Strategising for Kosovan targets

Virtyt Ibrahimaga and Iliriana Serreqi of Law Firm Ibrahimaga Osmani Tigani describe the rich opportunities that Kosovo offers for entry into strategic investments

Kosovo is a new small country in Europe. During the last 13 years, the country and international organisations have invested in its reconstruction and in creating the legal framework for economic development. With the assistance of the EU and USAID, Kosovo has developed some of the most modern legislation in the region. During the past 10 years, domestic companies have experienced a huge economic expansion and development. Local investments have reached the limit of their capacity. The new challenge for this country is attracting foreign investment.

This year, the country became a member of the European Bank for Reconstruction and Development, while last year Kosovo became member of the International Monetary Fund and World Bank.

With the new modern legislation and the reforms in the judiciary system, Kosovo is becoming ready for international investments. A small country with a land area of 10,908 km², a population of approximately 1.8 million with an average age of 25.9, a Western European orientation and a strategic position in southeast Europe, not far from the door to west Asia (it is only 900km from Istanbul) and 950 km away from Vienna, Kosovo is a very attractive place for future foreign investments.

Current economic data are encouraging. During the last three years, Kosovo had a sustainable economic growth of an average of 5%. The average inflation rate per annum over the past five years is 3.1%. The tax policy in Kosovo is one of the best in Europe. Income taxes are between zero and 10% and corporate tax stands at 10%. No withholding taxes on dividends and royalties are applicable. Value added tax is 16%, the lowest in the region. The labour force is the most cost-efficient in the region with an average wage in 2010 of €280 ($365) per month.

Kosovo profits from customs-free access to the EU market based on the EU Autonomous Trade Preference (ATP) Regime, Central European Free Trade Agreement (Cefta) and preferential treatment of exported goods in the US market. Given its central position in the Balkans and its liberal trade regime, Kosovo offers potential investors a favourable place from which products can be exported, free of any customs duties to the Cefta, EU and US markets.

Kosovo receives the largest support from international donors in Europe per capita. The EU has established a Rule of Law mission (known as EULEX) aiming to support Kosovo for fulfilling the EU rule of law standards. The EU as well other donors are investing in the development of public policies addressed at improving the investment climate, national security, creation of employment and stimulating economic growth. Kosovo is aiming at accession to the EU, and the EU has launched a feasibility study for a Stabilization and Association Agreement between Kosovo and the EU.

The most interesting economic sector for investments is the sector of energy and mining. With 14.7 million tonnes of reserves, Kosovo possesses the fifth-largest reserves of lignite in the world, after Germany, Australia, the USA and China. This makes Kosovo one of the most attractive places in Europe for investments in the energy sector.

The lignite is of high quality for the generation of electricity and compares well with the lignite resources of neighbouring countries on a range of parameters. Kosovo's lignite varies in net calorific value from 6.28-9.21 MJ/kg, averaging 7.8 MJ/kg. The deposits (Pliocene in age) can be up to 100m thick, but average 40m, and possess an average strip ratio of 1.7:1. This combination has meant that the cost of lignite-fuelled electricity in Kosovo is the lowest in the region. Kosovo's cost of €0.62/GJ compares favourably with €0.88/GJ in Bulgaria and €1.34/GJ in Serbia and Montenegro.

In addition, Kosovo has liberalised the electricity market. Distribution of electricity is no longer in state hands. In 2012, the States Company for the Electricity Distribution was privatised. The Turkish consortium Limak & Calik has taken over the company and will invest around €300 million euro in distribution infrastructure in the coming years.

Kosovo has reserves of lead, zinc, silver and gold with approximately 24 m. t ore (111-proven reserve and 112 probable reserve) as well as additionally approximately 26 m. t (333 resources) with approximately 5% lead, 4% zinc, 100 g/t silver and up to 1.6 g/t gold and nickel with approximately 13.2 m. t Ni-hydrosilicate ore with 1.3% Ni and 0.07% Co. Kosovo has also one of the largest deposits of chrome in Europe. A chain of Alpine-type chromite pods in southwestern Kosovo are part of a series of linear deposits that continue into Albania.

Kosovo also has huge unexploited deposits of magnesite with approximately 4.5 m. t ore (one of Europe's largest deposits), bauxite with approximately 5 m. t Fe-rich ore with 45-52 % Al2O3. There are also considerable deposits of halloysite, kaolin, bentonite, quartz, talc, diatomite, feldspar, garnet and asbestos.

Finally, Kosovo has huge deposits of industrial rocks (construction minerals and decorative stones). The reserves of andesite, tuff, gabbro, pyroxenite, quartzite, gneiss, sandstone, limestone, marble, marl, travertine, dolomite, clay, sand and gravel are unexploited and available in large amounts.

Meanwhile, more than one-third of the territory of Kosovo is covered by forest. Out of a total forest area of 464,800 ha, as much as 278,880 ha, or 60%, is in public ownership, while the remaining part of 185,920 ha is split between approximately 120,000 private forest owners. The total standing volume of wood is estimated at 53 million m³. Out of this total volume, 40.4 million m³ of trees have a diameter greater than 7cm. Broadleaved forests predominate covering 90% of the area, whereby oak and beech are the main species. The annual increment of forests is calculated to be 1.30 million m³. The forests of Kosovo have different varieties of woods such as beech (growing stock 15.96 million m³); oak (growing stock 9.67 million m³); abies alba (fir) (growing stock 1.57 million m³); pinus abies (growing stock 1.40 million m³); pinus ssp (growing stock 2.02 million m³); and other coniferous growing stock of 0.22 million m³.

Kosovo is also well endowed with agricultural land. Out of a total surface of 1.1 million ha, approximately 588,000 ha, or 53%, is cultivable land. Some 260,000 ha is used as agricultural land. A USAID financed project has conducted a study and has concluded that based on the natural resource characteristics of the climatic zones that exist in the country, a total of 105 crops can feasibly be grown.

At the other end of the spectrum, the IT sector in Kosovo has experienced a remarkable development since 1999. Kosovar companies in the IT sector offer today high quality services and the latest technologies to their customers, which consist of local companies and foreign companies who want to outsource their software development and/or call and support centres. Whether for the outsourcing of software development, data management, establishment of call and support centres or other consulting services, Kosovar companies offer high-quality services at low costs. The acquisition of the largest IT company in Kosovo, Pronet, by Asseco SEE is proof of high opportunities in this sector in Kosovo.

The origins of the automotive components industry in Kosovo date back to the 1960s, when the first large-scale auto components manufacturing companies were founded. The manufacturing companies supplied mainly parts for the production of Yugoslav vehicles, but also for the foreign markets and cooperated with well-known European and American automotive component manufacturers. The two best known flagships of automotive component industrialisation in Kosovo were Ramiz Sadiku, which produced primarily car seats and small vehicle parts, and Shock Absorber Factory Prishtina, which produced shock absorbers for various well-known brands such as British Armstrong and German Susta as well as French Peugeot, among others. Between 1989 and 1990, the Shock Absorber Factory produced 3.3 million units each year and employed more than 1,500 workers. With more than 200 years of tradition, textiles were the second largest industrial sector in Kosovo, after mining. In the past, products from Kosovar manufacturers targeted the local market, as well as other markets throughout the former Yugoslavia, Western and Eastern Europe, and the United States. The state textile industry companies engaged in textile production employed more than 1,000 people and sales totalled some €35 million.

For a decade now, Kosovo has been at peace, working with the support of the international community to build a modern, investment-friendly framework for sustainable economic development.

Kosovo has established a modern legal framework, consistent with EU directives and international best practices. Liberal market policies have been implemented, including low tariffs, duties and taxes. Regulatory institutions for monitoring and enhancing the completion and free market economy have been established. The public sector financial management systems have been implemented which many consider amongst the best in the Balkans.

Modern company law has been introduced. The types of business organisation that is usually found in European countries can be established in Kosovo, including partnerships, limited partnerships, limited liability companies and joint-stock companies. Companies can be registered within three days with zero administrative cost.

Kosovo has a law on international investments that provides investors with the protection of their investment from any later less favourable legislation. The law qualifies almost every investment of a commercial and private nature as a foreign investment. Among the highlights of the law on foreign investment are that it provides for equality of treatment of foreign investments with local investments. The law provides also that the laws applicable at the time of the investments will have priority over all later approved laws which may be less favourable for the investor. In addition, the law grants foreign investors the right to bring any potential investment dispute to arbitration.

Kosovo has a liberal trade regime and derives three main benefits from trade liberalisation: improved export possibilities, a better investment environment, and stable relations with its neighbours. Committed to establishing principles for the stable development of a pure market economy, since a very early stage of development, Kosovo's government has been working towards establishing a system for the free movement of goods and services throughout the country's borders. As a result, Kosovo enjoys free trade within Cefta, enabling its businesses and producers of goods to access the regional market comprising of 30 million consumers, free of any customs duties.

In addition, as briefly mentioned above, Kosovo benefits from non-reciprocal, customs-free access to the EU market based on the EU ATP regime. Quantitative and qualitative restrictions remain in force for only a very limited number of goods. Furthermore, a significant number of goods produced in Kosovo enjoy a preferential treatment in the US market. The Kosovar Customs Code is based on the EU custom code and is fully compliant with WCO agreed rules on customs procedures and the Harmonized Commodity Description and Coding System.

Kosovo's tax policies are streamlined and efficient. Unlike many other countries in the region, Kosovo has laid out a taxation system that is simple and that reduces the tax burden for individuals and businesses. Compliance is straightforward and taxes are few. Furthermore, the government is introducing tax incentives to support domestic production.

Corporate tax is determined on a flat basis at the rate of 10%. The Value Added Tax rate is 16% and is applied to all businesses with an annual turnover in excess of €50,000, with exemption for certain agricultural and capital goods on which VAT is zero. The rate of personal income tax depends on annual income and ranges from zero to 10%. No dividend tax is applicable. Health insurance for employees is not mandatory. An employer may, but is not obliged to, provide its employees with health insurance. There is no social insurance applicable in Kosovo. An employer is only obliged to pay for rental insurance at the rate of 5% of the employee's gross income.

