Document of The World Bank FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No. 66877-XK INTERNATIONAL DEVELOPMENT ASSOCIATION INTERNATIONAL FINANCE CORPORATION AND MULTILATERAL INVESTMENT GUARANTEE AGENCY Public Disclosure Authorized COUNTRY PARTNERSHIP STRATEGY FOR THE REPUBLIC OF KOSOVO FOR THE PERIOD FY12–FY15 May 1, 2012 Public Disclosure Authorized South East Europe Country Unit Europe and Central Asia Europe and Central Asia International Finance Corporation This document is being made publicly available prior to the Board consideration. This does not imply Public Disclosure Authorized a presumed outcome. This document may be updated following Board consideration and the updated document will be made publicly available in accordance with the Bank’s Policy on Access to Information. CURRENCY EQUIVALENTS (Exchange Rate Effective April 16, 2012) Currency Unit = Euro (€) €1.00=US$1.30 SDR 1.00=US$1.54 GOVERNMENT’S FISCAL YEAR January 1 – December 31 ABBREVIATIONS AND ACRONYMS AAA Analytical and advisory activities ARDP Agriculture and Rural Development Plan BEEPS Business Environment and Enterprise Performance Survey CBK Central Bank of the Republic of Kosovo CEFTA Central European Free Trade Agreement CEM Country Economic Memorandum CPS Country Partnership Strategy DPO Development Policy Operation EC European Commission ECA Europe and Central Asia Region EIB European Investment Bank EPAP European Partnership Action Plan ESW Economic and sector work EU European Union EULEX EU Rule of Law Mission in Kosovo EUSR EU Special Representative FDI Foreign direct investment FY Fiscal year GDP Gross domestic product GOK Government of the Republic of Kosovo IBRD International Bank for Reconstruction and Development ICR International Civilian Office IFC International Finance Corporation IFI International financial institution IMF International Monetary Fund IPARD Instrument for Pre-Accession for Rural Development ISG International Steering Group for Kosovo ISN Interim Strategy Note KEDS Kosovo Electricity Distribution and Supply KEK Public Electricity Company KEP Kosovo Enterprise Program KES Kosovo Environment Strategy KFOR Kosovo Force KRPP Kosova e Re Power Plant MDGs Millennium Development Goals MESP Ministry of Environment and Spatial Planning MSMEs Micro, small, and medium-sized enterprises LITS Life in Transition Survey MDRI Multilateral Debt Relief Initiative MIGA Multilateral Investment Guarantee Agency MIP Mitrovica Industrial Park MTEF Medium-Term Expenditure Framework MW Megawatt NEAP National Environment Action Plan OECD Organisation for Economic Co-operation and Development PCH Pro Credit Holding PIU Project Implementation Unit PM Particulate matter PPIAF Public-Private Infrastructure Advisory Facility PPP Public-Private Partnerships PRG Partial Risk Guarantee PSD Private Sector Development PTK Kosovo Post and Telecommunications Company QA Quality assurance R&D Research and development ROSC Report on the Observance of Standards and Codes SAP Stabilization and Association Process SBA Stand-By Arrangement SEDPP Sustainable Employment Development Policy Program SEE South East Europe SME Small and medium-sized enterprises SMP Staff -Monitored Program SOK Statistical Office of Kosovo SPF State and Peace-Building Fund STM Stability Tracking Mechanism TA Technical assistance TBD To be determined TF Trust fund UNDP United Nations Development Programme WBI World Bank Institute WBIF Western Balkans Investment Framework y-o-y Year-on-year World Bank IFC MIGA Vice President Philippe Le Houérou Dimitris Tsitsiragos Michel Wormser Country Director Jane Armitage Tomasz Telma Ravi Vish Task Team Leaders Jan-Peter Olters Gjergj Konda Frank Linden Neeta Sirur Elira Sakiqi Per Kjellerhaug CONTENTS EXECUTIVE SUMMARY ......................................................................................................................... i I. INTRODUCTION ................................................................................................................................ 1 II. COUNTRY CONTEXT ....................................................................................................................... 2 A. Political Context .............................................................................................................................. 2 B. Recent Macroeconomic Developments ........................................................................................... 3 C. Socio-Economic Environment ......................................................................................................... 5 III. KEY DEVELOPMENT CHALLENGES AND GOVERNMENT STRATEGY ........................... 8 A. Key Challenges in Promoting Private Investment and Employment ............................................... 8 B. Issues in Environmental Management ........................................................................................... 14 IV. KOSOVO-WORLD BANK GROUP PARTNERSHIP .................................................................. 15 A. Active Portfolio, Lessons Learned and Partnerships ..................................................................... 15 B. WBG Country Partnership Activities for FY12-15 ....................................................................... 21 Pillar I: Accelerating Broad-Based Growth and Employment Generation .......................................... 22 Pillar II: Improving Environmental Management ................................................................................ 29 C. The CPS Financing Program ......................................................................................................... 31 V. Risks ..................................................................................................................................................... 31 Tables: Table 1: Kosovo Macroeconomic Indicators ................................................................................................ 4 Table 2: Rankings for Key Governance Indicators ....................................................................................... 9 Table 3: Kosovo Active Portfolio ............................................................................................................... 16 Table 4: Country Specific Trust Funds ....................................................................................................... 17 Table 5: a&b: WBG Portfolio, New Lending FY12–15, CPS AAAs and Trust Funds .............................. 20 Table 6: Proposed Lending Program by Fiscal Year (in US$m) ................................................................ 31 Boxes: Box 1: Gender Disparity in Kosovo .............................................................................................................. 7 Box 2: Energy in Kosovo ............................................................................................................................ 10 Box 3: Public Procurement Laws, Country Fiduciary Assessment, Corruption and Governance .............. 28 Figures: Figure 1: Doing Business in Kosovo, the Western Balkans, and the EU10+1 Countries ........................... 13 Annexes: Annex 1: Kosovo CPS: Results Matrix FY12-15 ....................................................................................... 33 Annex 2: Summary of the Consultation on the Proposed World Bank Country Partnership Strategy for Kosovo for FY12-15 with Civil Society Organizations .............................................................................. 38 Annex 3: At-a-Glance ................................................................................................................................. 48 Annex 4: Selected Indicators* of Bank Portfolio Performance and Management...................................... 50 Annex 5: Summary of Non-Lending Services ............................................................................................ 51 Annex 6: Social Indicators .......................................................................................................................... 52 Annex 7: Key Economic Indicators ............................................................................................................ 53 Annex 8: Key Exposure Indicators ............................................................................................................. 55 Annex 9: IDA Program Summary .............................................................................................................. 56 Annex 10: IFC Investment Operations Program ......................................................................................... 57 Annex 11: Operations Portfolio (IDA) ....................................................................................................... 58 Annex 12: IFC Committed and Disbursed Outstanding Investment Portfolio ........................................... 59 EXECUTIVE SUMMARY i. This Country Partnership Strategy (CPS) for FY12-15 is the first to be prepared since Kosovo declared independence in February 2008 and became a member of the World Bank Group (WBG) in mid-2009. The CPS follows a series of Interim Strategy Notes (ISNs) implemented over the last decade and is closely aligned with the national development priorities set by the Government. ii. With high and persistent rates of poverty and unemployment (particularly among youth and women), the central development challenge confronting Kosovo today concerns how to forge an economic growth path that sustainably creates more opportunity