1. Introduction. 1 Government of Kosovo, Decision no. 01/61, accessed on: ,

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2 2 1. Introduction In December 2015 the Government of Kosovo adopted the Draft Law on Strategic Investments 1. This law aims to facilitate the bureaucratic procedures for potential investors in Kosovo. In addition to facilitating procedures, the Law also entitles the Government of Kosovo to directly negotiate with investors and encourage investments in case they meet the criteria as stated by the Law. The purpose of the Law is to encourage investment. One of the reasons often mentioned for drafting this Law by the Government is the acceleration of the economic development and reduction of unemployment in Kosovo. In other countries in the region, such laws have caused many reactions. While the facilitation promoted by these laws may encourage investment, there is the risk that the Government shall acquire too many competencies without being subject to any external control. Consequently, the possibility of corruption increases as well. Such worries have surfaced in Croatia 2 and Albania 3. The purpose of this study is to analyze the similarities and differences between this Law and the laws and policies on strategic investments in neighboring countries. By identifying the differences and results of various investment-encouraging policies, this analysis shall provide a conclusion on the opportunities and risks the Law on Strategic Investments in Kosovo presents. Based on these findings, this analysis recommends improvement and increase of investment packages as alternative methods to encourage investment, and if the Law is adopted, amendments to be made to reflect the democratic principles. 1 Government of Kosovo, Decision no. 01/61, accessed on: , 2 Lexology, Croatia adopts the Strategic Investments Act, accessed on: , 3 Panorama.al, accessed on: , Source:

3 3 2. Investments in Kosovo 2.1. Draft Law on Strategic Investments This Draft Law names several strategic sectors such as energy, mining, and tourism. It then defines employment criteria and the amount required to qualify an investment as strategic. Potential investors should apply for this title at the Inter-Ministerial Commission. The Inter-Ministerial Commission on Strategic Investments shall be comprised of six Ministers and the Mayor of the municipality where the investment shall be implemented. This Commission shall recommend strategic investments to the Government and the latter shall then render the final decision whether a project shall receive the title of a strategic investment or not. The Agency for Investments and Support to Enterprises, i.e. an Operational Group, plays a role in managing the procedures that the potential strategic investor shall perform at the state agencies 4. The title of a strategic investor provides benefits such as easier transfer of state property, easier access to licenses in order to start working, and expedited administrative procedures Business climate in Kosovo In addition to technical facilitations, such as low taxes and reduction of bureaucratic procedures, foreign investors have even more substantial requirements, which often vary from country to country. In general, these requirements include the rule of law, provision of energy supply, qualified labor force, and in many cases political security 5. Below we have analyzed where Kosovo stands in these fields. Doing business in Kosovo. Kosovo's ranking in the World Bank Doing Business 2016 Report shows that Kosovo has lost two places compared to Therefore, generally speaking, the environment of doing business in Kosovo is ranked 66th, following Macedonia (12), Croatia (40), Montenegro (46) and Serbia (59), but surpasses Albania, which is ranked 97th. 4 Government of Kosovo, Draft Law on Strategic Investments, accessed on Paulo Tembe, Attracting foreign direct investment in developing countries, accessed on

4 4 Table 1Ranking of Kosovo and countries of the region in the Doing Business Report Ranking according to fields Kosovo Macedonia Croatia Montene gro Serbia Albania Total Starting a business Construction permits Electricity Registration of property Access to loans Protection of minority investors Tax payment Cross-border trade Enforcing contracts Resolving insolvency Source: World Bank One of the categories on which the environment of doing business in Kosovo was assessed is access to the electric grid. In this category, Kosovo has lost 6 places in 2016 compared to 2015 (from 118 to 124). Another category is enforcement of contracts, which is one of the factors that impact the rule of law. The situation in Kosovo has deteriorated in this category as well (from 46th place to 48th). In both of these categories, Kosovo went the opposite direction to what is proposed to be done in order to attract investments and stands obviously worse than neighboring countries, excluding Albania. Labor force. Kosovo is considered as a country with a young population. About 35% of the population is unemployed, whereas youth unemployment is 61% 6. The high unemployment rate reflects the low production/services level, but also the gap between the skills of the labor force and market requirements. According to the World Bank, students in Kosovo are often left unprepared to enter the labor market 7. Political safety. Governmental institutions in Kosovo have been qualified as low-capacity institutions. Moreover, the high level of corruption in state institutions and the perception of the corruption have contributed in Kosovo's image as a country not preferred for 6 The Kosovo Agency of Statistics, Results of the Survey of the Labor Force 2014, accessed on , 7 World Bank, Increasing jobs in Kosovo, accessed on

