Privatisation of Kosovo Telecom Pre-Privatisation Commercialisation

Government of Kosovo, Ministry for Economic Development Kosovo Telecom European Bank for Reconstruction and Development

Kosovo - Privatisation of Kosovo Telecom Pre-privatisation commercialisation

Review and recommendations for a new operating model

Terms of reference

May 2019

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1. Background Kosovo Telecom (“KT”) is the incumbent state-owned operator in Kosovo and provides fixed and mobile services. Mobile services are provided through Vala, the largest mobile operator in Kosovo with nearly one million subscribers as of 2Q 2018. In fixed phone and broadband internet services, KT has approximately 48 thousand users. KT emerged as the operating entity following separation of postal services from the Post and Telecommunications Kosovo (PTK) entity in August 2012. The Company currently employs around 2,300 staff. KT is 100 percent state owned, with the state being represented by the Ministry of Economic Development (the ‘Ministry’). The Company is governed by the Law on Publically Owned Enterprises of Kosovo, Commercial Law and the Law on Telecommunication. The Board of Directors consists of seven board members appointed by the Government of Kosovo (the ‘Government’) via public procurement procedures, with the CEO being appointed by the board. Kosovo is not a member of International Telecommunications Union (ITU) and it therefore has limited control over numbering and frequency resources. Through the auspices of the European Union (EU), Kosovo and Serbia have worked with ITU to grant Kosovo a dialling code (+383), which became operational since February 2017. Vala has been using Monaco country code (+377). The Government has tried twice to privatise KT, with both privatisations being cancelled before finalisation. The first privatisation process, of a 75% stake in the company, was launched in late 2010, but cancelled in 2011. The second privatisation process was launched in 2012 - in April 2013 the Government approved a EUR 227 million bid from Germany's Axos Capital Gmbh for 75 percent of KT, but the transaction failed to receive parliamentary approval and the privatisation was cancelled in December 2013. The Government has decided to renew efforts to privatise and, to that end, adopted a Decision, authorising the Government privatisation authorities to proceed with the privatisation of KT. As part of these Government efforts the Ministry has requested the European Bank for Reconstruction and Development (the ‘EBRD’) to assist with the preparation of KT for privatisation. EBRD has agreed to support the Government in its efforts and will help retain external consulting advisors (the ‘Consultant’) to assist in this respect. The Consultant’s terms of reference are set out herein.

2. Project objective The Government has identified a need for a review of the structure, operations and practices of KT ahead of privatisation, along with recommendations for its restructuring while still under state ownership, with the objective of achieving sustainable financial viability by improve the financial, operational, technological, and human resource standing of the company. Activities will include: (i) identification of business-restructuring measures while taking into account existing or new businesses, existing or new technologies, investment requirements, and existing or emerging market trends over the next 1-3 years; (ii) financial restructuring measures that include debt restructuring, capital restructuring, and financing investment plans; and (iii) organisational and workforce restructuring measures including company management and governance for the purposes of implementing the measures proposed under (i) above. The measures proposed at (iii) should cover gaps in management, identifying skills to be replenished, workforce restructuring, changes in board composition and roles and other related matters. 2

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3. Consultant’s objectives Specifically, the Consultant’s objectives include the following: . An analysis of KT’s current situation; . Preparation of a study that identifies and evaluates options for achieving sustainable financial viability, and transforming and positioning KT for future growth and value creation. The options will be evaluated across multiple dimensions including, financial, operational, legal, regulatory, management and governance, and according to various scenarios. A key element of the evaluation will be simulations of the potential fiscal impacts; . Preparation of a detailed feasibility study and financing plan for the chosen option for a new operating model and service offerings;

4. Scope of work and tasks of Consultant Among the tasks the Consultant will undertake are: 4.1 Review of KT’s structure, governance, finances, operations and practices The Consultant will undertake a detailed review of and report on KT’s current situation. Among the Consultant’s activities in this respect will be: a) A review of KT’s legal and regulatory standing, including corporate entity and subsidiaries, ownership and governance structures, management structures, licensing, authorisations, and spectrum assignments (current and pending), and pending litigation and contingent liabilities (e.g. wage and salary arrears, pension benefits, etc.). With reference to governance, the Consultant will particularly focus on the practices in place along with the legislative/regulatory framework and the relevant corporate documentation governing such practices, with main focus – but not limited to: (i) the role of the Government (with identification of the main players and decision makers within the Government) in KT management, oversight, exercise of regulatory function and ownership function, with indication on possible conflicts and if and how the administration and management of KT is influenced by any third parties (i.e., parties not being shareholders); (ii) the governance architecture of KT, with focus on the processes, practices and policies in place at KT (including indication on the “owners” of such processes, practices and policies) for identification of the roles, responsibilities, reporting and accountability lines of the management bodies, board and key functions of KT as well as division/delegation of authority between the various bodies/functions of KT; the management and board structure, functions dynamics and responsibilities, including the processes, practices and policies according to which the strategy, the budget and the risks analysis and appetite of KT – and deriving financial and non- financial KPIs -are developed, approved, implemented and monitored, the practices and policies through which the management, board (and committees), and key function holders of KT are identified, nominated, appointed, evaluated, supervised, dismissed and made accountable for their actions; the internal regulations, practices, policies and processes governing the work of the management bodies, board (and committees) of KT; the composition and mix of skills of the members of 3

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the management and board of KT (with focus qualification, skills, reporting frequency and quality, availability of induction, training and access to information needed for efficient decision making); the effectiveness of the support provided to management bodies and board (e.g., role, functions and responsibilities of the corporate secretary, quality and frequency of reporting by management etc.) of KT; the reporting lines and interaction between the management bodies, board (and committees, if any), internal auditor, and other KT functions; the undertaking of evaluations (if any) by the management bodies, board, committees, including the quality of these evaluations and how the findings are addressed and how recommendations for improvement are implemented in practice; KT’s compensation policy and practices and their alignment with prudent risk management, succession policy and performance evaluation process.; (iii) the internal control framework, including the system of internal control in place, its accountability to the management, board (and committees), and its integration with the activities of the compliance officer (if any), the external auditors and the regulator; the structure, working processes, independence, reporting of the internal audit function, and their compliance with best practices; the organisational/risk management/internal control processes and procedures of KT; the Management Information System (MIS) (if any) to support the risk function and identify shortcomings; the processes regarding identification and reporting of conflicts of interests, disclosure of personal financial interests in companies’ transactions and disclosure, approval and reporting of related party transactions (as defined under IFRS). The Consultant will also assess if a policy of conflict of interest/Ethics Code and Code of Conduct/exist and the effectiveness of their monitoring and implementation; (iv) disclosure and transparency, including the reporting and communication channels within KT and with stakeholders, regulator(s) and the market and assess the completeness and transparency of disclosure of both financial and non-financial information (including governance, corporate social responsibility, environmental and social issues and adherence to the Kosovo Corporate Governance Code for SOEs) taking into consideration the interest of the stakeholders and the market. b) A review of KT’s financial position drawn from external audited reports, internal financial reports, management reports, business plans and projections. Among the tasks the Consultant will perform in this respect are: (i) review KT’s accounting system, internal control policies and procedures; (ii) review of KT’s general ledgers to identify relevant accounting transactions and balances including domestic and foreign currency holdings and settlements; (iii) draw up a physical inventory count, including fixed and current assets and inventory, review of the rules for the appropriate valuation and depreciation of assets, appropriately categorised; (iv) review of KT’s financial structure, such as assets and liability structure, debt/equity ratio, existing contracts and obligations, and investment needs; identifying issues related to the retention or disposal of KT’s assets and liabilities; c) A review of KT’s operational and technical activities from the perspective of network operability, functionality and coverage, workforce, subscribers, service offerings, sales and marketing capabilities, etc.; 4

Draft d) As part of the study, the technical priorities identified by KT as part of its Business Plan 2019 – 2021 should be evaluated, including those related to: (a) functional additions and modernisation of telecommunication systems, where platforms with status EOL/EOS/EOM are included; (b) expansion of mobile broadband coverage; (c) Modernisation of IPTV/OTT/GPON/broadband; and (d) modernisation of IT infrastructure and functional additions on the business platforms. KT’s existing capital investment programme (including related cost vs. benefit analysis) aimed at the development and modernisation of the company’s technological infrastructure should also be reviewed e) A review of KT’s organisational structure, staffing issues, employment rules and personnel procedures, assessing KT’s existing staffing levels and capabilities; f) An assessment of KT’s competitive position and opportunities relative to the trends and best practices in Kosovo and in the wider telecom/ICT industry regionally and globally, including benchmark analysis and comparisons; g) A review of specific commercial activities related to third-party cooperation, partnerships, and project management, as well as the evaluation of activities related to MVNO, examining matters such as commercial benefits, performance, operations. KT’s performance management practices, Key Performance Indicators (KPIs), management information systems (e.g. HRIS) and related practices should also be examined; The reviews and assessments above might include other issues and areas that are identified by the Consultant or the EBRD as being essential. h) Assemble a comprehensive picture of KT, drawing together the above reviews and analyses into a coherent and comprehensive report of the company and its operations, firmly placed within the surrounding market environment, accounting for all relevant economic, political and technical factors. i) The Consultant will produce the above as a detailed report, a summary report and in powerpoint format. In particular, the report shall detail: the main findings of the reviews and the changes needed to the processes, practices, policies and corporate documentation of KT and legislative/regulatory framework, necessary to align them to the standards taken as a reference and to achieve the target corporate structure. All proposed changes/improvements will be correlated with explanations referring to the shortcomings identified and justifications referring to the international standards taken as reference. All proposed changes in the practices will have to be enforceable under applicable Kosovo legislation, otherwise the required amendments to that legislation/regulatory framework shall be clearly identified and the Consultant will indicate the extent of the necessary amendments.

4.2 Preparation and evaluation of options a) Based on the above analysis and reporting, the Consultant will detail three specific options for transforming and positioning KT with the objective of achieving sustainable financial viability, taking into consideration its existing legal, regulatory, financial, operational, and market positioning; b) Each option should be supported by adequate financial and economic analysis of KT and the telecom/ICT sector in general, identifying the human resource/capabilities, management, investment and financial resource requirements, as well as fiscal impacts on the Government. All analysis should include relevant Excel files and models;

Draft c) Identify an options evaluation and selection methodology and use it to select a preferred option (‘KT New Operating Model’) taking into consideration various scenarios and key parameter sensitivities. Evaluation should be across multiple dimensions including, financial, operational, legal, regulatory, management and governance, and according to various scenarios. A key element of the evaluation will be simulations of the potential fiscal impacts. The Consultant will recommend this preferred model; d) Present the options and their evaluation to the Government and EBRD in a workshop to generate discussion, obtain feedback and consensus for the preferred option e) The Consultant will produce the above as a detailed report, a summary report and in powerpoint format.

4.3 Feasibility study and implementation plan for the KT New Operating Model a) Upon approval of the KT New Operating Model by the Government, the Consultant will prepare a detailed feasibility study and long term financing plan for the Model that will then be used to identify specific funding needs; b) KT must be sufficiently capitalised to continue to operate as a going concern on a day to day basis in the lead up to privatisation, subject to any further capital injection post- privatisation. This means that as well as having sufficient funds for capital investment. the company must have sufficient short-term funds to pay its staff and to pay its creditors and long term funds (including internally generated cash) to repay any loans that might be identified as part of the long term financing plan. Accordingly, in addition to identifying funding required for such capital investment and loan repayment (including any refinancing risk) the Consultant will appraise and recommend adjustments to assets and liabilities, estimate the necessary working capital for the company, and prepare a proposal for the funding of the working capital requirements; c) The Consultant will draw up relevant Excel models (including 10-year financial model) to illustrate and forecast the implementation of the KT New Operating Model; d) The Consultant will prepare a detailed implementation plan. The implementation plan will present a detailed roadmap of the process and procedures to fully implement the preferred option as part of the planned overall privatisation process. The implementation plan will include milestones, appropriate timeline and resource requirements (e.g. consulting, project management, financial and legal advisors, etc.); e) The Consultant will prepare a human resources plan consistent with the New Operating Model, including: (a) voluntary early retirement plan; (b) new employment terms and conditions; (c) organisational structure and staffing for the new company; (d) draft job descriptions and qualification requirements for key positions in the company; (e) a draft salary structure for KT, using relevant market-based benchmarks; (f) a needs analysis of management training for the new managers and retraining of the existing managers; and (g) recommendations for implementation of the human resources plans; f) The Consultant will present the feasibility study, financing plan and implementation plan for the KT New Operating Model in a workshop to Government and other nominated parties; g) The Consultant will produce the above as a detailed report, a summary report and in powerpoint format.

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5 Implementation timeframe It is anticipated that the project will have a duration of 6 months. The timetable for performance and completion of specific tasks will be fixed more precisely during the inception phase of the project. If necessary, appropriate and financially feasible, a further extension of time or scope may be sought.

6 Implementation arrangements 6.1 The Ministry for Economic Development and KT will be the counterparts for this project; 6.2 Implementation of the Project will be the responsibility of a Project Working Group (PWG). The PWG will contain senior representatives of the Ministry, KT and the Consultant, with EBRD participating from time to time as an observer; 6.3 The PWG chairperson will ensure effective participation of all relevant counterparts in the Project activities. The PWG will meet regularly to monitor progress on the Project, review drafts and provide input for the Consultant’s reports, according to a schedule set out in the inception report. The PWG Chairperson will be appointed by the Minister for Economic Development; 6.4 The Ministry will appoint a liaison person to be responsible for administrative and logistical issues attached to the work of the PWG including calling of meetings of the PWG, arranging meetings for the Consultant with relevant officials, keeping and distribution documents, keeping minutes, etc. This person will be the first point of contact for communications between the Consultant and the PWG; 6.5 The first meeting of the PWG should take place within one week of its establishment. At that meeting the Consultant will detail the basis upon which they are tasked to assist PWG; 6.6 No report will be considered as final before being approved by the PWG, and by EBRD as being of an adequate quality; 6.7 While aspects of the Project can be performed remotely, the team leader and relevant members of the consulting team will be required to spend an agreed minimum amount of project time on-site in Kosovo; 6.8 The Consultant will report on a regular basis to the EBRD Operation Leader.

