are
dealing with IPR infringements and have received some training on these
matters.

To meet its obligations under an SAA, key secondary legislation still needs to be completed. A law on
geographical indications needs to be adopted. The capacity of the IPO remains
limited and the office premises are inadequate making it difficult for the IPO to process registration
applications in reasonable time. Kosovo needs to put particular emphasis on
enforcement of the legislation. The fight against counterfeited goods needs to
be more vigorously addressed. The police needs a specialised unit dealing with
the IPR and police officers needs appropriate training. Effective
inter-institutional mechanisms need to be further improved and efforts in
addressing IPR infringement need to be significantly increased notably by
signing memoranda of understanding between IP offices.

Under an SAA, Kosovo would commit itself
to granting to EU companies a level of protection comparable to that of
domestic companies. Progressively, Kosovo will need to work towards a
comparable level of protection as granted in the EU.

3.5.3.
Public procurement

The public procurement law (PPL)
constitutes the basis for the legal framework. It has been amended frequently
in the past few years with the aim of increasing its compliance with the acquis. The current law reflects
adequately the main principles of a sound public procurement system and is
consistent with international good practices in public procurement. The new law
has been almost completely harmonised with the EU directives and all secondary
legislation has been in force since March 2012.

With the current regime, the economic
operators are well informed about procurement rules. The tender notice includes
sufficient information on what is intended to be purchased as well as the
evaluation and qualification criteria. The restricted procedure is defined as a
normal procedure that can be chosen as an alternative to the open procedure. Large value contracts need to be
signed by the Chief Executive Officers and Ministers. E-procurement is being implemented.
The contracting authorities are directly responsible if they do not publish the
tender notice for a negotiated procedure and if they do not follow the general
requirement for a minimum of three tenderers.

The public procurement system in Kosovo
consists of 161 Contracting Authorities (530 procurement officers are currently
working in public procurement bodies). The institutional setup comprises the Public
Procurement Regulatory Commission responsible for the overall development,
operation and supervision of the public procurement system, including
monitoring the use of the negotiated procedure, the selected qualification
criteria and the validity of contract signature. The Procurement Review Body is
an independent administrative review body dealing with complaints. The Central
Procurement Agency has refocused on central purchasing. These three
institutions now have new rules of procedures and new operational guidelines.

The Board and the Commission remain
independent institutions. They
are nominated by the Government and appointed by the Assembly. They report
directly to the Assembly. The Agency is now placed under the Ministry of
Finance and is administered by a Director who is yet to be appointed. The
government has not yet approved the lists of common-use items for mandatory
central purchasing, which weakens the Agency's ability to carry out its
functions.

The review of complaints is conducted
exclusively by the Procurement Review Body and the law does not provide for the
complaints to be filed with the contracting authority at a first stage. A panel
comprised of one or three board members reviews cases. The review procedure includes also public hearings and
decisions are available on the website. The complaints fee is € 500
whereas fines imposed are systematically no less than € 5,000.

Kosovo has also legislation on public-private
partnerships, which establishes a consistent legal framework on work concessions
and which is largely compatible with EU legislation.

There is no discrimination between domestic
and foreign companies in Kosovo, the legal framework is compatible with the EU
and international practices, and the administration in charge of procurement is
functioning.

To meet its obligations under an SAA, Kosovo needs to put more emphasis on ensuring compliance, in
particular as concerns the Procurement Agency. The integrity and transparency of the processes needs to be
increased. Further efforts are required to ensure that corruption and fraud
cases are addressed and prosecuted successfully. Corruption in the field of
procurement needs to be addressed. The professionalism of procurement officers
needs to be further improved with more emphasis on high-quality trainings. The
turnover of procurement officers is still significant and needs to be
addressed.

Under an
SAA, Kosovo would be required to ensure that EU companies are granted access to
contract award procedures under treatment no less favourable that of domestic
companies, subject to a transitional period to be negotiated for EU companies
not established in Kosovo. Kosovo would need to ensure that its public
procurement legislation is in line with that of the EU. It would also need to
strengthen the relevant institutions and judiciary so that public procurement
procedures are properly implemented.

3.5.4.
Standardisation, accreditation, conformity
assessment, metrology and market surveillance

The basic legislation on standardisation,
general product safety, technical requirements for products and conformity
assessment as well as on accreditation has been progressively adopted. The
professional Standardisation Council, the highest coordinating and policy-making body for standardisation, is
operational and is composed of members from both public and private sectors.
The Council decides on the establishment of technical committees. Kosovo also
has a Standardisation Agency, an executive agency of the Ministry of Trade and
Industry.

18 technical committees have been
established and approximately 4,000 European standards (ENs) have been adopted
as Kosovo standards, including a number of harmonised standards related to the
New Approach Directives. The Kosovo Standardisation Agency adopts standards via
the Albanian national standardisation body. The Agency applies the principles
of transparency, inclusivity and accountability of the WTO code of good
practice for standardisation, despite Kosovo not being a member of any European
or international standards bodies.

The Kosovo Accreditation Directorate is
placed under the Ministry of Trade and Industry. The Directorate chairs the
professional Council on Accreditation that meets once a year and includes
representatives from business organisations and the chamber of commerce. The
Directorate has a cooperation contract with the European Cooperation for
Accreditation (EA). In November 2010, it applied to sign a bilateral agreement
with the EA under the conditions applicable to signatories of the EA
multilateral agreement on testing laboratories. The Accreditation Directorate
has accredited 18 testing laboratories and 1 inspection body as Conformity
assessment bodies. The accredited laboratories cover food analysis, fuel
chemical testing, as well as physical-chemical testing and mechanical testing
of construction materials.

The legislation and policy on conformity
assessment is developed and implemented by the Department of Industry, within
the Ministry of Trade and Industry. The Department of Metrology within the Ministry is the only
institution in Kosovo responsible for establishing and directing the metrology
system in Kosovo. Two laboratories located in Pristina and Prizren have started
their operation in 2010.

The market surveillance legislation is
partially harmonised with the acquis.
Market surveillance functions are being centralised. The Market Surveillance
Department of the Ministry has recently launched an initiative to develop a
sectoral strategy on market surveillance including customs, health, food and
sanitary inspection, and labour inspection. Approximately 30,000 inspections
have been carried out since the Department's creation in 2005.

Overall, important elements of the legal
and institutional framework for
standardisation accreditation and conformity assessment are in place. Over the
past three years, the capacity of the Ministry of Trade and Industry in this
area has improved.

To meet its obligations under an SAA, Kosovo needs to complete the legal framework and continue its
alignment with the acquis. Further efforts are necessary in terms of
capacity building of the Ministry and of its agencies, of training and
awareness raising. For example, the capacity of the Standardisation Agency
needs to be enhanced. The
operations of the metrology laboratories still do not meet international
standards. The inter-institutional cooperation on market surveillance needs to
be improved, notably with the customs. Cooperation with the customs is crucial
given the level of Kosovo's imports. An effective surveillance has to be
carried out on products available on the domestic market. Data on market
inspection is only partially available as a database has not yet been
established.

Under an SAA, Kosovo would commit itself
to progressively align its legislation with the acquis, adopt the European
standards (ENs) and build institutional capacities to ensure enforcement of the
legislation. In particular, Kosovo would be required to i) promote the use of
EU technical regulations, European standards and conformity assessment procedures,
ii) conclude, when appropriate, an agreement on conformity assessment and
acceptance of industrial products, iii) foster the development of quality
infrastructure: standardisation, metrology, accreditation and conformity
assessment and market surveillance.

3.5.5.
Consumer protection

Kosovo has legislation on consumer
protection. There is also a Consumer Protection Office. Kosovo adopted a
Consumer Protection Programme 2010-2014 which aims to strengthen the role of the Council for Consumer Protection and
its supervisory activities, along with the transparency and accountability of
institutions responsive to consumers. The Council is composed of
representatives from business associations and consumer protection
organisations and individual experts. The Council is the main policy and
legislative-making body.

To meet its obligations under an SAA, Kosovo needs to continue in further alignment of the legislation
with the acquis. The Consumer Protection Office still needs to be significantly reinforced to ensure an effective
consumer protection. The overall system of collecting and processing consumer
claims needs to be enhanced to achieve concrete impact and improve the quality
of the market and of the general product safety. The role of the Consumer
Protection Department in evaluating and coordinating market surveillance
information and data related to consumer products has not been defined. Kosovo
needs to improve the implementation of the Consumer Protection Programme.