5 5 investments 8. The United Nations Security Council has qualified the period after last year's elections until the creation of the government as a political and constitutional crisis 9. Political crises create uncertainties among investors about policies of concern to them and their investment projects. Consequently, investors are less inclined to invest in such countries. Law enforcement. Kosovo is still qualified as a country with a low level of law enforcement. Judges, prosecutors, and police are perceived as subject to political pressures, whereas corruption and organized crime are considered as present and continuously increasing 10. Although the safety of life in Kosovo in general is satisfactory, there is a problem with the judicial system and its inefficiency in settling claims Comparison of the Laws of Albania, Croatia and Kosovo In this part we have analyzed the differences and similarities between the laws on strategic investments in Albania 12, Croatia 13, and Kosovo 14. Comparisons were made regarding targeted sectors for investments, the investment criteria, and envisaged procedures. Sectors Draft Law on Strategic Investments of Kosovo has a number of targeted sectors. However, it is not clear whether these sectors are final since, depending on the interpretation of the Law by the Inter-Ministerial Commission, investments in other sectors may be considered strategic as well. The list is topped by energy, tourism and agriculture, all fields of special interest for the economic development. 8 Economic Freedom Index 2016, accessed on , 9 Security Council, Monthly prediction, accessed on , 10 Crisis Group, Rule of Law in an Independent Kosovo, accessed on Progress Report for Kosovo 2015, accessed on Assembly of Albania, Law on Strategic Investments in the Republic of Albania, accessed on Croatian Parliament, The Act on Strategic Investment Projects of the Republic of Croatia, accessed on Government of Kosovo, Draft Law on Strategic Investments, accessed on

6 6 In addition to special sectors such as transport, energy, mines, agriculture, tourism, and technology, the Law in Albania leaves the door open for other sectors, as well as the cases when the investment is carried out in a "development priority area". The Council of Ministers defines through a decision what a development priority area means. This means that it is up to the Government to interpret this term. The Croatian Law has targeted even more sectors. In addition to the sectors specified by the Law in Albania, the Croatian Law also includes electronic communications, postal services, environmental protection, public utilities, forestry, forest management, health, culture, science, justice, and education. The Law in Croatia, in contrast to the Law in Albania, also includes construction of new buildings as part of investments. Table 2Targeted sectors in three countries Sectors Albania Croatia Kosovo Transport Energy Mining Agriculture Tourism Technology Electronic communications Postal services Environment protection Public utilities Forestry Forest management Health Culture Science Justice Education Food industry Sports and recreation Industrial parks Oil and gas pipelines Water and sewerage administration Waste collection, recycling and management Criteria - In addition to the defined sectors, the three Laws also list the criteria a potential project has to meet to be considered a strategic investment by the decision-making authority. The Law in Kosovo names several criteria about the minimum amount of the investment and jobs created. In addition, it requires the investors to meet the EU environmental criteria and respect international treaties. It also requires the investors to guarantee the

