## **<mark>Box 8</mark>**

## **<mark>Centralized models with an independent agency: the case of Kosovo</mark>**

<mark>The Kosovo Trust Agency (KTA) was established in 2002 as an autonomous agency to which these powers were delegated. The mandate of KTA is to “administer enterprises as trustee for their owners” and to “carry out ancillary activities to preserve or enhance the value, viability and governance of Enterprises”. The current legislation does not allow for the privatization of the POEs. The current institutional framework of the public enterprise sector generates a complicated set of incentives which are generally not conducive to the efficient operation of the POEs. On the one hand the Provisional Institutions of Self Government (PISG), which are responsible for fiscal outcomes, have little control over the POEs. On the other is the KTA, which has control over the POEs, but is not accountable for their fiscal impact. The PISG are under constant pressure from the public to improve the performance of the POEs. Being statutorily unable to do so – since they can neither appoint POE management nor decide on the disposal of profits or allocation of subsidies ‐ the PISG are tempted to side with the general public against the KTA and the management of the POEs. The fact that the senior management of the POEs has been made up of foreign contractors has only increased this temptation. Overall, the current system led to a conflictual relationship between the POEs and the PISG which practically precludes the type of co‐operation required to resolve the problem of the substantial fiscal burden represented by the public enterprise sector.</mark> <mark>What have been the implications of such a misalignment of incentives under a centralized structure for the two key energy and telecom sectors? The energy sector challenges call on enhanced transparency and effectiveness in the transfer of funds from KCB (particularly in situation of emergency) and a more accurate forecasting of needs from POEs. The ultimate objective is to gradually reduce the electricity utility KEK’s reliance on subsidies. KEK’s lack of creditworthiness – deriving ultimately from its very low level of billings and collections – means that any critical financing needs will in effect constitute calls on the KCB. The new regime introduced in 2006 through Monitoring and Control Agreements with POEs, allows for KSB funds to be transferred to POEs on a quarterly basis for operational shortfall. The need for increased efficiency in public expenditures is reinforced by the fact that around 25% funds transferred to POEs were unspent, due to reductions in projects and delays in procurement. Another challenge comes from the annual cash basis according to which the budget is operated, which makes reallocations of funds extremely cumbersome. PTK ‐ the other main POE, in terms of capitalization and turnover – is on the other hand a highly profitable company – though this is not an unequivocal indicator of efficient performance. Ironically, PTK’s profitability poses also major challenges for the fiscal position of Kosovo, because of the asymmetry of the impact of the losses and profits of the POEs on the KCB. Whereas KEK’s financial losses are absorbed by the KCB, no part of PTK’s profits were. PTK was only allowed to declare dividends for 2005 and 2006. Moreover, PTK will also provide a loan to KEK under a special trust fund administered by the Treasury.</mark> _<mark>Source:</mark>_ <mark>Vagliasindi (2008)</mark>

# **6.4 Dual Model**

The **dual model** used to be the most common and is still adopted in many developing countries, including Mexico, South Africa and Turkey. There may be a dual responsibility about certain specific aspects, for example, where both ministries have the right to nominate representatives for the board of directors. This is the case in Mexico, where representatives from both the Ministry of Finance and from the sector ministries or agencies sit on the board of majority state‐owned companies. The main disadvantages of a dual model that we have seen in our stylized review, coming from the multi‐principal agency problem, are amplified especially in developing countries not characterized by strong governance arrangements and respect of law. Such problems could be particularly strong at the subnational level (see Box 9).

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