Panelists at a Riinvest public procurement conference in 2012. (Photo: Riinvest)
In February this year, Kosovo celebrated five years since its declaration of independence. The new country is working to establish a viable democracy with well-governed institutions conducive to economic development and prosperity. Persistent corruption, weak rule of law, and poor quality of public institutions have undermined Kosovo’s reform efforts and sewn distrust in the government among citizens. Much of this is due to the political system that condones patronage relationships between politicians and business cronies who rely on weak institutions to secure control of the economy.
At the core of the problem is lack of accountability within government agencies and limited mechanisms for oversight by civil society and the private sector. Public procurement tenders, for instance, are awarded based on privilege and political loyalty rather than free and fair competition. Furthermore, government employees in charge of managing public tenders are left unaccountable for their flawed decisions and the resultant inefficiencies and corruption. In order to dismantle this crony system, Kosovo’s civil society and private sector need to take action to bring greater transparency and accountability to the public procurement process.
Since public tenders make up roughly one fifth of Kosovo’s GDP, it is crucial to strengthen the management of public funds and build a transparent and accountable implementation system that guarantees fair competition for everyone in the private sector. CIPE and its partner, the Riinvest Institute for Development Research, a leading think tank in Kosovo, have been working since 2011 to address the weaknesses in the public procurement process.
Participants at the Riinvest conference in Pristina
The concept of corporate governance is relatively new in Kosovo. Although corporate governance was mentioned during the discussions and debates surrounding privatization policy in the immediate post-war period, it was not the central point of the debate as it was mainly used to highlight some of the consequences of alternative methods of privatization. The absence of a stock market and specific regulations for private companies, coupled with a low level of awareness, explain the low level of compliance with corporate governance principles. The only group of companies that are legally expected to comply with these principles are publicly-owned enterprises (POEs), which are utility companies offering basic public services to the citizens of Kosovo. Because of their specific features, the way in which these companies are governed is of central importance.
The Riinvest Institute for Development Research, with the support of CIPE, was the first organization in Kosovo to organize seminars and conferences on the topic of corporate governance particularly in POEs. These activities have created a positive impact in this field in the country. By increasing awareness for the need for corporate governance, they have improved the legal framework and also managed to achieve positive changes in the implementation of OECD corporate governance principles.
Over this last year, Riinvest has been working on a follow-up study analyzing the challenges faced by the Kosovo government in the process of strengthening corporate governance in POEs. By using primary and secondary data, this study analyzes the developments achieved from the last evaluation made in 2008.
Panelists at the Riinvest's conference on public procurement
Pubic procurement on average accounts for 14 to 20% of countries’ GDP, which translates into a massive amount of spending on the global scale. In principle, procurement funds are supposed to go to crucial social investments such as infrastructure or education. However, public procurement commonly is one of the most corrupt areas of public spending. World Bank estimates that corruption adds on average 20% to the cost of public procurement – or significantly more in some cases.
Given the importance of public procurement to development prospects – and the potential it carries for corruption-related waste – it is crucial for countries to examine how their procurement funds are spent and how the transparency of the process can be improved. That is precisely what CIPE partner Riinvest Institute for Development Research set out to do in Kosovo.
Last year, Kosovo passed an amended Public Procurement Law that has largely brought its procurement legislative framework in line with European Union’s norms. However, the implementation of the law still leaves a lot to be desired, with procurement all too often being used as a tool of political patronage. As a result, favored bidders enjoy disproportionate benefits in public tenders while many other businesses are disqualified on a technicality or simply choose not to bid. Breaking this dynamic is a challenging but not impossible task provided that more transparency and accountability is injected into the process. The necessary first step is to make the need for such reforms the subject of an open public debate involving both the government and non-governmental actors.
Riinvest has been doing just that. In the past several months, the Institute has been conducting research focused on examining not just the procurement laws and regulations on the books but also how they are being implemented (or not) in practice. In the course of that research Riinvest has been talking to various stakeholders, including a survey of 600 enterprises, to gauge their experience in the public procurement process and formulate concrete recommendations for reform.