7 7 fulfillment of up to 60% of the investment. The special investmentbased criteria are summarized in table 3. Table 3 Criteria to acquire the Strategic Investor title Sector Monetary value ( ) Job openings Energy and mines 30 million 80 Tourism 20 million 60 Agriculture 10 million 50 Food industry 5 million 30 Industrial technology 40 million 60 Transport 30 million 80 Telecommunications 30 million 60 Education 5 million 20 Sports and recreation 5 million 30 Health 10 million 30 Industrial parks 10 million 50 Oil and gas pipelines 20 million 50 Water and sewerage 10 million 30 administration Waste 10 million 30 The Law in Albania envisions two types of projects that are considered as strategic investments: Strategic Investment - Assisted Procedure and Strategic Investment - Special Procedure. Acquiring the Special Procedure statute means that special rules can be established to expedite the investment. Of course, the impact of projects that acquire the status of Special Procedure in the country is higher than those of Assisted Procedure 15. Besides these economic criteria, in case the investment is carried in partnership with the Albanian state, this Law envisions that the private investor shall prove he has the financial means to guarantee at least 10% of the amount. The Law in Croatia does not have such categorization, similarly with the Law in Kosovo. The initial criterion is to prove that the specific project considerably improves the welfare of the citizens of Croatia. Another general criterion is to observe the rules of construction planning. 16 Another important criterion that strategic investments in Croatia shall meet is the non-violation of international treaties signed by Croatia, while it also has to be in compliance with the EU and Croatian laws, as is the case of the Law in Kosovo. This specificity is not found in the Law in Albania. 15 Annex I: The criteria to acquire the Strategic Investor status in Albania 16 Annex II: The criteria to acquire the Strategic Investor status in Croatia

8 8 Procedure - The main purpose of the Law on Strategic Investments is to facilitate the administrative procedures for the potential investors. The Law in Kosovo has requirements, such as business plan or proof of financial capacity, among others. However, the Law in Kosovo does not require a feasibility study for the proposed projects. It is also legally permitted for the Government to directly negotiate with potential investors. Moreover, the Law in Kosovo requires that potential investors also submit proof they have paid taxes and other duties in their respective countries. The Law in Albania obliges all the institutions and public organizations to establish special procedures to provide services to strategic investors. These services include issuing documents and licenses, but also providing information. A written request to acquire the Strategic Investor status shall be submitted to the Albanian Investment Development Agency, along with documents summarized in table 4. In comparison to the Law in Albania, the Law in Croatia envisions less, but more detailed requirements as part of the application for possible strategic investments. In comparison to the Law in Albania, the Law in Croatia demands from potential investors to submit an application in which they shall describe the investment project in detail and show how that project meets the legal requirements of strategic investments. Next, several similar requests to the ones in the Law in Kosovo and Albania are submitted, but it is also required that a conceptual description of the project, the statute and the location of project implementation, as well as a detailed profile of the company and its branches be submitted. At the same time, as is the case with the Law in Kosovo, a proof of payment of taxes is required. Table 3Requirements during the application procedure to acquire the Strategic Investor title Albanian Law Croatian Law Kosovo Law Business plan Financial plan Work plan Economic impact assessment Social impact assessment Requirements to the state Authorization for the agency Certificate of financial capacity Profile of the company and its branches Confirmation of payment of taxes Conceptual description of the project

9 9 Facilitations - In all three states, strategic investors are offered technical assistance in acquiring licenses and documents through an expedited procedure via the respective agencies (in Kosovo through the Agency for Investments and Support to Enterprises). In addition, state land and immovable properties may be offered to the beneficiaries. In Kosovo and Croatia these properties and land shall be offered to investors at a price set by an expert, without tendering or public procurement. Moreover, the properties or public enterprises under the authority of the Privatisation Agency of Kosovo and the Kosovo Forest Agency may be given to investors for use in case the Kosovo Assembly approves it with a simple majority. In Croatia and Albania, however, a decision like that is rendered by governmental authorities managing the property or the Council of Ministers. 4. The Impact of the Law on Strategic Investments on the Croatian Economy Over the years, investments in Croatia have had their ups and downs. As a percentage of the GDP, they peaked in 2008 with 31%. Since 2008, however, investments have constantly been decreasing, including when the Law on Strategic Investments entered into power. It can be claimed that the numbers show this Law did not have a positive effect in encouraging investments in Croatia. However, even with these numbers, one should keep in mind other factors that could have impacted the investments negatively, such as the EU financial crisis. Unemployment in Croatia rose in 2014 and then declined in Currently, the unemployment rate is around 17%, while in July 2013 it was 18.5%. 18 Considering the fact that investments in Croatia have not increased even after this Law entered into force, the probability of attributing this reduction of unemployment to investments is low 19. A study conducted in relation to the situation of investments in Croatia concluded that the investments absorptive capacity in Croatia is one of the factors that have hindered a greater increase of investment. In addition to this finding, this study also recommends 17 IMF Macroeconomic Statistics, accessed on Trading Economics Statistics for Croatia, accessed on Annex III: Economic indicators before and after the Law entered into force in Croatia