The M&A market will provide some very attractive opportunities in 2013.

The government plans to re-tender the project for the building of the new power plant Kosova e Re. This project was already tendered before, but was cancelled. The project includes: build-own-operate for a new lignite-fired power plant (known as Kosovo e Re Power Plant); rehabilitate-own (or lease)-operate for the 2 X340 MW Kosovo B power plant (presently de-rated to 2 X 280 MW); and build-own-operate-transfer for a new lignite mine called the Sibovc South Lignite Mine (also simply known as the New Mine).

The government has published the tender for the selection of a resort operator/developer for the Brezovica Resort Development Project. The selected bidder will be granted exclusive long-term rights to design, build, finance and operate a year-round mixed-use mountain resort complex located in Sharr National Park. The Brezovica ski resort area is ideally situated on the north and northwest facing slopes of the National Park. The ridge line spans 39,000 hectares of high alpine mountain terrain and forests, with a highly diverse and abundant offering of flora and fauna. Located within 90 minutes of two international airports, the Brezovica Resort area represents one of the last remaining under-developed ski resort areas in southeast Europe. The current ski resort area was originally established in 1954. Brezovica has a prestigious past, having served as an alternative site for downhill skiing events of the 1984 Sarajevo Winter Olympic Games and having hosted a number of International Ski Federation events in the 1980s and 90s. The resort has not received meaningful investment for more than two decades. Today, with responsible investment, development, and operation, it offers tremendous potential for value-oriented tourism. In winter, snow falls from mid-November through May, with an average of 128 skiable days. Summer eco-tourism opportunities include hiking, mountain biking, golf and other outdoor recreational activities.

Another interesting project is the privatisation of Trepça, a huge state-owned industrial mine complex in Kosovo. The government plans to privatise the assets of this complex without liabilities.

Trepça belongs to Europe's largest lead-zinc deposits. Trepça modern mining began in the 1930s, when the British company Selection Trust revamped the Trepça complex, including the development of a battery factory that made use of the lead. Active mining of the five mines ceased during the NATO bombing campaign. During the 1980s, with 70% of the mineral wealth of the ex-Yugoslavia, Trepça had assets all around the country, and employed 20,000 workers.

Trepça was the leader in the Balkans in the mining of lead, zinc, silver and gold. The Trepça facility includes enterprises involved in mining, metallurgy, the chemical industry, metal processing and other types of production and manufacturing. According to several recent studies, Trepça has around 50 million tonnes of confirmed reserves of lead and zinc in areas that have already been explored, in addition to potential deposits in unexplored areas. The company's production capacity is around 100,000 tonnes per month, although production now stands at only around 10,000 tonnes per month.

The government has already approved the Strategy of Minerals and Mining 2012-2025 which provides actions to establish prerequisites for prompt and sustainable development of the mining sector. The Commission for Mining and Mineral has been established and is in charge of issuing licences for mining. Kosovo has a very liberal law in this sector Any investor may obtain upon request an exploration licence for a mineral and upon the results of such exploration, the investor will be entitled to receive a mining licence. The new strategy is aiming at the liberalisation of energetic minerals, which ware previously declared as a strategic minerals.

Finally, Kosovo is also well-placed to offer offshore services. As described above, given its very favourable tax regime, low labour costs and central position in the Balkans, as well as its liberal trade regime, Kosovo offers potential investors a favourable place from which services can be exported, free of any customs duties to the Cefta, EU and US markets.

Virtyt Ibrahimaga
		Law Firm IOT Fehmi Agani no.1/16 Prishtina 10010 KOSOVO T: +381 (0) 38 227 358 F: +381 (0) 38 222 773 E: info@lawfirm-iot.com W: www.lawfirm-iot.com Virtyt Ibrahimaga is a lawyer and the managing partner of the firm. He has international educational and business experience. He qualified as an attorney from the University of Cologne in Germany, and holds an LLM from the University of Bremen. He has more than 12 years' professional experience, and worked for several years in Germany and Kosovo. He was involved in the drafting of several trade- and commercial-related laws in Kosovo and was also involved as an adviser in many privatisation and M&A projects in Kosovo. He is the deputy president of the Arbitration Tribunal of Kosovo organised within of the Chamber of Commerce, and is a member of several international organisations including Insol, the Lawyers Association of Germany, and the International Association of Arbitration. Besides being the managing partner of the firm, he focuses his practice on complex project financing and cross-border M&A transactions.

Iliriana Serreqi

Law Firm IOT Fehmi Agani no.1/16 Prishtina 10010 KOSOVO T: +381 (0) 38 227 358 F: +381 (0) 38 222 773 E: info@lawfirm-iot.com W: www.lawfirm-iot.com Iliriana Serreqi is a member of the corporate department and advises on all aspects of corporate and commercial law. She has experience in M&A transactions in Kosovo. In particular, she focuses on the areas of financing, privatisation, and commercial transactions. Serreqi has more than 12 years' experience. She was an external adviser of the Ministry of Energy and has participated in development of strategies for the privatisation and development of the energy sector in Kosovo.

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