39404 The World Bank Kosovo Monthly Economic Briefing Year-end issue, 2006 Electricity Shortage in the Region Reinforces the Importance of Improving Billing and Collection Rates in Kosovo Inadditiontogrowingregionaldemandandunexpectedlowerhydro-electricproductioninsomecountries,a majorfactorintheexpectedregionalelectricityshortagein2007isthatBulgariawillsoondecommissionunits three and four, totaling 880 megawatts, of the Kozloduy nuclear power plant. The two oldest units (one and two), dating from the 1970s, were closed when Bulgaria started EU accession negotiations and the EU is requestingthatBulgariaalsoshutdownunitsthreeandfourforsafetyreasonsbytheendofthisyear. Excess capacityatKozloduymadeBulgariasouth-eastEurope'sbiggestenergysupplier,covering80%oftheregion's electricitydeficitlastyear.In2007though,Bulgarianofficialspredictthatelectricityexportswouldfallfrom 7,600 GWh to about 1,500 GWh, threatening winter power cuts across the region. SinceAlbania, Kosovo andMontenegrowereinthepastmainimportersofelectricityintheregiontheyarealsolikelytobeworsthit. Greece and Serbia could also face power cuts at times of peak demand. Kosovo spent around 155 million for imports in period 2000-2005. Some of these funds, in the early years after the conflict, were provided by donors, but most of the funds, and increasingly in recent years, were transferredfromKosovoConsolidatedBudget.Budgetsubsidiesforimportexpendituresarejustoneofthe consequencesoflowlevelsofbillingandcollection.Withcashcollectionsofonlyaround44%oftheelectricity deliveredbyKEK,makinganylongterminvestmentandimportplanningbecomesalmostimpossible.KEK for 2007 has announced a tender for imports that would cover the period from January 2007 toApril 2008. The intention is then to move toApril-to-April import schedules that would cover the whole winter season underonecontractingperiod.Stabilityofsupplyduringwintermonthsiscrucial;however,inlightofrecent developmentsintheelectricitymarketoftheregion,itwillbeextremelydifficulttoattainfavorabletermsfor the15monthtender.Albania,Macedonia,andMontenegrointheirrespectivetendersforelectricityimports havereceivedoffersofsignificantlyhigherpricesandalsolimitedquantities. Inthelonger-term,thetwomoremodern1,000MWunitsatKozloduy(fiveandsix)areexpectedtooperate for another decade following a 200m modernization to be funded by the EU and a 670MW plant is being constructedinsouth-eastBulgariabyAESoftheUSA,whichwillbefuelledbylocallyminedlignite.Bulgaria should therefore re-establish its role as a leading regional exporter of electricity in future years. In addition, othercountries,includingKosovothroughthedevelopmentofanewKosovoClignitepowerplant,willalso increase exports in order to meet the demand of a growing region in the next decades. Higher prices in the region, unavailability of funds in KEK, and limited budget subsidies, re-emphasize the Key Statistics - at a glance theimportanceofimprovinglevelsofbillingand 2006 collection.Benefitsfromimprovedcollectionrates 2002 2003 2004 2005 Aug Sept. Oct. nowwillalsohavelongertermpositiveeffectsby GDP (% change) -2.4 -0.1 4 -0.2 .. .. .. helpingKEKtomakethenecessaryinvestments Reg. unemployment 282.3 282.3 302 319.7 324.5 324.8 CPI (SOK) .. 1.6 -2.5 2.6 2.8 2 0.4 in mines, generation facilities, and distribution Fiscal balance ( mn) 106.4 62.6 -134.3 -67.8 .. .. Exports (mn) 27.6 35.6 56.5 48.9 56.5 63.8 69.7 network,andalsoprovidecomforttoprospective Imports (mn) 854.8 973.1 1,063.20 1,180 814.4 941.8 1,068.8 investors assuring that Kosovo is an attractive Source: BPK, SoK, MFE, Kosovo Employment Office and IMF staff estimates marketforenergyproviders. Note: Monthly fiscal balance, export and import figures are non-cumulative. SOK (CPI) is % change year-on-year (e.g. Oct 2004 is change from Oct 2003 to Oct 2004). Registered unemployment in thousands. Source: BPK, SoK, MFE, Kosovo Employment Office and IMF staff estimates www.worldbank.org/kosovo Kosovo Monthly Economic Briefing Year-end issue 2006 The World Bank A Value­Developing Tax? A value-added tax (VAT) is an indirect tax levied at each stage in the chain of supply, on a firm's net value added. It applies to all commercial activities involving the production and distribution of goods and the provision of services. It is a consumption tax because it is borne ultimately by the final consumer, rather than a charge on companies. A common VAT system is obligatory for the EU members, with rates from 15% to 25%. In Kosovo, VAT is the main tax with a rate of 15% for all goods and services, and a VAT as % of Kosovo's budget