10 10 the improvement of human resources and infrastructure modernization in order to increase this capacity. Moreover, this study finds that another important factor is the favorable approach to investments by the local governments, and not only the central one The Impact of the Law on Strategic Investments on the Albanian Economy Albania adopted the Law on Strategic Investments in 2015 and it is still early to assess its success. However, Albania, despite having the lowest investment rate in the region, has managed to increase foreign investment as a percentage of the GDP from 3.6% in 2006 to about 10.3% in Unemployment rate in Albania was 17.3% in 2014 and in 2015 it rose to 17.5% 22. The impact of the Law in increasing the investments and unemployment remains to be seen in the future. According to a study conducted there, the investment situation in Albania was such due to the enviable geographic position and good environment for doing business. However, a concern often mentioned in relation to investments was political safety. Based on the recommendations of the World Bank, the same study concludes that several steps have to be undertaken to ensure the investors, such as establishing a multilateral insurance agency for political risks, as well as establishing institutions to settle disputes pertaining to investments Other Models for Attracting Investments Two neighboring countries, Serbia and Macedonia, did not adopt specific laws on strategic investments, but they have provided some other policies to encourage potential investors. In Macedonia, for example, the Law on the Areas of Technological Industrial 20 CroEconSur, The Influence of Foreign Direct Investments on Regional Development in Croatia, accessed on Arbër Demeti and Erjona Rebi, Foreign direct investments (FDI) and Productivity in Albania, accessed on Trading Economics Statistics for Albania, accessed on European Academic Research, Factors Determining Foreign Direct Investments in Albania, accessed on

11 11 Development has a similar function to the Law on Investments. 24 Their stimulating policies are in the form of financial aid, exclusion from taxes or other mechanisms, which in general add the competition to Kosovo in attracting investments. Financial aid - Serbia provides general grants and employment grants. General grants may be provided to big enterprises up to 50% of the total cost of the investment. 25 On the other hand, employment grants are provided for each employee in three different programs: employment subsidy program, internship and re-training. In Macedonia, users of zones, as investors are called, receive funds from the state of up to 50% of the investment cost or 50% of the salaries for two years for the job openings. For medium businesses, this percentage increases up to 60% and for small businesses up to 70%. The investor shall provide at least 25% of the investment. However, in case the investments exceed the amount of 50 million euros, the state financial aid is larger, which is a practice seen in the legislation of other countries as well. Another form of aid is when the Macedonian state partially pays for the construction works that have to be made for the investment, provided that over 20 new jobs are created and the total value of the investment is 1 million euros. Tax exemptions- In Serbia, the stimulus policies that are related to taxes are: tax breaks on profit, transfer of losses, avoiding double taxation, deducting (subsidizing) the contribution payments on employees' salaries, tax deductions on annual incomes, and exemption of VAT in free economic zones. Tax breaks on profit are provided to companies that invest over nine million euros and hire at least 100 employees. The transfer of losses in taxes may be done up to five years. This means that for every amount paid in taxes which in one way or another exceeds the legally required amount, the companies will have proportional exemption on paid taxes the following years. In addition, if a company generates sufficient profit even outside Serbia, it may also benefit from the so-called tax loans in Serbia for the same amount of taxes paid abroad. This is done in order to avoid double taxation. The burden of salaries, respectively taxes and contributions the company must pay its employees is reduced proportionally with the number of hired workers. Serbia provides VAT exemptions in the so called "free zones" of which there are 12 in total. In Macedonia, investors within the zones are exempt from income tax and employees' taxes during the first ten years. In addition, in these 24 Invest in Macedonia, Ministry of Foreign Affairs, accessed on: , 25 Serbian Agency for Investments and Export Promotion, accessed on ,