7 Consultant profile The project team should consist of advisors with the following expertise: . Team leader/project director; . Legal specialist(s); . Financial/accounting/commercial specialist(s); . Corporate governance specialist(s) . Technical (telecoms) specialist(s); . Organisational/Human resource specialist(s); . Telecom market strategy specialist(s) The team leader will be appropriately qualified and possess a minimum of 10 year’s substantive in assignments within the telecom sector. All individual experts proposed should be appropriately qualified and possess at least 7 years proven experience in their discipline areas in projects similar to the project described above.

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8 Contributions of Ministry of Economic Development and KT The Ministry and KT will make the following free of charge contributions to the Project: . Appropriate official counterparts in all Project activities, including chairperson of the PWG; . Access (or the facilitation thereof) to all necessary information in the context of the work (including all necessary information from KT); . Facilitation of access to relevant officials; . Facilitation of access to all relevant data; . Office space and facilities (including internet connections for Project team members); . A liaison person; . Other logistical support for the consultant during the time they work in Kosovo, to be agreed between the Project team leader and the Chairperson of the PWG The Ministry and KT will bear the cost of their staff and any staff appointed by them. KT will make a financial contribution to the cost of the Project, with the terms and conditions of this contribution being governed by a separate agreement between EBRD and KT.

9 Inception report 9.1 The Consultant, together with the Ministry and KT, will organise an inception visit with the purpose of informing the main stakeholders of the project, key milestones, working method and key issues. The inception visit will be organised within three weeks of signature of the contract. The Ministry and KT will organise the inception visit and schedule, with input from the Consultant; 9.2 Following the inception visit an Inception Report will be prepared containing project strategy, definition of work to be completed and a work plan including:  detailed targets and milestones;  a plan for the participation of relevant stakeholders in the Project;  observations concerning matters which may affect successful completion;  major technical reservations in the terms of reference;  elements in the terms of reference that require further clarification;  comments on the terms of reference (including tasks and their sequencing);  potential bottlenecks in meeting deadlines for the Project, and;  risks to overall success of the project and individual outputs, together with mitigating actions to reduce or counter these risks. The Consultant will provide a draft Inception Report within two weeks of the inception visit. Comments will be provided on the draft within one week of receipt and the Consultant will issue the final Inception Report within one week of receiving the comments.

10 Deliverables Copies of all deliverables will be provided electronically (by email) and in hard copy (where requested) to the Ministry, KT and EBRD. All reports will be in English. Where translations are required, the Ministry or KT will be responsible for their cost and preparation. A precise timetable for the deliverables will be agreed and be set out in the Inception Report. An indicative timetable is contained below. The Consultant will prepare a brief report at the conclusion of each task detailing its implementation.

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Deliverable Deadline Draft within 2 weeks of inception visit, final within 1 1. Inception report week of comments Report on review of current Draft by [xx xxxxx]. Final within two weeks of comment 2. operations on draft. Draft by [xx xxxxx]. Final within two weeks of comment 3. Options report on draft. Feasibility study and implementation Draft by [xx xxxxx]. Final within two weeks of comment 4. plan on draft. 5. Progress reports Fortnightly on Friday 6. Final project report Within two weeks of completion of field work

11 Progress and final reporting Bi-weekly progress reports will be provided to the Bank, KT and Ministry, reporting on progress and any obstacles and developments. A draft final project report will be submitted to the Bank no later than two weeks after completion of the fieldwork, containing a summary of work performed and results obtained. It should also deal with any outstanding matters or additional work required for satisfying the objectives of the Project. The Consultant will incorporate any changes/modifications that may have been proposed by the Bank or the authorities based on the draft reports. The final project report will be submitted no later than two weeks after the receipt of any comments by the Bank. The final report may include reports or sections of reports produced earlier in the Project, including the progress reports, but will be complete and in a form that it can be given to a third party, e.g. the donor. The final report will also contain a powerpoint presentation of the activities and achievements of the Project. Unless otherwise agreed by the Bank, the Consultant should provide both paper and electronic versions of all reports to the Bank in Microsoft Word format or later. Electronic versions may be submitted via email. All reports and deliverables for the Bank will be provided to the Operation Leader nominated by the Bank as supervisor of the Project. The Consultant will seek from the Bank guidance and a template for the report.

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