revenues reduced rate of 0% 2002 2003 2004 2005 2006 for agricultural Border VAT 169 181 186 195.2 194 production inputs. VAT 29 38 43 46.4 49 VAT This tax policy is Domestic refunds 0 -2 -2 -1.8 0 applicable in Kosovo Total since the 1st of July VAT 198 217 227 239.72 243.12 2001, and a new draft Total non-interest law is currently out revenues 499.0 589.0 611.0 628.0 680.4 for public debate. In Total VAT as % of budget reve. accordance with the 39.7% 36.8% 37.2% 38.2% 35.7% 1 Data approximated 2006 data projected (Source: MFE) 2 EU 6th VAT Directive, exemptions are provided for the sale or import of medicine, medical services, pharmaceutical and medical products, as well as the provision of public education services. Just in June of 2006, revenues collected from the VAT on boarder amounted to 18m, and an amount of 5.1m was collected domestically, totaling to 23.1m. Annual VAT as % of government's consolidated budget revenues was 38.2% in 2005 with a projection of 35.7% for 2006. VAT is a major step forward towards the creation of a self-sustaining economy. It has an impact on the business environment and the creation of a sustainable budget for public services. Yet, there are problems that need to be addressed in order for the authorities in Kosovo to strengthen VAT. First, domestic collection of the VAT is ineffective to a certain effect as the reliance is on business to report their sales while that is not the case with border collection. Currently this may not impose a great risk given the existing trade deficit, but it will become a serious problem once domestic production increases towards trade balancing. Second, VAT is paid by corporations with annual turnover above 50.000 or own assets of 50.000. Tendencies of the VAT Rates in the Region government are to apply VAT even for Country Standard Reduced VAT as % of corporations that have a lower level of VAT VAT Budget Revenues annual turnover, because as it is, Albania 20% 0% 31.6% companies may stay below the threshold to BiH 17% / 31% avoid the tax. The debate between the Bulgaria 20% 12% 11.3% government agencies and the business Kosovo 15% 0% 38.2% community is to decrease the threshold to Macedonia 18% 5% 26.8% 20.000-30.000m, and slightly increase Montenegro 17% 7% 28.9% VAT for 1%-2% in order to make up for Serbia 18% 8% or 29% the budget loss without risking its 0% competitiveness. Yet, there is a trade-off 12005/06 is the base year for VAT as % of budget revenues between minimizing distortions of competition and fraud by including as many traders in the VAT system and the administrative advantages of excluding small ones from whom little revenue can be gained. The problem that may arouse is that administrative costs would be higher because it requires more information and audit to be reported, thus become much more expensive to administer. On the other hand, the conventional wisdom is that higher tax rates dampen incentives to report official business. Even though, studies have indicated that a slight increase of VAT has not had a major adverse effect on Eastern European countries, in principle the regressive nature of the VAT system could imply that an increase of VAT might have an adverse effect on the poor. However, VAT revenues can provide additional funds for poverty-reducing spending. Thus, as the debate continues for the reformation of the value-added tax policy in Kosovo, its fiscal implications and how it would compliment growth are not certain. Kosovo Monthly Economic Briefing The World Bank Year-end issue 2006 Public Private Partnerships in South-East Europe While many Kosovar socially-owned enterprises have been privatized by the Kosovo Trust Agency (KTA), almost all of the publically owned infrastructure services ­ such as energy, water, sanitation, airports, roads, and fixed-line telecommunications ­ are still operated under a structure of publicly-owned enterprises (POEs) under the trusteeship of KTA. While there are already a few private infrastructure companies in Kosovo, such as the first mobile operator Vala and an independent hydro-electric power plant of the capacity of 40MWs, in the past year there has been increased discussion in Kosovo on those remaining POEs responsible for public infrastructure services and the advantages and disadvantages of private sector participation to develop and manage these POEs within appropriate concession arrangements. Prior to 1990, PPPs in infrastructure were restricted to a few developed countries, such as Australia, France, and the United Kingdom. State-owned and operated monopolies