12 12 zones the raw materials may be brought in and traded VAT-free. Moreover, free zone users are exempt from paying the fee for the reconstruction of the land on which construction is completed as part of the investment. Companies that invest in software, technology or scientific research need not pay any guarantees at the Customs for the used equipment. Other incentives - In Serbia, the import of raw materials and semifinished products are exempt from customs if these elements are used to manufacture export-oriented products. Likewise, the investor is exempt from customs on all machinery and equipment that s/he brings from abroad. This incentive is provided at the local level as well, mainly in relation to the fees paid for the use of public areas for construction or other purposes. Another type of incentive for the zone users is the financial aid for employees' trainings. This incentive enables the employees hired by the investor to acquire work skills so that their employment chances are increased after the investor leaves. Macedonia has also facilitated the business registration procedures through the one-stop shop, a method which enables the registration of businesses within 4 hours The impact of stimulus package on the Serbian economy The stimulus package for foreign investors came into power in June Investment as a percentage of the GDP was in decline from 2008 (30.34%) until 2010 (18.47%). From 2010 until 2012, investment went through a slight increase. Investment then declined again until 2015, when it rose to 18.38% 26. It seems the package had a positive impact in the increase of investment 27. This increase of investment may have also impacted the unemployment decrease. The unemployment rate has declined in 2014 to 17.6% from around 20% and has remained at around 17.3% during 2015 as well 28. A study conducted in Serbia attributes the success in attracting investments in this country to the primary and higher education of the labor force, infrastructure, technology, market size, and access to other markets abroad. Judging by these indicators of the Global Competitiveness Index, Serbia stands well compared to the other 26 IMF Macroeconomic Statistics, accessed on , 27 Annex IV: Economic indicators before and after the law came into power in Serbia 28 Trading Economics Statistics for Serbia, accessed on ,

13 13 countries in the region 29. Free zones that have been established in various territories are qualified as another key factor in the success of investments in Serbia. Even Financial Times has qualified two free economic zones in Serbia as the best zones in the world The impact of stimulus package on Macedonian economy The Directorate for Technological and Industrial Development Zones in Macedonia was established in In 2006 the process of expanding the zones was expedited because the government declared attracting foreign investments a priority. This was reflected in total investment in Macedonia as well: although year after year it increased, in 2007 investments peaked at 506 million euros 31. However, since then investments have not been as stable and have faced ups and downs 32. It can, however, be said that the zones were a success. Immediately after their implementation, investments have nearly tripled. A possible explanation is that when these investments were absorbed by the market, their level declined because there was no more need for investments in the Macedonian market to begin with. The increase in investment may have also impacted the decrease of the unemployment; however, the trend of change of unemployment rate does not fully reflect the investment level. Unemployment in Macedonia has been decreasing since In 2015 the unemployment rate reached its lowest point since 2000, i.e % 33. The success of investments in Macedonia has been attributed to a combination of free economic zones, macroeconomic stability, and creative ideas to facilitate bureaucratic burdens on businesses. Another factor for the success of Macedonia in the field of investment is the close cooperation with foreign Chambers of Commerce in Macedonia, which have intermediated the investing projects between the government and the interested Research in World Economy, Global Competitiveness Indicators as a Determinant of Brownfield Investments in Serbia: Generalized Linear Model, accessed on Ekonomika, the Role And Importance Of Free Zones In Economic Development: The Experience Of The Republic Of Serbia And The European Union, accessed on Trading Economics Statistics for Macedonia, accessed on , 32 Annex V: The economic indicators before and after the law came into power in Macedonia 33 Trading Economics Statistics for Macedonia, accessed on Monthly Macedonian Business, Macedonian Arch Towards Europe, accessed on

