MUNICIPAL COMPETITIVENESS INDEX 2020 MUNICIPAL COMPETITIVENESS INDEX 2020 1 2 MUNICIPAL COMPETITIVENESS INDEX 2020 CONTENTS EXECUTIVE SUMMARY ................................ 6 6. FINDINGS FROM THE FOCUS GROUPS ...................................... 50 1. OVERVIEW OF THE ECONOMIC BACKGROUND AND 7. MCI METHODOLOGY ............................ 52 BUSINESS ENVIRONMENT ........................ 7 7.1. COLLECTION ................................................53 2. WHAT IS MCI? ....................................... 8 7.2. CONSTRUCTION ...........................................55 3. MCI INDEX AND SUB-INDEXES 7.3. CALIBRATION ...............................................56 SCORES .................................................... 9 7.4. FOCUS GROUP 4. SUB-INDEX RESULTS .......................... 15 DISCUSSIONS- METHODOLOGY ..........................57 4.1. SUB-INDEX 1: BARRIERS TO ENTRY ............16 8. CONCLUSIONS .................................... 59 4.2. SUB-INDEX 2: TRANSPARENCY ...................20 9. APPENDIX .......................................... 60 4.3. SUB-INDEX 3: PARTICIPATION AND PREDICTABILITY .........................................24 4.4. SUB-INDEX 4: TIME COST ............................28 4.5. SUB-INDEX 5: TAXES AND FEES ..................32 4.6. SUB-INDEX 6: LOCAL ADMINISTRATION .......36 4.7. SUB-INDEX 7: LABOR MARKET AND SUPPORT FOR BUSINESSES .......................40 4.8. SUB-INDEX 8: LOCAL INFRASTRUCTURE ............................................ 44 5. POLICY WEIGHTED MCI ....................... 48 MUNICIPAL COMPETITIVENESS INDEX 2020 3 4 MUNICIPAL COMPETITIVENESS INDEX 2020 ABBREVIATIONS EGI Economic Governance Index FGD Focus Groups Discussion KBRA Kosovo Business Registration Agency NGO Municipal Competitiveness Index SMEs Small and Medium Enterprises USAID United States Agency for International Development VAT Valued Added Tax MUNICIPAL COMPETITIVENESS INDEX 2020 5 EXECUTIVE SUMMARY The Municipal Competitiveness Index (MCI) is a composite icant improvements were noted in transparency sub-index index developed to measure the performance of local gov- and labor and business support services sub-index. As in ernment in establishing a sound business environment. MCI 2019, the sub-index with the highest score remains the time allows one to understand the barriers in doing business as cost, suggesting that time spent by business owners in deal- identified by companies in respective municipalities. The ing with administrative procedures is not a significant bar- ultimate use of MCI is to inform policy makers about their rier. The municipal administration sub-index - which looks opportunities to improve the productivity and performance at the municipal officials’ capabilities and attitudes towards of the private sector by reducing barriers, eliminating redun- businesses and fairness in public tendering - has performed 1 dant administrative procedures, enhancing a fair legal envi- the worst, with an average national score of 3.94, with slight ronment and providing necessary infrastructure conditions. improvement from last year. The biggest changes in scores The cornerstone of this methodology is to gather primary can be noticed when looking at a disaggregated level of data data through surveys with business owners and entrepre- for each municipality. Here significant changes in rankings neurs. This is the sixth year that USAID Kosovo supports the can be noticed for all municipalities. This can serve as a implementation of this study with the aim of guiding policy good source of information to better inform policy-making reforms which are based on evidence. processes at local level. The report is organized in eight main sections. The first section discusses the general busi- The MCI includes eight sub-indices each capturing a spe- ness environment based on existing literature. The second cific dimension of economic governance that range from section is an overview of the MCI. The third section pres- opening a business to local physical infrastructure. The ents the indices at an aggregate level. The fourth section is 2018, 2019 and 2020 MCI reports in Kosovo, supported by divided into 8 parts that discuss the MCI sub-indexes. The the USAID Kosovo and implemented by Riinvest Institute, fifth section gives an overview of MCI policy weights. Focus have followed a combined methodology using qualitative groups are discussed in the sixth section. The seventh sec- and quantitative primary data sources. The report provides tion explains the methodology used in constructing the index comparisons of municipalities’ performance with the pre- and sub-indices. Finally, the eighth section summarizes the vious year. report with a brief conclusion. The overall MCI results of 2020 show a similar trend to the findings of MCI 2019, though with some improvements. The ten best performing municipalities are very similar to the top 10 performers in 2019. They include Lipjan/Lipljan, Gja- kovë/Đakovica, Viti/Vitina, Rahovec/Orahovac, Junik, Hani i Elezit/Elez Han, Parteš/Partesh, Obiliq/Obilić, Vushtrri/ Vučitrn and Mitrovicë/Mitrovica. The best performing mu- nicipalities in 2020, to a large extent, are also the ones which performed best in 2019 with few exceptions. The usage of policy weights alters slightly the ranking of the top perform- ers. The position of most of the municipalities remains the same, with the exception of Mamushë/Mamuşa which joins the list of top ten performers, dropping Mitrovicë/Mitrovica out of this list. Data suggest that the overall national MCI score has in- creased. A slight drop of the score was time costs sub-index, even though it still remains the best ranked indicator. Signif- 6 MUNICIPAL COMPETITIVENESS INDEX 2020 OVERVIEW OF THE ECONOMIC BACKGROUND AND BUSINESS 1 ENVIRONMENT Municipal Competitiveness Index (MCI) assesses the perfor- to be a lack of an integrated framework of economic policies mance of municipal governments across the 38 municipali- for building competitiveness and supporting production and ties of Kosovo, and the extent to which they manage to cre- exports. This led to unsatisfactory economic growth levels, ate an enabling business environment. In 2019 the Kosovar persistent high unemployment rates, lack of investment and economic performance has been characterized by similar high trade deficit. Municipalities play a significant role in es- macroeconomic dis-balances as highlighted in the 2018 re- tablishing a sound business environment where the private port. The economy faces a negative current account- mostly sector can flourish which consequently can accelerate the caused by the trade deficit, a close to 30% unemployment economic growth of the country. The MCI report shows that rate, and high poverty rates. Kosovo is at early stages of a municipalities in Kosovo face an array of difficulties, including functioning market economy, with little progress, especial- lack of transparency and unwillingness to inform businesses ly in supporting export-oriented businesses. The situation about upcoming tenders and bidding processes, unnecessary regarding the contract enforcement (mainly in the financial red-tape, lack of capacity among municipal officials, lack of sector) as well as access to finance has improved. But un- an appropriate framework for providing support to business- sustainable fiscal decisions by the government - expanding es and a poor municipal infrastructure which characterize categories for social benefits - raise concerns about the most of municipalities. Some of the improvements that have possibility of macroeconomic destabilization and strained been observed in local municipal governance have to do with relations with international financial institutions. The large barriers to business entry and time costs. trade deficit reflects the poor manufacturing base and weak position in international competitiveness. Dependence on re- Businesses are faced with many infrastructural barriers mittances and the high rate of the informal economy contin- (such as quality of roads and railways), institutional barri- ue to reduce employment incentives, which is reflected in ers (such as corruption; tax evasion and informality; cost of the low level of labour force participation in the labour mar- finance; quality of the judiciary system; quality of tax admin- ket, especially among women, and in high unemployment, istration among others) and skill-internal barriers (such as especially among young people and unskilled workers. More- quality and availability of labor supply). All of them combined over, limited steps have been taken to improve the quality of show that the business environment does not foster a rapid education, which is the key to long-term economic growth. private sector development. Therefore, actions that address these obstacles and bottlenecks, at both local and central The private sector in Kosovo, which is dominated by mi- level, are of paramount importance, especially in Kosovo’s cro-enterprises, has been underperforming and only recent- current stage of development. In doing so, this report seeks ly became the main driver of growth. Despite the positive to understand what policy adjustments need to be made to trend of economic growth during the last decade, Kosovo’s enable the private sector to unlock its potential and increase economic growth rates were not transformational, i.e. they competitiveness, both internally at the municipal level and were unable to tackle pressing development challenges like externally at a regional and global level.