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Felix Schwickert

Steps towards an enhanced business climate in Kosovo

The government of Kosovo has been able to initiate several reforms aimed at improving the regulatory environment for investors. The VAT refund system has been further improved so that refunds are now processed faster. Clarity has been provided on the feed-in limits for solar panels, and the Information and Privacy Agency has been strengthened to enable it to enforce existing data protection laws.

  • Kosovo
NL 17 | May-June 2024
Private Sector Development

Important steps have also been taken to provide better infrastructure for investors and to improve communication between the private sector and educational institutions. Several high-profile international investors have been attracted, which can serve as a positive testimonial for the country. Going forward, it will be crucial to quickly implement the initiated reforms further, in order for them to be perceivable for businesses.

Introduction

In Dec-22, the German Economic Team published a study on the business climate in Kosovo in cooperation with the German-Kosovar Business Association (KDWV) and REX Consulting. It showed that Kosovar and German businesses perceived the regulatory environment for investors in Kosovo as generally favourable. However, they reported that some aspects of the regulatory environment hindered growth and investment. Based on these reports, we formulated reform proposals that addressed several areas where businesses had urged reform.

Since then, we have closely monitored the progress of reforms in these areas. Our new study, published in May-24, assesses the progress of reforms over the past year and a half.

Swift processing of VAT refunds

Long and burdensome VAT refund procedures were reported to deprive businesses of liquidity in 2022. This is especially affecting smaller businesses that are obliged to pay VAT. We therefore suggested reducing the amount of tax inspections and increasing the processing speed of refund claims. We also recommended allowing smaller businesses to opt for calculating their VAT liability based on settled invoices, not on issued invoices. This would ensure that they are not obliged to pay VAT prior to receiving payments.

In 2023, the Tax Authority of Kosovo has worked intensively to modify and update its risk-based system, which automatically classifies VAT refund claims into three categories depending on the likelihood of the refund being fraudulent or incomplete. This has resulted in fewer tax inspections and an increased processing speed. The Ministry of Finance is currently reviewing the possibility of allowing smaller businesses to pay VAT based on settled invoices. However, no reforms have been initiated yet.

Installation of solar panels

Companies have stated that the lack of clarity around the amount of energy that rooftop solar panels will be allowed to feed into the low-voltage grid in the future has prevented them from investing in 2022.

In 2023, the Office of the Energy Regulator provided clarity on the matter by specifying a feed-in limit of 200kW for the coming years. While it is rather restrictive in regional comparison, it provides the necessary planning security to allow companies to make sound investment decisions.

Enforcement of data protection laws

Kosovo already adopted a law on personal data protection in 2016, in line with the EU’s General Data Protection Regulation (GDPR). This modern data protection regulation is especially helpful for companies in the IT- and business process outsourcing sector, but only if potential outsourcing customers from the EU can rely on effective enforcement of data protection in Kosovo.

The main obstacle to enforcement in 2022 was the insufficient institutional capacity of the Information and Privacy Agency (IPA), the agency responsible for enforcing the law.

Since then, the Agency has taken important first steps towards strengthening its capacity and has successfully recruited additional staff. Moreover, it imposed the first fines on institutions that have violated the law on personal data protection in 2023, thereby improving the accountability for offences. Nonetheless, non-compliance with the existing law remains a problem. Although the IPA organized workshops and provided guidelines for processing data, businesses still report that they lack information regarding rights and obligations when processing personal data.

Cross-border freight traffic

Kosovo is not included in international systems regulating the transport of goods and their insurance, such as the Green Card system. As we have demonstrated in a study, obtaining membership would significantly reduce the high transportation costs that businesses in Kosovo reported in 2022.

The topic is on top of the agenda of Kosovar officials, but no breakthrough has been achieved by the ongoing efforts to obtain membership. Nevertheless, the discussions held so far represent an important first step.

Reliable public infrastructure

The lack of suitable business sites in Kosovo represents a significant obstacle to the establishment of production facilities. Therefore, the Ministry of Industry, Entrepreneurship and Trade (MIET) established so-called industrial and technological (I&T) parks, commercial land with basic and some advanced infrastructure for businesses.

In 2022, businesses reported several problems related to I&T parks. Not enough parks were operational, and the existing parks were often not located ideally, did not offer sufficient infrastructure to attract specialised industries and businesses lacked awareness about their existence.

In 2024, MIET issued a new law and multiple administrative instructions regulating the establishment, administration, management, promotion, use and monitoring of I&T parks. In addition to the legislation, EUR 33 m were allocated to quickly provide well-located I&T parks, that offer the infrastructure required by investors. Some of these funds have already been utilised to advance existing park-projects and to finance new ones.

Higher education and vocational training

Businesses have reported a lack of communication between the private sector and educational institutions. This has resulted in graduates lacking the skills demanded by the job market, making it challenging for businesses to find suitable employees.

To address the issue, the Ministry of Education, Science and Technology (MEST) has established a commission and a task force dedicated to it. Additionally, it has launched a system for dual education. While these are important steps, it will take time and further efforts to see a tangible impact on the business climate.

Track record of successful investment projects

The image of Kosovo as an investment location suffers enormously from negative reports of foreign investors from the past. To mitigate the problem, Kosovo needs to acquire investment projects from large, internationally known companies that can serve as positive testimonials.

Over the past 18 months, Kosovo was able to attract multiple well-respected international investors, including two German companies, ZILONIS Energy Solutions and Munda. In the future, it will be important to use the hopefully positive testimonials from these investors to attract even bigger players.

Conclusion and outlook

In general, we can conclude with a positive tone. The reform-efforts in the areas monitored by us correspond quite well to the problems reported by companies, indicating that the Kosovar administration is well-aware of reform-needs. The many steps described above need to be followed up by a swift and efficient implementation of reforms in the coming months and years. Only if they are implemented to a sufficient degree to be perceivable for businesses, they can enhance the Kosovar business climate.

It is vital that the public and private sectors maintain regular communication throughout the ongoing reform process. With the support of the EBRD and the Swiss government, Kosovo established a platform for public-private dialogue, the “National Business and Investment Council”. The discussions held there will not only facilitate the swift implementation of the reforms initiated already, but also ensure that the administration remains well-informed about regulatory hindrances in the future.

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This newsletter is based on the Policy Study “Improving the Business Climate – Boosting Investment. Monitoring of Reform Implementation – May 2024”.