On April 5, Riinvest organized a conference in Pristina titled “Improving the transparency and governance of public funds in Kosovo,” which was the continuation of this work. The conference gathered public procurement officials from various agencies as well as representatives from the business community and the private sector. As one of the presenters, Ilaz Duli who is a board member of the Public Procurement Regulatory Commission, emphasized, the event was the first time when all those actors came together to discuss problems with procurement transparency and potential solutions.
The work continues, as Riinvest is finalizing its research and incorporating key takeaways from the conference in a forthcoming report on the state of public procurement transparency in Kosovo. Public procurement makes up close to one fifth of the country’s GDP and this makes it one of the key drivers of the economy. As such, greater transparency is of key significance to making sure the Kosovar taxpayers’ money is spent in an efficient way – and it must be an important focus of reforms.
Mirlinda Kusari, Executive Director of She-Era, at the CIPE Headquarters in Washington, DC
On April 26th and 27th, 250 entrepreneurs from developing and developed nations joined President Obama for the Presidential Summit on Entrepreneurship in Washington, DC. Among these business innovators was Mirlinda Kusari Executive Director of She-Era, Kosovo’s first NGO dedicated to women’s entrepreneurship and a former CIPE partner. CIPE took the opportunity to talk to Ms. Kusari about the initial forum that inspired her to found She-Era, the organization’s achievements in over a decade serving Kosovo’s female entrepreneurs, and the significance of the partnership with CIPE. To date, She-Era has trained over 5,000 women in starting up and operating businesses, and has provided mentoring and market research services to up to 10,000 entrepreneurs (both men and women) in Kosovo.
Good corporate governance in the financial sector prevents the abuse of power, self-serving conduct, and imprudent and high-risk behavior by managers – issues that gained new importance in the context of the global crisis. Unfortunately, in many countries corporate governance of financial institutions remains weak or largely overlooked.
Recognizing this, Riinvest Institute for Development Research, a private non-profit research organization and Kosovo’s first think tank, undertook a comprehensive review of the state of corporate governance in the country’s financial sector. CIPE’s most recent
Feature Service article highlights the key findings of this study.
Article at a Glance
- Riinvest Institute’s survey of corporate governance practices in the Kosovar financial system reveals improvements in transparency, disclosure, and shareholder rights over the last decade.
- Improvements are lacking in the area of board composition and relations with stakeholders, especially the business community.
- Lack of attention on the part of financial institutions to the views and needs of businesses is damaging to Kosovo’s economic development prospects.
- Government should encourage more competition in the financial sector and take actions to improve the supply and affordability of credit to the private sector.
The full report is available here.
Healthy, transparent, and accountable business sector institutions are critical for securing sustainable peace in Kosovo’s society. Declaration of Kosovo’s independence in February 2008 and thus resolution of its political status is expected to encourage greater investment and facilitate the country joining international financial institutions in the near future. Thus it is important to strengthen the governance systems in the enterprise sector and especially in the publicly-owned enterprises (POEs) which are the largest enterprises in Kosovo.
POEs in particular are susceptible to insider dealing and corruption. The situation is due to non-transparent practices and prevalent conflicts of interest of board members and company managers. Therefore the advancement of corporate governance (CG) principles is critical to improving the overall business climate.
In 2006, CIPE supported the Riinvest Institute for Development Research to carry out a program that introduced CG principles in POEs based on universally-accepted OECD standards. As a result, the Code on Corporate Governance for POEs was approved by the Kosovo Trust Agency (KTA), adopting the full set of Riinvest’s recommendations. In addition, Kosovo’s two largest POEs – the Electricity Corporation of Kosova and Post and Telecommunications Corporation of Kosova (PTK) – adopted CG standards in their operations and separated governance and managerial structures. However, full implementation of CG principles needed continued support and commitment from all the stakeholders.
In 2008, Riinvest revisited POEs’ corporate governance practices and released the results of its study on July 1. Riinvest’s President Muhamet Mustafa mentioned that this was a new practice in Kosovo that an organization follows up with a study to enhance outputs of the previous project and make them more sustainable.