Under an SAA, Kosovo would need to
develop active consumer protection policies, in accordance with the acquis, to
guarantee consumer representation, information and education. The capacities of
the administrative structures responsible for consumer protection need to be
enhanced to ensure essential health and safety requirements and the safeguard
of consumers' economic interests.

3.6.
Justice and home affairs
3.6.1.
Reinforcement of institutions and rule of law

For a detailed analysis of the situation
in judiciary and prison system see the Political Criteria.

The main elements of the legal framework
are in place. At the same time, they can be complex, comprising a mixture of
different legal acts applicable
in Kosovo, including legislation of the former Yugoslavia and form the Federal
Republic of Yugoslavia, UNMIK and the Kosovo authorities. This has led to legal
inconsistencies. Application at the court level consequently creates
difficulties and delays. There are ongoing efforts to eliminate fragmentation
and enhance approximation with the EU in this important area.

Over the past three years, Kosovo has
established the necessary
institutions in charge of the rule of law in Kosovo. The Ministry of Internal
Affairs oversees the work of the Kosovo Police, with a total staff of nearly 8,500
(including 1,100 civil officers). Persons belonging to minorities occupy 13% of
positions. The Kosovo Police has established good capacities for providing
general public safety and security.

Kosovo Police operates with a single chain
of command and continues to have a token presence in the north of Kosovo. There
are communication channels
between officers from the northern municipalities with the regional police
command in the southern part of Mitrovicë/Mitrovica. At the same time, EULEX
frequently needs to facilitate communication. Police officers in the north of
Kosovo work in difficult circumstances preventing them from fully discharging
their duties. Parallel security structures also operate in the north.

In 2011, the police established the
International Law Enforcement
Coordination Unit (ILECU) to facilitate cooperation with law enforcement
agencies from third countries. The Interpol liaison office is still with UNMIK;
some Kosovo Police officers are detached to this unit.

The Police Inspectorate of Kosovo (PIK) was
established in June 2011 as an executive body of the Ministry of Internal
Affairs, independent of the Kosovo Police. The PIK handles complaints, involves
the Professional Standards Unit when disciplinary investigation is needed, and has the authority to
launch criminal investigations.

Capacities in the Kosovo Police to
investigate complex criminal activities remain limited and need to be
considerably enhanced. Political leaders in Kosovo need to establish an
environment conducive to independent and professional investigations.

Personal data protection is a key component
of effective law enforcement cooperation in the EU. Kosovo has adopted the
primary legislative framework on personal data protection. The National Agency
for the Protection of Personal Data has been established as an independent body
reporting to the parliament. Currently, personal data protection is not fully
guaranteed. Kosovo needs to focus on implementation, drafting secondary
legislation and strengthening capacity. Public authorities, including law enforcement,
and the private sector need to be made aware of personal data protection
requirements.

For Kosovo to make progress in
consolidating the rule of law, it is essential it cooperates with EULEX, and it
supports the implementation of the EULEX mandate including the Special
Investigative Task Force. Fragmentation of legislation needs to be addressed
and law enforcement improved to ensure that the rule of law is effectively
applied.

Under an SAA, the contracting parties
would attach particular importance to the consolidation of the rule of law in
Kosovo and strengthening the relevant institutions in the administration in
general and in law enforcement and the judiciary in particular. An effective
SAA will depend upon a safe, efficient and predictable legal space. Authorities
and an independent judiciary working in line with proper democratic and
professional standards are not only essential for establishing the rule of law
for the immediate benefit of the public but also for international cooperation and
as regards the economic development including attracting foreign investment.
Contracting parties would cooperate on personal data protection legislation,
ensuring sufficient resources for the independent supervisory body to monitor
and guarantee the enforcement of the legislation.

3.6.2.
Asylum, migration, visa policy, control of
borders/boundary

A new asylum system was established
in April 2010. Kosovo has a comprehensive law on asylum. The Department of
Citizenship, Asylum and Migration (DCAM) in the Ministry of Internal Affairs
(MIA) is in charge of the asylum policy. Kosovo is mainly a transit country for
asylum seekers and irregular migrants, mostly arriving via the former Yugoslav
Republic of Macedonia and continuing towards the EU. Kosovo authorities have taken
steps to increase awareness about the rights and obligations of the asylum
seekers. The DCAM is in charge of the first instance asylum decisions whereas
the National Commission on Refugees is in charge of the second instance
decisions. Between 2009 and 31 July 2012, 511 asylum claims were processed,
none of which led to refugee status being recognised. The majority of the
decisions regarding asylum requests are negative decisions in absentia
(the asylum seeker having already left Kosovo). A new asylum centre in
Lipjan/Lipljan municipality was inaugurated in February 2012, improving the
accommodation facilities for asylum seekers in Kosovo.

Kosovo has a strategy and action plan on migration.
These are currently under review. The legal framework on foreigners and
citizenship is in place. A public information campaign addressing irregular migration from Kosovo to
the EU was held in 2011. Kosovo has made progress on readmission over
the past three years. A law on readmission was adopted in 2010. Readmission
agreements covering seventeen countries have been concluded. Since 2010, Kosovo
has made considerable progress in improving the framework on the reintegration
of repatriated persons. A strategy and an action plan on reintegration set
the priorities in this area. A Reintegration Fund for repatriated persons was
established in 2010. The reintegration office at Pristina Airport is the first
entry-point for repatriated persons. In 2012, seven regional coordinators were
appointed as focal points for municipalities aiming to improve communication
between the central and municipal level.

Kosovo's visa policy is due to enter
into force on 1 January 2013. This will establish a list of citizens who need
to be in possession of visa to enter Kosovo. In this context, Kosovo has signed
an agreement with Albania on consular representation. Kosovo residents mainly
use the Kosovo passports introduced in 2008, although some use Serbian
biometric passports. Kosovo started issuing biometric passports in October
2011.

A legal framework on civil status is
largely in place. Some secondary legislation still needs to be completed. Since
2011, the inspectorate unit of the Civil Registration Agency (CRA) has been
checking the integrity of the processes related to civil status. Measures have
been adopted to prevent municipal civil status officers from illegally editing
personal data without prior permission. The civil status registry books have
been digitalised and will be
entered into the new central civil status database. Certified copies of the
original civil registration books for the territory of Kosovo, which are
located in Serbia, are in the process of being handed over, based on the
agreement reached in the EU-facilitated Belgrade/Pristina dialogue.

The legal framework and institutions
(Kosovo Border Police, Kosovo Customs, and the Kosovo Veterinary and Food
Agency) to secure Kosovo's borders/boundary are largely in place. There is also
a strategy and an action plan for the border/boundary management. The
Kosovo Police has taken over the responsibility from KFOR for border
surveillance with Montenegro and with the former Yugoslav Republic of
Macedonia. Synchronised border patrols are performed on the basis of agreements
with Albania and the former Yugoslav Republic of Macedonia.

To meet its obligations under an SAA, Kosovo needs to continue in further alignment of the legislation
with the acquis and capacity building of institutions responsible for
these areas. The law on asylum needs to be further aligned to international and
EU standards. Lack of information concerning the origin of asylum seekers and
the absence of identity documents are obstacles for removing asylum seekers
whose applications for international protection have been rejected. Formal
operational procedures for the removal of rejected asylum seekers need to be
adopted.

On migration, the necessary
administrative instructions and standard operating procedures still have to be
adopted. Kosovo's legislation in this area conflicts with the legislation on
work permits. This needs to be addressed. Sustainable solutions are needed for
the status of internally-displaced persons (including access to personal
identity documents), family reunification conditions, stay permits for asylum
seekers, refugees and persons under subsidiary protection, stateless persons,
victims of trafficking as well as for people who, at their request, have been
released from their Kosovo citizenship.

A comprehensive data collection mechanism
is not yet in place, but database on asylum and migration is expected to
contribute positively to data collection and analysis, once effectively
applied. A migration profile for Kosovo needs to be developed.
Inter-institutional coordination needs to be enhanced and administrative
capacities improved.

Pending readmission requests are
largely due to challenges in verifying identity and determining citizenship as
well as delays in communicating negative replies. Cooperation on readmission
between different authorities needs to be improved. The deadlines stipulated in
the readmission agreements and in the law needs to be applied. The exchange of
information between requesting states and Kosovo needs to be strengthened. The
lack of readmission agreements with countries of origin or transit, and the
lack of application of the readmission law, is also a concern.

The number of requests for the
reintegration fund assistance is increasing. Overall, disbursement remains low
in response to individual requests. The employment schemes and housing projects
to which larger parts of the budget have been allocated are in an early phase
of development. Since the reintegration fund is provided from the state budget
the final financial disbursement decisions are made at the central level. The
Office for Reintegration, which manages the funding requests, will be upgraded
to a department in the MIA. This Department needs to take over the decisions
currently made by the Inter-Ministerial Executive Board on Reintegration. The
procedures applying to funding need to be further simplified.

A case management system is envisaged to
help further the authorities to process and access data on repatriated persons
in order to meet their needs better. The contacts between the central and
municipal levels need to be enhanced. The involvement of the line Ministries in
the reintegration process remains weak, notably on employment, education and
training. The lack of access to employment, education and training continues to
be an obstacle to the sustainable reintegration of repatriated persons, in
particular from minorities.

On visa, the administrative
instructions still need to be adopted. As regard document security, there are
concerns as to the accuracy and reliability of the civil status data available
both at the central level and in municipalities. The lack of document security
may challenge the reliability of the new biometric documents. Kosovo also needs
to increase the border/boundary protection in order to tackle frequent
trafficking.

Under an SAA, Kosovo would need to
ensure a framework for cooperation, including at regional level, in the fields
of visa, border/boundary control, asylum and (legal and irregular) migration. A
central element of cooperation in the area of preventing and controlling
irregular migration would be the inclusion of provisions on readmission, and
focus will also be on statistics exchange and enhancing capacities and
efficiency.

3.6.3.
Combating money laundering

A legislative framework on anti-money
laundering is in place, but it is not yet aligned with European and
international standards. Kosovo is currently revising the legislation to
include the provisions of EU legislation as well as the recommendations of the
Financial Action Task Force. This needs to be Kosovo's priority in the short term.
It is also a pre-condition for joining the Egmont group of Financial
Intelligence Units (FIUs). The FIU has initiated the procedure to join this
Group and has requested the Slovenian FIU to be its sponsor.

The relevant institutions have been set up
and are functional. The responsibilities of the EULEX-led Financial
Intelligence Centre (FIC) have recently been transferred to the FIU, attached
to the Ministry of Finance. The FIU does not conduct its own criminal
investigations, but provides intelligence to investigative bodies. The
cooperation with banks is good and an electronic system of cash transactions is
working: over 420,000 cash transactions above € 10,000 are reported to the
FIU each year. This is a high number compared to the size of Kosovo's
population and economy. Kosovo Customs are building on progress made in money
detections. The total amount of detected undeclared cash has increased. There
has also been an increase in the number of cash declarations over the same
period. In the short term, Kosovo needs to revise the law on prevention of
money laundering and financing of terrorism.

To meet its obligations under an SAA, Kosovo needs to prepare a strategy to fight money laundering. The
institutional setup, involving different police units and directorates, the
FIU, and the anti-corruption task force of the Special Prosecution, is complex.
It needs to be simplified to tackle money laundering effectively. Police
officers, prosecutors and judges need specialised training to run complex
investigations. The FIU needs to improve its analytical capacity to support the
investigations. Kosovo needs to improve its statistics in this area.
Furthermore, large amounts of money continue to be invested for example in real
estate without adequate supervision, and the FIU is not legally mandated to
execute inspections in casinos.

International cooperation involving Kosovo
in this area is limited. Kosovo is not a member of the Financial Action Task
Force (FATF) or any of the FATF-style regional bodies. A number of European
FIUs therefore currently refuse to respond to either intelligence provided by
the Kosovo FIU or to its requests for information. At the same time, Kosovo
needs to implement the existing FATF recommendations.

Under an SAA, Kosovo would need to
establish a framework for cooperation aimed at preventing the use of its
financial systems for laundering the proceeds of criminal activities.
Cooperation in this area would include administrative and technical assistance
aimed at establishing appropriate standards to counter money laundering
equivalent to those adopted by the EU and other international bodies on the
field, in particular the FATF.

3.6.4.
Preventing and combating organised crime and
other criminal activities, including terrorism

Over the past three years, Kosovo has
established the key elements of the legal framework necessary for the fight
against organised crime. Kosovo also has legislation for witness protection and
has established a relevant unit in the police. Kosovo has a strategic framework
for the fight against organised crime, drugs and terrorism; new revised
strategies have been adopted recently. Kosovo has a strategy and an action plan
on the fight against trafficking of human beings. Within the Ministry of
Internal Affairs there is a National Coordinator for combating trafficking, who
is in charge of coordinating activities and implementation. The coalition of
shelters for victims of domestic violence and trafficking in human beings was
established in 2011. There is also a policy framework for an intelligence-led
policing.

The relevant institutions for the fight
against organised crime, notably the law enforcement authorities and the
judiciary, are in place and have been increasing their capacities and their
efficiency over the past three years. Kosovo has recently put in place police
structures for international cooperation, notably the International Law Enforcement
Cooperation Unit. An Agency for the Management of Sequestrated and Confiscated
Assets was established in 2010. The Agency is primarily responsible to
administer confiscated and sequestrated assets. In the short term, Kosovo needs
to demonstrate a clear commitment to deliver results in the fight against
organised crime, including launching investigations, in close coordination with
EULEX. Kosovo needs to focus on adopting new legislation on the confiscation of
illegally obtained assets. It is important that the law follows European
standards and practices in this area.

To meet its obligations under an SAA, Kosovo needs to deliver on investigations and prosecution of the
organised crime. It also needs to improve statistics in this area.

A significant network of Albanian-speaking
criminals, including Kosovans is heavily involved in smuggling drugs, including
heroin and cocaine, in the region as well as the EU. Over the past three years,
the level of seizures of drugs in Kosovo has increased. At the same time,
further efforts are necessary to meet the challenge, in particular with regard
to arrests and convictions.

Kosovo remains a place of origin and
transit, for victims of trafficking. The trend of local women trafficked within
Kosovo and onwards to European countries for the purpose of sexual exploitation
continues. There is an increase in the number of underage victims trafficked
for sexual exploitation. Child-trafficking and exploitation for the purpose of
begging remain at high levels too. Pristina Airport continues to be a weak
point in this regard. The rate of convictions in these areas is low. The
judiciary and prosecution lack expertise and capacity to prosecute trafficking
cases resulting in weak accountability for trafficking offenders. Appropriate
government funding for shelters and reintegration of victims is necessary.

To date, terrorism has been a lesser threat
in Kosovo than other forms of serious crime. Kosovo nonetheless needs to
gradually ensure that its legislative and strategic framework is aligned with
the EU. Kosovo law enforcement authorities need to continue monitoring the
situation.

International cooperation with Kosovo in
the fight against organised crime is limited due to status considerations.
Kosovo needs to be more proactive and pragmatic in this area. Above all, Kosovo
needs to gradually build its credentials, and thus trust of international
partners.

Witness
protection in Kosovo is a particularly difficult challenge. The secondary
legislation on witness protection remains to be adopted. The capacity of the
Witness Protection Unit within the Kosovo Police needs to be further enhanced.
Further political support and in particular budgetary autonomy is required for
the unit to become fully operational.

Kosovo needs to establish a sound legal
framework on the interception of telecommunications. A clear distinction
between judicial interception and interception for intelligence purposes needs
to be made, in line with European best practices. Appropriate control
mechanisms need to be put in place to ensure that these tools are not misused.

The Agency for the Management of
Sequestrated and Confiscated Assets has managed only a small number of assets,
due to the low number of confiscations and sequestrations ordered by the
judiciary and executed by the police. The judiciary needs to use the provisions
on confiscation more proactively. Implementing intelligence-led policing
remains also a challenge.

In general, the fight against organised
crime is a major challenge for Kosovo. Concrete evidence of results in fighting
organised crime needs to be given as a matter of priority. To achieve results
in this area, the legal framework needs to be further strengthened and
implemented. Clear institutional responsibilities need to be established. Kosovo
needs to further enhance the level of expertise to tackle complex criminal
investigations. This needs to be supported by a political environment conducive
to independent and efficient investigations and prosecution.