were mainly responsible in other developed countries and almost all of developing countries for supplying electricity and water, managing airports and toll roads, and providing telecommunications services. Since that time, however, almost $1 trillion dollars has been invested in over 3,200 PPP projects in developing and transitional countries. There are many reasons for the PPP boom of the past 15 years: Two major ones often cited are, firstly, the need for governments to increase infrastructure investment to facilitate economic growth in a Investment Total Investment Total Investment ­ Total Investment ­ All context of limited public Year ­ Balkans Eastern/Central Europe Developing Countries availability of investment (US $million) (US $ million) (US $ millions) funds; and secondly to 2000 2,129 25,303 92,285 improve the financial and 2001 2,111 14,118 74,273 technical performance of 2002 1,009 17,240 58,039 inefficient publicly-owned 2003 1,925 11,776 53,152 services. In Eastern 2004 3,602 15,112 70,874 Europe, the transitions to 2005 5,159 34,352 95,792 market orientated systems 2006 21,985 181,748 969,432 also contributed to a philosophical shift towards private sector provision. As a result, Eastern and Central European countries have seen some of the highest levels of investment in recent years and accounted for over 35% of global developing country investment in 2005. The Balkans are also starting to receive significant levels of investment, particularly in Bulgaria, Croatia, and Romania. Most of the investment in the Balkans has been in the telecom, energy generation, and transport sectors. Some countries have recently begun to branch out by developing PPPs in other sub-sectors as well. For example, a few years ago the governments of Bulgaria and Romania signed 25-year concessions for their capital cities' water utilities, with the projects being won by major international firms bringing in hundreds of millions of euros in investment. Overall, Bulgaria and Romania are now being asked by the EU to bring there systems in order with EU standards regarding concession regulations and public procurement, privatization and post-privatization control. Tirana airport has also recently been concessioned in Albania, as have three major toll roads in Croatia. New projects currently under discussion include airports in Bulgaria, toll roads in Bosnia and Serbia, and electricity distribution in Albania, just to name a few. In Kosovo, some PPPs are currently being developed, such as attracting foreign investment into the mining and electricity generation sectors and the upcoming tender for the second mobile license. The private sector is expected to bring in over 1 billion euro in investment for a new Kosovo C power plant. There are also discussions of how to get the private sector more involved in areas of the transport sector that are often managed as PPPs, in one form or another, in most developed countries, such as airport management and operation and the development, rehabilitation and maintenance of roads. However, PPPs are not a panacea, and preparing and developing PPPs requires considerable capacity and preparation on the part of governments. The institutional framework, encompassing the legal and regulatory regimes, organizations, environmental standards, and procurement processes all need to be consistent with best international practice, if the potential benefits of a PPP is to be realized by the public sector. As these are often extremely complex and expensive projects, sometimes hundreds of millions of euros in investment, potential private operators will conduct extensive due diligence and request very detailed background information and studies from government. The risks of PPPs cannot be mitigated entirely, however, and the history of PPPs in the transport sector in SEE has not been good, with the majority taken forward in non-optimal frameworks requiring renegotiation.. But overall, given adequate preparation and an optimal institutional framework, PPPs offer one way to undertake procurement in the public sector that can realize significant benefits for a country. Additional information is available on request. For more information, please contact Shpend Ahmeti (sahmeti@worldbank.org), Vito Intini (vintini@worldbank.org), Florentina Mulaj (fmulaj@princeton.edu) or Edon Vrenezi (evrenezi@worldbank.org) at the World Bank Office in Kosovo on (381-38) 249-459.The findings, interpretations, and conclusions expressed in this briefing are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent.