Incorporation of Publicly Owned Enterprises in Kosovo. Frequently Asked Questions

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1 Incorporation of Publicly Owned Enterprises in Kosovo Frequently Asked Questions What is incorporation? In legal terms, incorporation literally means the creation of a company or a new legal entity. It is the creation of a formal legal wrapper into which existing assets (and liabilities) can be transferred. In practice, the process that we are calling incorporation for these purposes involves far more than the creation of new legal entities - it also includes a meticulous assessment, review and appraisal of all existing assets/liabilities, operations, contracts and cadastre and other official records and management structures, as well as a wide range of other legal, commercial and financial matters. The purpose of such an exercise is to ensure that everything is properly and correctly documented, recorded and registered, that assets and contracts are identified and transferred to the right entities, cadastre records and other registrations are updated or recorded in the correct name etc and that the business of the entity or entities is generally rationalized and recorded. Lawyers and accountants will then prepare a detailed report on all of the issues applicable to the company. This is a very time-consuming process indeed, involving a lot of paperwork and a lot of hard work by staff in the POE and by the consultants. In the case of PTK and KEK, the process of incorporation also involves restructuring the companies into several entities, reflecting the various business units. As part of the incorporation process, formal Boards of Directors are also created, with clear duties and roles. Rules and financial limits as to who can authorize what payments etc., and a more formal basis for the creation of accounts, are also established. Why do Kosovo POEs need to be incorporated? Kosovo POEs are like many other former socialist enterprises they have a legal status and appearance that are unclear and unfamiliar to investors, banks, suppliers, consultants and accountants. Incorporation will give the POEs a clear legal status. It will turn them into limited liability companies (or LLCs) - under the Law on Business Organisations in Kosovo. Incorporation should improve corporate governance, financial transparency, accounting procedures, and the efficiency of the organization as a whole and make the POEs more 1

2 attractive to outside licensors, investors and lenders such as the World Bank, EBRD, ICAO etc. Suppliers, such as insurance companies, will, for example, be more familiar in dealing with an incorporated entity. The Kosovo Energy law, the Telecommunications law and the Athens Memorandum on Energy also encourage the incorporation of POEs. These require telecom and energy companies to separate out certain activities for a variety of economically and commercially based reasons. Incorporation will have many other side benefits. It will force the POEs to assess the value and importance of their ongoing contracts and assets/liabilities, to tidy up their cadastre and other registrations, to improve their organizational structures and to assess the directors, managers and other staff roles. In this regard, it is a bit like a springcleaning exercise. The process of identifying, valuing and documenting all the assets and liabilities is particularly important, so that the standards followed (in particular, operational, financial, accounting, reporting and valuation standards) are closer to those found elsewhere in Europe. In addition, incorporation involves the clear establishment and publication of the goals, direction, mandate and purpose of a company, as set out in the company s incorporation documentation. Why incorporate KEK, as its name indicates that it is already a corporation (Kosovo Electricity Corporation)? KEK is a corporation only by name. It is not yet a corporation in the legal sense of the word, so it has to undergo the same legal process as the other POEs. Is incorporation one of the standards for Kosovo? Yes. Incorporation and functioning Boards of Directors for the POEs is one of the Economy Standards for Kosovo. Has incorporation been done anywhere else? Western European countries carried out the incorporation of their public enterprises from the 1960s onwards. Eastern European countries incorporated their enterprises from 1989 onwards. Does incorporation change the ownership of the enterprises? No. Incorporation is simply the placing of a legal wrapper around the enterprise or - in the case of KEK and PTK the separation of an enterprise into a number of entities. The owners of the enterprises remain as previously. In Kosovo, the shares for each POE will 2

3 be initially issued to the Kosovo Trust Agency, because under UNMIK Regulation 2002/12 (the KTA Regulation) the KTA is responsible as a trustee - for these enterprises. Once the projects have been completed and the owners have been identified and defined, the shares issued to KTA can be transferred to them. Does incorporation affect the value of the enterprises? Arguably, the value of enterprises to owners could increase as a result of the effects of limited liability that generally go along with most of the corporate forms that could be chosen on an incorporation project. Also, a case can be made that there will be significant corporate governance advantages and improvements on incorporation that should increase the performance, and hence the value, of the incorporated enterprises. Will the names of the POEs change as a result of incorporation? Yes. As the POEs will become Joint Stock Companies, their names will have to change accordingly. Will incorporation influence the future talks on the final status of Kosovo? Incorporation is a sensible measure, undertaken by governments around the world to improve the overall functioning of public enterprises. As it does not affect the ownership of the POEs, neither the Kosovo nor the Serbian governments should have cause for concern. Is incorporation part of, or a step towards, privatisation? Incorporation is a necessary pre-requisite for any privatisation because investors and lenders would generally require an incorporated company to be established before investing or lending, but incorporation does not necessarily lead to privatisation. It is possible, and indeed common, to incorporate without privatising, for the benefits mentioned above. For instance, Electricite de France, the French energy company, is a state owned company with a formal legal structure derived from an incorporation project, but which the French state still owns. Also, many utility companies in Central and Eastern Europe have been operating in the form of an incorporated entity with state ownership, with no imminent privatisation plans. The KTA has no plans to privatise the POEs. Will incorporation result in job losses at the POEs? No. The process of incorporation as described above creation of new legal entities etc. will not itself result in job losses. However, the further restructuring of the POEs, which the incorporation will facilitate, may lead at a later stage to reorganizations that may have an impact on the work force. 3

4 What will happen to the management of the POEs, will it change after incorporation? No, not necessarily. If the existing management performs according to the expectations, the Board of Directors (or the Managing Director, depending on the level of management concerned) may decide to extend their mandate. The evaluation of each member of the existing management will be done individually, based on his/her own performance, rather than based on the overall performance of the management team. Do the EU, UNMIK and the US support incorporation? Yes. The EAR is funding the project for KEK, District Heating and UNMIK Railways. The European Union Pillar IV also supports the project. Furthermore, UNMIK has also confirmed its support for the project. In February a workshop was held for all stakeholders, including PISG and all attendees supported the project. The project is also supported by USAID. What does the KTA Regulation say about incorporation? It is expressly envisaged in Articles 6.1(p) and (q) of the KTA Regulation that the POEs can be incorporated. The KTA Regulation therefore gives the KTA the power to implement such a project. Why was incorporation not done before? The KTA has intended to carry out incorporation for some time (see Operational Policies of February 2003). The main constraints have been resource-related in other words, having enough money to pay the specialist lawyers and accountants to undertake this very significant exercise. Who will do the incorporation? Incorporation is not a quick job and it requires specialist experience and input; therefore external consultants are being hired. There are two separate tenders, under public procurement law. One tender is being managed and funded by the European Agency for Reconstruction - for UNMIK Railways, KEK and District Heating. The other is being managed by KTA and is funded by POE s own funds - for PTK and the Airport. Will there be any capacity building or training for POE staff? Yes. As part of the Railways and District heating incorporation project, for example, at the end of the asset and contract verification exercise, the European Agency for Reconstruction consultants will be training POE staff and will be carrying out capacity 4

5 building for certain local staff about matters related to incorporation, for example directors duties, running Boards, financial issues etc. For KEK, PTK and Airport, capacity building will be carried out as a separate project. In addition, the POEs will nominate local project managers for incorporation that will work alongside the consultants, following their work throughout the entire process. What are the steps leading to incorporation? The first step is a detailed due diligence or fact-finding exercise. The consultants assess the various issues that influence the decision on how the entity should be structured, such as key licenses (e.g. mining or telecommunications licenses), business reasons for current structures and future business plans. They draw up by-laws for the company and its organizational structures and statutes for the legal entity, value the assets and work out which assets and liabilities to transfer and to where, and consider other miscellaneous issues, such as what new bank accounts are needed etc. They also have to assess which licenses and contracts are not automatically transferable and negotiate the right/consent to transfer those licenses and contracts with the issuer of such a license or the contractual counter parties. The POEs need to have and review all key documents, such as licenses, laws, structure charts, contracts, details of bank accounts, lists of assets and liabilities, accounts and audit reports ready and available for the consultants and must provide translations into English and have all key documents to hand and be ready to answer consultants questions. Each POE has appointed a point of contact for this purpose. After this fact-finding exercise and the report have been issued, the new legal entity is set up and the relevant assets and liabilities can then be transferred into them. An opening balance sheet is created and the first board meeting can take place. The POE staff needs to be trained so that they understand how to work within the new organizational structures, so that assets are purchased or sold to/from the right entity, the bank accounts are operated correctly, the Boards run smoothly etc. How many entities will be created? Depending on the circumstances of the company, one or more legal entities may be created. For example with PTK, there may be separate legal entities for the internet provider, mobile telephony, fixed telephony and postal divisions and maybe a separate entity for the common services elements such as buildings, employees etc. Similarly, KEK must have separate legal entities for distribution and power generation activities. Whether one or more entities are created often depends on legal and regulatory issues, such as mining or telecommunications licenses. It also depends on whether it is advisable 5

6 for the company to have the different entities/divisions operating separately for business/commercial reasons (efficiency etc.). How long will incorporation take? This depends on the complexity of the POE, on the legal issues encountered and on how organised and cooperative the POE is. Some of the most time-consuming issues are identifying and valuing the assets/liabilities, correcting the cadastre and obtaining consent from the parties to certain contracts. For PTK, the planned timeline is 6 months, for the Airport 4 months. KEK may take up to 9 months. What other public steps have to be taken? Under Article 10.3 of the KTA Regulation, the KTA must give notice in Albanian and Serbian language newspapers of major circulation in Kosovo at least 2 weeks before the transaction is finalized and given legal effect. The relevant Ministries must also be kept informed. Is incorporation a requirement before Boards of Directors can be established? No. Boards of Directors can be set up prior to incorporation. However, incorporation will put the roles, duties and responsibilities of directors and managers on a far clearer legal and practical footing, with all directors and managers better aware of the framework under which they will operate. Duties and powers of the Board and of management will be set out far more clearly. 6