Under an SAA, Kosovo would need to
develop a framework for cooperation aimed at fighting and preventing criminal
activities, notably organised crime. Kosovo would be required to devote
particular attention to issues such as trafficking in human beings, illegal
economic activities (such as corruption and illegal transactions involving
goods such as counterfeit products, industrial waste and radioactive material),
illicit arms trafficking and terrorism. Kosovo would also need to be able to
cope with the health and social consequences of different forms of drug abuse,
preventing the diversion of chemical precursors and reinforcing structures for
combating illicit trafficking of drugs.

3.7.
Cooperation policies
3.7.1.
Economic, monetary, statistical cooperation and
the protection of EU financial interests

The Ministry of Finance has a Department
for macro-economic and fiscal analysis, which is active in the
Government's economic strategic planning. The Department is in charge of
preparing the Medium-Term Macro-Fiscal Framework (MTEF), which represents the basis
for drafting the expenditure framework, analyses the current fiscal trends and
economic forecasts. The MTEF includes many of the features that are common in
international practice as well as a promising basis for sectoral analyses.
Kosovo has a legal requirement to conduct an assessment of the fiscal impacts
of all new policy and legislative proposals. Kosovo currently participates in
the Fiscal Surveillance Exercise.

Statistics are crucial for negotiating an
SAA. In recent years, Kosovo has improved its statistical
infrastructure. With the recent adoption of the law on official statistics, the main
responsibility for processing statistical data is with the Kosovo Agency of
Statistics (KAS). The Agency was also moved from the Ministry of Public
Administration to the Prime Minister's Office. It is now an autonomous budget
organisation. A Statistical Council was established in
March 2012. According to the new law, the Agency is responsible for drafting a multi-annual work programme for the Kosovo's statistical system. The cooperation of the statistical agency with other institutions
has improved. The quality of statistical information has also been gradually
improving.

The population and housing census was
carried out in April 2011, but did not cover the north of Kosovo. Figures
resulting from the census can be relied on. Preparations for the agricultural
census planned for 2013 have started.

To meet its obligations under an SAA, the MTEF needs to include a number of aspects that are common
practice in many EU countries, including: i) comparisons with projections of
other institutions and previous Ministry of Finance projections, ii) tax
expenditure, iii) public debt and deficit broken down by levels of government. The
MTEF also needs to be fully developed as a policy or reporting tool.

Ministries need to strengthen their
capacity to prepare adequate cost estimations. The practice of adopting a large
number of laws towards the end of each year is not conducive to rigorous
analysis of cost impacts.

Kosovo also needs to continue to prepare
for participating in the economic and fiscal programme framework for potential
candidate countries. Kosovo's inclusion in this framework could bring benefits
in streamlining, coordinating and analysing economic policy priorities over the
medium-term.

With regard to statistics, the
administrative capacity of the
statistical agency remains weak and the lack of
qualified staff is a serious constraint on the development of the Agency. Strengthening the management of the agency
remains a key challenge for the development of the institution and the Kosovo's
statistical system. The agency needs to improve the
quality of statistics, in all statistical domains, but especially business and macroeconomic statistics. The current discrepancy between the EU and Kosovo's statistical data
constitutes a challenge. Effective cooperation under an SAA will require the
KAS to produce data on macro-economic matters, such as trade and employment.

Protecting the EU's financial interests and
protecting the euro against counterfeiting is still at an early stage.

Under an SAA, Kosovo would need to
foster reform and economic integration into European structures by improving
the formulation and enforcement of market-based economic policies. It would
need to improve its capacity to provide information on macroeconomic
performance and forecasts, to formulate economic policy and to develop the
instruments necessary for its application. It would also need to take
appropriate account in its policy development of the European Economic and
Monetary Union. Kosovo would need to develop statistical systems, capable of
providing the timely, reliable, objective and accurate data needed to plan and
monitor transition and reform. Special attention would be given to the fact
that Kosovo uses the Euro as its legal tender. Kosovo's present use of the euro
as a legal tender is fully distinct from euro area membership. With regard to
the protection of EU financial interests and fight against counterfeiting of
the euro, the cooperation would also focus on further strengthening the
legislative framework and its enforcement.

3.7.2.
Investment promotion and protection, industrial
cooperation, small and medium-sized Enterprises (SMEs) and tourism

The area of investment promotion and
protection is regulated by the law on foreign
investment that focuses inter alia on the non-discriminatory treatment
of foreign investors. Over the past three years,
several amendments, such as the elimination of starter capital and the
reduction in the number of permits required, have been adopted. Kosovo has also
adopted a sector-based investment
promotion strategy, which includes recommendations and operational actions
to improve the business and investment climate faced by foreign investors. The
strategy identifies core sectors to be targeted by promotional activities:
business process outsourcing, automotive components, electronic contract
manufacturing services and agribusiness.

The Investment Promotion Agency is the main
institution focusing on efforts to attract foreign direct investments (FDI). It
is making efforts to attract FDI by further liberalising the FDI inflow regime
and promoting SMEs competitiveness. Net FDI inflows are
estimated to have reached € 394.6 million (8.6% of GDP) in 2011, slightly
higher than € 365.8 million in 2010. To date, some
2,000 companies of foreign or mixed ownership have invested in Kosovo.

Kosovo has committed itself to implementing
the key principles of the EU Small Business Act. The SME sector in Kosovo is
very large, dominated by micro-enterprises, with more
than 90% of the enterprises employing less than four people. The legislative framework consists mainly of the law on support to small and medium enterprises. In 2011, Kosovo
adopted the National SME Development Strategy 2012-2016 with Vision
2020. The goals of the strategy are built around the
principles of the Small Business Act for Europe. The SME agency is the main
institution responsible for implementing this strategy with an allocation of € 1.3
million and € 30 million from the donor community.

To meet its obligations under an SAA, Kosovo has still to establish stable, transparent and predictable
conditions for foreign investors. Attracting FDI is a major challenge for
Kosovo. It has only attracted a small amount of foreign direct investment, which
remained at around 8.5% of GDP. Foreign investments were concentrated in the
services and financial sector, with a few green-field investments.

Kosovo needs to complete the revision and
simplification of the legislation on enterprise policy. There has been no regulatory
impact analysis to date. Compliance costs remain high. The lack of
comprehensive, easily accessible and regularly updated information on
SME-relevant issues is a significant constraint for SMEs operating in Kosovo.
Support for start-ups is particularly underdeveloped. The four existing
incubators are still in a pilot phase and the voucher scheme was discontinued
in 2011. Kosovo needs to align further SME support measures with the Small
Business Act for Europe and improve the classification of enterprises. A
special SME/Entrepreneurship Support Fund would also facilitate SMEs' access to
finance.

Industry and SME development in general
continue to suffer from difficulties as regards the legal enforcement of
contracts, unreliable electricity supply and limited and expensive access to
finance. Coordination and communication between educational institutions and SMEs have improved. However, coordination and
cooperation need to be increased further, notably in the area of enterprise and
industrial policy (public authorities, chambers of commerce, banking
association, courts, regional development agencies, etc.). Overall, the
implementation plan for the SME and industrial strategies needs to be adopted,
adequate budget allocated and the responsible authorities need to be
strengthened.

Kosovo's informal sector large is fuelled
by weaknesses in tax and
expenditure policies and in law enforcement, including in the fight against
corruption and organised crime. It reduces the tax base and the efficiency of
economic policies.

Tourism has also a potential to contribute
to the economic growth. However, investment in the relevant infrastructure is
required.

Cooperation under an SAA would aim to
support Kosovo in creating a favourable climate for private investment, both
domestic and foreign, to promote economic and industrial revitalisation. In
particular, Kosovo would need to continue in establishing a legal framework
conducive to investment and promoting investment opportunities. In the fields
of industrial cooperation, SMEs and tourism, Kosovo would need to develop
policies aimed at promoting modernisation and restructuring, strengthening the
SME sector and developing tourism.

3.7.3.
Agriculture

As regards agriculture and rural
development policy, a number of thematic laws are in place or are in the
process of being adopted (covering, for instance, wine, livestock, seeds, and
organic agriculture) which broadly transpose the acquis. Basic legal
food safety, veterinary and phytosanitary acts are in place, notably food law,
veterinary law, law on plant protection, administrative instructions deriving
from EU's hygiene package.

Over the past three years, Kosovo's
agriculture sector has established the necessary administrative and regulatory
bodies to implement the acquis in this area. The sector is governed by
the Ministry of Agriculture, Forestry and Rural Development (MAFRD). The
Ministry runs a limited number of support schemes that are managed by a payment
department. It has also begun developing a Farmer Register and simplified
Land Parcel Identification System to contribute to overseeing the current rural
grant schemes. The Kosovo Veterinary and Food Agency (KVFA) implements food
safety requirements and EU food safety, animal health and plant health
standards. Like the Ministry, the Agency is a professional and motivated body.
There are also a number of laboratories and institutes in this area. Most
European standards on fisheries do not apply to Kosovo, which has no
marine fishing.

To meet its obligations under an SAA, Kosovo needs to continue efforts, in particular to implement EU
agricultural and food safety standards. The KVFA has carried out an assessment
of Kosovo's agri-food establishments (in milk, meat, slaughterhouses, cold
storage and dairy) to determine needs for upgrading. The process now needs to
be implemented and upgrades are being supported by the Ministry through its
grant scheme. Many establishments are likely to close as they lack the capacity
to invest.

The institutions working in this sector need
to be strengthened. The Ministry's budget has increased in recent years, albeit
from a very low base and it is still insufficient to cover needs. The KVFA
lacks sufficiently trained staff to monitor the implementation of laws and its laboratory
does not have adequate staff and equipment. Execution of phytosanitary controls
is deficient. The infrastructure of the veterinary border inspection points
remains weak and the transfer of samples from the borders to laboratories for
testing is not efficiently organised. Kosovo has not compiled the list of plant
diseases present on its territory.

There are insufficient food safety and
veterinary inspectors; these are supposed to be transferred from municipalities
to the KVFA, but this process has not yet been completed. This transfer would
help to control the continuing illegal animal trade and slaughtering and to
strengthen controls at livestock markets. Kosovo has been working for years to
establish its animal identification, registration and movement database. The IT
system is now operational but data entry of events, particularly animal movement,
is not systematic. Kosovo needs to make progress in controlling and eradicating
animal diseases. Kosovo has no infrastructure for collecting and processing
animal by-products, although a feasibility study for establishing a rendering
plant was completed.

Kosovo is attempting to create the
statistical infrastructure to manage agricultural policy, but the small average
size of farms in Kosovo and the large informal part of the agricultural sector
complicate this task. The farm register and the Farm Accounts Data Network are
incomplete. Next year, Kosovo intends to carry out an agriculture census. There
are significant differences between the EU and Kosovo data on agricultural
trade.

At the same time, Kosovo has the capacity
to continue reforms in this area. Kosovo's agriculture faces serious obstacles
to competitiveness: holdings are mostly semi-subsistent, land parcels are
fragmented and animal herds small. Land management suffers from uncontrolled
urbanisation and the absence of proper procedures to value and reclassify land.
Access to finance is another major challenge.

Cooperation in the context of an SAA
would aim at helping Kosovo to modernise and restructure its agriculture and
agro-industrial sector. In particular, it would include cooperation with
producers and regulatory authorities to help them meet EU food safety and
quality standards as well as EU standards of animal and plant health in the
form of assistance for training and organising controls with a view to gradual
harmonisation with EU standards; increased development of private farms and
distribution channels, methods of storage and marketing; modernisation of rural
infrastructure (transport, telecommunications, water supply); better forestry
management to balance forest preservation with the exploitation of an economic
resource; improving productivity and quality using appropriate methods and
products; training and monitoring in the use of anti-pollution methods in
connection with inputs; development of sustainable agricultural methods
(including organic production; and developing and modernising processing firms
and their marketing methods, promoting industrial cooperation in agriculture
and the exchange of know-how.

3.7.4.
Customs, taxation and financial control
3.7.4.1.
Customs

Kosovo's customs legislation is largely in
line with the EU Customs Code. The revenues collected
by the Customs Service, including VAT, excise on imported and domestic goods,
represent the largest share of Kosovo's budgetary revenues, (around 60%) and
continue to rise every year.

The Customs Service has carried out
significant modernisation efforts. Continuous progress is also visible in the
field of administrative and
operational capacity. A number of
operations tackling smuggling and organised crime have been undertaken. The
focus has mainly been on the seizure of counterfeit spirits and contraband
tobacco. Some efforts have been put into the enforcement of the intellectual
property rights, the fight against smuggling of narcotics and money laundering.

Kosovo is active in international customs
cooperation. It has signed nine bilateral agreements and further agreements are
currently being negotiated. Bilateral memoranda of understanding on systematic electronic
exchange of pre-arrival information (SEED) were also signed with Albania, the
former Yugoslav Republic of Macedonia and Montenegro. Since early September,
the Automated Customs declaration Processing system (ASUCYDA
World), which facilitates paperless clearances, has become operational.

In general, the customs legislation is
largely aligned with EU standards and the customs administration has sufficient
capacity.

The situation in the north poses a specific
challenge for Customs. In the north of Kosovo, Kosovo
Customs Service continues to cooperate with EULEX. Following the incidents in
July 2011 and subsequent agreements on the customs stamps and IBM in the scope
of the Belgrade/Pristina dialogue, very limited commercial traffic passes
through the two gates in the north. All commercial vehicles continue to be
directed to the Mitrovicë/Mitrovica Terminal for customs clearance. Revenue is
not collected at these gates. Goods subject to excise, sanitary and
phytosanitary controls are not allowed to enter via these two crossing points.
Due to the lack of efficient customs surveillance at the border/boundary line
between the north of Kosovo and Serbia, goods frequently enter Kosovo in the
north without customs clearance.

Certificates of origin for goods to be
exported are validated by customs for goods originating both in the north and in
the rest of Kosovo. Currently, Kosovo Customs faces a challenge in terms of access
to the territory of the north. This has implications for the respect of rules
of origin for the goods originating in this territory. In practice, the
requests for certificates of origin are scarce.

To meet its obligations under an SAA, further reforms and modernisation of Kosovo
Customs is required. Furthermore, the facilities of some border crossing points
(BCPs) need to be improved. There is also a need to
undertake further staff training and focus on capacity building in trade
facilitation, customs cooperation, customs valuation and enforcement of
intellectual property rights.

Kosovo needs to ensure that its customs
authorities further enhance their effectiveness to meet the demands resulting
from the liberalised, preferential trade under an SAA, in particular regarding
the proper certification of origin and investigation and enforcement methods. Customs
formalities should not be an obstacle to trade.

3.7.4.2.
Taxation

The Tax Administration of Kosovo is
the executive tax authority, responsible for implementing tax-related
legislation. Kosovo relies heavily on indirect taxes
collected at the borders: only about 14% of all tax revenues stem from direct
taxes. VAT is 16% and only companies with a yearly turnover above € 50,000
are subject to it. The personal income tax has four rates (0, 4, 8 or 10%). The
10% rate applies to revenues exceeding € 5,400/year. There are three
corporate tax rates (4, 8 or 10%), the highest one applying to revenues above € 50,000/year.
In 2011, direct taxes amount only to 3.2% of the GDP. This is very low.

Tax evasion remains widespread. To address
this challenge, a taxpayer compliance management strategy (2012‑2015) has been
prepared. Outstanding tax arrears are being addressed. A Tax Investigations
Unit within the Tax Administration has been established and the taxpayers'
register is being upgraded. The number of electronic tax declarations has increased significantly.
Commendable progress has been made by establishing the one-stop-shop for
business and vehicle registration.

To meet its obligations under an SAA, the tax authority needs to be able to adjust the policies and
identify the means to improve the effectiveness of tax collection. The focus needs to be on enforcement. Work efficiency
needs to be increased as well as the cooperation between the Tax
Administration, the police and the courts. The core IT system (SIGTAS) is to be
replaced by modern infrastructure. The taxation structure also needs to be more
compatible with the EU.

The Independent Review Board for
appeals by businesses and
taxpayers against the Tax Administration and Customs Service decisions needs to
increase its efficiency and effectiveness. A significant backlog of around 1,900
cases (543 in taxation and 1,337 in Customs) needs to be addressed. In addition, 119 cases were remitted by the Supreme Court for
procedural reasons, entailing an overall workload of around 2,000 cases. To reduce the backlog, the capacity of the Board needs to be
strengthened. Kosovo also needs to prepare legislation to integrate appeals decisions into the regular court system by
establishing a fiscal division at the administrative court.

Cooperation with the EU under an SAA
would facilitate the reform of fiscal systems in Kosovo and foster further
development of the tax administration to ensure effective tax collection and
fight against fiscal fraud. Cooperation would aim at avoiding harmful tax
competition.

3.7.4.3.
Financial control

The key regulatory provisions and
institutions for the Public Internal Financial Control (PIFC) are in place. The
law on internal audit provides a solid legal basis for setting up internal
audit units in Kosovo. These have been established in most budget
organisations, including municipalities. The legal framework for external audit
is in place. The Office of the Auditor General (OAG) is an independent
constitutional audit institution reporting to the Kosovo Assembly. The internal
rules governing the audit work of the OAG (e.g. audit manuals, guidelines,
guides on audit quality management) are in place. The OAG carries out mainly
regulatory audits. The Committee for Oversight of Public Finances of the
Assembly regularly discusses the audit reports prepared by the OAG.

To meet its obligations under an SAA, Kosovo needs to improve the day-to-day practice of internal
control. More needs to be done to develop a risk-based control environment, to
improve the efficiency, effectiveness and economy of operations, to increase the
reliability of (financial) reporting and to do better planning and budgeting
arrangements. There is also a need for a greater understanding and acceptance
of accountability within budget organisations to establish a culture of
delegation of responsibilities and authorities. Kosovo needs to pay particular
attention to the independence of the internal audit function, particularly at
local level.

With regard to the OAG, it needs to improve
its capacity to deliver performance audit work. Furthermore, as the OAG is part
of the civil service, the implementing legislation of the civil service law is
too prescriptive and limits in practise functional independence of the OAG.

Cooperation with the EU under an SAA
would focus on public internal financial control and external audit. The
objective of the cooperation would be to set up and implement internal control
and internal audit in the public sector and to strengthen the role of external
audit in line with international frameworks and standards.

3.7.5.
Employment, social policy, public health policy,
education and training, and research technology and development (RTD)
3.7.5.1.
Employment, social policy and public health
policy

Over the past three years, Kosovo has put
in place the elements of the legal framework required for this area and
provides basic social assistance. There is a legal framework on the rights and
obligations of unemployed people and jobseekers, and on support to persons
having difficulties accessing the labour market. Kosovo legislation also
regulates the registration of unemployed persons and jobseekers, and includes
support measures. The labour law adopted in 2010 brings Kosovo standards closer
to those of the International Labour Organisation. The new law on the social
assistance scheme includes measures for unemployed persons to move from social
assistance dependency into the labour market.

Kosovo has a National Employment Strategy
and sectoral strategies. Implementation is carried out by the Public Employment
Services (PES) and seven regional offices coordinated by the Ministry of Labour
and Social Welfare. The Labour Inspectorate monitors the implementation of the
legal provisions on labour. Kosovo has digitalised registry systems on
unemployment and on social assistance.

Kosovo has three main social assistance programmes:
cash transfer systems to households, war veterans' benefits and disability
pensions for working age people who have disabilities and are unable to work.
The social assistance scheme attempts to fill the gap created by the absence of
other types of benefits, such as child benefit, sickness benefit and
unemployment benefit. Municipalities are increasingly responsible for the
family and social services provided by the Centres for Social Welfare. The
central pension system provides a minimal level of assistance to retired
persons. Workers below 55 years of age are mandated to place 10% of their wages
into the Kosovo Pension Savings Trust. The Economic and Social Council is
operational but the dialogue between the government, employees' and employers'
organisations is weak. Kosovo has two employers' organisations, one trade union
confederation and eighteen trade unions. No exact data exists on trade union
membership.

Kosovo's health services infrastructure
consists of a combined centrally funded and privately funded three-layer
system. The legislative framework in the health sector has improved. A
necessary major health reform is underway.

To meet its obligations under an SAA, Kosovo needs to do more to promote social dialogue. Important
legislation on tobacco, blood, tissues, cells, organ donation and
transplantation and communicable diseases still needs to be adopted or amended.
Kosovo also needs to adopt new health insurance and public health laws.
Accessibility and affordability to all groups in society are of concern. Good
health services and human resources management, accountability and principles
of commitment need to be put in place. Health information statistics and
information remain weak. The necessary financial and human resources are
missing. Adoption, implementation and enforcement of EU health legislation
remain weak. Overall, completing and implementing the policies and legislation
are likely to remain challenges for the years ahead, especially when it comes
to economic and social reform and the development of a sustainable health system.

Cooperation in this area under an SAA
would aim at supporting Kosovo in the reform of its employment policies. It
would also promote social dialogue as a key driving force for economic and
social reform as well as legal approximation on labour law and health and
safety at work. Under an SAA, the aim will be to cooperate to adapt Kosovo's
social security systems to the evolving economic situation and the new social
requirements. Kosovo would also be encouraged to adopt comprehensive social
inclusion and anti-discrimination policies and measures to improve the
situation of the most vulnerable social groups.

For the health sector, an SAA would help
steer Kosovo towards a sustainable and good quality health system, based on EU
standards, and accessible to all. Under an SAA, Kosovo would need i) to further
develop health protection policies in accordance with EU law to improve health
and prevent illness of its population; ii) to harmonise its legislation on
health protection, develop independent and effective administrative structures
and enforcement powers to ensure essential health and safety requirements and
the safeguard of patients' rights; and iii) to protect citizens from health
threats and disease, promote healthy lifestyles and cooperate with the EU on
health issues.

3.7.5.2.
Education, training, research and innovation

Kosovo has a comprehensive medium-term
education strategy, encompassing all education sub-sectors. The legislation on
higher education is in place and requires higher education institutions (and
programmes) to undergo external evaluation by the Kosovo Accreditation Agency
(KAA). A number of programmes do not meet KAA quality standards. On the basis
of the law on pre-university education the Ministry of Education Science and
Technology (MEST) has given priority to teacher professional development and to
modernising teacher training in line with the new Kosovo curriculum framework.
The MEST and the Ministry of Labour and Social Welfare have put emphasis on
vocational education and training (VET) as means to promote skills development,
employability and economic development in Kosovo.

The National Qualification Framework (NQF)
validation and accreditation procedures are in place. The National Quality
Authority (NQA) carries out its functions effectively, but with limited
resources. Kosovo participates in the Western Balkan Platform on Education.
Kosovo's application for membership in the Education Reform Initiative in South
East Europe is being processed by the secretariat.

Kosovo has a law on scientific research and
aims at enhancing participation in international research projects. Kosovo has
three public universities and fourteen public research institutes. Kosovo has
made progress in defining the institutional basis and strategic orientation to strengthen
its research and innovation capacity. The Kosovo Research Council has
been established and it has developed a five-year programme to improve the
research sector and its linkage to higher education. Integration into the
European Research Area and contribution to the Innovation Union have been set
as a medium-term goal for Kosovo. Kosovo has participated in the Seventh EU
research and technology framework (FP7, 2007-2013) as a project partner.

Overall, in the areas of education,
training, research and innovation, the policy and legal frameworks are in
place, as are the relevant institutions.

To meet its obligations under an SAA, Kosovo needs to strengthen its investment into education and
research. This is important in the light of economic and social development needs.
The educational system will also need to address gradually the needs of
students with disabilities. Further efforts are also necessary to provide
adequate conditions for education for persons belonging to minorities,
including access to education in their languages.

There is a need to establish a research
fund to support the activities of researchers and build the capacity of
research institutions in Kosovo. The main challenges are the lack of
scientifically qualified personnel, the low number of PhD students,
insufficient laboratory equipment and inadequate technical know-how. The
research community in Kosovo remains rather isolated vis-à-vis the
international scientific community. Kosovo needs to build capacity in a number
of key sectors (energy efficiency, environment, food safety, health research
and social science research), which have been identified as a priority.

Cooperation under an SAA would build on
the existing programmes and mechanisms and continue to help Kosovo raise the
level of general education, higher education, vocational training and to
promote youth cooperation. It could also encourage the development of an
environment conductive to research, notably through joint research and
innovation ventures and the transfer of technology and know-how.

3.7.6.
Culture, audio-visual, telecommunications and
postal services and information society

The legislative framework for the
telecommunications sector is covered by framework laws (the law on
telecommunications, the law on information society services, law on prevention
and fight against cybercrime, law on postal services). Related by-laws have
increased alignment with the acquis, covering issues such as market
analyses, definition of the providers with significant market power, full and
shared unbundling of the local loop and the sub-loop, provision of access and
interconnection. In 2012, Kosovo adopted a law on the financing of the public
service broadcaster (RTK) and a law on the Independent Media Commission (IMC).
The RTK law also foresees the creation of a TV channel in the Serbian language.

Over the past three years, Kosovo's
telecommunications, postal services and information society sector has
established the necessary administrative and regulatory bodies to start to
implement the acquis in this area. Telecommunications are regulated by
the Telecommunications Regulatory Agency (TRA) and the audio-visual sector is
managed by the IMC, which aims to manage the sector in accordance with EU
standards.

To meet its obligations under an SAA, Kosovo needs to continue efforts to complete the legal framework to
implement EU standards in this area. Kosovo needs to adopt laws on information
society government bodies and on electronic communications. The institutions
working in this sector need to be strengthened: the independence and capacity
of both the TRA and the IMC have been challenged by government interference,
low salaries and lack of resources and budgets. The process to nominate a new
IMC Council only began in June 2012 after the IMC was without a board since
December 2010.

RTK's long-term sustainability is still
unresolved despite the recent RTK law. The budget to finance Kosovo's cultural
institutions is limited. The capacity of the Ministry of Economic
Development for information society policy development and coordination,
including the issues covered by the Digital Agenda for Europe, is weak.
Strengthening the administrative capacity and intensifying international
cultural and media cooperation is important to prepare Kosovo to participate in
EU programmes in this area.

As well as a lack of enforcement capacity,
problems of status handicap Kosovo's ability to implement fully the acquis.
Kosovo does not have its own country code and uses the Serbian country codes
for fixed telephony, with each mobile operator using codes of other countries
(Monaco and Slovenia). This creates additional costs, reduces Kosovo's control
over its system, creates problems of coordination with the regulators of Monaco
and Slovenia and constitutes an obstacle to implementing EU rules on number
portability. In addition, Kosovo does not have an internet domain name, and unlicensed
(Serbian) mobile companies continue to operate in Kosovo. This interferes with
Kosovo's spectrum management. Kosovo is not a member of ITU and has therefore
an insufficient allocation of spectrum, including for the digital switchover.

Cooperation in telecommunications and
postal services under an SAA would promote gradual alignment with the acquis.
This would involve, in particular i) the further development of legal and
regulatory aspects of telecommunications and postal services, ii) the
progressive liberalisation of the sector, iii) the promotion of an
investor-friendly environment for modernising Kosovo's telecommunications networks
and their integration into European and world networks, iv) institutional
reforms suitable for a liberalised environment.

An SAA would promote cultural
cooperation with the objective strengthening the cultural policy capacity of
Kosovo, reinforcing the capacity of cultural operators and of increasing mutual
understanding between individuals, minorities and peoples. Kosovo would need to
align gradually its policies and legislation with those of the EU, including as
regards cross-border/boundary broadcasting and the acquisition of intellectual
property rights for programmes and broadcasts by satellite or cable. Its
institutional reforms would need to promote cultural diversity, freedom of
expression, freedom of speech and a flourishing public service broadcaster,
suitable for a liberalised environment, as well as preserving the independence
and capacity of regulatory bodies. An SAA would also include provisions
establishing the general principles for the participation of Kosovo in EU
programmes such as the future Creative Europe Programme.

3.7.7.
Transport

Kosovo has adopted a number of pieces of
sectoral legislation, even if several will need to be completed. The basic road
transport legal framework has been established according to the acquis.
The 2010 law on railways sets the framework for the sector's unbundling, which
is almost complete. Kosovo is advanced in adopting EU standards in aviation
through an active involvement in the European Common Aviation Agreement,
particularly as regards economic regulations.

Over the past three years, Kosovo has
established the institutions necessary to implement the acquis in this
area. Transport is the responsibility of the Ministry of Infrastructure, with
sectors managed by the appropriate regulatory authorities, such as the Civil
Aviation Authority (KCAA) or the Railway Regulatory Agency (RRA). An accident
and incident investigation body, covering air and rail transport, is currently
being established.

There is no combined transport in Kosovo.
In the absence of any maritime vessels, inland waterways or inland waterways
vessels, neither maritime transport nor inland waterways acquis apply to
Kosovo.

To meet its obligations under an SAA, Kosovo needs to continue efforts to complete the legal framework
to implement EU transport standards. Kosovo needs to redraft three road
transport laws to harmonise them with the acquis, especially in the
fields of accession to the occupation, haulage, passenger transport and the
transport of dangerous goods. The law on the Agency of Air Navigation, which
would guarantee the professional management and independence of the Air
Navigation Service Provider (ANSP), needs be adopted too.

The institutions working in this sector
need to be strengthened: the railway regulator lacks staff, capacity and budget.
The ANSP has been separated from the National Supervisory Authority (NSA), but
it still needs to be certified. Aviation security, which is managed by the
Ministry of Internal Affairs, is a concern: due to a lack of budget for
training, inspectors lost their accreditation in 2010.

Implementation of the road transport acquis
is limited. Road safety is a concern and the accident and fatality rate on
Kosovan roads is very high. Limited inspection capabilities, outdated vehicles,
and the low quality of road infrastructure outside the main roads hamper the
enforcement of legislation. Rail traffic levels are low, rolling stock is
outdated and it is difficult to reconcile the financial needs of the
infrastructure manager with the ability of the service provider to pay.

Kosovo's transport infrastructure needs to
be further developed to promote economic development. The current transport
strategy with a heavy emphasis on building new roads only adds to the imbalance
of the transport sector, crowding out investment in
other transport modes, particularly railways. It is important to secure
funding for adequate road maintenance.

As well as a lack of enforcement capacity,
problems of status negatively affect Kosovo's ability to implement fully the acquis.
Kosovo (including its transport operators) cannot join many of the
international or European bodies regulating transport or the relevant sector
associations. Kosovo is being prevented from reaching some technically-based
solutions in certain areas. This is particularly important in aviation: the
KCAA is not a part of the system of standardisation inspection and safety
assessment on foreign aircraft and has not been able to enter into working
arrangements with the EASA. In addition, Kosovo's aviation sector continues to
suffer from Serbia's restrictions for direct flights to/from Pristina over
Serbian aviation territory, which has a financial impact for the air operators
and an environmental impact for the region.

In transport, cooperation under an SAA
would contribute to restructuring and modernising Kosovo's transport systems
and improving related infrastructures, improving the free movement of
passengers and goods, achieving standards comparable to those prevailing in the
EU, aligning transport legislation to that of the EU, and allowing progressive
mutual access to the EU and Kosovo transport markets and facilities.

3.7.8.
Energy, including nuclear safety

As a contracting party to the Energy
Community Treaty, Kosovo has already adopted a number of key laws relating to
the energy sector compatible with the acquis. Its energy sector is
governed by a package of three laws adopted in 2010, which aim at implementing
the 2nd EU internal Energy market package. The 2011 law on energy
efficiency is the basis to implement much of the energy efficiency acquis.
Kosovo has adopted a framework law to implement EU
nuclear safety and radiation protection acquis and to establish a
nuclear safety agency.

Over the past three years, Kosovo has
established the institutions necessary to implement the acquis in this
area. As well as the Ministries responsible in this area (Ministry for Economic
Development for energy, Ministry for Environment and Spatial Planning for
nuclear matters), Kosovo has a regulator (the Energy Regulatory Office) and
recently established its Nuclear Safety Agency. Kosovo's Transmission System
Operator, KOSTT, has been established and is carrying out its functions
properly. KOSTT is also improving the transmission network and therefore
reducing transmission losses.

To meet its obligations under an SAA, Kosovo needs to continue efforts to complete the legal framework
to implement EU energy and nuclear safety standards. Kosovo needs to start
preparing for the implementation of the 3rd EU internal energy
market package, a legal obligation as of 2015 under the Energy Community
Treaty. Kosovo also needs to make progress in implementing EU rules on
mandatory oil stocks and will have to amend its framework nuclear safety law to
prepare for further transposition of the nuclear safety acquis. The
institutions working in this sector need to be strengthened: the nuclear safety agency has insufficient staff, the Energy Regulatory Office needs adequate resources to carry out its
responsibilities, and Kosovo needs to instrumentalise the Energy Efficiency
Agency and create the energy efficiency fund. Restructuring of the sector,
including tendering for new generation capacity and completing privatisation of
the distribution and supply company, in conformity with Energy Community Rules
on unbundling, needs to continue.

Kosovo's only indigenous energy source is
lignite: 97% of its power is generated in two lignite-burning plants. Both are
ageing, unreliable and highly polluting. Kosovo has no
nuclear energy, its renewable sources are limited and Kosovo
is not connected to gas networks. Kosovo has launched a tender to build a new
lignite-powered plant, which would significantly improve the sector's
environmental impact. This is also important as an alternative source of power
as Kosovo has committed under Energy Community Treaty obligations to close
Kosovo A by 2017.

Kosovo's management of its power system is
hindered by the Serbian power utility maintaining an unlicensed branch in the
north of Kosovo. Power is also deviated from a hydropower plant to supply the
north. In addition, KOSTT still does not participate in regional mechanisms to
plan and remunerate electricity transit, due to differences over its status. As
a result of the current situation, Kosovo loses revenue and the lack of control
imperils the stability of Kosovo's power system.

In the framework of an SAA, Kosovo would need to develop further its energy policies with a view to gradual
integration with EU policies and networks. It needs to implement its current
energy market legislation and significantly improve the level of bill
collection and payment from the current numbers: only 71% of power produced is
paid for, fuelling an unsustainable growth in demand. Kosovo also needs to
adopt secondary legislation to meet its own 9% target for efficiency
improvement by 2018. The regulatory framework to develop renewable energies
also needs to be improved, if Kosovo is to meet its planned target to produce
26% of its energy from renewable sources by 2020 (up from the current level of
less than 3%).

Cooperation under an SAA between Kosovo
and the EU in the field of energy would need to take into account the
principles of market economy and the Energy Community Treaty. Cooperation would
focus in particular on the formulation and planning of energy policies,
improving interconnections and modernising infrastructure, establishment of a
competitive electricity market, improving and diversifying supply, better
management of energy utilities, strengthening the role of the regulator,
improving demand management, developing energy resources and renewable energy,
and promoting energy saving and energy efficiency, promoting nuclear safety and
nuclear waste management.

3.7.9.
Environment and climate change

A number of framework laws covering the
main environment acquis areas are already in place. Kosovo has adopted
laws on environmental impact assessments and strategic environmental
assessments broadly in line with EU standards. The legal framework to implement
EU air quality standards is in place. Kosovo adopted a framework law on nature
conservation to transpose EU nature protection acquis. Other framework
laws are in the process of adoption. Kosovo is starting to prepare to implement
the EU climate acquis.

The key institutions are in place. The
administration responsible for environment and climate policy is the Ministry
of Environment and Spatial Planning, supported by the Kosovo Environment
Protection Agency, which monitors the state of the environment. There is also a
network of inspectors.

To meet its obligations under an SAA, Kosovo needs to continue efforts to complete the legal framework
in accordance with EU environmental and climate standards. The remaining
framework laws (on waste, chemicals, water, noise and civil protection) need to
be adopted and completed by secondary legislation.

The institutions to implement EU standards
are in place; their capacity to implement and enforce legislation at central
and local levels needs to be strengthened. The budget devoted to the sector is
insufficient and environmental and climate concerns are not mainstreamed into
other policies. Kosovo lacks sufficient human, administrative and capital
capacities to implement EU environmental and climate standards.

Preparations are at an early stage in the
area of industrial pollution control and risk management. The environment in
Kosovo faces severe challenges: most pollution levels are significantly above
EU levels. The lignite power plants are the main source of air pollutants, with
some (dust, NOx and SO²) levels exceeding several times
EU and WHO limits. Furthermore, Kosovo's air quality monitoring network is not
yet fully operational. Kosovo has only one operational wastewater treatment
plant and a large part of the population is not connected to drinking water
supply networks. As a result of issues related to status, Kosovo is not in a
position to become a party to most conventions, protocols or other
international environmental agreements. Kosovo is not a party to the UN
Framework Convention on Climate Change. There is no climate change strategy,
action plan, economy-wide mitigation targets or policies and measures on
climate change.

In the context of an SAA, Kosovo would be
expected to devote substantially greater resources to implement EU
environmental standards and to address its environmental challenges, given the
investment needs as regards water quality or waste management. To improve air
quality, Kosovo needs to close the Kosovo A power plant in line with its Energy
Community Treaty obligations. Environmental considerations need to be
mainstreamed into other policies, particularly energy, transport, forestry,
agriculture and industry. Urbanisation needs to be better balanced. Kosovo
needs to establish a climate strategy and a system
of greenhouse gas monitoring and reporting and complete its greenhouse gas
inventory.

Under an SAA, Kosovo would strengthen
its cooperation with the EU in combating the deterioration of the environment
as regards air and water quality, waste management and nature protection,
monitoring and reduction of industrial emissions, promoting energy efficiency
and safety at industrial installations, soil protection, classification and
safe handling of chemicals and urban planning.

Cooperation under an SAA would also be
used to develop Kosovo's climate policy and to help Kosovo's involvement in
global efforts to mitigate and adapt to climate change. Strengthened
cooperation with the EU would help Kosovo adopt the necessary legislation, as
well as establish an adequate administrative setup. It would also assist Kosovo
in mainstreaming climate consideration in energy, transport, industry,
agriculture and education policies.

3.8.
Financial cooperation

The EU has been supporting Kosovo
through several different funding instruments: the Community Assistance
for Reconstruction, Development and Stabilisation (CARDS), the Instrument for
Stability (IfS), and the Instrument of Pre-Accession Assistance
(IPA). From 1999 to 2011, the EU has provided over € 2.3 billion of
financial assistance and close to € 1 billion in support of the
international presence in Kosovo.

In the Financial Framework 2007-2013, the
EU has made available over € 630 million for Kosovo under IPA. The EU has
provided support to strengthen the rule of law, public administration reform, minorities,
culture and youth, wider socio-economic development including trade and
regional development, education and employment, and agriculture. In 2011, a
total of € 68.7 million was allocated under the IPA Annual Programme (IPA
component I) in close coordination with the Ministry for European Integration
and other government institutions. Current IPA assistance is mainly focused on
the rule of law, the economy, trade and industry, and the public administration
reform. The IPA cross-border cooperation component (component II) was activated
for Kosovo in 2010.

To enhance the involvement of civil society
in Kosovo's policy dialogue and development, € 3.3 million was made
available under the Civil Society Facility 2011-2013. The programme aims to
enhance the dialogue between the government institutions and civil society in
Kosovo, to increase the involvement of social partners in socio-economic
development, and to strengthen the capacities of youth organisations. The
European Instrument for Democratisation and Human Rights has been providing
additional support for the development of the civil society development in Kosovo
since 2007. In view of the next financial perspectives, the Commission has
adopted a proposal for the Instrument of Pre-Accession Assistance II covering
the period 2014-2020.

The relevant institutions and coordination
mechanisms to establish cooperation in the field of financial cooperation have
been put in place. There is also an increased level of expertise to define the
assistance needs.

The Ministry of European Integration is in
charge of donor coordination at the central level. Besides the large EU-support,
there are also other sources of support to Kosovo, such as from Member States,
other countries and international financial institutions. To meet its
obligations under an SAA, Kosovo would need to ensure that financial
cooperation would continue to support democratic, economic and institutional
reforms, in line with the Stabilisation and Association Process. Kosovo would
need to ensure the strengthening of donor coordination.

An SAA with Kosovo would foresee continuing
EU financial support to help Kosovo to achieve the objectives of the agreement.
Such assistance could further focus on different areas of approximation of
legislation and cooperation policies covered by the SAA.

[\*]               This designation is without prejudice to positions on
status, and is in line with UNSCR 1244/1999 and the ICJ Opinion on the Kosovo
declaration of independence.

[2]               COM(1999) 235 final.

[3]               COM(2012) 602 final.

[4]               The latest official data from the Labour Force Survey
are from 2009. In 2010 and 2011 the surveys were cancelled due to financial
constraints.

[5]               The decline has been driven mainly by methodological
changes.

[6]               Data from the Central Bank of Kosovo.

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