14 14 7. Conclusions and recommendations The Law on Strategic Investments puts Kosovo in a more competitive position with the countries in the region which have special policies to attract potential investors. With the established facilitations, investors have more reasons to consider Kosovo as a potential place for investment. However, despite the Law, Kosovo does not provide tax exemptions for employees or customs exemptions on raw materials, as is practiced by Serbia and Macedonia. Therefore, despite this Law, the success in attracting investors is not guaranteed. The situation in Kosovo is not ideal for implementing this Law. The space and competencies provided to certain institutions are disturbing. The Law should provide a balance between the need to reduce the procedures and overview of tendering procedures which minimize the chances for corruption. The Law should also serve as protection for Kosovo's assets and resources in case the investors leave. Besides the facilitations in procedures and the financial stimuli, Kosovo has a less favorable environment for doing business compared to all the countries in the region. In order to succeed in encouraging investments, such laws should be supported by substantial reforms in relation to the environment of doing business and the quality education of the labor force. This is because, in addition to technical facilitations, reduction of bureaucratic procedures and financial incentives, investors have demands for political and legal safety, skilled labor force, and in general, a suitable environment for doing business. These reforms are harder to achieve because they require deeper reforms, more time, political will, and financial resources. Based on this, the GAP Institute gives the following recommendations: Law on Strategic Investments should not be approved without the amendments specified below as it bears great risks of abuse with state property; Remove the Article that permits the transfer of the state property to the investor without tendering procedures or require the Assembly of Kosovo to vote on this matter; Require detailed feasibility analyses and plans for each investment proposal;

15 15 Define more specifically what a strategic sector is and define the method to enter new strategic sectors; The Government shall enter into negotiations with investors with prior consent from the Inter-Ministerial Commission for Strategic Investments to reduce the chances of misuse; Add the Ombudsperson and one representative of the Parliamentary Commission for Economic Development to the Inter-Ministerial Commission for Strategic Investments in order to ensure a more all-inclusive approach; Within the criteria on the number of employees, the Law should clarify the duration of the employees' contracts and if they should be full-time; As an alternative to attract investors, also establish financial packages such as: o Establish free economic zones for various sectors; o Subsidize employees' salaries, tax breaks on profit, reduce income taxes, subsidize employees' contributions, exempt raw materials from import taxes, exempt from local construction fees or various permits, grants for partial funding of the investors' costs for the construction of buildings; o Financing (subsidizing) and supporting trainings for employees to guarantee the transfer of knowledge from the investor to the employees; o Establish special neutral institutions to settle disputes pertaining to investments to create security for investors; o Increase cooperation with international Chambers of Commerce in Kosovo for investment projects and increase the number of foreign Chambers of Commerce here. In relation to the environment of doing business: Improve the access of businesses to the electricity grid; Improve the implementation of the law, both in matters related to the settlement of contracts and the increase of security; Work on educating and training the labor force.

16 16 8. Annexes Annex I: The criteria to acquire the strategic investor status in Albania Table 4 The criteria to acquire the strategic investor status in Albania Sector Assisted procedure Special procedure Monetary value ( ) Job openings Monetary value ( ) Job openings Energy and 30 million - 50 million - mines Transport, 30 million - 50 million - infrastructure and k.e. Tourism 5 million million - Agriculture 3 million million - Technology 5 million - 50 million - and technical development Development priority zone 1 million million 600

17 17 Annex II: The criteria to acquire the strategic investor status in Croatia Table 5 The criteria to acquire the strategic investor status in Croatia Investment type Monetary value ( ) General 20 million Co-financed by EU 10 million Local self-governed units 2.5 million On Croatian islands 2.5 million Farming and Agriculture 2.5 million

18 18 Annex III: The economic indicators before and after the law came into power in Croatia Figure 1 The economic indicators before and after the law came into power in Croatia GDP UNEMP TI

19 19 Annex IV: The economic indicators before and after the law came into power in Serbia Figure 2 The economic indicators before and after the law came into power in Serbia GDP UNEMP TI

20 20 Annex V: The economic indicators before and after the law came into power in Macedonia Figure3 The economic indicators before and after the law came into power in Macedonia GDP UNEMP TI

21 21 GAP Institute is a Think-Tank established in 2007 in Kosovo. The main goal of GAP is to attract professionals to create an environment of professional development and research, which is encountered in similar institutions in western countries. This also provides the opportunity to Kosovans for researching, developing and implementing projects with the aim of advancing Kosovan society. This Institute's priority is to mobilize professionals in addressing economic, political and social challenges of the country. The main goals of GAP are to fill the gaps between the Governments and the citizens, and also fill the gaps between problems and solutions. This project is supported by: